What We’re Reading (Week Ending 14 November 2021) - 14 Nov 2021
Reading helps us learn about the world and it is a really important aspect of investing. The legendary Charlie Munger even goes so far as to say that “I don’t think you can get to be a really good investor over a broad range without doing a massive amount of reading.” We (the co-founders of Compounder Fund) read widely across a range of topics, including investing, business, technology, and the world in general. We want to regularly share the best articles we’ve come across recently. Here they are (for the week ending 14 November 2021):
1. Meta’s Andrew Bosworth On Moving Facebook To The Metaverse – Alex Heath and Andrew Bosworth
But acknowledging the moment we’re in, I mean, what do you say to the people who say this is a change to distance the brand tax that exists with the Facebook name now, for certain people and for lawmakers and the press, from everything else you all are doing?
Yeah, it’s not that. I mean, everything that we do is centered around consumers and consumer expectations. So we really were starting to hit these unusual spots. I’ll give you an example. So we had Oculus accounts. And part of the problem with Oculus accounts was that people really weren’t building up any kind of network to connect with. And what we do know is that when people have a network, they have more fun. For the same amount of time spent in the headset, they enjoy it more. That’s what they tell us.
And so we went to pretty elaborate extents to try to get, “Okay, let’s use the Facebook network in Oculus.” It’s an odd fit. It was an odd fit. And now Mark has announced that we’re going to change the way that we do accounts in Oculus.
So we’re trying to solve a problem and the only solution available to us isn’t a great solution. This kind of thing was happening all over the place. Facebook is a product. Having it try to also be an umbrella brand, which we tried, obviously, for the last several years, was really a struggle for us. It was really a struggle for consumers. I don’t think consumers really had a strong mental model of how that works.
If you ask consumers about Instagram and WhatsApp, and do you want to link these things or not link them, they understand what that means because those are products that they can have a sense of. And so I think we want to be able to have things like accounts that are at the Meta level, but still give consumers a really strong understanding of how products relate to the data that they’re giving up, who they’re connecting to, what value they’re getting in exchange for all of that, make sure they feel good about it. So I think all these things are very consumer-friendly.
That’s a very practical reason to do it. The second part of it, for me, is — I know that it’s cheesy. No one wants to just run with the story we’re telling. But it’s the real damn story. It’s an exciting vision of what comes next. To some degree, we have hit the natural saturation point with mobile phones, with the mobile internet, with social networks. They kind of are what they’re going to be. There’s a lot of them, it’s very competitive, but they’re competitive on the margins. But we’re not seeing big steps forward and totally new things as much anymore.
And I think the metaverse feels like something that doesn’t exist today, and you can’t do it any other way. It’s in pockets, there’s little glimpses of it. And I think we’re excited about that. But the things that we’re describing are mostly just not possible without tremendous investment. And so I think for us, the corporate umbrella of Facebook served us so well for such a long time, because it was itself an unfulfilled vision. There’s still a lot of work to do there, obviously, but now we have a new unfulfilled vision that I think can power us for, let’s say, the next 15 or 20 years…
…This whole metaverse concept, I talked a lot with Mark about this. We can keep it pretty high-level. The idea is this immersive, embodied internet that is 3D. You could think of today like Roblox or Fortnite, where people are hanging out as avatars. And you guys are wanting to build this in AR and VR. I’m curious about how you take the concepts that we know today, a lot of them that you helped invent at Facebook and social media, and translate that to the metaverse. Is there going to be a News Feed in Horizon, which is this metaverse platform, software platform, you’re building? How are you thinking about the ways people engage with content in the metaverse?
I don’t think there will be a literal News Feed, except there might be your actual News Feed from Facebook. There’s no reason that 2D interfaces aren’t going to be an important part of an immersive metaverse in the same way that they’re an important part of how we navigate the physical world. But yeah, of course. There’s going to be so much to do. And in some ways, if you think about when you go to a city, there’s so much to do in a new city. How do you figure out what you want to do? There’s entire services, entire industries designed to help you navigate the amount that there is to do.
