Drinking from the Firehose #136: 🏠 House brands. 🏠


Technology distorts the conventional definition of monopoly. Many consumer technology products are free for consumers, and monopolies are supposed to keep prices high, not low.

Google's a great example. Searches are free for consumers. On a performance basis, online ads are often cheaper for businesses than less sophisticated offline alternatives. That's why online advertising continues to eat offline year over year, growing at a 16% CAGR.

Moreover, monopolies are supposed to control the vast majority of the market in which they are dominate. Yet a company like Google receives "only" 37% of the $129 billion of U.S. online advertising spend. As a percentage of total advertising spend, its share is even smaller.

If we're to consider the monopolistic nature of a free consumer service like Google, we must shift the conversation from dollars towards engagement.

A recent article on SparkToro caught my eye. The author cited clickstream data from Jumpshot/Avast to argue that, while it represents less than a majority of online ad dollars, Google and its associated properties account for 94% of all searches.

Google has leveraged its dominance in search to push users towards its own results instead of 3rd party blue links. Google justifies this practice because, arguably, so-called "zero-click" results are faster, and therefore benefit users. Yet, Google is also competing with its customers (advertisers) and its ecosystem (webmasters) by prioritizing zero click results, which now resolve an estimated 50% of all searches on Google. If we just look at mobile web searches, where smaller screens yield less real estate to display search results, zero-clicks represent 62% of searches.

"Competing with your customers" is more common than you'd think. It's not just Google. Very few platforms are truly horizontal. The incentives to compete on an un-level playing field are just too high.

My favorite example is selling private label goods, a practice which is nearly as old as retail itself. In the book Private Labels: Store Brands and Generics, the author recounts the founding of Macy's in 1858 in NYC by Rowland Hussey Macy. At the time, it was common for stores to extend credit to customers. Macy decided to only accept cash, but to offer transparent prices 20-50% below his competitors. He made the math work by removing the cost of bad debt and offering a mix of private label goods, which he sourced directly (and cheaply). The first private label product was a Macy's brand hoopskirt. A century later, Macy's house clothing brand exceeded 4,500 items. Today, 20% of Macy's revenue comes from private label goods.

Amazon applies a similar strategy in e-commerce. It uses sales data from its 3rd party marketplace to inform decisions on private label. Amazon has been less successful in this effort than one may expect. Studies of its 75+ private label brands show relatively poor organic rankings and worse reviews than average. Excluding Whole Foods' 365 house brand, only 1% of Amazon's sales come from private label today. Clearly, success in competing with your customers is more than just promoting your own brands.

While Google may act on an unfathomable scale in comparison to retailers and e-commerce players, its monopolistic search practices aren't without precedent in other industries. As such, it will be hard for regulators to make the case for Google to change its zero-click product strategy without significant collateral damage to other companies both online and offline.

For this reason, startups looking to break through on the internet cannot rely on a benevolent regulator to level the playing field at some future date. To the contrary, the fastest growing consumer startups that I've seen in the last few years have discovered scalable acquisition channels outside of search engines and ad platforms. Now more than ever, early stage companies will benefit from betting on a deliberate, proprietary channel strategy from the get-go.


Less than Half of Google Searches Now Result in a Click

Google is almost certainly even more dominant than the chart above suggests. That’s because mobile apps, which Jumpshot doesn’t currently measure, aren’t included — this is just browser-based search data. The Google Maps App, Google Search App, and YouTube are installed on almost every mobile device in the US, and likely have so much usage that, if their search statistics were included, Google’s true market share would be 97%+.



The bull case for WeWork.

People on the internet had a lot to say about WeWork's S-1 filing. Ben Thompson wrote a contrarian, bull case for the company. His article makes an analogy between WeWork and AWS, arguing that the former provides a flexible platform for physical space -- something every company needs. Like AWS turned CapEx into OpEx by building programmable, elastic data centers, WeWork has turned long-term lease liabilities and one-time tenant improvement CapEx into elastic office space subscriptions.

It's a neat metaphor, but one that didn't sit neatly with me. I was glad Ben wrote a follow up to his post the next day explaining one key difference:

"AWS can serve anyone anywhere immediately. All you need is a browser and a credit card to sign up. That means that AWS’s fixed costs are not only shared with all of AWS’s customers but also that that customer base can scale more rapidly and more cheaply.

Real estate, on the other hand, is a physical asset. On one hand, this means that while a single WeWork location can achieve efficiencies for all of the workspaces and offices in that location (shared lobby, shared restrooms, shared beer, etc.), there is no obvious shared efficiency across different geographic locations."

The short case for Uber.

I hesitate to share this very negative post on Uber. It appears that the author has a bone to pick with the company. That said, he does make one interesting point, which I wanted to elaborate on here.

Most of Uber's operating leverage to date appears to come from paying drivers less. The company has increased its take rate on ridesharing services from 16% (2016), to 21% (2017), to 22% (2018). With 2018 ridesharing GMV of $42B in 2018, the delta between 2016 and 2018 take rates accounts for $2.5B of marginal cash flow. Adjusted EBITDA has improved from -78% of core platform net revenues in 2016, to -36% in 2017, to -19% in 2018. Without the take rate increase, the latter number would be -43%. Uber would not be anywhere close to cash flow positive without its take rate increases in the last two years.

This begs the question: with several studies pegging median driver wages at $13-15/hr, how much lower can Uber sustainably drive wages? The implication is that Uber must now drive operating leverage through other means. Yet, at $40B+ of GMV, one would think it should have significant economies of scale already.


Love, Taylor.

Taylor Swift and Spotify once appeared that they would never, ever, ever get back together. Her new album release strategy, thankfully, shows that all is well.

Spotify is exclusively releasing an enhanced copy of her new album Lover that includes handwritten "love letters" from Taylor. This move feels very native to the D2C medium and a smart way for Swift to build an air of exclusivity around the album's release.


Ride the Lightning.

Don't borrow USB cables from strangers. A security enthusiast recently developed so-called OMG Cables that appear normal, but, once plugged in, they can give a hacker the ability to take over your Mac remotely. Fun!


Ain't misbehavin'.

The Washington Post interviewed University of Chicago behavioral economist Richard Thaler about his new book on irrational human behavior in investing. The interview is a laundry list of all our worst cognitive biases as investors: endowment effect, sunk cost fallacy, loss aversion, hindsight bias, and more.


What happened to childhood?

More social science suggests that children are becoming more stressed than ever. Depression and suicide rates have risen significantly over the last decade for teenagers, specifically.

With many possible root causes, the simplest explanation is the general lack of safe, unstructured time to build relationships and practice social skills:

"Tali Raviv, the associate director of the Center for Childhood Resilience, says many children today are suffering a social-skills deficit. She told me kids today 'have fewer opportunities to practice social-emotional skills, whether it’s because they live in a violent community where they can’t go outside, or whether it’s because there’s overprotection of kids and they don’t get the independence to walk down to the corner store.' They don’t learn 'how to start a friendship, how to start a relationship, what to do when someone’s bothering you, how to solve a problem.'"