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I guess today is Ben Thompson Ben is the author of my favorite business strategy newsletter called strata Curry. He's also the host of the exponent podcast and now the dithering a new podcast he recently
Want with John Gruber, I think Ben is among the most interesting business analyst in the world and I've learned from and directly applied many of his ideas. We cover many of the major Concepts. He's introduced over the years including his well-known aggregation Theory. I think that to understand how the internet has changed the business world for good. You must read been and follow his thinking I'm excited to finally have him as a guest on the show. Please enjoy our conversation then I thought I'd fun place to start would be with a recent post.
That you called the end of the beginning and we're going to back way up after we talked about this concept to talk about aggregators and platforms and ecosystems and all these cool things you've written about but love to start at the end there tell us a little bit about what you were thinking through in that post and why it might be important for these big and come and technology companies.
Well first off thanks for having me on even though I'm not your typical investor would be your I've been a big fan of podcast so that post it's interesting because there's an aspect to
Post where it's kind of obvious but also it's sort of very poetical in some corners of Silicon Valley in particular. So the idea there is that maybe Tech Isn't So Special after all meaning that Tech likes to think about self all were sort of constantly disrupting ourselves and it's like back in the day IBM was powerful and then Microsoft came along and then Microsoft was powerful and then Google came along and then Google is powerful and then Facebook came along, etc. Etc. And a Pokemon etcetera etcetera and the idea being that there's always a sort of new power.
ER around the corner and the position of the largest companies is very fragile, even though they look totally dominant today in the future. They're going to be disruptive destruction certainly fits very much into this sort of framework. The question that I have is it sort of looks at technology as the sort of discrete sort of series of events where you went from the Mainframe to the desktop for example, and I'm obviously compressing significantly there is many computers and whole host of things sort of in the middle there, but then you went from desktop to mobile and you went from the dead.
Up to the Internet into all these are sort of presented as discrete events. It's like when one era and that air goes on and then suddenly they are is disrupted by sort of a new era. You can actually look back and all these eras from another point of view are actually all on one Continuum where you sort of have to Dynamics going on and so on one side you have the shift of how you interact with Computing going from being a sort of batch process with that sort of destination oriented where you were
Literally had to go into the computer room and you enter the computer room with your stack of punch cards or whatever might be any win and you ran your job and then you came out and then you had your job finished you went back and you checked it and then you made a new job. Then you went in and did it and then you shifted to sort of being on your desktop. Look while the personal computer because you have your own computer. You have to go to the like the company batch Center or whatever. It might be and you can sit there and you can do job mobile while your phones with you and people have talked about the phone is actually the
Computer like we wasted a perfectly good name for the phone. I'm the desktop computer, but you think about it. We said personal computer because it was my computer but it was still a destination device. You had to go to your desk to use it and the phone what made it different is the phone is always with you and I would say that's actually one broad process of going from destination batch oriented Computing to continuous always with you Computing and instead of those being sort of discrete steps into progression.
And where We've Ended up in a pretty ideal spot as far as that sort of Paradigm is concerned which is you have this device with you that has a large enough screen to do work done is small if we pocketable it's always connected it you can always be connect with and you think about it. What's after that? Well, there's the watch but the watch is almost too small. It's better for a few specific use cases, but it's not better as a general purpose computer and you see the same thing was like a our glasses. For example, you can see them being better for specific use cases, but at some point you are across the line where you
Maximize the general-purpose usefulness and now you're going to specialize bits you songs with chips. For example, we're chip sort of all came into a central processing unit. And what's been characterized the industry over the last decade has been an explosion of specialized chips. And I think you'll see a sort of devices. You'll see an explosion of devices and sensors, but the core piece The Hub of it that general purpose device that can scale and lots of directions is the smartphone. We've kind of reached a logical endpoint of that sort of Revolution. And so if you think about it in that perspective,
Active that suggests that IOS and Android are actually far stronger and in a much better position even Windows was and windows will start to be the most sort of dominant Monopoly ever. Why because there was a natural step Hardware enabled Step Beyond the PC that did everything the PC did but better it was more continuous. It was more usable and more places. Whereas what's after the smartphone restarting into specialized devices, which may be better again for some use cases, but generally speaking may not replace the general-purpose.
So that's one side one side is sort of the interactive part of computers on the other side is sort of where data lives and sort of broad compute. Generally. It was interesting is we started out with an all in one room. So when you went to that batch room to run your stack of cards that was where the Mainframe was and there was like a big computer that took up the whole room where multiple rooms and and ran all the computations is spit it out. And so we started out with it being actually one sort of big piece and then when you win to the desktop, yes, you had some compute locally, but that connect to the internet.
Lynette you sort of had the on-premises server room and things would be handled their their data storage there etcetera Etc. And now you back up into the mobile era at the same time you shifting to the cloud as far as the backend storage goes what has happened to the cloud. Well, it's gone from being to one room to being on one campus Authority with vpns, maybe one entire company to spanning the entire Globe where these companies brag about having how many data center reaches they have all over the world. And what's next after that or we talking like Interstellar, but you think about it.
And there's more specialized application software is taking on Amazon work on the edge, but that's maybe a more specific use case than just general wide spread everywhere available compute. And so you had the computer and data storage layer expanding from one room to being omnipresent in the cloud. You had the interaction layer expanding for being a batch processing one room to in your pocket everywhere and it's kind of a natural end point anything past. This is getting super specialized is not necessary general purpose.
So it follows then the companies that are dominant at this specific moment in time at this endpoint are by far the best place for anything going forward. So I already mentioned IOS and Android on the handheld in the cloud. It's Amazon and Microsoft and Google to an extent and those are the companies that are best placed. Not just because their current Paradigm is probably going to last longer than people think but also their best place for these specialized applications. There's a specialized applications are not as large of an opportunity. It's not going to have the sword.
What the potential that cloud relative to on-premises server have or mobile relative to the PC have and so in this view the companies that were at or this is the foundation sort of going forward and whatever happens is going to build on top of these companies. And in that article, I gave an analogy to sort of the car industry where we had this explosion of hundreds and hundreds of car companies formed per decade in the first few Decades of the century and then by 1930 was over the top three companies were established there were established basically all over the world and there's barely any new
car companies formed until Tesla like 67 years later because once things were in place, once the economies of scale were in place, once the sort of Paradigm was set it was set it so that's my point about sort of being obvious. This is sort of what happens to most Industries, but Tech is always thought it was special and that's the sort of heretical part to say. Well, maybe you're not so special after all has a very long answer to your
question. No, I love it. I mean, it's such important history and so far the stock market agrees with you if you take price action in this most recent period as an indication
Whether or not that will be true. It seems as though the market thinks it will be its continued to assign really really not crazy. Rich but Rich valuations to these companies and their near their all-time
highs. It makes sense because I think the way to think about the pandemic generally and its impact on the world is not that it's going to provoke a sudden shift in Direction, but rather because we were already in this period of transition because of the internet and the internet impacting all sorts of businesses and in the way people work, etc. Etc. What the pandemic I think did was accelerate trends that were happening in
Anyways, and if this thesis is correct that the trend is these companies become even more foundational and critical to everyday life. Then the pandemic ought to help their valuations because it's accelerating that shift or that completing that shift as it were and so from that perspective. It definitely makes
sense. We'll come back around to some of the interesting issues around whether or not these companies should be regulated some aspects of them should be considered utilities and so on but I want to back up to some of the root level.
Is that you've introduced into the world around technology strategy over the years starting with the big one which is aggregation Theory and I thought a neat entry point into aggregation Theory would be this concept of the smile curved. Could you describe what the smile curve is? And then we'll use that as a jump-off point to go a couple layers down and aggregation
Theory The Smiling curve is actually a from here in Taiwan where I live the former CEO of Acer stances. The founder of Ace are actually what he observed a long time ago.
