Uber: A $3B Valuation?

Dan Primack (of Fortune and Term Sheet fame) writes in his newsletter today about his time in Aspen,  at Fortunetech:

Uber CEO Travis Kalanick yesterday was on sage here in Aspen, and suggested that his company’s recent ice cream truck promotion really was one of several experiments to see what types of services Uber ultimately could provide beyond basic “rides.” The ice cream truck effort he viewed as successful — despite some supply shortfalls — while an earlier effort to deliver BBQ sandwiches in Texas was deemed a failure (namely because the food was beig prepared pre-delivery, and was no longer fresh upon arrival).

He also declined to discuss his company’s new funding round, which is not yet closed. But let me share something Kalanick wouldn’t: My understanding is that he is in late-stage talks with at least two large new investors to the company, and neither of them would be considered traditional venture capital. And I’m not talking about quasi-hedge funds like Tiger Global. Also, expect the pre-money valuation to be well in excess of $3 billion, with Kalanick not taking any money off the table (i.e., no founder liquidity slice). More on this to come soon… Just been a bit hard getting all my ducks in a row from Aspen.

Good for Uber.

I think the business model is great, despite some grumbling from entrenched taxicab associations and their lobbying groups. And it is a win for consumers – especially in teams of peak demand, despite their grumbling about exorbitant costs:

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[That link to the article James Allworth (worth following) cites in his tweet is here. Also worth reading.]

But I keep wondering (and hopefully this is not just armchair punditry) if Uber isn’t slowly and painfully lowering the barriers to entry in this industry…and clearing the way for copy-cat competitors from coming in and grabbing market share from Uber at some point in the not too distant future. 

Of course, success in any market or industry invites new entry…and I’m pretty sure Uber and its investors didn’t get to where they are now without thinking issues like this through

Which is why it will be very interesting to see how they build an “Economic Moat” around themselves and what said moat is going to look like.

Differentiation In The Toy Aisle: Melissa and Doug

It’s always nice to read about companies that are successful while being very different from most others in their category.

Melissa and Doug (on whose toys we’ve also likely spent a pirate’s ransom in the last 4 years) is one such company. There are no batteries, no electronics, touch screens or apps. Instead, it’s all wooden blocks, puzzles and such. 

Matt Richtel writes, on The NYT:

They do little public relations and don’t advertise in magazines, or on radio and television. They don’t put coupons in Sunday newspaper inserts. They don’t rely on big hits, industry analysts say, just a steady stream of variations on classic toys mostly for children up to the age of 5. Nonetheless, their business has grown by double digits every year, to an estimated $325 million in revenue this year from $100 million in 2008 (and to 650 employees from 200), according to a toy company executive familiar with the company’s operations. Such figures make theirs a midsize toy business, of which analysts say there are fewer and fewer these days. In this industry, three huge players — Mattel, Hasbro and Lego — account for around $14 billion in sales, or about a third of global toy company revenue.

The rest of the article also makes for an interesting read and talks about the company’s history, growth trajectory and the threats (a shrinking category and kid behavior, not necessarily specific competitors) it faces. 

How To Compete On Price: Lessons from American Paintbrush Makers

As they say, competing on price in commodotized markets is a race to the bottom. Scale and distribution are the only two things that can save you there. 

But what if you’re neither a behemoth nor do you have Amazon or FedEx’s distribution expertise?

You can do one of two things, as illustrated by Adam Davidson in his NYT piece on American brush-makers and Chinese competition:

1. Compete on quality

(Bronx Paintbrush Factory Owner: Israel) Kirschner hasn’t changed a thing. He makes brushes the very same way, employing many of the same machines, that his father did 50 years ago. He told me that he sticks with the old ways because, unlike with toys and T-shirts, a big chunk of the brush business caters to professionals who aren’t merely shopping for price but rather for quality. Michael Wolf, who runs the Greco Brush Company, a supplier to professional house painters, told me that his customers need to know before each job that every single bristle on every single brush will be attached properly. One loose fiber left on a wall can damage a painter’s reputation, which in turn can hurt Wolf’s too. Wolf said that he can buy brushes for between a quarter and a dollar cheaper in China, but he is never sure exactly what he’ll get. Some orders are shoddy; others never arrive. So Greco sticks with the company he knows. “My father did business with his father back in the ’50s,” Wolf told me. “We’re keeping it going, the two of us.”

