Mad Hedge Technology Letter
January 29, 2020
Fiat Lux
Featured Trade:
(THE NEW NORMAL FOR THE INTERNET)
Russia can now “unplug” from the internet, is this a sign of things to come?
Since 2010, the internet has become the de-facto global cock pit.
A breaking up of the internet is heavily negative for American tech companies who vie for overseas revenue.
The more unified the internet is, the easier and more cost effective it is to scale up a business and sell software and hardware to the customer.
The advent of the Russian intranet could lay the groundwork for other sovereign nations to build their own version of an intranet.
This could lock out foreign companies from doing business or only allow them access if they play by unfair rules.
There is also the dual objective of keeping close tabs on local dissidents and controlling the media which countries like Iran have found convenient and mightily effective.
The internet is not a simple place anymore.
Cross border digital transactions and cooperation of it is diminishing at a rapid pace.
Take for instance Russia’s third-largest internet company Rambler which sued Amazon-owned Twitch platform for 180 billion rubles ($2.87 billion) over illegal streams of soccer matches from the English Premier League.
Russia is the third-largest user of Twitch worldwide which could eventually lead to a ban of the service.
Where does this eventually stop?
Next on the chopping block could be Google search and then YouTube.
Many of these free services make money by serving up ads and revenue would be seriously hit if a wide swath of usership are taken offline.
The announcement merely noted that Russia successfully tested a country-wide alternative to the global internet, but the devil is usually in the details.
Either way, pulling out the rug from underneath Russian netizens is a serious option for the Kremlin.
The results will now head to the higher ups to conclude when and how the new Russian intranet will be implemented.
There are still loose ends that Russia needs to sort out like integrating a separate DNS system.
A new system connecting the physical infrastructure directly to the rest, which at present must do so through international connections. And that’s just to create the basic possibility of a working Russian intranet.
Russia has taken comfort in knowing that China has its own version of the internet aptly named the Great Firewall, but China has not cut off access to abroad merely focusing on pressure points and content not supportive of its government.
Authoritarian countries want to rule with an iron fist, and this will help them do so, the added bonus is stonewalling American capitalism inside their border in digital form.
How would a domestic internet work?
By bottlenecking the points at which Russia's version of the net connects to its global counterpart.
Domestic ISPs [internet service providers] and telcos would need to route the internet only within the digital border of Russia.
This would require close partnership with domestic ISPs which would be easy to facilitate since state-owned firms have oversized clout inside of Russia.
The more networks and connections a country has, the more difficult it is to control access.
Countries receive foreign web services via undersea cables or "nodes" - connection points at which data is transmitted to and from other countries' communication networks.
These would need to be blocked too.
Then Russia would need to create something new from scratch.
In Iran, the National Information Network allows access to web services while policing any digital content and is operated by the state-owned Telecommunication Company of Iran.
A “walled garden” would nullify the usage of virtual private networks (VPNs).
At this point, netizens can still tap outside internet sources by connecting to different servers abroad through VPNs.
Russia already has an army of tech talent it can employ through heavyweights Yandex and Mail.Ru.
The handful of entrenched behemoths would benefit greatly from Russia shutting off itself to the outside world.
Russia has even banned the sale of smartphones that do not have Russian software pre-installed and this is just the next step.
The Russian government has had their hand in online censorship before, such as its failure to block Russians from accessing encrypted messaging app Telegram.
The state-owned Tass news agency reported the tests had assessed the vulnerability of internet-of-things (IoT) devices as we step into the era of 5G.
The cybersecurity element of this cannot be diminished, and what this tells us is that your smartphone and smart home devices aren’t safe at all.
Even though American tech companies won’t be widely affected in 2020, foreign revenue will start deteriorating in piecemeal fashion.
This will likely turn into a whack-a-mole problem with American companies hoping to plug the gaps but helpless if wide audience purges ruins numerous digital audiences.
There is a reason why YouTube isn’t successful in China and there is a reason why Mail.Ru isn’t the main internet provider in the U.S.
“Invention is by its very nature disruptive. If you want to be understood at all times, then don’t do anything new.” – Said Founder and CEO of Amazon Jeff Bezos
Mad Hedge Technology Letter
January 27, 2020
Fiat Lux
Featured Trade:
(HOW TO PLAY THE CHINESE PANDEMIC)
(TRIP), (TCOM), (GOOGL), (EXPE)
Am I going to rant about Peloton today?
No, I’ll save that for another day.
Let’s get straight to the chase – the epidemic from Wuhan is crushing tech stocks.
If you want a way to play the Chinese coronavirus outbreak, then look no further than Trip.com Group Limited (TCOM).
This company owns a series of reputable Chinese travel apps from Trip.com, Skyscanner, and Ctrip.com.
