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WCM Investment Management | Insight | Beach Reads 10 - 13 | Welcome to Beach Reads. A common theme running through many articles in this edition is "platform" businesses.
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Beach Reads

October 13, 2020

Welcome to Beach Reads. A common theme running through many articles in this edition is "platform" businesses. Platforms are important for investors to understand, especially as they become more powerful and prevalent, and as their definition continues to evolve. As a brief update: I'll be out for the next Beach Reads, so I'd like to extend an advance thank you to my teammates who have volunteered to publish in my absence. I'm excited to share some fresh perspectives from a broader swath of the WCM team here in Laguna. Below, I outline the articles covered in this edition of Beach Reads.

  • The gamification of the workplace and how a gaming chat platform is expanding beyond its core base
  • Two articles on how to better understand platforms. The first thinks through open source challenges and opportunities, while the second outlines two types of platforms
  • Retail: How "browsing" e-commerce platforms may come to be, especially in the west
  • A look at how and why antitrust rules and tax laws need to be updated
  • The NYT: an investment thesis
  • Reflections

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Conor Deveney

SECTIONS

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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. Technology: Video Games and Real Life

Secure the BaaG

Close followers of Beach Reads have likely picked up on my fascination with the metaverse, which continues with another post about a metaverse-esque theme: business as a game, or BaaG. While this piece is a bit out-there, I enjoyed how it framed the increased "gamification" of life, and potentially work as well. With the backdrop of COVID, it isn't much of a stretch to consider further gamification of parts of our lives. "At the simplest level, BaaG is just a shiny new interface on top of existing tools that makes work feel more fun," the article says. "One way to think of it is, 'What if developers built business-in-a-box software in the Unreal Engine?" The wide variety of work-from-home tools available today, combined with platforms such as Stripe and Shopify represent the skeleton on which a BaaG service could be constructed. "When you start to think about all of the disparate, 2D tools we use to work as compared to the rich, contained environments in which gamers play, the way we do things seems bland. And we're getting to the point at which developing game interfaces for work is technically feasible." Some business dashboards today already take a step towards "gamifying" business management but I think a broader, more encompassing virtual work environment, especially in a WFH world, could be helpful in maintaining engagement, motivation, and even collaboration.

Discord's New CMO Wants To Help More Than Just Gamers Connect

Speaking of gaming and the workplace, this short Forbes article introduces Discord's new CMO and her vision for the chat platform. With a background at VSCO and Nike, Tesa Aragones says she wants to help deepen and broaden communities on the sizable platform. Discord "says it now has more than 100 million monthly active users, with people spending 4 billion minutes in conversations each day across 6.7 million communities," the article says. More and more, these conversations are no longer solely gaming related: "The company has been trying to scale and diversify. Much of the momentum has been this year, especially as people look for new ways to communicate with friends and family during the pandemic. According to Aragones, Discord's user base has grown by about 50% since February, and the company now says 30% of people use the platform for reasons other than gaming." While Discord could be a key part of BaaG, it is clear that the company's success will be at least partially predicated on expanding the user base beyond the current core. This article provides a number of existing use cases of Discord outside of gaming, and how it is used alongside other software tools.

02. Investment Philosophy: Understanding Platforms

Making is Show Business now

This blog post from Alex Danco reviews the topics introduced in the book Working in Public: The Making and Maintenance of Open Source Software. One of the most interesting highlights is the not immediately obvious connection between developing and marketing technology and show business. "Making technology seems like a world apart from entertainment and show business. But in this new world, making is show business. Look at what founders do all day! And I don't mean that in a derogatory way. It's hard work to create a product, create attention, and then – most importantly – manage that attention so it feeds your momentum but doesn't burn you out." As it relates to open source development, Danco outlines that creators tend to be less successful working in large groups than when working on a project largely independently while maintaining mindshare with a broader group. This is an interesting divergence from the team-oriented internet communities of the late 1990s, which tended to be built on trust: "In the old world, you maximized engagement and retention of your community by giving them trust, and giving them context, and making them peers. Platforms make it easier to create and discover and distribute, but at a cost: too many people, too much attention, and too little friction to join or leave. The cost of platforms is less overall trust, and less overall context, for everyone but the core nucleus. Instead of fighting that tradeoff, we accept it: we find new ways to build, like microservices, which make it easier for low-trust, low-context participants to be productive anyway." One interesting topic to consider in light of this piece is how platforms can be successful and maintain engagement, which the article below touches on.

