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WCM Investment Management | Insight | Beach Reads 8 - 4 | Welcome to Beach Reads. Earnings season has made the past few weeks hectic for many, including me, so this edition is a bit lighter than usual.
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Beach Reads

August 4, 2020

Welcome to Beach Reads. Earnings season has made the past few weeks hectic for many, including me, so this edition is a bit lighter than usual. As earnings begins to slow, we could probably all use a little time away from our screens, so if you can't head to the beach I hope you find a way to get a little fresh air some other way. Below, I outline the themes covered in this edition of Beach Reads.

  • How PR firms, self-hosted media posts, and gig economy platforms help create narratives and build businesses
  • Big tech and anti-trust concerns. Plus a Microsoft and TikTok tie up?
  • Thoughts on the importance of inflection points in investing and structural reasons for market inefficiencies
  • Reflections: the act of democracy and craft beer

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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. Online Publishing and Presences: Creating and Controlling the Narrative

How to Win Founders and Influence Everybody

This Wired article elevates the importance of communication by studying the role played by Margit Wennmachers, a partner at Andreessen Horowitz and co-founder of the OutCast Agency, in improving the messaging and image of Silicon Valley. The author focuses on how managing communications develops not only an image and identity but also helps to effectively run a business. From the article: "Andreessen Horowitz can advance its own editorial ideas through blog posts, podcasts, social media, and a newly launched YouTube channel independent of the media, connecting directly with people starting or building their own companies … 'the running joke of the firm is that we're a media company that monetizes through venture capital,' Andreessen says." This theme, that internally produced communications shared publicly can help attract like-minded, talented individuals, is reminiscent of the idea put forth in Alex Danco's Craft is Culture piece in the last edition of Beach Reads. Beyond this function, I found it fascinating to learn how messages are conceived, crafted, and disseminated; how narratives are controlled; and how meaning is created by a select few people. Powerful positions, no doubt.

Come for the Network, Pay for the Tool

I've featured the work of Toby Shorin in the past and think this recent post adds to the theme of increased online content creation. The owner of strategy and research firm Other Internet focuses on how online presences and content can create real, niche communities that serve needs that are not met by large social media companies. These communities can be supported via subscription instead of advertising. From Shorin: "Paid communities are a still-nascent category, but the business model is familiar: free content with a subscription paywall for more (the standard model of content + social). Paid communities develop this formula further: they take the subject matter of a content producer or brand lifestyle, and pair it with a paywalled digital social space for ongoing user interaction. Here the community is not a passive audience, but one that generates its own discussion, and for users comprises much of the value in and of itself. This community often comes to re-shape the brand or content development process." In a way, this sounds like the digital manifestation of existing physical social groups, such as country clubs. Perhaps unlike physical groups, these online communities will likely be used by brands as some sort of sales or marketing channel, which Shorin believes will be difficult to balance: "Different users of the 'community' word have different motivations, and these motivations will be the origin of conflict — conflict not only about the word's meaning, but about how this type of business should be operated. But these debates, no matter how uncomfortable, should be had. Because in a very real way, the financial and social sustainability of paid communities will depend on the degree to which the communities are recognized not as a monetizable resource but as a body of people with social needs, emotional lives, and practical concerns of livelihood." There are a lot of ideas to pursue here: the infrastructure needed for these communities, the right way to monetize them, how much external or "branded" content should exist within them, etc. Perhaps a good first take at branded content for paid communities is through mimetic advertising.

Unbundling Work from Employment

The process of unbundling and rebundling is a common theme on Beach Reads (see this Shishir Mehrotra podcast). In the context of COVID, however, a new (un)bundling phenomenon has been brought to my attention by this substack article: unbundling and rebundling employment. In the piece, the author examines how new tech platforms and high unemployment have increasingly led people to make money through more entrepreneurial or creative means, rather than by pursuing a traditional job. The industry that caters to these individuals is largely fragmented and the author posits that both people and platforms will eventually rebundle: "As individuals professionalize and seek to take their businesses to the next level, I anticipate more re-bundling—whether it's short term collaborations with other micro-entrepreneurs, or building out teams that work together for longer-term projects. There's a massive opportunity for digital platforms that lower the barriers to micro-entrepreneurship to support the growth of these workers, in whichever directions they seek." It'll be interesting to see if the multiple revenue streams that individuals currently make will be aggregated onto a single platform with other workers, effectively re-making a "traditional" employer. If this is the case, the future structure of work may be less interesting than the fact that switching costs will be lower than ever and employees may be better able to pursue positions that they find most fulfilling.

