Mad Hedge Technology Letter
October 17, 2018
Fiat Lux
Featured Trade:
(THE SPOTIFY REGIME),
(SPOT), (AAPL), (NFLX), (MSFT), (AMZN), (GS)
It’s not earth-shattering to concede that our attention spans have shrunk and as a result, there are unintended consequences.
The various smart devices and other technology vying for a slice of your precious attention have been accepted as the new normal.
Whether it’s binging on Netflix (NFLX) or gaming on a Microsoft Xbox (MSFT), consumers are absorbed obsessively staring into a screen most of the day.
As tech penetrates the core of our existence, the music industry has been the recipient of changes that were hard to fathom just a few years ago.
And as all businesses morph into pseudo-tech enterprises supported by data analytic teams, management is able to unearth some compelling data and utilize it to commercialize the audience.
Spotify (SPOT), the world’s leading music streaming platform, doesn’t monetarily reward music artists unless a stream surpasses a minimum of 30 seconds.
This is just one way that Spotify’s founder and CEO Daniel Ek has changed the music industry.
Think about the implications.
Gone are the elaborate instrumentals to warm listeners up before a catchy chorus hooks you forever.
Songs are entirely front loaded now with the end goal of persuading listeners to not swipe until the 30-second barrier is passed.
Whatever happens after that doesn’t matter – the song might as well go silent because Spotify will pay the artist.
According to Spotify data, Ed Sheeran’s “The Shape of You” is Spotify’s most-streamed song with 1.94 billion listens.
This is just one scant nugget of data in Spotify’s treasure trove of global music data that finely chronicles the state of the music industry and how consumers devour music.
Spotify CFO Barry McCarthy promptly explained the Spotify’s relationship with data and music at the Goldman Sachs’ (GS) Communacopia conference by saying, “The company with the most data wins. The company with the most data insights wins. The company with the engineering culture, software-driven business wins. And that’s the play we’re making.”
In the current tech climate, I will take software over hardware any day of the week.
Hardware sales are a one-off event until the next cycles bring an upgraded iteration which could take years to execute.
Software sales are an annual recurring revenue stream that is as sticky as the software's quality giving hope to company CFO’s of a perpetual income stream.
It doesn’t matter that Spotify isn’t profitable. The end goal isn’t to make money in an industry that is notoriously difficult to combat the royalty expenses eroding 70% of every $1 of revenue.
What has happened is that Spotify is too big to fail and it loves every second of it.
The music industry needs Spotify just as much as Spotify needs the music industry and this awkward partnership is far from a match made in heaven, but it works for the foreseeable future.
It helps that artists, for the most part, have bought into the data-based streaming model.
Music artists have turned into tech-like firms themselves.
Their new goal is to compile an audience then monetize like Spotify itself.
It speaks volumes of how the tech model has penetrated every corner of the world.
Apple (AAPL) is acutely aware of the potency a music streaming service offers and has been investing in Apple Music, its music streaming arm.
Rumors have been swirling that Apple absorbed the entire staff of a music analytics firm called Asaii including the owners, for a tad under $100 million.
This talent grab on the heels of the Shazam purchase indicates that Apple seeks a better understanding of how to curate music playlists and better serve music fans who own Apple devices.
Even though Apple has the second leading music streaming service, they have ceded the battle to Spotify.
CEO of Apple Time Cook is on record saying, “We’re not in it for the money.”
Indirectly, Cook means Apple Music is a loss-making division and he doesn’t care because it is just a small fragment of what makes Apple one of the best companies in the world.
Apple has also commissioned 24 television shows and 2 films costing them $1 billion.
A single billion is peanuts considering the eye-popping amount of Apple’s cash hoard. They can afford to take the long-term view and slowly enhance the ecosystem instead of Spotify whose eggs are all in one basket.
Apple is more concerned about offering iOS users the best experience possible and in return Cook hopes to count on them to use iOS devices for a lifetime.
Apple Music’s biggest weakness is its biggest strength.
In short, Apple music is tailored to the iOS operating system.
If you sign up, the app directs users to sign up for an Apple ID if you do not already have one.
Android lovers have little interest in signing up for Apple Music considering they do not have an Apple device and then must pay $9.99 per month after the introductory 3-month offer expires when Spotify is free. It’s not worth the extra hassle.
It is almost certain that Spotify will enact an Android operating system pivot to build a moat around its business and that is something Apple cannot do.
Spotify will start partnering with Samsung, Microsoft, and the Android-based Asian manufacturers to focus on monetizing the Android audience and make it even more inconvenient for listeners to access Apple Music.