There’s going to be way more to do in the metaverse, especially when you can instantaneously travel to any of the many cities that we kind of imagine ultimately populating the place. You’ll definitely need to have services that help you with what’s new, what’s hot, what’s trending, and what’s going on. What are other people doing? What are your friends doing? How can you plan things? Can you schedule things? So all those services are going to exist and we’re super excited about them. But I do think that it’s a little bit cart before the horse. Before I can figure out how I need to rank content for you, I need to have content for you. That’s just the sequencing that has to happen…
…I think this is getting at how maximalist and expansive this idea is, because I think when people think of the metaverse and Facebook, they think of a 3D version of Facebook and the Meta headset. What you’re talking about, especially using blockchain potentially, is taking it from one environment to the other. Say I want to move from Fortnite to Horizon. They’re both in VR. I want to take my avatar and all my virtual goods with me. Still, I’m very skeptical that you guys are going to figure that out with all the competitors in the industry. Maybe once this becomes just so realized that people have to do it because consumers are demanding it, then maybe. But building up to that, Apple, for example, they’re doing mixed reality. They’re going to have a headset. They’re going to have glasses. I think there’s zero chance they work with you all on interoperability in any kind of a virtual world. Maybe you disagree, but that’s the largest company in the world as an example. So how do you get people to actually buy into this?
There are a lot of levels here. I certainly think that you’re right. Just as the internet itself went through a lot of revisions and protocols that were designed but never adopted, and then these ones were adopted and different things happened. I expect the same to happen around the metaverse. And the majority of these questions are hard and they’re still ahead of us. Having said that, I don’t think we’re as far apart from most of the people in the industry as you might think. I think we all generally get a sense that if we can empower creators to have a richer economy, that creates a flywheel where more digital creation happens; that’s really good for consumers and that grows the economy, that grows the pie. We all benefit. One of the obvious things that you can do to increase the value that you’re giving to your developers, your creators — I’ve heard Roblox, I’ve heard Epic, I’ve heard a lot of people talk about this — is getting them a larger audience. That’s an easy one. It costs you nothing. They’re developing the same thing and now the audience is larger. So I think the watch word for the metaverse is continuity, being able to have a continuity of experiences across both experiences and platforms built by different companies.
And so, yeah, there are areas where this is actually pretty workable. Let’s take avatars. Being able to implement somebody else’s avatar or having to implement your avatar for someone else’s system is actually pretty workable. It’s not an impossible challenge. Does that mean every avatar is going to be useful everywhere? No, of course not. But there are also clothes that I can’t wear in every place that I go in the physical world; that wouldn’t be appropriate.
I’d love to know what this is.
You know, I wouldn’t wear an Easter bunny costume to church. That seems like a mixed message. And so it’s not unheard of that we would have these cases where’s like, yeah, I can’t take this thing over there because of whatever rules that apply over there. So it’s not totally unheard of even in the physical world. So anyway, I bring this up to say, I agree it’s going to be hard. You’re absolutely right. If there’s a thing to be skeptical of, you nailed it. That’s the hardest part for sure. However, at least at a conversational level, whether I’m talking to people at Microsoft, talking to people at Google, different people, there is a vision that we share, I think, that is coming into focus for the industry. And if we can find really strong standards in a way that allows people to recoup their investments, because this is expensive work, as Mark said, then I think there’s a chance. There’s a path.
There’s a second path, which is the one that often works, which is you get enough consumers in one area. And then you’re able to attract more and more partners into the area to interoperate on that platform because they want to go where the marketplace is. And that’s another path that is possible.
2. She drew millions of TikTok followers by selling a fantasy of rural China. Then politics intervened – Liu Yi-Ling
On camera, Li Ziqi, one of China’s most darling vloggers, lives a peaceful, enviably pastoral life. In one video, Li spends her morning riding through a misty forest on horseback, collecting magnolia flowers in a wooden basket. Dressed in a sweeping red cape, she looks like a cross between a Disney heroine and a mythological Chinese princess — something that taps into a current craze for traditional hanfu clothing, popular among young people nostalgic for a simpler, pre-industrial past of rites and etiquette. At her Sichuanese countryside home, off the grid and entirely self-sufficient, there are no signs of modern life: no smartphones, laptops, money, or microwaves. She returns to cook the flowers on a traditional stove fueled by dry hay, preparing magnolia pastries from scratch. “I’m hooked,” one YouTube user commented. “Straight out of a dream.”