Was that we the PC industry on one side there is sort of the brand and service and marketing side of things and itís either sort of the R&D things that are secured by patents and excellence in manufacturing Etc. And then fabrication is in the middle and the value of those components looks like a smiling curve where it's high on the ends the brand and marketing and all those sorts of things are high the specialized technology secured by patents or foundries Superior Manufacturing Technologies is
Hi, but fabrication, actually putting stuff together is very low a company like a sir, ironically enough. He tended to sit in that fabrication space where you win in the fabrication Space by having two Superior cost structure, but you're not going to capture a lot of value or the value chain. And you see this for example in the iPhone is a company like Foxconn is relative to their perceived importance has actually a relatively low market cap. Whereas in this art when I originally introduced this I compared them to Larkin Precision, which creates the
As assembly for the the iPhone a tiny part of the phone but a much higher sort of relative market cap to their sales because it's a highly differentiated piece that is sort of a sustainable particular position and obviously tsmc being on the is a good example of this Intel traditionally was undecided whether to charge so much for the processors and then the other side when Stan was writing about this who's thing about? Oh, yeah dowel basically or compact when they sort of shifted away all their fabrication Asia and they were trying to capture that high-end and
Using a series of lube up to the chain year, but particularly windows and stopping on that higher end side of the PC value chain. And so this is this idea where value flows to either highly differentiated inputs on one side or sort of the end part where your capture a lot of consumer attention on the other end to be in the middle putting pieces together is not a particularly great place to be actually first introduced this concept. I talked about the Acer example and what are your position but I was actually worried about publishing where the
DIA in publishing was increasingly that the value is going to flow to either side either the side that captures consumer attention, which was Facebook and Google and these companies where users go to them first and then follow links to Publishers or is going to go to individual content producers like myself where you could actually be highly differentiated you could be able to capture value in that way and the Publishers were the Fabricators where they were sort of in the middle trying to use the differentiate inputs to sell.
To the users at the end, but actually all of the Power and value was accruing to the ends and they were losing sort of their position in the value chain, which is different than the old days where local publisher had a local Monopoly and their power was predicated on controlling distribution, but when there's worldwide distribution, then that sort of goes away.
This might be a ridiculous question, but I'll ask it anyway apparently ridiculous because the major aggregators may already be created in the internet era sort of back to our opening discussion, but the question would be how would one go.
About creating an aggregator. What are the steps to building something like this? And I guess of course we need to begin with a simple definition of your sort of three rules for what an aggregator is. The one that I've seen you right before our direct relationship with the customer zero marginal costs and lowering customer acquisition costs as it scales
the idea of the algorithm that has been developing for a long time. But the most important thing is first and foremost is that it's different than a platform. This is a big frustration. I have we can get into it perhaps later or two when it comes to questions of
Is that people think about big internet companies and their Frozen with this picture of Microsoft where you have a platform with an API and drivers where so the oems plug it on the bottom and application sit on top and it's sort of a facilitator for the entire ecosystem and platforms have tremendous value because they begin their facility every ecosystem. They're also dangerous because they have Direct Control sort of components in that sort of value chain. And so you can squeeze the Williams on one side.
Can squeeze developers on the other I think an example today would be apple and they're sort of controlled. The App Store is a great example of leveraging the power of the platform and perhaps problematic Waits an Aggregate and the other hand is very different in that they sort of they leverage abundance because there's so much stuff out there consumers are overwhelmed and they need a way to sort through it. So this idea classic example is Google where there's so much stuff on the internet. How do you find something internet? Will you go to Google and Google helps? You find it and when you
Go to Google and you find something. Well, then that's great. You go there and everyone benefits you benefit who benefits and the site they directed to you benefits. And now all those sites are motivated sort of work better on Google. They want to work harder to show up better behind Google search results in with funny. The SEO industry is in many respects an industry where people pay money to be better Google suppliers in so you think Google's perspective. They're not spending a dime. They're just pretty specifications out there and people are jumping say, oh, how can I serve you better Google and they serve Google better.
And users get better results, etc. Etc to get sort of a virtuous cycle and then boom boom and drop ads in front of you. And so what enables this to get to those threes or characteristics you mentioned one is a sort of direct relationship with users. Google is directly connected the users. They go to Google to search for something or they go to the search bar in the browser Facebook. Same thing. You would have Facebook first. It's a place that you go to directly and that's what is the sort of core at capturing value you do that because you provide something users like this is what regulars have to get through their heads is no one's forcing.
People to go to Google no one is forcing people to go to Facebook. They're going there by choice. They could not go there they could go to Bing or a better example, they could type in a URL. This is where complaints will Encompass like Yelp. For example fall very flat for me. It's like at the other day wasn't that long ago when people were saying oh Google is doomed and I wrote something someone always has a problem for Google because people can do skit apps and do sort of search directly. They're going to lose local because people just go straight to yell. Well, it turns out that Google
Very aggressively to that and is that a bad thing? Because they didn't stop usually go to Yelp. It's only yep was banned from Android. That's a platform issue. If Androids only made it to the Yelp app didn't work on Android. That's an obvious abuse of platform power people using Google instead of using Yelp is a problem of you not liking what customers chose to do, but there's nothing you can really do about that. And so some of these regulations and I'll be like pushing on a string where it's like we saw with Europe and Google
Being where you're like, oh Google disadvantage these shopping comparison sites. Well, you know, what, if you go to Google and you search for shopping comparison site, they give you a list of shopping comparison sites. If you search for shoes, they give you shoes and somehow this father's Regulators that by giving customers what they wanted which were shoes. They didn't serve up shopping comparison sites. Like well, I mean your problem is that customers are not searching out other shopping comparison sites, which is a marketing problem for those companies is hard to see how that sort of fools.
Possibility it again. That's not to say Google hasn't committed abuses. It's just to say that if you don't understand the nature of their power, which is customer Choice driven, your regulations aren't going to work and we've sort of seen that again and again, so number one is regulation with users. Number two is the sort of zero marginal cost of serving users and what this means is because Google when they get good they can scale infinitely. There's no natural geographic limitation or production-based limitation on how many people they can serve this is matters for both a marginal cost effective sort of transactional costs.
It's a lot of just accounting trajectory. For example, could I scale infinitely given that I'm doing a correct rejection everyone. There's probably some sort of gating factor with Google. It's also frictionless that they can sort of scale infinitely Facebook is the same sort of thing number three is this idea where you get decreasing acquisition process over time. And so you think about Google the more people use Google the more data there is in the system the more feedback loops. There are that make sort of their search results better and that attracts more users. And so even the marginal user is
Products getting better over time action thing a better example this that I like to use is Netflix. Netflix is a little interesting because they're dealing with money is involved in a much more direct extent. So the scalability factors are much more limited relative to say how Google or Facebook where it's all frictionless, but you have this concept where the marginal user for Netflix at the beginning was having to sign up for a service with a few thousand shows. And now the marginal users going to Netflix is signing up for a service with tens of thousands or hundreds who knows almost happens on that looks why because
the content they seek out is Evergreen. It's always available. I can go watch Orange is the New Black when their original shows and it's valuable to me today. So the marginal value of Netflix is increasing as their customer base increases as opposed to a lot of services where the more customers that are it degrades and quality and becomes even harder to acquire them and then they have to spend marketing cost to acquire them. And that's just where companies fall apart so many companies face, they're sort of projections and calculations on the cost of acquiring customer at the beginning the
Was it beginning you're serving your ideal customer? The one that really wants your product and so they're going to look over the problems with your product, etc. Etc. Going to be easy to acquire and usually your marginal customer gets more and more difficult to acquire need to spend more money. And what happens is Facebook and Google actually end up taking all your profit over time.