Signing up for Spotify and listening to its ad-free subscription without creating an Apple ID is more appealing.
And after three months, users have the option to continue a free version of Spotify, albeit with digital ads popping up.
This leads me to the belief that there is definitely space for more than one player in the music streaming industry.
Amazon is another tech firm who has a music streaming service but are more concerned if they convert users into prime memberships.
If compiling the most music data wins out, then Spotify is in the lead with its 83 million paid users and 101 million free users.
Apple trails in second place with 50 million users which is still an extraordinary number of listeners and easily monetizable.
The way music streaming platforms works is that users are more likely to listen to the most popular artists and songs and not look for an adventure.
The app is merely there to locate the songs they already like or click on a recommendation produced by an algorithm.
It’s not like going out on a Friday night to experience some unknown singer in a grunge basement and becoming a new fan. Users know what they want, and they desire to access it. Such is the nature of internet search.
Spotify’s data shows that out of 3 million artists on the platform, 200,000 artists receive 70% of the music streams, clearly segmenting the haves and have-nots.
The rest of the 2.8 million are struggling to be discovered and cannot cut a wage off of Spotify’s platform.
Online music streaming products also align perfectly well with artificial intelligence-based voice activation technology.
These services will deeply integrate this technology into its services as they desire to ramp up the quality of services.
As for the music streaming business hopefuls, it's game over as the three major players have the leverage to put out any fires that crop up.
When you break it down, Spotify has a 180 million user audience growing at 30% YOY and is hellbent on becoming profitable.
As they enhance the platform’s tools and services, gradually expect more subscription-based products to entertain users.
And even if Spotify doesn’t become profitable as soon as they would like, the aggregate hoard of data will multiply in value.
Spotify is already the most prized music asset in the world with a market cap of $26 billion, about $10 billion higher than all global music revenues.
Yes, Spotify destroyed album artwork and its audio quality of 320 kilobits per second is no match for CD-quality audio. But this is the world we live in today and Daniel Ek’s Spotify is the 800-pound gorilla in the room.
Spotify is a great long-term buy-and-hold asset. Take the latest weakness to add to your position.
“I was born in Sweden, and in Sweden, we are known for the piracy services.” – Said Founder and CEO of Spotify Daniel Ek
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more
Global Market Comments
October 16, 2018
Fiat Lux
Featured Trade:
(WHY COAL IS A SHORT),
(KOL), (BHP), (UNG),
(TESTIMONIAL)
Mad Hedge Technology Letter
October 16, 2018
Fiat Lux
Featured Trade:
(IS IT REALLY ESSENTIAL OR NOT?),
(AAPL), (GOOGL), (MSFT), (AMZN)
What has been one of the top performing asset classes since the beginning of 2016?
Is it Apple (AAPL), Amazon (AMZN), gold (GLD), oil (USO), or collectible French postage stamps?
If you said “Coal,” you win the kewpie doll.
In fact, the 19thcentury energy source was one of the best investments you could have made over the past three years.
Indeed, the Van Eck Coal ETF (KOL) has picked up an eye-popping 210% since it printed its $5 low the first week of 2016.
Google (GOOG) eat your heart out.
You might give credit to the president for the meteoric move, thanks to policies so overwhelmingly helpful to the industry that they brought tears to the eyes of the owners of coal mining companies.
But you’d be wrong again.
Most of the move took place before the election.
As a result, I have recently been deluged from readers asking if it is time to buy this prehistoric energy source.
My answer is no, not ever, and not even with Donald Trump’s money.
However, my answer relies more on basic market dynamics rather than any environmental sympathies I might have.
You can blame China.
The Beijing government is manipulating its domestic coal industry to prevent them from defaulting on hundreds of billions of dollars with of loans to local banks.
So, it has cut back the number of days the industry can operate from 330 to 276 days a year.
What happens when you restrict supply and increase demand? Prices go through the roof as they have done smartly.
It gets better.
The Middle Kingdom was hit with rainstorms of biblical proportions, flooding many mines and forcing them to close many mines. The sushi hit the fan.
That forced major consumers, the big steel producers, and electric power plants to resort to the international spot market, or the “seaborne market” to cover shortages to avoid shutting down themselves.
Who is the world’s largest supplier to the seaborne market?
That would be BHP Billiton (BHP), the largest capitalized company in Australia, which has seen its shares appreciate by 144% since 2016 bottom.
I have been following coal for 45 years ever since I was the coal correspondent for the Australian Financial Review during the 1970’s.