Scenes from Li’s life — harvesting jujube dates, hatching ducklings, and simmering peach blossom wine — have mesmerized audiences around the world. She’s drawn a following of 55 million on Douyin, the local version of TikTok, and a YouTube subscriber base of 16 million (where she gained the Guinness World Records title for the most subscribers to a Chinese-language channel). She is beloved by fans from China to Portugal to Bangladesh, was named an “ambassador” of Chinese culture by the Communist Youth League, and dubbed “Quarantine Queen” by The New York Times. She is a balm for her followers’ high-pressure, screen-centric, time-constrained existences. Through her, they live vicariously in an online Eden, where pollution, industrial food chains, and coronaviruses cease to exist…
…In Li’s videos, viewers found solace in a fantasy that is simple, unchanging, and untouched by the chaos of the outside world. That fantasy dimmed when, in July, she disappeared from online life. In August, her assistant made a cryptic post on Weibo to address her silence: Li Ziqi had “neglected many real-world problems,” and was “taking time to resolve some issues.” A few days later, Li posted a photo of herself filing a report at a police station: “Capital indeed has its good tricks!” read a comment she wrote under the post. She deleted the post shortly after.
Chinese social media swirled with rumors, speculating a profit-breakdown dispute between Li and her management. International news outlets guessed that Li’s silence was connected to the broader crackdown on online celebrities, such as the condemnations of actors Kris Wu and Zhao Wei, and the censure of online fandoms, which took place around the same time. Some fans wondered if she’d been driven underground by the pressure of the “Kimchi Wars” — a nationalist spat between Chinese and Korean netizens that exploded in the comments section of one of Li’s videos about harvesting and preparing pickled vegetables.
After a largely unbroken three-month hiatus, she finally resurfaced with a deft, two-step move: first, appearing for an interview with CCTV; then, only days later, filing a lawsuit against Hangzhou Weinian. When the CCTV host asked her about her plans for the future, she explained that she wanted to do work related to “rural revitalization” and “common prosperity,” and “guide youth … away from becoming influencers,” toward a path of “positive energy,” parroting all the hottest official keywords of the day. “I think of myself as a new socialist farmer,” she said. In distancing herself from the “bad values” of the influencer economy and aligning herself with the “good values” of the Party, she cut ties from one patron and cozied up to another. She is yet to upload any new, full-length videos.
3. An Interview with Eric Seufert about the Impact of ATT – Ben Thompson and Eric Seufert
I want to ask about that because I noted too that they described it very differently. I interpreted that though as them both saying the same things just in different ways. But do you actually feel like Snap was actually not that good at building these detailed user profiles, and they were more simplistic about it? Which in some respects is a good thing, because it almost feels like that would make them be able to recover more quickly even though they seemed more behind the eight-ball here.
ES: I do think that’s probably the case. I mean, first of all, they have fewer users, they generate less data, their ads platform is younger. They rolled out some of these products years behind when Facebook did so I think just for those very straightforward reasons they probably had a less mature product and also Facebook’s just got a much bigger org around this. Also before the Snap exec said that, he said something like, “No, we think our ability to target is basically uninhibited relative to where it was before. It’s just that we’re not able to measure the outcomes and so, for that reason, our advertising suffered as a result of that.”
So the process — that round trip is very important. Facebook serves an ad to you, you click on the ad, you go to a website or you go to an app. In either one of those, the destination would happen from an ad in the mobile app, that’s where 95% of their ad revenue comes from their mobile products, Instagram or Facebook Blue. You click the ad, you go to either website or an app and then when you do things on those properties, Facebook observes the fact that you do those things, either through the pixel on the website or through this SDK integrated into the app and then when you do those things and it observes that you do those things, it ingests that data into its own system and because it has an IDFA linked to your Facebook user account and the destination property had either the pixel sending data back with your Facebook ID linked, or the app had your IDFA attached to those events, it’s able to enrich its profile of you. Then it knows more about what you’d like to do and what you like to, more importantly, what you like to buy and then, with that knowledge, the next time it serves an ad to you, it’s a little bit smarter about what you’re most likely to click on and interact with.
