This quick read from Bloomberg is interesting - it outlines how Visa is changing interchange rates. From the article: "Visa Inc. is planning the biggest changes in a decade to the rates U.S. merchants pay to accept its cards, hoping to persuade more people to abandon checks and adjusting its fees for new businesses such as ride-hailing services...The company's interchange rates -- fees charged every time a consumer uses a card -- will go up or down depending on the merchant and the way a consumer pays for their purchases, according to a document Visa sent to banks that outlines the changes. Higher rates are looming for transactions on e-commerce sites, while retailers in certain services categories, such as real estate and education, will see fees decline." I'm curious if this is a sign of strength or weakness on the part of the networks - the pricing power suggests that this should be interpreted as an illustration of how strong the rails' existing networks are.
ABOUT Beach Reads
Welcome to Beach Reads, a collection of interesting links that we at WCM have come across and want to share. The goal of this publication is to engage with a broader audience in order to better ourselves and others. Feel free to email us at firstname.lastname@example.org with any thoughts or feedback, and click here to subscribe!
01. The Evolving Payments Landscape
Klarna CEO says ‘maybe’ of taking public Europe’s most valuable fintech next year (but he’s not ruling out another round, either)
This article from TechCrunch is a good interview with the CEO of Klarna, Sebastian Siemiatkowski. The conversation covers a fair number of topics, but I found Sebastian's discussion of consolidation and the credit card industry to be very interesting. From the interview: "TC: A lot of competitors have sprung up in recent years. Why hasn't there been more consolidation in the space? Is it too soon? SS: I think it might come eventually, but I do think again that there's a lot of focus on these companies right now . . . and the point is that like, what we're trying to do all of us, all these companies together, is really going after the trillion-dollar credit card industry that hasn't served customers well, that has been all about hiding fees and hasn't been transparent and whose products and services are fairly poor quality." I'm curious how seriously card networks are taking the "alternative payments" threat. Visa has invested in Klarna - will it ever be the replacement?
Mastercard has had a phenomenal run as a business and a stock, in no small part thanks to the CEO, Ajay Banga. This article, from the Financial Times, features Ajay's views on "government parochialism" in payments and the threat it poses to a global and secure payments network. Ajay also described why he pulled out of the FB-led digital currency Libra. I enjoyed his thoughts on the project: "Concerns about data integrity help explain why Mastercard pulled out of Libra, the Facebook-led digital currency project that was unveiled last year. Mr Banga likes the idea of a global currency and joined the association of companies backing Libra, but concerns over compliance and the business model led him to withdraw... He also did not see how Libra would make money, and 'when you don't understand how money gets made, it gets made in ways you don't like'. Finally, he was alarmed that Facebook had positioned Libra as a financial inclusion tool but then proposed linking it to a proprietary digital wallet, Calibra." Ajay's clear vision for Mastercard and forthcoming nature seem to help the company succeed. I wonder how much of ditching Libra was because it was seen as a threat, though.
02. Advertising Mediums: Facebook
A theme I've become familiar with over the last couple of years is the declining ROI of FB/insta as an advertising channel. This article, from ModernRetail, highlights the pros and cons associated with advertising on FB. In short, the platform has become considerably more expensive as of late, but finding another avenue to reach such a large pool of customers is incredibly challenging. From the article: "Founders and marketing executives say that no one channel has been able to replicate the success they initially found on Facebook. They've lessened their dependency on Facebook — but many of them say it's still the channel through which they acquire the most new customers... Talk of moving away from Facebook advertising picked up this year in particular for a few reasons. Pinterest and Snapchat started to more aggressively court DTC brands after reaching critical milestones respectively, like going public and building out a self-serving advertising platform to make it easier for brands to start advertising." I'm curious what this means for DTC startups, or at least B2C startups - as advertising costs continue to climb in popular channels, will another alternative emerge?
This interview, conducted with a DTC brand marketer, highlights further "issues" with FB, specifically with the checkout feature recently rolled out on Instagram. One of the problems mentioned in this article that I've heard before concerns FB's treatment of data (see the MA article above for another example). From the interview: "We also started to look at the customer's journey and flow through [Checkout], and how that might impact marketing. One of the things was that Instagram basically said, 'You cannot market to the customer, and you can't send them any transactional emails.' So an order confirmation, shipping confirmation — none of that can be sent from the brand. Instagram does that. Those are all moments and touchpoints from a marketing standpoint, where we have a moment to communicate brand, even though it's just a transactional confirmation. That's taken away from us. It's just not the best experience overall, and we decided not to go with it." Anecdotes like this seem to help explain the success of the Shopify platform.