How much of the aggregators that we have that we can point to do you think strategically thought about this concept early in their lives whether it was the founder of the CEO be curious to hear your thoughts on how these things tend to get going if
If there's a common pattern between say Facebook or Google or some of the other aggregators that you've written about Airbnb being a level 2 aggregator. I'm just curious if you think there's some sort of magic spark that makes it possible for a company to potentially grow into one of these
things. Yeah. I think that that is giving me in this concept too much credit. There's certainly a bit of a descriptive nature to this. I think someone who's written about these Concepts a lot is Bill girly particular. This idea of sort of owning demand is way more important than owning Supply what I hopefully I've contributed
Is noting that this concept is more generalizable than maybe at first seemed and is actually pretty descriptive. And the other thing I think I've really focused on is why this is different than a platform and is actually I've talked to Bill about a fair bit is pointing out why this distinction is actually really really important. And so I think that's probably my biggest contribution is teasing out why those are different and why that matters for how to think about these companies but you know to actually think about this and probably the best example of I think a company that's think about this explicitly is Spotify.
I'd and sort of their shift into podcasts. So the recent news about them taking Joe Rogan and he's going to be sort of exclusive to Spotify. A lot of people assume. Oh that's just Spotify trying to get more subscriptions. And I think they'll be happy with subscriptions they get but this is pretty clearly an advertising play and that's why for example Spotify recently shifted their accounting of cost for Content completely to the advertising division. Like I mean people keep pushing back in this like, well, you don't change your accounting if you're not the sort of clear about where this is going, but most people are not indians out.
Of accounting say the least although your audience Arturo loves it. What I see Spotify trying to do is trying to get a critical mass of listeners to podcasts and meanwhile, their technology is much better suited for monetizing me and that's very under monetize. How do you monetize a podcast not well one you could have a host read an ad which is very hardest ramanujan scale. And so you see the company's doing it or ones with very large lifetime values because it's sort of worth the time domain registrar's and
like that or you have something where you use the dumbest sort of dynamic insertion, which is you insert on download and so you co the IP address this person is in Los Angeles area. So we'll put something somewhat related to Los Angeles in and out you do nothing else with customer. It's the dumbest sort of targeting possible and I think we will try to say this is similar to Spotify. Not at all Spotify is trying to deliver a Facebook type of advertising experience. They have a relationship with you. You already have a few hundred million people with Spotify in general. A lot of them are paying customers, so they have
Holds them wrapped information that your name they have your email address to register with them that you might restore the key to unlocking identity broadly and they have a much more finely tuned understanding of their customers number one and the number two because Spotify streams everything. They don't need to worry about this download issue because as you're listening to a podcast, they'll be able to put in an ad specific to you in the time and place that you are and it will be different for everyone. And again, we'll see if it works.
So you can see a world in which this monetizes way better than other podcast apps just like Facebook ads monetize way better than your general sort of banner ad on the internet. That's not applicable to anyone if that happens then suddenly they're cpms are so much higher than everyone else that future podcasters Spotify won't need to pay them. They'll be saying look, we've all these customers we monetize better because we understand these customers better. You need to come onto our platform and use our Superior. We will monetize you better and then
Suddenly they become the center of this where they have a critical mass of users who they understand better and they pull podcasters on this argument is sort of a virtuous cycle and become sort of the center of podcasting. We'll see how that works out. It's interesting because in one respect podcasting is super fragmented and that's a great place for an aggregate come in zagar's or cleans up the mess. Google came into a world of all these web sites everywhere that was just hard to manage and they just organized it made it approachable. I think a challenge for Spotify is because the ecosystem is relatively
Ali has been around for a while. There's a lot of people are set in their ways and you see that even Spotify to date their growth in the area has mostly been converting new podcast listeners making people who didn't listen I asked before start listening to them. The big question is can it get people actually shift their habits to use Spotify and it's going to be a little tougher because that's what I have to do is exclusive content producers of content than your value starts being captured to The Smiling curve idea by sort of the differentiated Creator themselves, and so it's going to be
Little more difficult than the path that Google or Facebook went but it's certainly what they're trying to do.
You very such an interesting example of spotify and think about sometimes Netflix in a similar vein where lets us explore this concept of the suppliers in the market place. So we've already talked about these Concepts in a few different company examples, you've also written about how they're sort of three different levels of aggregator depending on the type of Supply. The magic of course is the Google and Facebook where people like you said paying money to make themselves,
Better suppliers. Let alone you not having to pay them anything but things like Netflix and Spotify. Obviously, they're paying suppliers to come on the platform and I guess I'd be curious what you call Netflix is Originals, I guess first party suppliers or something like this. But how do you think about the role of supply and from a competitive standpoint how aggregators interact with providers or suppliers
the idea that on the internet controlling demand
is more important in controlling
Supply is sort of the big picture take away but to your point.
Relative power of suppliers determines how big and profitable the company that controls demand can be take spotify's other business music as an example in this case because the suppliers are have a monopoly on music for all intensive purposes. What's so brilliant about the music industry model is because there are new sort of almost a venture idea where they give you money up front to your recording, but then they own it. They'll take a lot of losses and a lot of bands that don't break through or soon as they don't break through but because the ones that do the moment that
That song is recorded is now part of the back catalog and the power of music companies come from the back catalogue with. Oh, why don't you artist just go to Spotify. It's like well, they still need help sort of getting off the ground. And if Spotify users respond by certainly working in the longer, I think to make that something they can help new artist with but as long as new artists are going somewhere else the back catalog of these companies getting more valuable over time and the more viable that back catalog is the more negotiating power. They have relative Spotify. Thus they can take a percentage of subscriptions as
Opposed to they that's the other thing why the podcast thing about subscriptions doesn't make sense Spotify pays based on the money. They make not necessarily in the share. And yes, they're trying to change those parameters over time, but the whole that the industry has on Spotify because Apple can step up and offer the exact same songs is a very strong one. And so Spotify is a very weak aggregator in the case of Music where's podcast? Because this is Supply is much more disparate. Everyone's independent. There's not
sort of that unifying force tying a bunch them together that's actually a place for Spotify can exert much more potential control and power in the space. If Apple actually cared or at any interest in doing this they could have rolled up the podcast face ages ago because they had the central directory. I choose doesn't host podcast Allah who don't realize this but it sort of the directory where everything is and more important thing is the Apple podcast players the biggest podcast player it had Apple chosen to leverage that particularly couple years ago. They could have built this.
Thing built an ad Network go all these sorts of things. It's just not what Apple sort of does and so they sort of just let it be but that's where the power sort of would have been because they control the map they control the end user Netflix is interesting here because Netflix has shifted over time to integrate down the value chain and exert more control over suppliers. So it used to be people don't realize that the Netflix original strategy is actually also shifted over time where originally they were just buying shows House of Cards was I believe as Sony he was also sold
Old internationally, so I remember it being on local TV here. It was only on Netflix. I believe in the US Sony took on all the costs they produce the show and they sold it to Netflix what Netflix has shifted to over the last several years and this is why Netflix has had such crazy cash burn is they are producing shows from the get-go, which means they own the entire thing. They own all the worldwide rights. They own all the residuals and is something creators have grumbled about a lot of them. Don't get residuals on Netflix. So when Netflix keeps all the upside,
They pay more Upfront for that right? But in the long run remember the orange new black concept it lives on Netflix forever. It provides customer acquisition benefits to Netflix forever. And so Netflix wants to keep all that forever upside on their own books. Well, if you're putting in all the money up front for a show taking all the risk, you're going to spend a lot of cash and that's why for about three years. Netflix is free cash flow was massively negative because they were pulling forward all these costs that whereas like
House of cards they paid Sony over time as it was delivered there putting them all those costs up front. So that in the long run. They only have Revenue upside doing of cost in the future. I mean obviously it from accounting perspective. They're going to deal with the cost then from a cash flow perspective. The cash flow is all pulled forward the idea there though is they're actually exerting more control over Supply so they can garnish more upside from controlling demand people really fundamentally. I think don't get that specific point. There's such a focus on their free cash flow.