I wrote a long thread on QuantMar, which is this stack exchange site that I operate. I found this video from, I don’t know, six, seven years ago from one of Facebook’s ad auction economists and he was giving a presentation at UC Berkeley to some grad students and it was on some grainy cam and I don’t know that it was meant to be seen by a lot of people, but he just walks through the whole logic of the auction algorithm, it’s really, really interesting.
The way they operate that calculus of deciding which ad to show you is an impression pops up in your feed and they have a whole universe of things that they could potentially fill that with. That pertains to content, so like stuff that your mom shared or whatever, but also some of those units are dedicated to ads, some proportion. The way that they decide what to fill into that space, onto that canvas, is they take this whole set of content options, whether it’s content or an ad and they look at your profile and your history of clicking on stuff and they say, “What’s the probability that this person’s going to click on this thing?” Then they multiply that times the expected value of you going to do that thing and so if it’s content it’s “Are they likely to engage with this? Are they likely to leave a comment? Are they likely to like it?” Engage with it in some way beyond just scrolling past it. If it’s an ad, “How likely are they to click on it? What’s the expected value of their participation in that product? Are they likely to make a purchase? Are they likely to put something in a cart? Are they likely to complete a level in a mobile game? What’s the expected value of that?” And then they use that expected value, they moderate it by the click probability and that’s how they rank them, that’s how the whole bid mechanism works.
So if I’m a niche product, and I have a very deep monetization in my product, or a very early-stage monetization where it happens very quickly but there’s a low probability of click, I have to bid a lot higher to win that space than somebody else that’s got lighter monetization but there’s a higher probability that you do the click and then do that thing subsequent to that click. So that’s the kind of logic that’s used to power the filling of those impressions, those content spaces. That’s the logic they use and then when you do that thing, well then that helps them inform the next decision…
…Why is SKAdNetwork so bad? What are its limitations in, I know there’s a lot of them, so it’s hard to summarize it. But in a nutshell, what is the problem with SKAdNetwork?
Just for the audience, SKAdNetwork is Apple’s API for apps to basically measure to do ads. It’s supposed to be a replacement for what they got from Facebook, etc. It’s from Apple, Apple has perfect knowledge of an app because it’s happening on their OS and the app was obtained through their App Store and so Apple could theoretically make SKAdNetwork actually even better than anything Facebook could do because they have perfect knowledge of what’s happening, but it’s definitely not that. What are the issues with it?
ES: It’s hard to know even where to start. First of all, SKAdNetwork was actually released in 2018 and I discovered it somehow on a message board or something for app developers. I wrote an article about it, like basically, “What is this thing? Is Apple going to totally transform mobile advertising with this SKAdNetwork?” And nothing ever became of it. It was totally irrelevant, no one used it, no one.
It wasn’t a competitive product.
ES: I think it was just they were releasing V1 in anticipation of ATT. I don’t know that they necessarily had planned ATT in terms of the exact way that it was rolled out and exact way that it was defined, but I think they knew they were going to do something like that down the road and they wanted to have this ready. Anyway, so at WWDC20 they introduced the Version 2.0 of it, which was designed as the replacement for IDFA-based attributions. What it does is it allows you to attribute an install to a campaign, but without including any information about the specific user that installed the ad. It’ll basically provide you with the knowledge that an install happened and that install was driven by some campaign, but you don’t know which user that was. It can include some context around what that user did in the app subsequent to installing, so there’s ways to instrument events that can be tracked and returned with this SKAdNetwork signal, it’s getting a payload which is called a postback.
But it’s just designed in such a way to be totally inadequate, I think that by design it does not work. There’s a couple of reasons for that. One, is that operates on this timer system that is incomprehensible as to what the purpose of this timer system is, aside from just making the pushback data useless…
…Is there a chance that Facebook doesn’t actually come back from this, this ends up being more fatal than we think?