03. Luxury Brands
The $100 Billion Man: How Bernard Arnault Stitched Together The World’s Third Biggest Fortune With Louis Vuitton, Dior And 77 Other Brands—And Why He’s Not Done Yet
There seems to be no shortage of articles written about Bernard Arnault, which is no problem by me! I love reading about the man, who is at once a corporate raider and a suave fashion visionary. I also tend to like how he talks: "Why are brands like Louis Vuitton and Dior so successful?' Arnault asks. 'They have these two aspects, which may be contradictory: They are timeless, [and] they are at the utmost level of modernity...It's like fire and water." For many luxury companies, I think striking this balance is critical to success. Another interesting balance is between obtainable and aspirational. Also, for those interested and haven't heard another story involving LVMH, I recommend reading "The Billionaire Who Wasn't," about private billionaire Chuck Feeney.
This piece from Esquire profiles Hermes - or more specifically, the Hermes museum and the company's collection and creation of unique products. Given the article on Arnault above and LVMH's attempted takeover of Hermes, I thought this piece was worth including. One section from the article caught my eye: "The [Hermes] museum, which is not open to the public, is maintained as what Émile-Maurice intended it to be: a source of inspiration for the creative minds at Hermès. A place where the designers can come to marvel at the things he himself marvelled at, and see how they can inspire new collections and new objects. 'We have a phrase: 'Les vase communicant',' explains Menehould, describing the principle in fluid mechanics where a liquid will fill three connected vessels to an equal level. 'One vase is the past, one vase is the creation and one is the future. The more we need to create, the more we need to discover into the past. All civilisation is creative — stories of innovation, craftsmanship — and we want just to be a part of this story, and never cut the chain." I love this and actually think it has some application to investing. An evolution of my investment process has been to make sure to understand a company's past, not just the next quarter or year. Path dependency is a strong force, and understanding where companies (or luxury items) come from is key to understand where they are going.
This article from the NYT was an interesting glimpse into the classic car market. Some fears about extended prices and a global slow-down have weighed on resell prices as of late, but it appears that some of these concerns have abated for the time being. From the article: "As the global economy has endured a trade war and other uncertainties, some of the exuberance in this billion-dollar [classic car] business, which surged after the last recession, is showing signs of ebbing. The Arizona Auction Week, one of the market's two annual tent-pole events, just completed its mid-January run with sales down 3 percent from last year...That drop was nowhere near as disastrous as the 34 percent slide at the industry's other tent-pole extravaganza, last August in Monterey, Calif. But the falloff in Arizona to $244 million, from $251 million in 2019, still felt ominous." I don't know where the classic car market is headed, but I'm sure it has implications for stocks like Ferrari.
04. VC, PE, Public... and Music
I thought this article, from The Economist, was interesting in how it compared public and private markets. We've all heard the puts and takes around the "actual" returns of both PE and VC versus public equities. Regardless of the true return profiles, I think some of the structural conflicts apparent in all of these industries are worth examining. From the article: "Recent converts to the private world, dazzled by the historical returns, may not fully appreciate the hazards. The capital washing into San Francisco's venture-capital industry has bloated both the value of pre-ipo companies and the egos of founder-managers. The big concern is that a shift from public to private capital merely swaps one set of agency conflicts (shareholders v company managers) for another (shareholders v private-asset managers)." The author seems to be highlighting time horizon issues and remuneration for managers as key concerns. These are endemic in any industry with pooled capital/involving capital allocation decisions, in my opinion. One other interesting highlight is the claim that PE adds value: "Better returns for investors reflect in large part better operating performance by the firms that most funds invest in. In the main, the academic literature finds that private-equity and venture-capital funds add value to the firms they own. They raise efficiency, revenue growth and profitability. The firms have better management habits than entrepreneur- or family-owned firms." In the spirit of full disclosure, I haven't read the academic literature. However, when looking at public markets, I can't help but point to shortfalls with some well-known PE companies and their strategies, like 3G's ZBB, which tend to help in the short term but harm in the long run. Also, public companies we follow that tend to do well as roll ups do not follow a slash and burn strategy.
I really enjoyed this article from Alex Danco and highly recommend it for those interested in both public and private markets. In the article, Alex compares "financial capital" and "production capital" - he posits that funding for recurring revenue (SaaS) startups will transition from being primarily funded through speculative financial capital to more of a combination of financial capital and production capital - including debt. What has changed to make this possible? From Alex: "As this new [SaaS] model came together, the word 'user' became the most important word in tech. People on the outside sometimes wonder why businesses with so few traditional assets seem to require so much financing. Well, they are accumulating assets: users are the new assets, and their use is what you're out to monetize. Whatever your business model is, acquiring users is the new building factories." This is an interesting way to frame SaaS companies and what assets might mean in a digital world. In regards to raising debt, Alex argues the following: "Of course, there is a way to have your cake and eat it too: raise more capital, with less dilution on your cap table, and without needing a dangerously pumped valuation. It's to raise some debt! Not a huge amount; I'm not arguing founders will be better off if they start racking up enormous debt loads instead of raising VC rounds. Debt is not runway. I'm just saying, there's more than one way to construct a capital stack. And that, believe it or not, taking on some debt can be a smart way to finance a business. Everyone else in the business world understands this!" I'm not in the VC world but loved this piece and would enjoy hearing what others with more perspective think of it.