Without understanding. Why is it that there's free cash flow for these few years was unusually high in a way. It wasn't before in a way that project won't be going for well because if you're shifting your business model from cash flowing out over X number of years to all the cash flowing out in one year and then you garnish it in the long run you're going to if you're shifting, you're sort of working capital model. You're going to have a huge cash flow. But once you adjust then it will look more normal over time. I think that's what you're seeing with.
Netflix forecasting their cash flow is going to improve it's because they've now shifted their model sort of flipped it on its head and we'll be able to capture that upside without these sort of extreme sort of outflows in the meantime and meanwhile, they're doing it in a time of where interest rates are miniscule. So it was a good sort of taking advantage of the moment and now they're I think much better place sort of going for and by the way, you see this in the pandemic a lot of the networks in a lot of attrition folks are trying to stretch out their content because they don't have enough content. They only have content 3 to 6 months ahead of time.
It's like just-in-time content whereas Netflix because they've shifted to this working way ahead of time to remodel they have content for the next year. And so they're not shifting their timing at all. Obviously the math make adjustments their production going forward, but they're sort of ended up being better place because they shifted to a higher inventory model if that makes sense.
We've talked about to really fascinating examples where the categories are sort of video for Netflix and has Daniels talked about with Spotify not music, but audio for Spotify. How do you
You think it's possible to compete against one of these aggregators when scale economies tip in their favor? So the Netflix example the amount of cash that is being spent and burned to produce. This stuff is kind of Staggering and its growth ready staggering and obviously they've got an enormous scale economies Advantage. Do you think that it's possible to attack them in that category of video?
I think it's very stupid to attack them head-on. And so the problem is that just think about that scaled Vantage if Netflix.
And x amount on a show they can spread it out over way more subscribers than UK it which means that you're sort of cost per subscriber for a new show is going to be massively higher than Netflix's and that's just going to be a fact of life for all these folks sort of going forward and that's a tough place to be in the answer though is you don't necessarily have to take the same business model approach is definitely so Disney the reason what is so compelling about their streaming model and the low price that they've done it is they have other ways to monetize.
Stammers they can monetize through theme parks or cruise ships. This is all pre-pandemic thinking but one suspect it'll be the case of the long run we shall see but the idea is that Disney actually establishing a direct connection with customers really for the first time. I mean Beyond sort of maybe their cruise ships and stuff like that to understand their customers to other email addresses to other credit cards real communicate with them directly is so valuable given the other ways Disney can monetize those customers that you have to think about Disney plus not just as being a
Dental moneymaker, but as a phenomenal sort of top of the funnel tool we generator for their entire business. And so in that case they can compete with Netflix because their payoff for buying content or not selling it to Netflix as it were is monetized not just by their streaming price, which is where they compete with Netflix had on but also by all the other parts of their business and so it's a much more sort of rational approach another company where they're just trying to also build a subscriber business compete with Netflix.
You're trying to compete on Netflix is grounds in a matter where Netflix has a massive advantage and it's going to be a very sort of difficult position to be now. You could brute force it. I mean if Apple really wants to spend several billion dollars a year that could be a problem for Netflix but it entails Apple accepting pretty significant massive losses for quite a long time by definition because they are going to spend less efficiently because they have a smaller user base. That's just why Netflix is difficult to compete with in this
Guard again the scale matters, you need a different business model if way to monetize or just women was cashed in and willing to spend it. I think the outcome here is next couple years and a little trick for Netflix is all these competitors popping up but I think in some respects it's setting Netflix up for the next stage, which is all these companies realizing this is a terrible business for them and they're actually better at being suppliers and then they go back to selling the Netflix and then Netflix ends up being sort of the future Cable Bundle for basically anything that's not live and everyone.
It sells a Netflix and I think that is actually is the logical place where this ends up so maybe a rough few years as an emphasis to compete but I think they'll win that competition and then we'll be very well-placed
leaving media now to talk about two other fascinating companies as it pertains to this lens of sort of platform and aggregator which are Amazon and Shopify. So the famous example of shopify's called arms is arming the rebels against maybe the Empire. That is Amazon. I'm curious how you think these Concepts
Platform and aggregator apply to those two companies and whether or not Shopify specifically will Trend towards becoming an aggregator when thus far it's really has been about arming Merchants with better and better platform tools.
It is a good example and the third company I would discuss your sort of Walmart and they're particularly jet sort of focused sort of e-commerce Ambitions what Walmart has figured out is it's great example you extent they can do things differently than Amazon they can succeed so
Grocery, for example Walmart's doing much better than Amazon because they already have existing grocery infrastructure and it turns out a big promise groceries perishables where you need sort of a regular supply chain, that's different than an e-commerce fly chain and Amazon's really struggled to sort of figure these aspects out because they're totally optimized for sort of a different sort of a use case. And where's Walmart has done. Well Walmart, meanwhile has done terribly a traditional e-commerce because they're not optimized for that and Amazon is and so Walmart then try to build up their
Bilities to take on Amazon and it was a total disaster because Amazon they're trying to beat Amazon at Amazon's own gig in Amazon's already at scale. They are able to get Billy's and all the customers go to Amazon already. And so how's Max of compete they offer lower prices. They try to marketing. Now, you're killing yourself is customer acquisition cost. You're sort of getting hit from both sides. You have a worst cost structure and you're handing money to Facebook or Google to acquire customers. So it was a very sort of tough go of it. Meanwhile Shopify is very different if you're a merchant you go to Amazon.
You're sort of giving everything that was on its Amazon labeling is Amazon's website is Amazon's boxes. You're literally paying Amazon to hold your inventory for you. Like it's a pretty tough gig. Why do you do it? Because the customers are at Amazon people go to Amazon. They search for something. If you want to access to customers you need to be there. It's a great example of the Abbey or concept. We're controlling demand lets you control Supply Shopify goes in the opposite direction in that enables suppliers to have their own direct relationship with customers they can
Set up their own store. You can get customers to come in and acquire things without having to have the middlemen there. And this is a concept this is how you compete. I am online. I'm publishing things online. How do I succeed in a world of Google and Facebook? I go around wound Facebook. I establish a direct connection with my customers. I send them emails emails and Open Standards. Like the web is an open standard that lets me sort of send my content to them directly and that lets me build a nice little business that goes around the Arab years as a work. That's what Shopify enables as well.
Well in this is the way to compete with Amazon because your compete with Amazon in a way that Amazon can't respond to its orthogonal sort of competition because your entire point is to support and feature suppliers the left side of the styling curve to go back to our initial idea that are differentiated on their own. Now, there's lots of challenges on that side of the supply chain, which particularly because the customer acquisition issue Facebook ends up eating up a lot of the profit. They're pretty if you're actually not differentiated and you know your customers via Word of Mouth
Spreading you have to go through Facebook. Advertising Facebook is going to end up eating while that up. But just the fact that you're that because competition is so high a lack of differentiation is going to kill you either on one side or the other that's not necessarily A indictment of Facebook or Shopify. Just a reality that the competition with the entire world is your just for Market is higher than it has ever been so shocked by become like Amazon wanting to be a mistake. I think people don't associate the entire reason why people use Shopify is because people don't know
what Shopify they know it. So this shop would cool shoes that I like or the shop with cool knickknacks or whatever. It might be whatever thing is on Shopify and the Brilliance of the Shopify model is people like to point out the churn rate or we don't the Terminator how many people start shops on Shopify and flame out. It doesn't matter for Shopify. Their platform is scalable because of technology in a way that a million people can start a shop by shop and 950 thousand of them can go out of business and Shopify now is 50,000 new customers who are generating the money. That's a great place to be why because
The cost of scaling to serve people because of Technology the marginal cost is zero. So it's actually High turn on Shopify is a positive signal not have the negative symbol and this is a something I think a lot of people that aren't familiar the internet have a hard time wrapping their heads around you wait, you want High turn absolutely that means you're getting way more customers in at the top of the funnel now, it's going to be challenging for Shopify. I'm actually writing today. I think we'll probably post for you you post this but about the Facebook shopping thing where they're partnering with Shopify will
the problem is that the gravity on the internet always flows to whoever owns consumer attention. And so I actually think this is a natural place for the value chain to go but it does show the weakness of Shopify, which is I actually really don't write about valuations Shopify is an Amazon competitor. It doesn't follow that they're going to live longer and have certain Amazon valuation. It's a different model that can be a very very profitable very successful. One one that arguably has a better and greater.