I had to write a mind-numbing five pieces a week on coal (the AFR was a daily). So it’s safe to say that I know which end of a lump of coal to hold upward.
For a start, you never want to invest in an asset that is dependent on government fiat for rising prices. They can change their minds at any time. The loans in question could get paid off.
And you can count on the world market to suddenly find new supplies whenever a commodity price doubles.
Remember the Rare Earths bubble where we were active players?
After a hyperbolic bubble, prices fell by 90%. Rare earth turned out to be not so rare. Only the cheap labor to extract them free of environmental regulation was.
So you can count on the current coal bubble to deflate eventually. The perfect storm is about to run in reverse.
That leaves us with the long-term fundamentals of coal which are bleak, to say the least.
China is far and away the world’s largest coal consumer at 49%, followed by the US at 11%. This is why China is also the world’s largest producer of greenhouse gases.
China is making every effort to reduce reliance on these cheapest form of energy, thanks to the blinding, choking smog alerts besetting its largest cities.
It is only still using coal because with an economy growing at 6.6% a year plus, it has to rely on every energy form just to keep the lights only. Power brownouts can lead to political instability.
Coal consumption in the US has been in a death spiral for years falling from 50% to 33% of electric power generation over the past decade.
That led to the bankruptcy of several of its largest players such as Arch Coal (ACI) and Peabody Energy (BTU).
The collapse of natural gas prices to $2/btu made a cleaner burning alternative cost-competitive. And gas lacks the nitrous and sulfur oxides and particulate pollution prevalent in coal.
Read the prospectus of any electric power companies and you will find them besieged by lawsuits from consumers claiming that the coal they burned caused their asthma and cancers. Utility companies would love to be rid of it.
And then there’s solar energy.
California governor Jerry Brown has signed the nation’s toughest climate legislation, mandating that all power come from alternative sources by 2030.
On several days this year, alternatives already accounted for 100% of the state’s total power production.
While ambitious, the target is viewed as doable. Solar energy, which now accounts for 5% of the state’s power output, will do the heavy lifting.
Many other states are expected to follow suit. No room for coal here.
The United Kingdom has already taken this path as have many other nations.
It says a lot that a country that ran a coal-based economy for 300 years announces the closing of its last mine which it did a few years ago. It will replace the power output with alternatives.
Having lived in England during the violent miner’s strikes during the early 1980s, it was quite a revelation.
So the writing is on the wall. Another major producer, Anglo American (NGLB.BE) sold two major mines in Australia.
Coal is clearly an energy source whose time has clearly come and gone. So, will the price of coal. The next recession, which may only be a year off, could well drive the entire industry into bankruptcy.
Looks Like a Short To Me
He is at it again.
No, not Elon Musk, but Andy Rubin – the Godfather of the Android operating system could create another ground-breaking shift in the world of technology.
Apple’s (AAPL) iOS system was the leader of the pack until Rubin’s timely intervention.
When Apple debuted the iPhone and, shortly after, the Apple app store, there was nothing remotely comparable at the time.
The roaring success of the iPhone and its app store could have been so much more to the global smartphone audience if it consumed everybody.
You could smell broad-based world domination, but it never materialized.
Android now has 85% of the global smartphone market share, and Apple has carved out the last 15% albeit in the high-income markets.
You can thank Microsoft (MSFT) for all of this – let me explain.
Android was hands down the best purchase ever made by Google for a paltry sum of just $50 million.
It was in 2005 when Android was bought by Google and Rubin’s work commenced overseeing the construction of a platform that could avoid licensing restrictions dragging down the industry.
Android was initially commissioned by Google to build a platform to stymie another potential Microsoft monopoly, but this time, in the mobile space.
Google didn’t want to be blown away by Microsoft as the pivot to mobile was picking up steam.
Google assumed that Microsoft had the best chance to execute the shift to mobile because of the universal acceptance of the Windows operating system.
And little did they know that Steve Jobs had a game changer up his sleeve when he rolled out the iPhone.
The premise was very simple for Android - offer supreme customer value, massively scale a global platform, and catalyze explosive growth.
Easier said than done.
In the end, Rubin was able to generate a blanketed adoption of the Android operating system in smartphones.
Apple has been, by and large, the victor of hardware because even though the Android system is more popular, the manufacturer of Android-based phones cuts across a broad swath of different international companies from Google itself to Samsung, LG, and the various Chinese makers.
Around half of Americans are proud to be an iPhone owner and Apple was able to ensure they were the only manufacturer of their proprietary iOS system harvesting all the profits.
