Mad Hedge Technology Letter
April 3, 2019
Fiat Lux
Featured Trade:
()
(GOOGL), (NFLX), (AMZN)
YouTube has to be the online streaming asset of the year even relegating Netflix (NFLX) to the minor leagues – I’ll tell you why.
India is the new China.
Netflix’s growth strategy is intertwined with India and the management has been extraordinarily vocal about their interests there.
The Indian online streaming renaissance isn’t just fueling Netflix’s rise. In fact, YouTube and its free platform are performing miracles along the Ganges River.
How big is YouTube in India?
YouTube already has 245 million monthly active users in India penetrating 85% of the country’s internet population making India one of its best-performing markets.
The company says more than 60% of its streaming hours in India come from outside the six metros, meaning YouTube has captured the hearts and minds of the rural population who cannot afford to pay for online content.
KPMG forecasts India’s online streaming audience to surpass 550 million by 2023 and YouTube will capture 70% of the 550 million audience.
How did YouTube manage to do this?
First, the content is free with ads allowing rural Indians to join in.
Second, local Indians became hooked on Alphabet’s YouTube with Alphabet (GOOGL) taking an already brilliant platform and supercharged it by tailoring it to popular local influencers that are joining in droves inciting a massive network effect.
Effectively, YouTube attracted these influencers with eye-popping audiences to create organic and original content without the $8 billion Netflix planned content budget in 2019.
YouTube was able to do this by borrowing the Instagram format but transferring it to a more effective video platform model.
Take for instance Nisha Madhulika whose channel has blossomed into one of the most popular Hindi language-based online cooking channels on the internet.
To see one of her videos, please click here.
Her channel has over 6.8 subscribers, yet, accumulating subscribers is one thing, and making money is another.
Past videos that were posted around 2-3 weeks ago have views between 200,000 to 400,000.
These influencers build up revenue by displaying 3rd party ads generated by Alphabet.
A general rule of thumb is that for every 1 million view, ad revenue collected is around $2,000.
Therefore, Nisha and fellow YouTubers with massive audiences are incentivized to pump out high-quality content in high volume.
Scrolling through her numbers, Nisha appears to average around $700 of revenue per video.
She sprinkles in the occasional viral video that garners 1.5 million views which would earn her a tidy $3,000 for a single video.
Not bad and that is before any of the possible marketing opportunities are quantified.
As long as she focuses on the quality of the videos, she can consistently earn $700 per video, then she can do more by partnering with affiliates to sell 3rd party products and receive a commission that is trackable through the links she leaves at the bottom of her videos.
Nisha’s video business works like this, her channel entails producing 3-5 short videos per week producing around 9-11 million views per month adding up to between $18,000-$22,000 in revenue per month.
Remember that while she is accumulating views for newly posted videos, there are still viewers rummaging through her older content demonstrating the beauty of the network effect.
Older videos in Nisha’s case usually add an extra $3,000-$5,000 per month to the bottom line in pure profit.
Many influencers curate, edit, design, and film the content themselves, or subcontract these jobs for a cheap fee.
An influencer could run their YouTube channel for less than $100 per month minus the fees for the equipment.
YouTube has created a powerful platform for content creators to monetize their original content and give them incentives to stick around and build a business.
Netflix has more of a mercenary model where they contract highly paid actors to contribute a finite amount of content for a fee.
YouTube’s model penetrates to the heart of the average person with regular people instead of propping up overpaid Hollywood actors like Netflix.
In many cases, YouTube’s influencers offer live, raw, and personal access, and the data suggests that live, unscripted content are one of the most monetizable types of content on the market due to its original nature and unpredictability.
That is why live sports like the NFL and NBA are easy to sell, monetize, and in great demand.
I do believe that Netflix has a great product but overpaying for Hollywood’s best talent is not sustainable because the cost-benefit ratio isn’t worth it, which is why Netflix is raising customer prices to monetize the quality of streaming content better.
With other big tech players coming into the market, it will push up the costs for Hollywood talent putting more short-term pressure on their financial model.
Even if Netflix does get the right actors to provide content, they do have their fair share of bad movies.
YouTube’s performance in India will be hard to compete with, even harder when they avoid expensive mistakes, a bad video is simply glossed over and ignored.
