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WCM Investment Management | Insight | Beach Reads - 3-30 | Welcome to another quarantine edition of Beach Reads. With everybody stuck at home all day, I hope these links afford readers a brief escape from the new, daily grind.
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Beach Reads

March 30, 2020

Welcome to another quarantine edition of Beach Reads. With everybody stuck at home all day, I hope these links afford readers a brief escape from the new, daily grind. This edition features a lot of long-form links, so feel free to come back to them when you have the time. Enjoy!

  • The first section includes links to articles that detail how the digital media landscape is evolving
  • The second section features three interesting pieces about business models (both what is best and how different ones are changing)
  • The third section is about investing through volatile markets
  • The fourth section consists of three pieces that are linked by their focus on how tomorrow might be different than today
  • The fifth section, "Reflections," gives some advice on managing relationships during COVID-19 and also touches on avalanches
Conor Deveney

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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 insights@wcminvest.com with any thoughts or feedback, and click here to subscribe!

01. Digital Media: Evolving Landscapes for Advertisers, Content Creators, and Consumers

Why Don't We Just Ban Targeted Advertising?

This article, from Wired, is a good read on the privacy implications of targeted advertising. While the headline is somewhat sensationalist, similar privacy measures (to a certain extent) are currently in place in parts of Europe. In this piece, the author examines the micro-targeting practices of the internet advertising giants like Facebook and Google (as well as The Trade Desk, not mentioned) and outlines the dangers associated with hoovering up highly personal information as well as selling it to third parties. The vast sums of money being made by these advertising firms has others jumping into the market, and this is what scares me more as surveillance may become omnipresent: "The behavioral advertising business model has given rise to a teeming ecosystem of adtech firms, including data brokers, that pass user information through each step of the chain between publishers and advertisers. It's all perfectly legal and very profitable, which explains why established companies like Adobe, Comcast, and Amazon have been getting in on the action...the practice of mining and monetizing user data has migrated to sectors like insurance, finance, and even automobiles—not to mention law enforcement, as the revelations about the facial recognition company Clearview AI remind us." Restricting targeted ads is a clear negative for advertising companies' business models, so I wonder what the catalyst will be for more stringent privacy controls in the US, if any.

An Interview with Eugene Wei About the Half-Life of Information

This was as fun interview from Stratechery, in which Ben Thompson chats with Eugene Wei. In their discussion, Ben and Eugene cover the shelf-life of information, but more specifically, they focus on the digital content of the large "streaming" players: Netflix, Disney, Hulu, and YouTube. The basic idea is that the shift to ever-available digital information/entertainment as well as the proliferation of content has resulted in shorter-lived content relevance or "half-life." One point that I found particularly insightful was how media companies will manage the half-life of their content and what implications this has for their business models: "The other factor here that matters is that I don't think any one of these companies completely controls that amortization or half-life period because it is context dependent. You're always competing with other forms of media and companies; you don't operate in a vacuum. That is the crux of the question and it'll be really interesting to monitor the amortization schedule of Netflix moving forward. But also I think that for all other media companies, it will be very curious to see if they are fighting in an overall zero sum game." The idea here is not only that IP must be relevant for a long time, but also that all entertainment competes against itself. This means that Fortnite competes with Netflix just as much as Disney does.

The Impact of COVID-19 on Pay-TV and OTT Video

Another good article from Matthew Ball, this one about COIVD-19's impact on the TV world. There are a lot of interesting thoughts here - the basic ideas are that 1) COVID-19 will accelerate cord-cutting and the general increase in OTT relevance over the traditional TV bundle and 2) some changes, especially in sports, are likely to occur solely thanks to COIVD-19. I particularly enjoyed Matthew's comparisons to changes that occurred during the GFC. Here is one example: "During the Great Recession, for example, digital ad spend saw both the smallest decline and fastest recovery. By 2010, total spend was up by even more than 25% from 2007. This stemmed from the fact that, unlike television or print, digital ad spend was the easiest to analyze, measure, and justify on an ROI basis. TV remains a black box. And while there's still some radio, print, and outdoor ad spend left, TV will likely suffer the greatest rationalization." And while history may not repeat itself, it often rhymes. One other interesting point that Matthew makes is how COVID-19 will actually accelerate the existing divergences in OTT providers: "the gaps between today's OTT streaming leaders and the legacy players now entering the market is likely to expand or exacerbate, as is the gap between the 'leading' legacy players, such as Disney+ and AT&T's HBO, and the laggards, such as NBCUniversal and ViacomCBS." One might expect Netflix to be the biggest beneficiary as a result, but Matthew has his reservations here.