ES: No, I think where I see Facebook moving is I wrote this Twitter thread about it last quarter and my sense is, short term they’ll all regain measurement efficiency, there are approaches. Instead of the brute force guerilla collect all the data and attach it to a user approach, just much more sophisticated and technically demanding statistical and probabilistic approaches. And they’ll move in that direction.
That’s all the CapEx on computers to crunch all that data.
ES: Right. Exactly. In mid-term, it’s content fortresses. They just pull as much content interaction into their own environment as possible. It’s all first party data to them and they just get stronger as a result. And then, longterm, it’s metaverse, that would be the bull argument for Facebook. But they have risks, this is unprecedented stuff, this is corporate warfare, like atomic warfare, this isn’t skirmishes at the border.
Right.
ES: But there’s a whole lot of new opportunity that’s arising as a result of this for creating whole new measurement paradigms, for potentially shifting a lot more content onto the open web. So maybe this just reshapes our relationship with content and reshapes the things that we interact with on our phones and elsewhere. It’s also a very exciting time because just these ideas that we held as absolute have been shattered.
And it’s not just on Facebook, that’s on Apple too. The idea that you could link out to an alternative payment system in your app a year ago, two years ago, you’d be risking a lot to do that, that was almost unthinkable. And now, it’s policy. The idea that you could just with aplomb email your users and say, “Don’t buy your stuff in the app, buy the stuff on the web shop right now.” that’s totally new, these are new commercial venues that have opened up. It creates a lot of opportunity.
It was very interesting actually on Twilio’s earnings call, they were talking about this. The ability to connect directly to your customers, it’s always been valuable, but now it’s astronomically valuable and that’s why they feel well placed for obvious reasons. But I thought that fits with what you’re saying here.
ES: Yeah. At the same time that Apple’s exerting more dominance in some areas of mobile, it’s also having its dominance receding. One thing that’s really exciting about the opportunity to open up a web shop that services the in-app content environment, is that the App Store really sucks as a storefront. It’s just clunky. There’s not a lot of options for it, there’s not a lot of tools, you can’t A/B test stuff. If you have a web shop, you could do anything. The web is super easy to just quickly make changes and deploy them, you don’t have to do an app update that requires a manual review. You can do everything on the backend, you can A/B test to your heart’s desire. It’s just much more dynamic than what you can do in this very restrained environment, which is the App Store.
So I think the ability to have a web shop where you personalize offers to people, you offer dynamic discounts, you offer a totally tailored bespoke product to you based on your behavioral profile that I have from a first party data environment, that’s super exciting and that didn’t exist in the App Store before. That’s an opportunity that just got opened up and really, I mean, to do it in public without having to worry about Apple punishing you, that opportunity only arose in the last couple weeks.
That’s super interesting. So in your estimation, if Apple has to allow purchases outside of the app, then net relative to killing IDFA, Apple’s feeling the pain actually probably much more?
ES: Well, we’ll see. I mean, I don’t know. Maybe that’s what IDFA was all about. Maybe it was just, let’s try to wrap our arms around this and say, “Hey, you could do a web shop, but you need featuring from us to be a successful business. So do you really want to risk that?” Maybe that was the whole idea here. Maybe it was just pre-empting what they saw as the inevitable opening up of the App Store environment.
4. Mike Cannon-Brookes – Sriram Krishnan and Mike Cannon-Brookes
I want to switch gears just a bit. This next section is roughly “Teach me to do your job.” It’s one of my favorite questions to dive into with interesting people. Let’s start with a very simple one. Tell me how you spend your time. What does a calendar in the normal work week look like for you?
I always try to be very intentional with my time. Time is the one thing you can’t get back. By intentional, I mean that I choose as carefully as I can where to spend my time. Everything flows from that as it creates constraints.
For example, the first thing I put in is “kid time.” I have certain times of the week where I do school drop-offs, I do pickups, I do things like that. That’s the first time that goes into the calendar and you cannot book a meeting over it. My EA has been trained that if someone tries, they get told “Eff off.” Unless it’s crazy important—and I mean it has to be crazy important—that time is blocked out. That’s worked out really well as people learn to adapt around it. Being intentional is one thing.