Given Spotify's recently announced acquisition of The Ringer, I thought this article was timely. In it, the author describes a future where audio is always on in an ambient sense - in other words, audio of some sort is always in the background. Consumer devices like Airpods are accelerating this "always on" audio world. In this world, Spotify can do well by diversifying away from solely music streaming (e.g. into podcasts) and eventually become a social platform of sorts. From the article: "Spotify's long term success hinges on differentiated discovery... if Spotify is able to successfully scale rungs 2 and 3 of the ladder [past just music streaming] to meaningfully and permanently shift its 'resource mix' away from music streaming, the label bargaining power question becomes less significant and frees the company to move aggressively into deeper on-platform social experiences." I love the idea that Spotify will become a social company - I think some of its early success in the US was because of Facebook integration and the social element of sharing music. In recent years, the platform seems to have become less social, but I wouldn't be surprised to see it begin to push back into it in its own way. As a loyal Spotify user, I'd love to see what social features would be rolled out!
05. Investment Philosophy and Approach
I enjoyed this letter from Tyro Capital management. In it, the authors cover a wide variety of topics, from macro risks to behavioral biases. One part of the letter reminded me of the difference between expiring knowledge and compounding knowledge, and thought it was worth highlighting: "if a manager allocated research time based on what industries and themes very likely will accrue significant economic value over the long-term (fundamental view), the research becomes an asset that is monetizable repeatedly any time price offers an opportunity. Fundamental views change very slowly in comparison to price views, which change by the second. Furthermore, the knowledge here of both the underlying and the pricing dynamics compound over time... Research should be done based on what is worth knowing over time, not based on what may be actionable today." I love this - especially that last sentence. In my opinion, a big part of the research process is all about building models or frameworks (thanks, Munger) to help influence continued research and improve pattern recognition.
What a phenomenal read. Most of us know Clayton Christensen from his book, "Innovator's Dilemma." And while an accomplished scholar, I was blown away by this speech he gave at HBS back in 2010. In it, Clayton describes six important strategies for living a fulfilling life. In my opinion, this is required reading for Beach Readers. There are too many quotes to pick from, but here is one of many that I loved: "Management is the most noble of professions if it's practiced well. No other occupation offers as many ways to help others learn and grow, take responsibility and be recognized for achievement, and contribute to the success of a team." Management includes rearing children, managing relationships, and succeeding as an individual. One of my favorite parts of this piece is how Clayton integrates business concepts with day-to-day life in order to help drive home points to all of us that spend too much time in EDGAR. Clayton Christensen recently passed away, but his work will continue to live on and impact that lives of others.
I liked this article from Northwestern because it deals with a problem that I struggle with and am sure many others do, too. In the piece, the authors give an overview of two studies that suggest that when working with both short-term, easier tasks and long-term, more difficult tasks, focusing primarily on the short-term tasks likely makes you worse at what you do and slows down the rate at which you learn. From the article: "Let's say you're slogging through a hectic workweek. Your to-do list is crammed with minor tasks like answering emails or submitting invoices, as well as complex projects such as revamping your marketing strategy. In the midst of the chaos, are you more likely to choose the easy or hard tasks? If your intuition says the easy ones, you're in good company. Recent research by Maryam Kouchaki, an associate professor of management and organizations at Kellogg, and colleagues suggests that people gravitate toward simpler tasks when struggling with a heavy workload... To ward off this temptation, managers should encourage workers to tackle difficult tasks and break projects into bite-sized pieces so that employees still get the satisfaction of completing each step." This is a good suggestion, but for me, I don't feel done with a big project until it is really done, regardless of how I break it up. Does anyone have other suggestions for managing workloads?
Disclaimer: To the extent that Beach Reads discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. The companies and or securities referenced and discussed do not constitute an offer nor recommendation to buy, sell or hold such security, and the information may not be current. The companies identified and described do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the companies identified was or will be profitable. Beach Reads does not constitute a recommendation or a statement of opinion, or a report of either of those things and does not, and is not intended, to take into account the particular investment objectives, financial conditions, or needs of individual clients.