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How do pandemics affect financial markets? Plus: the experience economy, gaming IP gold, hunting for neutrino's, and how Crash Bandicoot was made.
Lightspeed, Slow Ventures, and The Information hosted Social2030 last week in SF to a sold out audience. The conference featured panelists from Facebook, Snap, Reddit, ShareChat*, Cameo*, and many more. I enjoyed meeting a bunch of Drinking from the Firehose subscribers at the conference. Thanks for making it out!
We are still in the process of compiling our learnings, so I will hopefully be able to share a summary post with you next week.
One Big Thought
I usually avoid topics that are well covered by media for One Big Thought. Coronavirus should therefore be off-limits. It’s everywhere — figuratively, and literally. However, after a weekend of stockpiling and preparing for SF to turn into 28 Days Later (note: good movie to watch if you happen to be self-quarantining), I find it hard to think about much else.
I searched for a data-driven perspective on pandemics and came across this article by Jamie Catherwood of the blog “Investor Amnesia.” He makes a habit of reading old primary texts on financial markets and authored a piece this week highlighting the consequences of past pandemics on financial markets.
To set the context for Jamie’s work, I’ll make an obvious statement — the market got clobbered last week. Amazon*, Alphabet*, Facebook*, Microsoft*, Apple*, and Visa all lost 10-20% of market value from Feb 19-27. Norwegian Cruise Lines got demolished, falling 35%. Of all the companies on the S&P 500, only 7 companies gained value — one of them Clorox.
In fact, it took only 8 days for the S&P500 to fall 10% from its all-time-high on Feb 19th —the fastest decline from an all-time high in the last 50 years. I found a chart compiled by Birinyi Associates that compares this drop to prior ones (sorry Mailchimp subscribers, but I don’t have a link for you):
We’ve seen bigger drops in the past (and may continue to see one in the coming weeks), like the 55-day, 33% decline starting in Aug 1987, or the 87-day, 20% decline starting in Jul 1990. The depth and pace of this correction, however, really stands out and speaks to global fears around what could become a pandemic.
In his article, Jamie demonstrates that financial panics tend to be associated with these types of outbreaks. His first example is the 1892 outbreak of cholera in Germany. Several Germans boarded a steamship to NYC and died in transit. The incident ignited a debate around whether the steamship should be allowed to dock in the U.S. and where — similar to the debate we’ve seen today around cruise ships and airplanes with suspected coronavirus patients. False information fueled bearish sentiment in the stock markets. Several public companies reported that customers were shifting their buying habits. Yet, the reality was much less severe. There was no outbreak in NYC. Financial markets eventually regained their sanity.
Actual pandemics have indeed left imprints on financial systems, but not over the long-term. The Bubonic Plague of 1347-50 preceded one of the highest periods of inflation England saw over more than a century. Prices equilibrated, however, by the late 1300’s. Given that Adam Smith wasn’t born for another 400 years, it’s also hard to imagine a similar response from a modern central bank. The Spanish Flu pandemic of 1918 significantly increased poverty rates in Sweden and depressed capital returns. However, the study in question showed no statistically significant long-term effect on earnings of companies. Jamie confirms this with another study that shows no statistical correlation between mortality rates and market prices, even during the Spanish Flu.
The situation at hand is deadly serious, but I found some comfort in the fact that no single pandemic (including some of the worst ever) has itself contributed to lasting economic consequences. I now mostly worry about the health and safety of my fellow humans. Hopefully, we’ll all pull together as we have in past catastrophes.
Check out Jamie’s full synopsis here, and stay safe out there!
Tweet of the Week
Links I Enjoy
My Lightspeed partner Mercedes Bent designed a framework for evaluating IRL experiences that I’ve found quite useful. 72% of millennials prefer to spend money on experiences vs. traditional goods. Multiple experience economy companies have sales over $1 billion in 2019. Part of the re-platforming of retail is the shift to these types of compelling experiences.
Panera announced unlimited coffee and tea for $9/month for its MyPanera members. I’m honestly surprised this took so long. It’s a brilliant move that probably costs them very little, but will create many new MyPanera signups. For example, the actual coffee in a grande Starbucks drink costs ~$0.30. Labor is largely a fixed cost since brewed coffee requires almost no prep time. If a typical Panera shopper consumes a single cup for each of 20 monthly work-days, she would cost ~$6, but generate $9 of revenue. Panera bakeries operate at ~20% gross margins (excluding franchise fee revenue), so with a little breakage this subscription could even be accretive, while simultaneously lifting overall spend.
Streaming services and conventional movie studios are desperate for IP that already has an established audience. Video games as a category are under-monetized relative to their risk profile. Many games have a global fan base of tens, maybe hundreds, of millions of consumers ready to see their favorite story arcs in movie, or serial TV format.
Matthew Ball has some theories on why the time is right now for game IP. The first and foremost? “IP ages like whiskey”:
The growth in value of popular IP is exponential over time, not linear. The difference between “Halo” IP in 2020 versus 2010 isn’t that it’s twice as old, or ten years older. Today, “Halo” is IP that spans generations. This correlates with the fact “Halo” has a greater cultural impact and more fans than it did a decade ago, but it’s distinct. Consider, for example, that a famous 1990 survey found that more American children recognized Mario than Mickey Mouse. Those kids now have kids.
Cash App is a hidden giant inside of Square*. The company released its Q4-2019 shareholder memo, revealing $1.1 billion in 2019 Cash App revenues, growing 157%, at 41% GMs. It had 24 million monthly active customers at end of 2019, growing 60%. Surprisingly, Bitcoin accounted for over half of Q4 revenues.
Japan announced the construction of the Hyper-K, its upgrade to the world’s largest neutrino detector Super-K. Both are massive containers of purified water, hidden under a mountain, surrounded by photomultiplier tubes. These tubes are calibrated to amplify tiny pulses of light from neutrino collisions in the water, ideally from distant supernovae.
From a related Nature article:
“Every 2–3 seconds, a supernova goes off somewhere in the Universe, and it produces 10^58 neutrinos,” says Masayuki Nakahata, who leads the Super-K, an international collaboration led by Japan and the United States. With the upgrade, the detector should be able to count a few of these ‘relic’ neutrinos every month, says Nakahata, who is a physicist at the University of Tokyo.
Naughty Dog is one of top studios in gaming, known in recent years for franchises like Uncharted and The Last of Us. The studio first broke out in a major way with its classic 1996 release Crash Bandicoot. Founder Andy Gavin goes into incredible detail on some of the technical solutions he invented to create the first 3D platformer. For example, he created a domain specific compression algorithm in order for his animations to run on the limited memory of the original Sony Playstation.
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Disclaimer: * indicates a Lightspeed portfolio company, or other company in which I have economic interest. I also own stock directly in AAPL, ADBE, AMZN, CRM, FB, FTCH, GOOG/GOOGL, NFLX, SHOP, SNAP, SPOT, SQ, and TWLO.
Header image credit: https://investoramnesia.com/2020/03/01/pandemics-markets/