02. Tech, Anti-trust, and Regulation

Statement by Jeff Bezos to the U.S. House Committee on the Judiciary

Big tech anti-trust concerns have been making headlines for weeks, and this past week saw the first round of examinations of the titans by the US government. All the links in this section pertain to big tech and antitrust, and I figured a good way to begin would be Jeff Bezos' statement to the US House Committee on the Judiciary, in which he frames Amazon in a broad context and welcomes scrutiny. Bezos juxtaposes the innovation of small companies with the ability of large ones to undertake more ambitious, capital-intensive projects: "I love garage entrepreneurs—I was one. But, just like the world needs small companies, it also needs large ones. There are things small companies simply can't do. I don't care how good an entrepreneur you are, you're not going to build an all-fiber Boeing 787 in your garage." Bezos' argument that big companies play a role that is beyond small companies goes to the key question: how big is too big?

The Power, Peril, and Plight of The Big Tech

This long form substack post reviews current legal thinking as it pertains to large tech companies in the US, specifically Amazon, Google, Facebook, Apple, and Microsoft. In addition to providing various takes on anti-trust law and different ways to ameliorate potential issues, the article also provides compelling insights about innovation. A common argument is that large companies that aggressively buy startups stifle innovation. However, "a recent [study] indicates, in fact, the opposite as the authors 'found evidence of a strong positive association between VC investments and lagged M&A activity, consistent with the hypothesis that an active M&A market provides exit opportunities for VC companies and therefore incentivizes them to invest'. Without exit opportunities, a strict antitrust law may lead to some unintended consequences and can possibly reduce VC funding for startups." It is easy to believe that an IPO or other exit opportunity might well incentivize VC investment (not just M&A), and I know firsthand that it isn't uncommon to hear exit plans that are explicit sales to a targeted group of companies. This may still stifle innovation, though.

Microsoft and Bytedance Put TikTok Talks on Hold After Trump Signals Opposition

The July 21 edition of Beach Reads featured a Stratechery article that advocated for increased regulation of TikTok, echoing a narrative that had been rumbling in recent weeks that the US should ban the app. Now, the story has become significantly more complicated. According to the WSJ, Microsoft was working towards a deal to acquire the US operations of TikTok before President Donald Trump's comments that he wants TikTok "Ban(ed)...from the United States." From the article: "The high-stakes haggling threatens to scuttle an ambitious play from Microsoft to take on Facebook Inc. in social media. The software giant initially plans to let TikTok operate independently, one person said, much as it has done with LinkedIn since acquiring that company for more than $26 billion in 2016." Not so fast, though: apparently the acquisition talks are back on.

03. Investment Philosophy

Market inefficiency, liquidity flywheels, asset class arbitrage, and Hong Kong Land

The value vs. growth debate rages on. But, this time, the article above takes a different tack by looking at systematic forces that create dramatic, sustainable divergences from fundamentals rather than comparing returns or looking at style drift. While every active investor must fundamentally believe that the efficient market hypothesis (EMH) is incorrect, a commonly held principle is that more or better information is the edge that should be pursued to generate alpha. This article suggests that understanding asset class structures and incentives can reveal a lot about price performance and represent a source of market outperformance. Describing the number of intermediaries between the ultimate equity owner and the individual making the buy/sell decision, the author highlights that competing time horizons and incentives have "significant consequences for the way assets are priced, and at a system level, can result in truly massive levels of market inefficiency, and this inefficiency can also be highly persistent, because the arbitrage forces that are supposed to correct mispricings are not only relatively ineffective in the short term, but frequently overwhelmed by structural flows-based feedback loops that have a tendency to amplify rather than moderate these inefficiencies." The idea introduced here is that "liquidity flywheels" can divorce prices from fundamentals -- effectively confirming that most humans/investors are crowd followers. "Industries or countries enjoying and/or expected to enjoy rapid growth, which are perceived as offering significant opportunities, are the frequent locus of inward liquidity flywheels, as people crowd into a theme to get 'exposure' to growth opportunities, and the price increases such flows engender have a tendency to be seen as validating the narrative, which acts to trigger yet more inflows." The reflexive nature of these inefficiencies is described in more detail in the work of W. Brian Arthur of the Santa Fe Institute, and I believe that recognizing and acknowledging that institutional inefficiencies exist is an important unraveling of the EMH that goes beyond information (dis)advantages.