Second, I have a lot of interests now. As such, I intentionally have 10% of my week dedicated to work outside of Atlassian on a calendar-time basis. Obviously sometimes I have a board meeting that takes six hours. But if a week’s roughly fifty hours of work, there’s five hours that can be done outside of work. My investment team and philanthropic team outside of work receive a certain portion of that and I have to decide how I want to use it over a month or a quarter. That 90/10 percentage split seems like it’s worked well. Within the 90%—at Atlassian—that is made up of one on ones, as much on product and strategy as possible, and lastly, storytelling. I define storytelling as the broadest version of scaled communication.
One of the things that’s really hard in a larger company is sharing and repeating stories. This is less about the company’s founding and such, but rather “What is our strategy? What are we trying to achieve? What are we doing?” Though people can look up our OKRs, it’s not quite the same. If someone new starts tomorrow, they’re going to get directed to the company OKRs throughout the course of onboarding. They’ll read them and be like, “Okay.” It’s different than if they hear repeatedly in different forums that we’re guiding the ship towards a few sets of goals. I think storytelling is incredibly important and that takes a lot of forms. Because of this, I try to divide my time evenly between product strategy and scaled storytelling—town halls, presentations, et cetera. Ironically, working from home has been amazing. Yesterday I recorded two videos—fifteen to twenty minutes each—that were going to different groups in different formats…
…What does a good product review, business review, or business update meeting with you look like? What does a bad one look like?
I’ll take two angles: the product and the team.
On the product—whatever it is that we’re building—I always think about whether we’ve combined technology and creativity in a clever way. I think about whether the product is exciting; whether it has a distribution advantage or at least some way that we can see it work, where we’re playing the chess moves ahead.
You can’t help but get excited when you come in and go, “Oh, man, that thing’s just going to crush it.” When the team has taken some new piece of technology and used some creativity to twist it or turn it in a unique way—that excites me. You can just see it working. If you do it long enough, you walk out of the meeting and you’re like, “That thing. That’s a lock. That’s a win. That one there—done. We don’t even need to do an A/B test.” Ironically, we have a bunch of examples where we have literally gone, “I know, we’re big on A/B testing. Just ship it. That thing’s great.” From a product side, when you just walk out and you know—that’s a great meeting. It’s very hard to explain why that is. I would say the closest thing is when you see the potent creativity and technology mix, when art and science have merged in the right way.
On a team basis, it’s a great meeting if the team seems to have its shit together. I know that sounds like a weird or a simple answer, however, you can pick up on things if you’ve watched or managed teams for long enough. You can say, “That’s a strong team,” or “That’s a weak team.” Sometimes even the product has a long way to go, but you can walk out confidently and say, “Man, that team knows its space. It knows what it’s trying to do. It seems to have the right level of leadership.”
If it’s just the product manager answering questions, that’s a bit of an alarm. At Atlassian, we operate on a triad model—we have many different triads between the product manager, designer, and engineering lead. If the designer and engineer are answering each other’s questions, that’s usually a good sign that the team knows what they’re trying to do. It’s crucial to home in on whether a team has the energy, consistency, and excitement to execute.
You can feel the energy in the room when the team is in sync, getting along, and excited. Similarly, you can also feel if they’re not in alignment, if they’re trying to put on a brave face for the Emperor. You can just feel it in the room if you’ve been there enough times.
Exactly!
Two other things: Confidence is vital. I like to see if senior leaders disagree with founders. As I get older, I increasingly ask open questions and note if opinions change or not once I weigh in. If a leader disagrees and pushes back on something with evidence to back it up, that’s a good sign.
It is vital to instill the team with the confidence to disagree with senior leaders. Not disagreeing offensively, but rather saying something like, “Hey, actually no, we did the customer research and I think left is a better direction to go on that particular issue.” or “No, the competitors are all charging that. Here’s why I think that we should hit the bottom of the pricing curve.”
Disagreement with seniority in a constructive way usually shows that the team has their shit together. It means that they know more than you do and that’s good. They inevitably should know more than I do.