Netflix is in the midst of testing a mobile-only Indian subscription package for around $3.64 per month, or 250 Indian rupees, to respond to YouTube’s godlike presence there.
Remember that most rural Indians do not have access to hardware such as computers, laptops, or tablets, and run their lives with cheap Chinese smartphones from Oppo and Vivo.
If you thought $3.64 was a cheap streaming package, then Amazon (AMZN) takes it one step further by offering Amazon prime video for $1.88 per month or 129 Indian rupees.
I like Netflix’s product and the narrative is still intact, but I adore and love YouTube’s transformation that has caught many of us by surprise.
This massive shift wouldn’t be possible without Google’s army of best of breed ad tech.
Even more poignant, YouTube takes direct to consumers to a rawer entry point enhancing the special experience.
The problem with Hollywood talent is that reformulating them onto Netflix’s platform brings them closer to the audience to a certain degree, but not like Nisha’s cooking channel where she can speak directly to the viewer and even interact with her audience in the comment section.
YouTube has mastered this relationship between content creator and audience, and no matter how many times I watch Will Smith’s Bright, I can’t expect him to reply to my comments.
Well, there’s not even a comment section on Netflix’s platform.
In short, Netflix’s Indian strategy is incomplete and I predict that YouTube will extend its lead there because the scalability is well-suited for the Indian rural audience who have little or no discretionary income.
The freemium model wins out again.
Affixing a Netflix grade streaming asset to Alphabet’s booming digital ad business is a match made in heaven.
Buy Alphabet on the dip – YouTube’s outperformance in 2019 will surpass expectations and carry Alphabet shares to new all-time highs this calendar year.
“Artificial intelligence is the future, not only for Russia but for all humankind. Whoever becomes the leader in this sphere will become the ruler of the world.” – Said President of Russia Vladimir Putin
Mad Hedge Technology Letter
April 2, 2019
Fiat Lux
Featured Trade:
(HOW TO GET CONTROL OF YOUR LIFE)
(GOOGL), (FB), (LYFT)
Don’t get caught up in the cesspool of digital ads inundating your life.
I’ll teach you how to take back control of your life and even mess with these data thieves.
No need to thank me.
One of the most frequented complaints I hear today is the overflowing number of digital ads people are faced with that make you want to pull your hair out.
If you want to play your part in taking back your internet freedom, then read on.
The internet ad business is a world that borders subterfuge.
The high stakes environment is perpetuated by none other than Silicon Valley and specifically the tech heavyweights that wield capital dominating the data sphere.
Even though it sounds remarkably cliché, data is truly the new oil.
You would be surprised how many internet operations are based on the back of you, the user, and the data you generate.
Take Lyft (LYFT).
They are forced to tap the digital marketing world to attract qualified drivers.
Not only does Lyft spend ad dollars on driver recruitment, but they must spend to grow the number of passengers.
The rider base, as a result, synthetically grows which is directly attributable to paid marketing initiatives.
Lyft lays out on a platter the ways they attempt to generate new passengers and drivers, essentially becoming market makers, and it’s a mind-boggling long list including:
“referrals, affiliate programs, free or discount trials, partnerships, display advertising, television, billboards, radio, video, content, direct mail, social media, email, hiring and classified advertisement websites, mobile “push” communications, search engine optimization and keyword search campaigns.”
Even if there is only a 20% chance of breaking even, these unicorns are incentivized to lose others' money translating into poor quality growth or initiate high-risk strategies or carry out a combination of the two.
Sales and marketing costs in the year ending Dec 2018 came in at $296.6 million, meaning that over 37% of overall costs to Lyft were attributed to this one segment.
If that wasn’t bad enough, Alphabet affiliated company CapitalG took in $41.4 million, $74.4 million, and $92.4 million of ad-related services in 2016, 2017, 2018 laughing all the way to the bank.
Not only do Alphabet have a 5% stake in Lyft, but they are incentivized to bump up Lyft’s search engine optimization ranking to the top because they’ll benefit through asset appreciation if the company flourishes.
The process is rigged so what can we do about it?
Seizing control of your life and personal data first centers on installing a different browser other than a Google-based product to diversify the data out of Alphabet’s (GOOGL) iron grip.