On Inflection Points

This is a lengthy blog post from a partner at VC firm "Compound" that examines the nature of inflection points in business and technology. In detailing different kinds of inflection points, the author elucidates some fascinating points, for example, that massive companies with trillion dollar valuations come from the maturation of multiple inflection points: "It wasn't just that the best companies benefited from desktop internet penetration globally, but instead they also understood how the internet would proliferate into mobile, and how high speed networks would expand the use-cases, moats, and horizontal expansion of their businesses. In a historical context, the sophistication, malleability, and ambition of scope is what often separates single inflection point companies from maturation wave companies, and thus billion dollar companies versus trillion dollar companies." This analysis highlights, in my opinion, a key attribute of many successful companies: adaptability and an institutional desire to change and improve. The author also touches on a topic covered in previous Beach Reads: the growing divide between the large and the small, and writes that the increased speed of change has resulted in faster disruption times. "As we move down the stack of the world's most valuable companies even outside of those with market caps of $500B+, a macro shift has occurred due to the increasing pace of technology proliferation as well as the depth of private capital markets and scale of incumbents creating faster disruption than ever before. This has led to investors and acquirers demonstrating a strong willingness to pay up materially for potential expansion and the perceived moats that this can create/replenish." I'm curious to hear if others think it is truly a novel phenomenon that people pay up for quality, if moats are more fleeting than previously as a result of faster disruption periods and, if so, how we should think about innovation as a moat source?

04. Reflections

Together, You Can Redeem the Soul of Our Nation

This poignant and powerful deathbed plea by the late Georgia Congressman and civil rights leader John Lewis serves as a call to action for all Americans. The fundamental duty of any government is to protect those who live under it. Yet Lewis shows that people of color have never enjoyed the protections that white people take for granted. "Though I was surrounded by two loving parents, plenty of brothers, sisters and cousins, their love could not protect me from the unholy oppression waiting just outside that family circle. Unchecked, unrestrained violence and government-sanctioned terror had the power to turn a simple stroll to the store for some Skittles or an innocent morning jog down a lonesome country road into a nightmare. If we are to survive as one unified nation, we must discover what so readily takes root in our hearts that could rob Mother Emanuel Church in South Carolina of her brightest and best, shoot unwitting concertgoers in Las Vegas and choke to death the hopes and dreams of a gifted violinist like Elijah McClain." To continue Lewis's work, each of us, individually and collectively, must participate. "You must do something. Democracy is not a state. It is an act, and each generation must do its part to help build what we called the Beloved Community, a nation and world society at peace with itself."

Will Craft Brewing Survive?

Even before COVID-19 hit, the craft brewing industry was working through what was potentially an oversupply of different beers and certainly decision fatigue at the package store level, where the ever-expanding SKU count confused more and more people. However, in the era of COVID, small breweries are in trouble - especially because of laws that are a hangover from Prohibition that mandate off-premise sales to be run through a handful of powerful distributors. The use of distributors has long been a point of contention in Massachusetts, home of the Boston Beer Company, whose founder Jim Koch recently endorsed a change in the law that helps pretty much every craft brewer – except his own. "From Lawrence to the Berkshires, craft brewers serve as economic engines, employers and draw tourism to their communities. If brewers have to wait another two years for a bill to be considered, some will not survive," Koch said in a statement provided to the News Service by the company. "Boston Beer had to make a decision. At the end of the day, that decision was to sacrifice ourselves by being excluded from Franchise Law reform in order to protect the hundreds of our fellow craft brewers in the state." The change means brewers of less than 250,000 barrels of beer a year can switch distributor, but Boston Beer can't because it produces 4 million barrels of its signature Sam Adams beer annually. This isn't the first time Koch has stepped up to the plate: in 2008 during a worldwide hop shortage, Koch shared hops from his strategic reserve with other brewers. This magnanimity is unparalleled (remember, Boston Beer Company is a public company) and indicates a focus on bettering broad stakeholders. Here is how: "It's easy to make fun of the recent era of micro-brews and macro-hops. But the modern rise of American craft brewing has been a genuine success story of entrepreneurship, localism, small-business creativity, and in many places, of civic renewal." Having visited craft breweries ranging from Other Half to Monkish, I personally understand the positive impact breweries have on communities. Koch seems to as well.


 

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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