Impact on the world and sort of the aggregator model but you're not going to have the same sort of big picture scalability. If you think about where Shopify can really make a difference. It's not their position. It's getting into things like Logistics. Now this last year sort of trying to get a 3pl network. And you say what's like Windows Windows had the oems in the bottom and application developers on top. Well Shopify should have merchants on the top all the infrastructure to support e-commerce on the bottom anyone 3pl provider, which is his provider Camp interface with a tiny Mom and Pop shop selling cookies on the
Yet but Shopify can intermediate that so they provide scale and both directions such that you can make those connections in a way that's very very useful to both sides and also a very very deep moat because you have that connection that you can't form one on what an aggregator I can always go around and form a one-on-one connection. It's a very sort of the aggregate or type of moat and this go that regulation question and aggregator type of moat is very different than a platform to promote a platform time.
Is all about apis and drivers in a literal sense for an operating system, but in a broader sense, it's about making these connections that can't be made without the platform a narrator. I can always go around and catch my consumers directly they succeed because of scale and sort of ease of use and it's the obvious thing to do to beat that you have to have something that's easier and better or so highly differentiated that customers will go to the effort to go around it.
There's our adjacent concept to all of this which you call the moat map.
We've talked about parts of this. We started really picking apart suppliers as differentiated versus commoditize but there's a second element here around Network effects, which is a concept. That's nice that it's taken us this long to get there. Usually it's the central point of conversation in technology discussions describe what you mean by the moat map and where some of these companies might sit and also what some examples are like uber that may not sit in the right spot on this conceptual map.
Actually that doesn't Mission concept. It's a hard one to sort of communicate with
It means I haven't thought it through sufficiently, but there's this idea of Missy what I just referred to we're a platform their Network effects are sort of externalized and so Microsoft built a network between developers on one side and users on the other end basically Ohms on a third site. So it was a three sided Network and you can argue all are you like systems integrators and all those sorts of things on A4 size like a four-sided Network. It was a brilliant business. It is to be really business Microsoft has leveraged it into sort of what they're doing today, and they're trying to build a boat.
Is in the cloud a lot of us build last week was about this and the things that they open source and the tools they made are all about making it possible for people to build on a business applications that connect users that work on Metro Services, etc. Etc. In the future where IOS and Android are the OEM to the Future and Microsoft Services sit on top of them. So that's what Microsoft does they're very good in that Apple's app store has a similar sort of thing your network effect between developers on one side and users on the other and so in this case the network effect is externalized you go the opposite
Action where the network effect of having more use becomes more internalized the product Facebook's an extreme example, the Facebook the suppliers are the users users go on. They write content Facebook. They upload photos. They look at content and photos from other users and they're all locked into the network and Facebook owns that entire thing and to the extent that others come in. It's still defined by that Facebook sort of owning that sort of network there. Same thing with Google Talk about the feedback the data feedback feedback. We will get some people on the Internet or on Google servers.
Services that makes the service better and learning and they talk about go on about machine learning and AI all this is about Google harvesting the usage of users to enhance their services and sort of a feedback loop in those are network effects at the type of network effect, but it's much more internal to the product. It's not about tying together different pieces on the outside and I think that you get this idea where in that world where everything's internal the suppliers are totally commoditized the websites on Google doesn't care which website it is. All they want is a particular information or fact
Total commoditization of websites Facebook does the same thing a story from the New York Times is given the exact same prominence as a picture of my nephew. There is all in the same feed total commoditization of content and I think that's a characteristic of companies that have sort of internalized Network effects where it's all self-contained and they're just diminishing What A supplier is a differentiation there squashing that left side of the curve. We look back we talked about before in it's the opposite in the case of a platform. If you have external network effects where people come to your platform.
Cuz they want a particular application. Then it's in your interest that application be highly differentiated it having photoshop on your platform. You want Photoshop do more differentiated not less because you want people to want to use that application and thus use your platform. And so the motivation in the way that the motor works for an externalized coming to externalize network effects. They want highly differentiated suppliers because those suppliers are dependent on the platform. So the more digits spiders are the stronger their own platform.
Laughs and you can see it again this gets at why a platform their motivations the way they work the way they are defensible the way they need to be regulated are just fundamentally different than aggregators on the other side and just works totally different and it dries it will all we try to do it sort of the same way. So you mentioned Uber I think a challenge with boober is their Network effects are externalized because they have drivers and then they have sort of passengers but there's no differentiation. They're trying to commoditize the drivers and so they're kind of
of in this weird spot where it's sort of misaligned with the way these platforms typically work. They don't keep people completely internalized. But also there's no differentiation. And so that's why they end up their kind of oppositional to everyone Uber is very very user friendly, but they have a very oppositional relationship with drivers and the drivers aren't always multihoming. They want to be a lift or maybe they'll doing delivery with other services etcetera etcetera. And so when you get out of that sort of alignment it gets much more challenging and I think you've seen this with when are
He was really humming. They had a much more sort of I think positive relationship with their hosts where the hosts were commoditized to an extent where you on Airbnb you sort of who's out there, but it was totally a sort of like internalised Airbnb again is all matters of it's all gradient as a were Spectrum, but I think the more that you're highly tuned to one side of the other the better your business is going to be and the less you need to for example, like uber at least in theory. They should spend all their money on acquiring
users and that should bring suppliers on to Uber to serve those users. It ends up that we were actually spends a ton of money trying to recruit drivers. That's a signal that they're not quite an aggregator. There's something that's not quite right here. And so part of this article was trying to figure out what is it that's off about this business model.
What do we haven't talked about? We talked a lot about how the lack of friction on the internet just changes the entire Dynamic of the world. We have talked a ton about just pure constraints. There are lots of business strategy books written about wanting to control a choke point in a value chain be curious to hear your thinking as a kind of related to everything else that we've talked about about value chain thinking and sort of this difference between modularity and integration that you've written so much.
Much about and how that relates to good profitable business models.
Well, the big problem is you're right people talked about sort of controlling a point of the value chain, but it turns out in the analog world that point was almost always physical distribution. So you think about you had the people watching football on TV. Well, there's a limited number of broadcast licenses. There's a limited number of professional football teams. So you have sort of scarcity there you have scarcity in the license distribution of this or the football game you have
There is a constraint on the number of commercials that could be showed based on pausing the game there are and yes football is a lot of stoppages but there still has to be a game at some point or your sitcom show is 22 minutes long. There's eight minutes of commercials. That's it. There's no more commercials after that. There's 24 hours in a day. That's a constraint you had to go to the store where There's a constraint on land how many big stores can there be and sort of your area you go to the store There's a constraint on the amount of shelf space that there is how many things can go on the shelves There's a constraint on yourself. Can you actually physically carry in your cart or
Your car to take home and then of course, there's constraint on money how much can you afford to spend constraints up and down that entire sort of value chain and that value chain that I just described was basically all the dominant sort of us Western companies in the area you had to Media companies Sports is a big win for that. You have the car companies you had the big retailers you had cpg companies all of them were defined by physical constraints. All of those constraints are going away on the internet so you can watch content on Netflix and
Goes on and on and on and on there's no constraint of content. Everyone can watch different content because you're not constrained by time. There's not oh everyone we have a limited block. There's no constraint on broadcast channels. There's an infinite number of things you can watch it any one time. Do you have to fit in three channels or even on cable a hundred channels or 500 channels? It's infinite channels and you can start and stop at any one time. Oh, yeah, we have 500 channels, but the movie is going to start at 8:00 p.m. No, the movie started at 8 p.m. For you at 8:30 p.m. For me and 8:25 p.m. For the other person. It's just the wazoo.