I have chosen to use the browser called Brave, based on the Chromium web browser, it comes preinstalled with an ad blocker and disables web trackers, and most importantly, works well.
To visit their website, click here.
Make sure to import your passwords and bookmarks from your prior browser to ensure a smooth transition.
Once you are armed with a browser with a functioning ad-blocker, notice how the ad-less experience enhances your browser experience.
Try out YouTube.com, notice that ads don’t pop up in the beginning or middle of your viewing session and they do not even prompt you to disable them.
To understand which websites are hellbent on grabbing your digital ad dollar, then you will visit the odd website such as CNBC’s live TV feed which forces the user to disable the ad blocker which can be done at the top.
As much as CEO of Facebook (FB) Mark Zuckerberg has been vilified for his ad practices, he does not force users to disable ad blockers to use his platform to his credit which indicates that most users really have no idea about this stuff.
Seeking Alpha, the internet financial new site, is one of the worst eggs in the dozen, full out blocking users from even viewing the main homepage if you are accessing it with a VPN (virtual private network).
If you do access Seeking Alpha with an ad blocker, every page you click prompts an annoying reminder to “white list” the site which is polite verbiage for don’t block us or we will prevent you from using us.
Awareness and actionable methods to take back your internet freedom and personal data are vital to the health and longevity of the internet.
Instead of enriching these few Silicon Valley bullies, change your browser to an independent service, install an ad-blocker, and lastly buy a VPN.
A VPN is a software that circumvents geographical restrictions by connecting to servers in different countries effectively masking your computer’s IP address location.
This can have many different applications such as during my summer vacations in Switzerland, I can access all the US-based internet services that would require my IP address to originate from a domestic American location.
A VPN is also important in minimizing the chances of cyber threats and offers extra layers of security.
Chinese internet users often access international websites that are habitually censored through VPN software getting access to the west’s treasure trove of professional knowledge.
In many cases, a small Chinese company wielding a VPN is the difference between success and failure.
VPN software is the Chinese communist party’s worst enemy which is why they forced Apple to remove them from Apple’s app store recently.
My go-to VPN is Astrill. To visit their website, please click here.
Knowledge is power.
The masking of a computer’s geographical location will stymy digital ad crawlers diluting ad data forcing them to revalue the digital ad tools they use to charge exorbitant amounts to analog companies to digitally advertise destroying ad revenue.
I see this as a positive development as the unintended consequences of these digital ad creatures have toxified the internet for the naive user with many digital companies resorting to perverse tactics that beget even more perverse marketing tactics.
The slew of new tech IPOs is offering us inside knowledge into how enslaved tech companies are to the likes of Alphabet and Facebook digital ad apparatus.
To shake them off our tails, users on mass need to alter how they use the internet to protect from being pickpocketed in broad daylight.
Once revenue begins to suffer, they will have to act more reasonably to the betterment of the internet which we all share as a communal good.
“Move fast and break things. Unless you are breaking stuff, you are not moving fast enough.” – Said Co-Founder and CEO of Facebook Mark Zuckerberg
Mad Hedge Technology Letter
April 1, 2019
Fiat Lux
Featured Trade:
(THE NEXT TECH BUBBLE TOP HAS STARTED)
(LYFT), (PIN), (UBER), (AAPL), (JPM), (FB)
Don't go chasing rainbows.
That is what the current tech IPO environment is hinting.
Even though market conditions are frothy, that doesn't mean I'm calling a market top today, hardly so.
I predicted that Lyft (LYFT) would storm out of the gate like a bull on ecstasy, and I was vindicated when the stock flirted intraday with the $87 mark.
The scarcity value of these gig economy companies is hard to quantify.
Examples Uber unduly promise ambition and innovation leading to hopes of a possible air transport service and sharing network that I would need to see to believe.
The built-up expectations smell of over-promising and under-delivering, the majority won’t be able to deliver merely half of what their manifestos promulgate
As I put my analyst hat on, the 2019 IPO frenzy coming online has some of the same fingerprints of the infamous dot com bust of 2001.
The two main trends symbolic of the last time the tech industry disentangled were overly generous valuation, pricing in revenue expansion of 80% for the next five years when the leader of the pack Microsoft (MSFT) only grew at 50%.