Onlookers aren’t giving Android the credit it duly deserves in the global scheme of things.
Fortunately for Google and Rubin, Microsoft CEO Steve Ballmer fudged his opportunity while Palm, Symbian, and BlackBerry never stuck around either for recorded posterity. It could of easily have gone the other way.
Android has become so entrenched in non-iPhone smartphones that Google was fined $5 billion for being too dominant in Europe or for what regulators tout as illegally cementing their position. The battle is still going on in court with a final verdict coming shortly.
What does Rubin have on the menu this time?
After establishing his own private company to battle the tech Goliaths, he built an initial smartphone that was an unmitigated flop.
The Essential PH-1 smartphone offered a stock Android experience meant to appeal to the medium-tiered smartphone market.
The phone had solid hardware, enough juice in it to be competitive, a poor camera, and it did little to stand out from the crowd. There are many other cheaper substitutes with better brand recognition selling similar enough devices.
In general, it is a passable smartphone, but the initial price point was a reach in this ultra-competitive climate.
Sales were an outsized bust barely able to penetrate the American smartphone market.
Sprint offered the phone for $699 and registered 5,000 sales in the first month.
To put it into perspective, Apple routinely sells 40 or 50 million smartphones per quarter.
The Essential phone was discounted down to $499 in an attempt to salvage revenue. That didn’t work either.
You can now buy the phone on Amazon.com (AMZN) for $378.
All told, the phone did about 150,000 in sales and Rubin needed to rethink his vision.
Even as recently as this spring, takeover rumors swirled because of Essential’s stable of engineering firepower.
The vultures never swooped and Essential is back with a vengeance building their second phone - Essential Phone PH-2
To stem the tide and make their mark in the smartphone industry, Rubin decided Essential needed a fresh strategy requiring immense chutzpah.
Smartphones have essentially become commoditized in the mid-tier range and consumers look for the best specs at the lowest price point. Samsung has made a living picking off this type of buyer.
Rubin decided to align his future product with the technology that will change the world – artificial intelligence.
Artificial intelligence will be incorporated into the design for the phone to work for the user without him using it.
Yes, that’s right, the user will not have to even have his paws on the phone. The artificial intelligence will mimic the user’s behavior and carry out its functions and tasks alone.
Rubin said, “You can be off enjoying your life, having that dinner without touching your phone and you can trust your phone to do things on your behalf.”
This audacious strategy is a risky bet that consumers will be comfortable enough with artificial intelligence to allow them to venture out alone into this complicated world with no checks and balances from the user themselves.
Imagine some catastrophic scenario if the artificial intelligence taps into a user’s bank account and begins deploying hard-earned capital to exotic locations all over the world.
Smartphone competition has effectively made smartphones widely available for most of the world, but cultivating a smartphone company from scratch requires a dose of creative intuition.
Betting on the development of artificial intelligence is one of the few weapons in Rubin’s toolkit.
This could be Rubin’s last attempt at a smartphone and moving further out onto the risk curve means this could be a whale of a failure or a spectacular success. I can’t imagine his investors allowing him to produce another failed smartphone.
My bet is that consumers aren’t ready to absorb the type of levels of artificial intelligence that Rubin hopes to infuse into his new phone.
Even if he lays an egg, he will be back on another project in no time. That is the sort of slack you get by being the godfather of the Android operating system. Funding is as lush as a tropical forest.
Secretly, I want him to succeed because the world needs positive disruption to the Silicon Valley cohort of megacompanies from independent sources.
My bet is that a smartphone will not be the revolutionary new product the world is clamoring for. It’ll be something we have never seen before.
Please click here to visit Essential’s website.
A GOOD PHONE BUT TOO SIMILAR TO THE REST
Dear John,
I would like to express my appreciation for all that you put into your daily letter.
My background is in the medical field so when it comes to investing and finances, I need all the help I can get. It's totally amazing that you are a one-stop shopping experience.
You the incorporate past, present, and future in where to invest. With your service, I have learned the who, what, when, where, and how of successful trading and have done rather well with your input and the text alerts.
Often times though I have gone off on my own in trades and have given much of my profits back.
You warn your subscribers of the pitfalls and the need of strict discipline in knowing when to exit and limit your loses. I am surely learning this the hard way.
You are definitely the voice of experience in all matters of trading and I hold you in high regard as my mentor.
Sincerely,
Christine P
Morristown, NJ
“In the future, driving cars will be outlawed. It’s too dangerous to drive around a two-ton death machine,” said Tesla founder Elon Musk.