The Mad Hedge Technology Letter doesn’t tend to do tech alerts on Chinese companies listed in America as American depository receipts.
We rather not expose readers to the high risk of one of them suddenly being kicked off of one of the exchanges.
American investors have zero rights of recouping any losses if Alibaba or Baidu delists or even announces to switch its listing on the Shenzhen tech exchange.
Remember that founder of Alibaba Jack Ma signed over the PayPal of China Alipay to himself without even telling Yahoo about it.
Yahoo was also locked out of any profits from the decision as well even though they were seed investors in Alibaba.
That is China in a nutshell for you!
So what’s happening now? Tourists are staying home in droves and the ones that support the economy which are the Chinese ones during the peak travel season of Chinese New Year.
Cities are getting quarantined left and right in China and the mainland has ordered all travel agencies to suspend sales of domestic and international tours.
Chinese shares have felt the pain with shares of China Southern Airlines Co. – the carrier most exposed to the site of the outbreak – cratering 20% since the second death from the virus was confirmed.
If the situation unfolds like the SARS outbreak of 2003, things could turn bleak quickly.
Remember that in just one month of the SARS outbreak, Chinese air passenger traffic fell 71%, and Trip.com was rerated and has fell off the face of the earth.
I am predicting the same type of devastating numbers to the online travel world.
Trip.com has struggled to keep up with competition from digital rivals like Meituan Dianping and Alibaba, and even if the virus is conquered, business might never come back.
Despite the trade war and Hong Kong’s protests, the world has been held up by the Chinese tourist.
108.39 million Chinese overseas trips were taken last year, a 9.5% gain, after surging 11.7% in 2018.
Flight volume was brimming along nicely until the virus, but the hotel-booking sector is getting crowded.
Meituan Dianping has recently overtaken Trip.com as China’s top site, and now has 47% of China's market, 13% higher than Trip.com.
Now, Meituan is moving further onto Trip.com’s turf with luxury hotels, while chains like Marriott International Inc. are pushing for direct booking on their China websites.
Alibaba said part of the $13 billion it raised from its Hong Kong listing in November would go toward fliggy.com, its online travel group site.
The way the Mad Hedge Technology Letter is playing the sudden drop in overseas travel confidence is through the travel app I dislike the most – TripAdvisor (TRIP).
I actually don’t have a personal problem with the functionality, but the business behind it is terrible.
That was the main reason I strapped on a put spread and I can’t see TripAdvisor outperforming dramatically in the next few weeks in the face of a global pandemic.
This was a short-term trade that TripAdvisor won’t rise 11% in 30 day
I didn’t like this company before the coronavirus and now that Chinese tourists are home sitters for the Chinese New Year, this could put a dent into TripAdvisor’s new China initiative.
Trip.com Group had taken the lead in the day-to-day running of TripAdvisor China. It owns the majority share, with TripAdvisor claiming a 40 percent stake.
Chinese were supposed to increasingly travel the world while its customer base is also becoming more global, in particularly with Trip.com and Skyscanner.
But that is all on hold now.
Yes, it is possible that there could be a dead cat bounce in shares if the virus is tamed, but the 2-week travel season is something you can’t get back once it’s over for TripAdvisor.
I believe this will come out in the numbers along with details about Google’s algorithms further destroying TripAdvisor’s relevancy in the online travel industry.
Then take into account that the company just announced a 200-employee purge for the explicit reason of increased competition from Google and things seem to be going from bad to worse.
The company has done a proverbial deal with the devil by positioning itself to be utterly tied to Google’s search algorithm while Google is going head-to-head with them.
Google has upgraded its travel search tools recently to turn the screws on several trip booking websites like TripAdvisor, Booking.com and Priceline.
In its last earnings release, TripAdvisor noted that Google has placed ads at the top of its search results, forcing companies like it to buy more ads.
The company had a rough last quarter, reporting adjusted earnings of 58 cents a share, down from 72 cents a year earlier and short of analysts’ estimates of 69 cents.
Rhetoric from management was equally as disappointing with them saying, “Google (is) pushing its own hotel products in search results and siphoning off quality traffic that would otherwise find TripAdvisor via free links and generate high margin revenue in our hotel click-based auction.”
“Google has got more aggressive. We’re not predicting that it’s going to turn around.” TripAdvisor CEO Stephen Kaufer said at the time and I don’t see how our put spread will lose money in the short-term.
I will advise readers to take profits when the time comes. Be aware that TripAdvisor also has an earnings report coming up in 2 weeks that could gyrate the stock.
I expect broad-based weakness in guidance and poor performance last quarter in the report.