2. Compete with non-stop innovation

At the other end of the business is Lance Cheney, 53, the fourth-generation president of Braun Brush, who told me that he would close his company rather than make the same kind of brush, the same way, for 50 years. He is constantly creating innovative brushes so that he never has any competition. Cheney makes a beaver-hair brush that’s solely for putting a sheen on chocolate. He sells an industrial croissant-buttering brush and a heat-resistant brush that can clean hot deep fryers. His clients, he said, now include General Mills (he made a brush for their cereal-manufacturing line) and the energy industry (a line of expensive brushes for cleaning pipes in nuclear reactors). He even developed Brush Tile, fuzzy panels used in artistic wall hangings. He said his proudest creation is a tiny brush that helped Mars rovers dust debris from drilling sites. When Cheney sees other firms making one of his brushes, he often drops the product rather than enter a price war. Braun Brush, he said, has grown at 15 to 20 percent annually for the past five years.

PS: Of course, not every industry has conditions that allow for (1). If the primary users of paint-brushes were amateurs who didn’t care for quality, that strategy wouldn’t fly. And if this category didn’t support or need innovation (for example, if this was about can openers…), (2) wouldn’t work. Another reason why competitive strategies can’t be indiscriminately used without understanding customer needs. But then again, you already knew that…

Dora And Her Viacom Friends Jump From Netflix to Amazon

So it turns out that Dora and her Viacom friends (Blue’s Clues, The Backyardigans, etc.) have all jumped from Netflix to Amazon. 

Subscribers may have been surprised (don’t remember seeing an email or pop-up message from Netflix ever about any kind of content disappearing soon, and for good. For good reason?).  But Netflix investors were not:

In April, Netflix told investors that it would allow its deal with Viacom to expire, saying it has been moving away from broad, multi-year deals with networks and cable channels in favor of more selective licensing arrangements.

As that LA Times article says, Netflix is instead getting Disney’s stable of characters – but only in 2016.

Obviously, this is a good deal for Amazon (it did shell out hundreds of millions of dollars for the deal; neither Amazon nor its shareholders care, of course) and Amazon Prime viewers. And this is a lucrative deal for Viacom, though it comes with a caveat (from the LA Times article also):

According to Bernstein Research, Viacom has become increasingly dependent on streaming service revenue to help boost profits. Subscription video-on-demand (SVOD) made up nearly 5% of the company’s operating income in fiscal 2012 — and 200% of its growth in operating income. 

“But SVOD hurts ratings for kids’ networks,” Bernstein media analyst.

“Now the debate is whether SVOD licensing fees offset the ad revenue decline,” he said. “In the short run, we agree ‘yes’ but going forward, we think ‘no.’  Cannibalization increases, and licensing fees decrease as the balance of power shifts in favor of the SVOD providers.”

Anyway. I am sure Netflix has its reasons for letting the deal lapse. And I am sure it fully expected someone like Amazon to snap it up. Two things though:

1. Given the importance of kids videos (not a very long-tail market, and they don’t mind seeing the same damn thing a few hundred times) to streaming video providers, does this deal help Amazon take off and firmly establish Prime as a very viable alternative to Netflix?

2. As long as Netflix is in the business of competing for content that others produce, expensive deals and bidding wars every couple of years will be the norm. So will we see Netflix attempt to start its own kids franchise at some point? Animated series only…which are presumably easier and cheaper to produce, compared to $100m grown-up dramas that most people only watch once or at best, twice.

Executive Compensation, As A Competitive Tool


In an increasingly competitive world, companies wield compensation to give themselves an edge. 

With impressive margins, an ever expanding pie (of untapped markets and un-converted customers) and growing piles of cash on the books, Apple is proving to be exceptionally good at doing so.

As Adam Satariano and Hideki Suzuki write on Bloomberg, 

Last year was the second in a row that payouts at Cupertino, California-based Apple ranked among the most generous. Apple directors, who put CEO Tim Cook at the top of the heap last year, are using compensation to keep the team that transformed the iPhone maker into the most valuable technology company under co-founder Steve Jobs, who died in 2011. The urgency has increased in recent months as Samsung Electronics Co. and Google Inc. challenge Apple.

“It’s a retention strategy to keep the key executives who were present in the Steve Jobs era,” said Greg Sterling, an analyst at San Francisco-based Opus Research. “They want to be sure the actual talents that they bring to the company are retained, and also from a perception standpoint to retain confidence in the leadership.”

Since most of this compensation is (I think) in the form of restricted stock units that either vest this year and in 2016, or between this year and 2016, Apple should benefit from the execs’ expertise and experience over the next couple of years. In fact, based on their receiving more such grants every year, over the next few years, it is possible that Apple may be able to keep them around for the next several years. 


Some additional thoughts, while we are on the subject of executive compensation:


Happy Employees = Profitability? Or Profitability = Happy Employees?

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In all the years I’ve shopped at Whole Foods or Trader Joe’s, for that matter, I’ve never met an unhappy employee.

The guys refilling the produce bins, the ones behind the sandwich counter (at WF) and the cashiers helping you part with your money – they are all unfailingly polite, friendly and helpful. [A cashier at Whole Foods once “told” me to buy strawberries instead of blueberries because there was a 2-for-1 sale on strawberries that day.]