A tantalizing clue was the utterly deficient cash flow generated back then.
The underlying premise revolved around putting the network effect on a pedestal irrespective of understanding that the network effect should have caused cash flow to accelerate which was conspicuously absent.
Losing money and losing a lot of it does lead to paralysis, examples were rife, for instance, priceline.com losing $30 on each air ticket sold.
Even more hard to fathom was that Priceline was stretching itself to the limits on the open market filling ticket orders because of a dearth of inventory steepening losses.
Priceline gushed about a unique business model of collecting excess ticket inventory that airlines couldn't sell at low cost and reskinning them to a digital audience hoping to take advantage of this price dispersion.
But in reality, this wasn’t always the case.
Priceline was on a suicide mission and expanding from 50 employees to 300 employees based upon misleading growth was madness.
In a nutshell, investors bypassed pragmatic arithmetic and were lifted by the fumes of exuberance that had manifested around the euphoria of the tech bubble.
Lyft is not revolutionary, they are a broker which occupy a low position in the spectrum of tech intellectual property.
Exploiting drivers, compensating them per hour, and letting them figure out their own cost structures for car insurance, fuel costs, and opportunity cost while offering zero benefits is a court battle waiting to happen in California.
And if your response was the way they craft value is by way of a proprietary app, well, Google, Apple, or even Netflix can produce the same type of app and quality of app in a few weeks with their legendary phalanx of top-tier engineering talent.
To Lyft’s credit, they have at least collected the treasure trove of data the app has compiled which is extraordinarily valuable.
The top of the tech bubble means that big tech is overreaching into any revenue they can get their hands on like a heroin addict yearning for the next syringe.
The environment has transformed into an eerily zero-sum game, such as Apple (AAPL) cooperating with JPMorgan Chase (JPM) to create Apple pay, and then instantly flipping around to compete with JPMorgan Chase in the credit card space with Apple Pay being an accomplice.
Big tech has sown the seeds of discord by quietly attempting to trample on any analog business they can get near.
Leveraging the network effect of billions of users in a proprietary walled garden to extract the incremental dollar for a new service is impossible to compete with for analog companies without a similar embedded on-demand audience.
Lyft co-founder and CEO Logan Green mentioned in an interview that in the next five year, he plans to deploy a subscription service coined as transportation-as-a-service like a software-as-a-service option which cloud platforms sell.
A fight to the bottom with Uber will cause major disruption in the pricing mechanisms of the subscription service and could force Lyft to earn less revenue per ride than the current pricing system.
Investors need to remember that Uber is bigger than Lyft and possessed more ammunition.
At the end of the day, the race to the bottom is never good for profitability or sustainability, and Lyft has yet to provide any substantial clues on how they will navigate through this quagmire.
My guess is that Lyft will have to do a deal with the devil of sorts to slang its branded broker app onto the cresting wave of Waymo as Waymo motors ahead and starts to materially monetize its self-driving program.
Remember that Alphabet already has a small stake in Lyft and these two could partner up with Alphabet dictating terms.
Lyft cannot compete with the holy grail of tech - self-driving technology – they are way down the tech value chain.
If we look at the bigger picture, the broader market has been riding the coattails of Federal Reserve Chairman Jerome Powell’s 180-degree turn from winter’s statement that interest rate tightening was on “autopilot.”
Now, there is only a 27% chance given by the market that the Fed will raise rates at all in 2019.
The market responded with strength begetting strength allowing the bull run to continue and even whispers of a possible rate cut later this year.
Sentiment will not change until we get to the point when earnings can’t surpass the expectation which have been lowered substantially.
I bet this won’t happen until late this year or next year.
This is inning 8 or 9 of the bull crusade, the closer is warming up in the bullpen.
Lyft’s opening day gallop is just one of the side effects from a market that is toppy.
“Our goal was to completely change transportation. Change traffic. And make it possible to get anywhere you want to go without owning a car.” – Said Lyft Co-Founder and CEO Logan Green
Mad Hedge Technology Letter
March 28, 2019
Fiat Lux
Featured Trade:
(MACDONALD’S GOES HIGH TECH)
(MCD)