“I don’t want to be liked.” – Said Founder and Former CEO of Alibaba Jack Ma
Mad Hedge Technology Letter
January 24, 2020
Fiat Lux
Featured Trade:
(THE NETFLIX EARNINGS SHOCKER)
(NFLX)
Netflix is saying no to over $2 billion in extra digital ad revenue – that is the critical takeaway from Netflix’s earnings call that fell in line with exactly what I thought would transpire.
As Netflix’s domestic subscriptions continue to soften, this is the first of many earnings calls where management will be put to the sword on why they still haven’t swiveled to digital ads.
As you guessed right, Founder and CEO Reed Hastings pulled out all the usual excuses explaining why Netflix is leaving a massive chunk of revenue on the table.
Some of his evasive rhetoric came in the form of explaining there’s no “easy money” in an online advertising business that has to compete with the likes of Google, Amazon, and Facebook.
He continued to spruce up his excuses by saying, “Google and Facebook and Amazon are tremendously powerful at online advertising because they’re integrating so much data from so many sources. There’s a business cost to that, but that makes the advertising more targeted and effective. So I think those three are going to get most of the online advertising business.”
Even most peons would understand that Netflix’s network effect is so robust that they could turn on the digital ad revenue spigots with a flick of a wrist.
It doesn’t matter that there are also three other tech firms in the digital ad sphere.
Netflix certainly has the infrastructure in place and manpower laid out to harness the power lines of the digital ad game.
Hastings weirdly lamented that revenue would need to be “ripped away” from the existing providers, he continued. And stealing online advertising business from Amazon, Google and Facebook is “quite challenging.”
I don’t believe that is entirely accurate.
Dipping into that digital ad revenue would be quite challenging if you are a 2-man start-up, but the power centrifuge that has become to be known as Netflix is stark crazy for taking the high road on data privacy when the US government still allows tech companies to profit off of digital ads.
The musical chairs might stop in less than 3 years, but not now.
It’s hard to understand why Netflix isn’t approaching this as a short-term smash and grab type of business.
If they really wanted to, they could have layered each service into ads and non-ad subscriptions just like Spotify does.
If muddying their premium service is taboo, then there are alternative solutions.
I understand and agree with Hastings that delivering “customer pleasure” is the ultimate goal, but that doesn’t mean there can’t be an ad-based model as one of the options.
I believe this is a substantial letdown to the shareholder and the stock price would be closer to $500 if there was a realistic ad revenue option.
Even worse, Hasting’s argument for not delving into digital ads is flawed by saying, “We don’t collect anything. We’re really focused on just making our members happy.”
That is materially false.
Netflix already tracks loads of data and it doesn’t take a Ph.D. data analyst to ignore that when you are busy perusing the Netflix platform, Netflix’s are tracked non-stop.
Netflix uses algorithms to track user’s behavior through tracking viewership data in order to make critical decisions about which of its original programs should be renewed and which should be booted.
It also looks at overall viewing trends to make decisions about which new programs to pursue.
It then also tracks user's own engagement with Netflix’s content in order to personalize the Netflix home screen to user’s preference.
Netflix is already “exploiting users” and they are doing shareholders a massive disservice by not maximizing revenue to the full amount they can.
And yes, I do agree Netflix is not as good as Facebook, Google, and Amazon at tracking users, but the roadmap is certainly out there for Netflix to indulge in digital ads.
It would take less than 18 months for Netflix to be running on full cylinders if they poached a few experts.
Aside from the lack of digital ads, Netflix finally is starting to acknowledge the new competition from two major streaming services, Disney+ and Apple+ — both of which have subsidized their launch with free promotions in order to gain viewership.
Then it gets worse with streaming service Quibi, WarnerMedia’s HBO Max and NBCU’s Peacock rolling out.
The latter features a multi-tiered business model, including a free service for pay-TV subscribers, an ad-free premium tier and one that’s ad-supported.
Other TV streaming services also rely on ads for revenue, including Hulu and CBS All Access. Meanwhile, a number of ad-supported services are also emerging, like Roku’s The Roku Channel, Amazon’s IMDb TV, TUBI, Viacom’s Pluto TV, and others.
Considering much of Netflix’s rise is fueled on debt, it’s bonkers they aren’t going after every little bit of revenue that is there for the taking.
Netflix could lose 4 million subscribers this year, and sooner or later, Hastings will run out of places to hide.
Slowing domestic subscriber growth and bad guidance don’t sound like a roaring growth tech stock to me.
“If the Starbucks secret is a smile when you get your latte... ours is that the Web site adapts to the individual's taste.” – Said Founder of Netflix Reed Hastings
Mad Hedge Technology Letter
January 22, 2020
Fiat Lux
Featured Trade:
(THE HOLLOW VICTORY FOR TECH IN THE CHINA TRADE DEAL)
(MSFT), (AMZN), (HUAWEI)