Of constraint of time you have no more constraint when it comes to shelf space Amazon has infinite shelf space. You can hold as many products as possible. That's why they have the merchant program because the merchants let them expand their inventory massively at zero cost Amazon. It's incredible model. You have no more constraint on how much you can buy because you can sort of bring stuff in there's no Warren advertising Facebook and Google the internet. Generally, there's an infinite amount of space to advertise now realistically Facebook has chosen a whim it how much advertising is in a
But then stories comes along suddenly face book inventory explodes. Remember people when Google first I filled in the early years, but always folks Echo the cost per click is decrease. Your cost per area is decreasing. This is such a bad sign. It was totally analog thinking know the cost decreasing is a positive signal because it shows they're increasing inventory faster than its being consumed which means they're actually increasing their long-term upside and same thing with Facebook Facebook Stories. Come along could they have that Ernest called couple summers ago is like oh our cost is going to go away.
Down these will monetize as well and their stock plummeted and it was like this is actually the best news about Facebook in quite a while because they were previously talking about we're going to have a constraint on the number of inventory we have because you don't want to be saturated or over give users too many ads what they suddenly created tons and tons of new inventory. That's a great single for them. That's a very positive indicator for them. The price dropping per ad is good news. Not bad news. Again. This is requires the shift to thinking about
Abundance not thinking about scarcity. And so all these parts of the chain so users users now everything's at supported it turns out the constraint of spending is actually lower to because users can consume basically an infinite amount of media where they had to pay for all their media previously and so in all these cases the entire thing that under girded all parts of sort of our economy were based on scarcity in almost every case that scarcity has disappeared the way you win on the Internet is you be
the starting place where people go to to start with Google Facebook these aggregators or your highly differentiated and you leverage the fact that you have zero distribution to reach anyone also the internet allows drastically lower cost structures and you see this in publishing it blew my mind last week where the Atlantic weight off a bunch of people and they have 80 writers on the Masthead and they had a staff of 315. Well it made sense in the previous world where you have all these support functions that actually made the money because
Actually made money in publishing previously was not writing. It was delivery trucks and distribution deals printing presses. That's what actually made the money on the internet though. You actually make the money through Atlanta shifting subscriptions. It turns out those writers. They're no longer a cost center there a profit Center and there your own profit Center that you have and they need to dominate sort of your roster of what's on there and you have to get way more efficient on the back end and how you support them because everything else is a cost center. It's a shift in
mindset about what is profitable and what drives sort of meaningful profits in the long run sustainable profits in the long run and as to get away from distribution and into how do you deliver sustainable
differentiation? Obviously, you're doing a version of this, but I'd be curious to hear your thoughts on the future of the media business model more generally speaking. You started to hint at it there that differentiated talent that people to get around the aggregator will seek out the absolute best writer or podcaster or
Producer whatever on a given topic. Do you think then that that's the model that its individual creators that go direct to Consumer. Does it start to re bundle again as things always seem to do what do you think about the future of media on the internet
as to be a lot of experimentation and trying for sure I mean is what I do wheelers is basically being I write analysis about tech and media and sort of try to win on that regard. That's honestly a really hard model. I'm not sure it's actually the best way to think about things.
Things with differentiation does not necessarily have to be just analysis differentiation could be I'm going to write about this specific topic that no one else is covering it you have to think about it being a horizontal opportunity, which lets you go very deep in sort of a specific area. Whereas previous Publications were more broad-based future Publications would be very very narrow and they'll take advantage of the fact that their addressable Market is not just New York or is not just the United States. They're just a market is the entire world and I just need to get X number of subscribers wherever they might be and I will succeed.
One example, I'm actually I'm pretty bullish on and I'm waiting for someone to sort of crack this code. No that's been deeply tried yet. But is this idea of local journalism? I'm from Madison, Wisconsin if I want to find out what's going in Madison, I could go to the Wisconsin State Journal and it is an atrocious experience. There's ads everywhere. It's hard about what's going on. There's just wire stories that national news stories, etc. Etc. And why why is it like that because they are of newspaper has been around for a long time that there are
Option is we need to publish something every day? And we need to get content out there that we put ads next to and the motivations on this sort of version 1 media companies in the internet where the same thing more content so we can get more as it turns out though. What I actually want. I just kind of want to know what's going on. I used to go back there every summer. I want to do this going on. They're building a new billion new convention center and new hotels going up. What I would actually really like is someone on the ground to send me out an email every day saying here's what happened today City.
With this etcetera etcetera and if nothing happened then send an email that said nothing happened that's actually way more valuable me to get something. It says nothing happened because I'm not looking for content to read there's so much content to read the internet. I don't need more content. What I'm looking is to feel informed and you deliver the experience of feeling informed often times by telling someone nothing here go spend your time somewhere else and you've actually check that but that sort of mental box. It's a total shift in mindset.
At about what you're delivering trying to sell content on the Internet is a loser's game. It's on a screen zero marginal cost. What you need to deliver is a service a service of continually making someone feel informed about something or continually delivering analysis. They find valuable service is something that in the consumers mind is an ongoing sort of thing in that case the emails that I send four days a week are artifacts of the service. I'm providing of my service to you is I'm going to think about the
at and media in the way things are changing and current news and I'm going to figure out to shift my thinking and oh I'm going to deliver to you a sort of summary of my thought process for days a week that's the service that I provide these thing that's valuable you can pay me directly you don't need to go through Apple you're going to go through Facebook and you go to Google we have a one to one relationship that by the way thanks the internet does scale very very very well I do the same amount of work that I did a few years ago but I make more money because I have more subscribers that's me leveraging
the internet leveraging technology to make a model that was not that possible previously possible and oh by the way I have subscribers and like 85 countries or something because the whole world is my market so many media companies through the internet as killing their business and it did the ones that succeed in the future though we'll figure out how the internet makes their business possible in the first place
seems like there's room in media for I'm thinking about writing here so I pay your annual fee and then I bought another one on
Up stack which is an interesting platform that enables writers as creators to create these sort of subscription business models, but then I very quickly got fatigued at constantly paying because the subscription rates are pretty high for sub stack writers call it 50 a hundred two hundred dollars a year after four or five of these things and like jeez paying more for this than this is rising my list of cost pretty quickly. It seems like a great place for there to be a bundle a recollection of different writers that I could peruse. What are your thoughts there? Do you think that there are
RR let's say for writing as an example room for someone to go try to build all of the demand which doesn't seem to have happened thus far
for sure. There's an aspect of this model that's a bit consumer unfriendly to the exact point that you said, you have to manage them all separately. You have to pay for them all separately. It doesn't scale very much with one customer. So first off I would say the answer to that is there's a lot of people in the world and the answer to Publications is to find their specific Niche such that the customers that are willing to go.
Through the hassle and pay and there's only that it was your second third for subscription. Then you weren't there Target customer anyway, and I think this is an ethical people underestimate how big the internet it is because I hear this description fatigue thing a lot and there's sort of this assumption that there's only about 10,000 potential subscribers in the world. And how much are they going to pay again? And again, it's like no there's actually billions of potential subscribers in the world. And a lot of them have different interests will care about different things. So I'm a little skeptical too big pictures friction fatigue issue.