Shopping at Costco, similarly, is a pleasant experience – though the folks there exude an air of competence and efficiency, in place of the friendliness at the other two places. 

It would be reasonable to therefore conclude that the steady growth and profitability of all three retailers is somehow related to the happiness/friendliness/efficiency demonstrated by their employees. It would also be logical to assume that perhaps these workers were paid more than their counterparts at other retailers. 

And you would be right. 

What would be wrong though, is to conclude that “Companies that invest in higher salaries for low-level employees find success in a competitive market“, as the tagline for a recent article in The Atlantic did. 

That’s the kind of correlation-causation conflation (alliteration, my new friend) that should make all thinking beings shudder. But why do they do it? Because it is beguilingly easy to do so (and we all do it on a daily basis).

In the case of Costco, Whole Foods and Trader Joe’s – what makes them profitable to begin with is a combination of the following: locating stores in affluent neighborhoods, not stocking a gazillion products and offering high-end, high quality and/or difficult to buy elsewhere, goods. 

Taken together, these conscious strategic decisions

(a) attract customers with the ability and the willingness to spend a lot of money (more money than what a typical Walmart shopper might spend, at least)

(b) enable them to control various operational costs (non-labor, non-wage costs)

(c) create conditions ripe for profitability

[As an aside, specific to Costco, its membership fees, which are of course almost all pure profit, act as a barrier to entry for those that might not be a good Costco customer…so it is likely using this to make sure that only a certain kind of customer steps in to its’ stores.]

These companies’ labor practices, including higher wages, benefits, scope for advancement and training, complement their core business strategies, in two ways: 

Cost reduction (HBR article from 2006) because employees stay longer:

Costco’s practices (wages and benefits) are clearly more expensive, but they have an offsetting cost-containment effect: Turnover is unusually low, at 17% overall and just 6% after one year’s employment. In contrast, turnover at Wal-Mart is 44% a year, close to the industry average. In skilled and semi-skilled jobs, the fully loaded cost of replacing a worker who leaves (excluding lost productivity) is typically 1.5 to 2.5 times the worker’s annual salary. To be conservative, let’s assume that the total cost of replacing an hourly employee at Costco or Sam’s Club is only 60% of his or her annual salary. If a Costco employee quits, the cost of replacing him or her is therefore $21,216. If a Sam’s Club employee leaves, the cost is $12,617. At first glance, it may seem that the low-wage approach at Sam’s Club would result in lower turnover costs. But if its turnover rate is the same as Wal-Mart’s, Sam’s Club loses more than twice as many people as Costco does: 44% versus 17%. By this calculation, the total annual cost to Costco of employee churn is $244 million, whereas the total annual cost to Sam’s Club is $612 million. That’s $5,274 per Sam’s Club employee, versus $3,628 per Costco employee.

And increased sales (via James Surowiecki in The New Yorker):

The big challenge for any retailer is to make sure that the people coming into the store actually buy stuff, and research suggests that not scrimping on payroll is crucial. In a study published at the Wharton School, Marshall Fisher, Jayanth Krishnan, and Serguei Netessine looked at detailed sales data from a retailer with more than five hundred stores, and found that every dollar in additional payroll led to somewhere between four and twenty-eight dollars in new sales. Stores that were understaffed to begin with benefitted more, stores that were close to fully staffed benefitted less, but, in all cases, spending more on workers led to higher sales. A study last year of a big apparel chain found that increasing the number of people working in stores led to a significant increase in sales at those stores.

The reasons for this aren’t hard to divine. As Fisher, Krishnan, and Netessine show, customers’ needs are pretty simple: they want to be able to find products, and helpful salespeople, easily; and they want to avoid long checkout lines. For a well-staffed store, that’s no problem, but if you don’t have enough people on the floor, or if they aren’t well trained, customers can easily lose patience. One of the biggest problems retailers have is what is called a “phantom stock-out.” That’s when a product is in the store but can’t be found. Worker-friendly retailers with more employees have fewer phantom stock-outs, which leads to more sales.

But despite that, any of them could decide, tomorrow, that they can live with unhappy employees or with employees that make minimum wage and fewer benefits if such a move didn’t damage the bottom-line (such damage can come from some customers choosing to go elsewhere where employees are “fairly” treated – or – from their brands being damaged and reducing their ability to price products at a premium). 

And that’s where the progressive visions of their founders and CEOs come into the picture. 

John Mackey at Whole Foods and Costco’s Jim Sinegal (and Costco’s current CEO, Craig Jelenik) believe in paying their employees living wages and more. More power to them…I would do the same thing. But only if I was running a retail business that was structured to be profitable, to begin with. 

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