Platform Liquidity: Why Economic Incentives Matter

It's becoming increasingly difficult to come across a company that doesn't style itself as a platform (just see the article above). Previous Beach Reads have presented different frameworks about platforms, with a focus on marketplaces. While determining exactly what constitutes a platform is a discussion for another day, this article from Sameer Singh helpfully breaks platforms into two categories. Type A are platforms that are "focused" and have "integrations," resulting in "weak defensibility and scalability" (e.g. Slack), while Type B are "multi-purpose with native apps" that have "strong defensibility and scalability" (e.g. Shopify ). The differences between the categories determine the way incentives exist within each and how growth should be pursued, according to Singh. "Startups building platforms with known use cases (Type A) can easily reach liquidity by targeting developers who already share users with them. On the other hand, startups building truly multi-purpose platforms (Type B) have a more difficult path to liquidity — they need to attract hobbyists first to show some traction before they can appeal to professional developers." Thinking about how network effects operate in different types of platforms and how they scale as a result is a helpful way to add some structure to the otherwise generally nebulous discussion of platforms.

03. Retail

Browsing e-commerce: An untapped $250B+ opportunity

Continuing the theme, this short Medium post from Vivek Goyal of Altimeter Capital provides a fresh take on e-commerce platforms. Specifically, Goyal ponders how e-commerce will evolve into a more entertainment-based browsing experience from one primarily driven by functional, pragmatic purchases. He cites the success of the "browsing" e-commerce model in China, but wonders when it will come west: "Browsing e-commerce has already been proven in China. PinDuoDuo (PDD) is a $180B+ GMV business (LTM Q2–20) built on this model. TaoBao and ByteDance have also built products on these lines, but I have not seen any solution at scale in the west." This article in the July 21 edition of Beach Reads touches on this topic by recommending that Shopify make its Shop app more of a discovery platform driven by influencers and social connections. Instagram may be the leading western player pursuing the browsing e-commerce model, and perhaps Pinterest isn't far behind, but we have yet to see exactly what a successful browsing e-commerce experience will look like, and I, like Goyal, am excited to watch its evolution.

04. Business Regulation and Taxation

Anti-monopoly Vs. Antitrust

A topic of increasing consequence at the nexus of business and technology is monopoly as the US government looks into whether a handful of megacaps are potentially operating anticompetitively. In May I featured this story that called for new ways of understanding monopoly in today's world. This Stratechery article poses a somewhat similar argument. After a brief history of antitrust laws in the US, Ben Thompson concludes that a new approach is needed to understand the power that large tech companies may or may not have. "So much modern antitrust action against tech companies is like pushing on a string: the reason these companies have power is because so many customers choose to use them, and it is both difficult and probably unwise to try and regulate the individual choices of billions of users. At the same time, as I noted, I am sympathetic to the issue of just how much power these companies have: constraining that power, though, needs new laws that start with Internet assumptions, and anti-monopoly advocates would do well to focus on solutions that, instead of retracting privileges, extend them (a la incorporations in the 1800s)." It is against this backdrop that Thompson critiques the House panel's report, concluding that "monopolies were asserted with effectively zero evidence, and there was little to no mention of the positive impacts of these companies, even as basic business practices were described in the most sinister terms possible." The path forward here likely involves a new way of thinking about, and regulating, the accumulation of power and role of competition. For what it's worth, I tend to enjoy Tim Wu's thoughts on monopoly and this NYT article provides a different takeaway than Thompson provides.