02. Business Models: A Growth Framework & Updates in Music and Payments

Hierarchy of Engagement, Expanded

In the last edition of Beach Reads, there was a link to a podcast with a number of partners from Benchmark. In the piece, they mentioned an article called "The Hierarchy of Engagement." I hadn't read it yet, so I decided to check it out this week. In the slide deck, the author describes how to build an enduring product/business. Specifically, she outlines the "hierarchy of engagement," which is built in the following order: first, grow your engaged user base, second, retain users by making sure that more engagement = more value to users, and third, create virtuous loops so customers stay with the product. While this seems largely tailored to apps/tech platforms, I think it can actually be extended into other areas as well - it seems like a strategy employed by many companies in financial market infrastructure, for example.

The Key to Selling Music in the Streaming Age

This is a link to a WSJ interview with the CEO of Interscope, John Janick. In it, John tells the WSJ what is important to stay relevant in music today. Given the diverse range of mediums that music is consumed - most of it through streaming - record companies have had to adapt. In the streaming landscape, John said that speed is critical: "In the past, you used to be able to have [18-month album] cycles. Now you have to consistently be putting out music. DaBaby has put out an album probably almost every six months for the past few years, and each one just keeps getting bigger and bigger. He's...dropping music constantly, playing shows all the time. Billie, we were dropping a song pretty much every two to three months with a video. That's what's worked for them." This sounds similar to what works with many other digital first businesses, ranging from entertainment to business software.

Venmo, Square Cash Vie For Stimulus Funds Distribution

With a hefty fiscal stimulus coming to American individuals and businesses, a significant challenge has come into focus (as highlighted in this pyments article): how to best distribute funds. The current plan is to distribute funds via direct deposit, but this poses a problem in terms of reach and time to delivery: "Though the money is planned to be distributed via direct deposit, that option may not be feasible for everyone. Fourteen percent of Americans making under $40,000 a year don't have a bank account, according to figures published by the Federal Reserve in 2019, and Venmo, Cash App and other such services are available to even those without bank accounts." If anything, I think the problems with distributing this fiscal stimulus highlight a bit of ossification in the financial system.

03. Investing Through COVID-19

The Highest-Quality U.S. Companies Have Weathered the Storm Best

Given the moves in markets, this article from Morningstar could already be dated. But I doubt it: in the piece, the author points out that wide-moat businesses have fared best in the recent volatility. While ascribing a value to a company's moat is inherently partly qualitative, it is pretty cool to see that this analysis works as intended. Importantly, for Morningstar, this is not solely an allocation benefit: "performance relative to the market can be explained more by individual stock positions than sector exposures." The author also points out that wide-moat companies benefit most in downturns, while lower quality companies can excel in good times: "In difficult years for the U.S equity market, the Wide Moat Index has proved the most resilient. The trend was most pronounced in 2008, when wide-moat stocks lost 28.2%—painful in absolute terms, but a far cry from the near-50% loss sustained by the No Moat Index. In the sovereign debt crisis of 2011, and the difficult years of 2015 and the 2018, wide-moat stocks held up best. On the flip side, in big up years for the market, the rising tide lifted No Moat stocks highest. This was the case in 2007, 2009-10, 2012-13, and 2016."

Invest Like The Best: Investing Through a Crisis

This podcast was a timely recording, wherein Patrick O'Shaughnessy interviews Dan Rasmussen about investing through market volatility. I thought one of the more interesting parts of the podcast was about positioning into and out of a market downturn. Around the 25 minute mark, the two talk about value and what could potentially be wrong with it coming out of a downturn. According to Dan, the best argument against value is that the quality of growth businesses today is different than in the past. Obviously the valuation here matters, but it is an interesting argument. It was also somewhat endearing to hear the reality of the new work from home life: there are definitely some children playing in the background. This podcast isn't too long, so if you want some perspective on positioning during volatility, give it a listen.