You as far as this model being a problem because I think it underestimates how big their it is that said on an individual basis for sure. It's a think it would be better. If there is a bundle you could pay x amount and get all these great independent writers and I'm a big believer in bundles. The economics makes sense for everyone involved the problem is how do you from here to there? Because if you want to make a bundle of Saitek analysis, I would hope to think you would watch Checker to be involved in that well for a bundle to make sense for me.
these person that would not subscribe to trajectory directly but would subscribe to the bundle the number of those customers and their incremental value has to outweigh the value of giving up from my current subscribers by contributing them to the bundle given that I'm in a strong position I was fortunate sort of be early to this space that's going to be a very difficult proposition which means you're gonna have to pay me a bunch of money and then your economics are is fall party the Spotify like they're paying Joe Rogan a lot of money because
they wanted him to bring his customers into what is their bundle for podcasting for all intensive purposes and so that's just a real challenge we you see with bundles is despite the fact that they make sense because they're so hard to form they usually end up forming for infrastructure reasons class example here is the Cable Bundle which did not form because people thought it'd be a great way to make money it Formed because there's people like West Virginia or something that wanted to watch broadcast TV and their homes couldn't get a signal because they're like Halo and about and so they got together and they put up a big and
No, and ran cable from that antenna to their homes so they can watch the big three broadcast networks and at something more communities did this and some point someone's weight. We have cable everyone's home. We could put extra stuff on this cable and we could actually show things that are on the broadcast networks. And that's you had Community Access television, which came along catv into that transition and cable and then HBO came was like, well, what if we put satellites dishes at all these antennas such that we can broadcast.
Last one signal that is not over the air but is actually something different. It goes to these satellites and then it plugs into the cables. It was everyone's house and boom the cable industry was born or it actually I think of TNT did it first and that's where the cable industry came from that you ended up with a bundle, but the bundle came from the fact that you needed the cable and on the internet where everyone is distribution, it's a lot harder to figure out. What is the cable. What's the thing that holds everyone together?
Subset given the fact that everyone's on sub stack. They're probably better place to maybe make a sub stack bundle. I think that's something that they've hinted at in certainly would make sense in the long run. But that goes to the point that you need a way to sort of already have everyone in place before any one of those providers games too much economic power such that you have to buy them off to get them in and your economic sort of fall apart.
We haven't talked at all about what I would call a layer below platforms. I think infrastructure is probably the right way.
Word a company like stripe or plaid that is providing tools to all sorts of different companies. Any thoughts here from a strategic standpoint. I've seen you write less about these companies, but I'd love to hear your thought on this sort of infrastructure layer of Technology.
Yeah. Well, I think that's more of a platform. Where is the way to think about it and platforms don't need to interact with the end user AWS. Most people are using programs that run on AWS and have no idea that they're using AWS. There's a story a couple years ago. So now I'm going to try to not
Amazon and they like IP blocked all the Amazons addresses their applications worked. That's a great example of an abyss is a platform and that platform does not need interact with customers at all. It can just be the layer that stuff sits on top of I think there's an aspect where that's a way to think about like stripe stripe is a platform another way to think about it is it is just infrastructure and infrastructure requires massive amounts of investment to build which provides sort of own natural moat because if you want to build sort of a competitor stripe as such a huge cost Advantage relative to you trying to catch up
Up that's going to be very hard sort of to deal with and obviously stripe is sort of taking that and trying to layer up into merchant services into Financial Services Etc. And I'm pretty bullish on that opportunity to do so. It's a approach that is less about it's not actually at all about acquiring demand. It's about having that Superior cost structure that comes from scale and that is what gives you your most. So it's actually kind of living at the bottom of the smiling curve to go back to the example from before but you're
It there because you have a superior cost structure and you have scale that lets you sort of provide services at a way that no one can compete with and it lets you spend on things like Superior developer tools and Superior documentation and all the things that strike is so great at because your cost per production of those things is lower than anyone else because you're
such a large customer base a company that I haven't seen you write a ton about which I'd love your opinion on is epic games. They seem like both infrastructure and platform components.
Oh nents, they've created amazing media. If you consider games to be media interactive media and they also seem very intent on behaving strangely and sort of reducing their own cash flow in a variety of interesting ways. They recently increase their floor from 50 Grand a year before they start charging to a million dollars a year as one example any thoughts on Epic as an infrastructure way or a platform company or what it might represent in the competitive field that we've discussed.
I remember a bit. I think the gaming industry is fascinating.
And is in many respects sort of a leading indicator of where things are going the whole sort of free to play versus free to win sort of concept is fascinating. So free-to-play is you can use a game and then you're sort of hit a wall you do in app purchase or unlock it that's been a dominant sort of model on mobile and is a reason why is because make a lot of money whereas free to win is you can be fully competitive in the game. There's no Advantage accrued from Pain. The only reason you would pay is because you want a different Avatar you
I want different clothing or you want sort of decorative functions that don't apps or different Fortnight famously different dance, you know celebratory dance which have nothing to do with your ability to win, but do have a lot of ability to do with your status and sensing the game and this really Taps the idea that a lot of these games better thought of as different worlds. I mean, no one bats an eye at someone buying a luxury bag to sort of signify their status in the real world. And if you're online in these virtual,
Old why is it any different to buy a special dance to signify the same sort of thing? It's not any different at all. Again. There's sort of an insistence on the real world is different in the virtual world. The world is defined by where we are and we're sort of we are mentally and a lot of people are spending a lot of time in these spaces and it makes total sense that we'd monetize them in the same way of monetizing the real world. So just broadly speaking. I think that's one way to think about it. Another way is the benefits that come from being a platform that come from the broad-based.
Availability and so from epics perspective I would imagine comes to their engine or those lines is if you have it in your game, they make all their money all their money the huge amount of money from the huge winners. You think about like a VC mop you don't really care about ones that you have a nice outcome. Yeah. It's okay to get your money back, but you're not going making your reputation or raise your next fun based on someone doubling your money over five years. That's actually already be the worst rate of return. There's investing in Big 5 tech companies in the market you make
Money off of the huge return and I think this is the case I think on the internet generally there's this sort of returns to scale these exponential sort of returns. And I think that's probably a similar mindset that epic is stating where actually we only really want to collect money from the games that go huge and the best way to maximize the number of games that go huge with our engine is to get our engine in more games, which means charging less upfront making it more attractive as the Shopify thing the more companies that use
Shopify in fail is a positive indicator for Shopify because that means they're getting more rolls of the dice at that one that hits it big same thing with epic the more rolls the dice the better increasing the rolls of the dice is in a world of abundance all the increasing role device. It's not about your failure rate because failing is cheap. It's often zero. It doesn't cost epic anything. If someone uses an epic engine and doesn't pay applicant dime. It doesn't cost epic anything. It's all virtual. There's no marginal cost. So in a world of zero marginal cost you want to increase your rolls of the dice as much as possible.