OECD drafts principles for $100bn global tax revolution

As the US increasingly looks to how it can regulate large tech firms, the rest of the world, represented by the OECD, is trying to improve corporate taxation. A recently drafted set of principles aims to "ensure that multinationals — including highly profitable US tech giants and European luxury goods companies — pay corporate taxes on profits where they operate and cannot shift them to tax havens." The current US election cycle may determine the future of such reform, which the OECD believes will "enable tax authorities to collect up to 4 per cent more corporate tax." Regarding the US: "The question of whether an international political deal on the tax changes can be struck will be one of the first big tests for the next US president after the election in November. Washington has been the main reason why political progress on a deal has stalled." According to the OECD, failure to coordinate international taxes has an economic cost: "The result would be a proliferation of uncoordinated and unilateral tax measures and an increase in damaging tax and trade disputes; which would cost up to 1 per cent of global GDP."

05. Theses: The NYT

The (Not) Failing New York Times

The format of this thesis – a slideshow – is a bit different than other theses I've featured, but the content is fantastic. The deck shows how the New York Times, which looked to be at death's door not too many years ago, has mounted an impressive turnaround through a four-part strategy. According to the author, the plan was to 1) clean up the balance sheet, 2) invest in content, 3) invest in tech, and 4) launch new revenue streams. "The Times has taken their print profits and reinvested heavily – and wisely – in their core offering: journalism," while also focusing on raising subscription revenue. "By adopting the strategies and digital know-how of Netflix, Spotify, Tinder, and Hulu, NYT has remade itself into a subscription-first company." The result: "NYT now has 4x more subscribers than they did at their print-era peak." The author believes the turnaround is still in its early days and that growth should continue for years. The piece is enjoyable not only because it opened my eyes to the NYT as a business, but also because it highlights the value that subscription businesses with quality content and loyal customers can unlock. This article from a previous Beach Reads is worth reading alongside this NYT thesis.

06. Reflections

Inside the airline industry's meltdown

As of just a few months ago, air travel was nothing short of ordinary. Since the dawn of commercial aviation 110 years ago, flying has become cheaper, more encompassing, and ever more prevalent. That all came to a halt with the emergence of COVID-19. This article, from The Guardian, outlines the chaos that the industry was thrown into at the beginning of 2020 and how difficult it is to manage the people, planes, and airports that make air travel possible. In what feels almost like a lifetime ago, the March/April spread of COVID in Europe and the US challenged airlines to keep pilots and planes flight-worthy when no one was flying. "Ton Dortmans, KLM's head of engineering and maintenance, explained what his team had to do to bed their planes down through the spring and summer. Fuel tanks were emptied, although not entirely: 'You still need some weight in the plane, for the bursting wind we get here in Amsterdam.' For the same reason, the blades of the engine fans were locked into place with straps, so that, on gusty days, they didn't whirl around endlessly and wear their parts out. The water tanks were drained. Engineers 3D-printed covers to place over the small holes on the plane's surface, which conceal sensors that measure air pressure and altitude. The covers protected them from moisture and insects." These dramatic and sudden changes largely remain in place, and despite large bailouts from governments around the world, the future of airlines remains uncertain. The article points to an interesting argument, though, that COVID-19 didn't create new trends for airlines, but rather accelerated ones already occurring. These include the demise of wide-body planes and the hub-and-spoke airport model, and the adoption of more fuel-efficient aircraft. "These changes were under way even last year...The coronavirus has only made them seem more practical still."

A Columnist Makes Sense of Wall Street Like No Other (See Footnote)

Bloomberg columnist Matt Levine is likely familiar to many readers. This recent NYT profile praises his unique writing style (including his frequent use of footnotes) and his ability to bring clarity and levity to otherwise dull or complex subjects. "Mr. Levine's favorite subjects include insider trading statutes, bond-market liquidity and the ubiquity of securities fraud, but his columns are never boring," The article reads. "They may be the only entertaining words a financial markets professional reads all day." With prior experience as a lawyer, banker, and student of the classics, Levine brings broad perspective to his writing and often pokes fun at Wall Street, making "readers feel in on the savage joke that is late capitalism." Those interested in reading Levine's work can find it here.


 

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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