04. Envisioning the Future

Inside China's controversial mission to reinvent the internet

This is an important read from the FT about a proposed new internet structure coming from China, dubbed the "new internet protocol." In the article, the author describes the state-run (or at least top-down) internet proposal that would replace the existing, open, and largely American-controlled (by private companies) IP. There are important implications if a new IP is rolled out that is built from the top down: those that control it would have incredible say as to what occurs over the internet - and would have the power to determine what internet users do and do not see. From the article: "Wherever our digital future is currently being built, there seems to be global agreement that the time has come for a better version of cyberspace. 'I think [some] people would argue that our current model of the internet is deeply flawed, if not broken. At present, there is only one other truly comprehensive and fully realised model out there, China's,' wrote Griffiths in The Great Firewall of China. 'The risk is that if we fail to come up with a third model — one that empowers users and increases democracy and transparency online, and reduces the powers both of big tech and government security services — then more and more countries will tilt towards the Chinese model, rather than deal with the fallout of the failing Silicon Valley one." I'm unfamiliar with a third model that has gained any traction. Does anyone know of one that could replace the existing IP and prevent a top-down IP?

The Umami Theory of Value: Autopsy of the Experience Economy

This essay is a wide-ranging review of modern culture and, for lack of a better term, the emergence of the obsession with the ephemeral - in this essay effectively referred to as cultural umami. While the piece covers a lot of ground, it relies on two primary anecdotes: fashion and food. Leaning on the culinary world, the authors provide the following definition of umami: "To us, Chang's essay gets to the heart of the matter. Through the lens of his theory, we've come to see it this way: strong flavors, namely umami, mark a surge of intensity in the flow of experience. It also becomes clear that paradox itself is at the heart of contemporary consumption." Intensity and paradox are the hallmarks of modern consumption - the authors talk about instagrammable food and fashion pieces as capturing this sentiment. The somewhat tongue-in-cheek example is one many of us may be familiar with: "One to five years later, metaphorical umami makes the combination of the food and the authenticity of the space somehow culminate in a desire to pay prohibitively expensive rent in a postindustrial wasteland." Now that some societal phenemenon (e.g. the "experience economy") are challenged thanks to COVID-19 changes, I'm curious what comes after cultural umami.

Coronavirus Is a Wake-Up Call for Supply Chain Management

I'm not in charge of a supply chain but still found this article from the HBR to be fascinating. In a world where businesses carry minimum inventory, rely on just-in-time systems, and operate complex supply chains, it is no surprise that COVID-19 has many scrambling to figure out how to manage sourcing. Executives know the importance of supply chain management, but many haven't mapped it out due to the associated complexity: "Many companies and leaders talk about the need to do supply network mapping as a risk-mitigation strategy, but they have not done so because of the perceived large amount of labor and time required. Executives of a Japanese semiconductor manufacturer told us that it took a team of 100 people more than a year to map the company's supply networks deep into the sub-tiers following the earthquake and tsunami in 2011. This explains why most companies are like a major South Korean consumer goods company, which recently told us it had known that it should have mapped its supply networks but has not done so because of the difficulties involved." Some companies will come out of this crisis stronger, with better disaster mitigation programs - others will fail to learn their lesson.

05. Reflections

How Not to Tank Your Relationship in Quarantine

Some required reading for the couples out there. This article, from The Atlantic, gives some tips on how to survive being with your partner 24x7. Here is the conclusion: "This is going to be a period of great growth for relationships,' says the anthropologist Helen Fisher, who has studied romance around the world. 'Couples are either going to grow together or grow apart.' Therapists love to advise couples to create quality time for themselves, and now we have more of it than ever. Use it wisely—and positively." Let's all try to grow together rather than apart when stuck with others.

Snow Science Against the Avalanche

This long-form article, from The New Yorker, is a great read about nature, science, and human foibles. In it, the author gives the history and current science around avalanche mitigation. Today, mountain-goers are often safe thanks to close weather monitoring, knowledgeable experts, and even artificially created avalanches. One of my favorite lessons from the article, that I think is applicable to investing, concerns those that tend to go back-country at mountains. These individuals are more at risk of avalanche; however, there are sensible precautions that can be taken to minimize the hazard. However, many ignore the risks. This is where the distinctly human element comes into play: "In the early two-thousands, when no amount of snow science seemed to be improving outcomes [of avalanches], the study of 'human factors' that contributed to avalanche accidents became popular. Tremper lists six common 'heuristic traps' that lead to avalanche fatalities: doing what is familiar; being committed to a goal, identity, or belief; following an 'expert'; showing off when others are watching; competing for fresh powder; and seeking to be accepted by a group. The Swiss pocket guide for backcountry skiers is full of technical information about slabs and slope angles, but it also includes the advice 'Don't give in to temptation!" Sound familiar?


 

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.

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