we've talked so much about the sort of bits in the rules of bits instead of the world of atoms in the transition between those two things I'd love to kind of come all the way full circle now to the Future and this notion that has become popular of it being a time to build the road about Park injury since kind of now instantly famous call to action saying that this is a key time for us to make big advances that we haven't or maybe have failed to in the last couple of decades but it seems like a lot of that might be much more in the real world than the
Annette world I'm curious how you're thinking shifts over into that part of things into the atoms rather than the bits
it's certainly a tough question any sort of striking how the responsibility for this is immediately thrust upon the tech world the entire point of Technology many respects is this idea of zero marginal cost and I mean the whole idea of Silicon Valley is chips which are Sam the idea of a chip is that you spend a ton of money developing a chip but once you start producing
loosing chips the chips are basically zero marginal cost in all of the high price of the chips is either capturing profit or it's sort of capturing your R&D dollars in your infrastructure dollars and in that model we need a lot of money up front and then sort of infinite upside on the backside that's what venture capitalist Venture Capital was formed around the economics of Chip production it turns out the economics of Chip production are very similar to the economics of software production which is you spend a lot of money building
Product or a service then once people use it. It scales infinitely for epic to build a game engine cost tons and tons and tons and tons of money for an additional user to use that game engine cost is zero. This is the fundamental core economic entity personal technology. And it's the reason why so many people get the industry wrong because they don't grasp that issue. Well, it follows though that that is a very poor model for real-world infrastructure spending which often entails ongoing costs many things in now, maybe there's an asset and you
At a road once and then over time there was a form of venture capital around canals and turnpike's and things along those lines. It's not as Extreme as sort of the modern Venture Capital model. So that's one area where there is room for Innovation is is there room for a type of investment model is less sort of grand slam driven and is a more of a guaranteed return even though that absolute return might be slightly less. I think there's definitely need for new kind of sort of investment model to dry that sort of thing and maybe Tech feces can sort of help drive this
DC is a very small part of the overall world to say that VC has to take this responsibility is kind of weird when your typical sort of fidelity fund managers as much money as the entire us VC industry combined there's a very weird focus on this specific sector that doesn't actually manage that much money other things that can do though is the work from home distributed work thing is very very interesting and it's interesting not just for the implication for the companies themselves I think a lot of companies haven't fully thought this through and there's going to be lots of
Cups and they're projecting experiences in a pandemic to what's going to be normal all the time and that might not work out well but this idea of the more that Tech spreads out and is less San Francisco Centric in the more there's driving competition between cities and between politicians and spreading the influence I think we have a very positive sort of impact why can San Francisco be sold poorly run while all these Tech I'm sure they're well because there's no competition they're not going anywhere
it's just a general state of annoyance with each other and no actual change well if it turns out we see this with an Amazon second headquarters and its frame sort of negatively for understandable reasons given Amazon's wealth that oh they're setting these cities against each other well yes in a very narrow sense anything as good or bad side does a pretty bad articulation of it but this idea that companies should compete for workers by having better infrastructure by having better capabilities is something that I think is an important one the third thing though is there is absolutely
we a political aspect of this and Tech probably needs to be more involved in politics there's to what extent are a lot of the most Innovative people in Tech because they're naturally interested in Tech or because to build a service online doesn't encounter any regulation and he challenges there's not going through five million committees to build sort of a road or whatever it might be there's certainly a big issue there and just how hard it is to get stuff done the real world why would you spend time doing that if you could just do stuff online and not face any obstacles
and that's going to be a more challenging one to sort of fix something when that when you think about broadly there's also I think more room for industrial policy I think the sort of globalization that was unlocked in part by the internet in a big part by the internet but not just the internet also things like 747s that could fly over the ocean and Carolina Freight or containers being a standardized shipping thing all those sorts of things drove towards this world of extreme efficiency that it turns out if something hits or there's an issue and
up one being a problem has arisen currently but also shifts where the power is and this idea that opening up to China would allow liberalism to flow from the West to China Well turns out it so it's a two-way street and Chinese authoritarianism can flow out where they are demanding a NBA GM be fired because somebody said on Twitter which is supposedly banned in China what are we doing here try to us a band Twitter that's fine now they're reaching into the u.s. to say what we can and cannot do and that requires a collective response which is a government response
Maybe industrial policy to encourage production. If not in the u.s. Maybe in the west probably it is funny because it's like the term ministration one hand good to stand up to China on the other hand. If there is sort of be much more cogent to Meanwhile be forming deals with your allies with like Mexico. For example, we should be trying to make Mexico into the next China. There's clearly not sort of a holistic thought about this but it is certainly I think good generally that we're taking steps that direction but there should be lots of pieces and it's not
not just text responsibility, but Tech can probably do more as well
over the years covering so many different companies what company have you learned the most by investigating?
I mean, it's a tough question to answer. So I'll go with the one that popped in my head right away, which is Netflix and the way that they shifted their strategy over time and in every step they made shifts that increase their Embrace of Internet assumptions if that's why I can put it so starting out with DVDs and more like fees well,
That is an idea of unhooking from infinite inventory and also sort of times no longer a constraint and then shifting to buying the catalogs from other folks. Well, when they bought that catalog from Stars famously, what was interesting is there's I think 11,000 movies in that catalog the effective number of movies on Stars was what which is whatever was showing on the Stars Channel. Whereas the effective catalog size on Netflix is 11,000. So they actually immediately had a superior product.
On a new dimension that never even occurred to stars because they were taking internet assumptions include actually stream things and then the shift to sort of acquiring first buying shows that they owned but then producing their own shows all of these are predicated on this idea of zero marginal costs. The power of scale be able to stream to the whole world with no increased costs in every step. They've been ahead of their competitors and their suppliers have gotten Superior deals because they understand
The internet works in the way that fundamentally flip so many assumptions Under head.
My closing question for everybody is to ask you for the kindest thing that anyone's ever done for you.
The one that sort of Pops the head. I think I told the story on other podcast before was when I first started check re I've been doing it for a month or two before I sort of reached out probably because I wanted to have a sort of a bit of a catalog there. I'm a big believer that for a publication the most important story you write is the Second Story someone clicks on in that you can write one good article, but
They go to your size. I was a good article and they start clicking around if the second article they click is also really good. Then the go wow, maybe there's actually some degree of consistency here where I should sort of be connected this so I sort of had this in mind. I wanted to have I just want to send my site onto someone was one article on It Go, please read my blog. Well, there's one article here. He's just actually worth my time. So when y'all a few months in I emailed guy named John Gruber who does during Fireball mostly focus on Apple and some of that respected a lot. He had been and he had been running been
and since the mid-2000s and always looked at as that's what I want to do on to be an independent writer on the internet be great reach out to them say I read new site you should check it out just a few articles didn't hear anything back maybe a month later I got an email from him pointing out I misused the word he gave me the etymology of the word I used to make all you make the same mistake I actually made a shortcut so I'd always make to do with auto correct itself as Etc and that was the end of the email but this is knowing people who know John Greer is this is very unsurprising email get from you but I figured out
he's probably going to a piece it would be very exciting well he didn't just linked to a piece actually wrote a full article and the beginning he's like oh this is the best new blog I've seen in years read this article resistor or glowing praise and at the end he says but for the first time I disagree with Thompson and he's like a thousand words saying why I was wrong about something but that endorsement at the time I had about 500 Twitter followers just use the metric I went from 500 to 1500 overnight since that I hundred forty thousand more but it's been like a just a slow and seberg
in that was as far as a step change goes down is by far the biggest and that is really what kick-started sort of the site and I've always been sort of deeply appreciative and grateful for that funny now six seven years on we actually just started a new podcast so I just check re obviously with you're aware of it for days a week you can consume it either be an email which is the way it's always been or via podcast was a new offering me and John are actually doing a new podcast through days a week 15 minutes per episode just to sort of explore where the mean amount
has a podcast and so it's subscription-only which is a new idea but it's kind of cool that he did sort of this great favor for me and now seven years later we sort of get to do something as equals it's very gratifying in that regard
I love the book ends of the story such a neat concept and so many of these answers are about helping somebody early on in their career or their project or whatever it is and I love that example thank you so much for your time today Ben I've learned a huge amount from your writing over the years I've been trying to get you to do this for years I'm glad that we waited because there are so many
More to talk about I really appreciate your time 12 hours ahead on the other side of the world. I've loved the conversation and I love you, right? Thank you.
Well, thank you. I appreciate it. And I'm a big fan of the podcast and it's a real honor to be here. Hey everyone Patrick here again to find
more episodes of invest like the best go to investor Field Guide.com forward slash podcast. If you're a book lover, you can also sign up for my book club at investor field guide.com forward slash book club after you sign up to receive a full investigation.
Stir curriculum right away and then three to four suggestions of new books every month. You can also follow me on Twitter at Patrick underscore. Oh shag OS H kg if you enjoy the show, please leave a quick review for us on iTunes, which will help more people discover invest like the best. Thanks so much for listening.