One of Scott’s favorite techniques—which I’ve started to adopt over the years— is to scratch one area quite deeply. We often use it in interviews. For instance, I have asked people to tell me about what happens when you click a button in a web browser in technical interviews. I try to go as deeply as I freaking can. I’ll continue: “How does that turn into HTTP?…Okay, cool. And that runs into TCP? How does that work?” If I get to the point that I’ve run out of questions, and the candidate can still go deeper, that means he/she is likely a really good engineer; he/she has thought about the seventeen layers of stuff that go together to make a web page work.
I like when engineers can pick any area—even those outside of their core speciality/expertise—and go deeply. They should always be aware of first principles. Similarly, you can ask me about Atlassian strategy and I can go six levels deep on anything straight off the top of my head. That’s my job…
…Alright, here’s the next one. The name is a little unclear, but perhaps it’s the Obama Priority System? In short, it allows you to assign tasks priority from P1 to P4. Though I did a lot of Googling, I could not find any evidence of President Obama actually using this tactic.
I inquired a long time ago about how Obama prioritized. I found that it was basically a simplified form of Kanban in a world where he did not control what was actually happening.
The way I remember reading about Obama’s prioritization system was that every big issue going on for him as President was assigned Priority 1, 2, 3, or 4. He had a certain number of P1s and P2s that came directly to him, as he was going to make the call on those particular issues. With P3s, maybe he knew about them and advised from afar, but he did not delve into the weeds. P4s were off his radar completely. The latter two—P3s and P4s—were handled by his Chief of Staff, the Secretary of the Treasury, or whomever. He could only have two P1s and four P2s simultaneously to prevent decision fatigue and overwhelm.
Because he was President, there was a natural limitation to this Kanban strategy. Every week—sometimes every day—he would have to rejuggle this schedule because he lacked control over his inputs. For example, if Syria starts a war with Yemen, that becomes an immediate P1. He didn’t get to choose that. It immediately went to the top of his pile.
That said, what Obama did so brilliantly was develop a system to rearrange his priorities. Without this, he would not be able to think clearly amidst the chaos of his office. He would move one of the two P1s to P2; one of the P2s to P3; and so on. Again, the basic idea was that he, as President, couldn’t control his inputs. Though he had many issues that he wanted to tackle—Obamacare, for instance—he allowed himself two big issues and four small issues to work on simultaneously. Everything else was passed to other people down the chain.
I try to use this in my own thinking. Though, to be honest, the last year has been really bad for that, but that’s another story. I have P1s, P2s, P3s, and P4s that I move around. There’s a whole chain underneath that reassigns tasks automatically. When I say that P2 is now a P3, my Chief of Staff and EA know exactly what that means and take action accordingly.
It’s less Syria and Yemen, less big, hairy, global issues, so it happens less frequently than it did on Obama’s Kanan. That said, it’s a useful mental model as I can only really focus on two big things and four small things.
This doesn’t just apply to work, oftentimes the four small things are personal things that are going on. I think it’s important and realistic that these things be on the list because they take up both time and mental space.
5. The Tim Ferriss Show: Chris Dixon and Naval Ravikant — The Wonders of Web3, How to Pick the Right Hill to Climb, Finding the Right Amount of Crypto Regulation, Friends with Benefits, and the Untapped Potential of NFTs (#542) – Tim Ferriss, Chris Dixon, and Naval Ravikant
Tim Ferriss: Perhaps, Chris, we could also start just to show, it could be change, it could be evolution, but Web1, Web2, Web3, if you could lay it out.
Chris Dixon: The way I think about it is Web1, the internet, of course, existed before the ’90s, but the web sort of this killer app on top of the internet was created in 1990. I think of Web1 as let’s call it 1990 to 2005. The key thing with Web1 is, it was dominated by open protocol. So the web has a protocol called HTTP, email has a protocol called SMTP and these were the proto, these were the platforms you were building on then.
So, if you were Larry and Sergey and you were building Google, you were building it on top of HTTP, right on top of the web. The web was open, which means no one controlled it. What that means from Larry and Sergey’s point of view is, they knew if they built a successful product, a successful search engine, they would own it and they would control it. You couldn’t have somebody come along and say, “I’m going to take 50 percent or I’m going to shut you down.”…
…People call Web2, let’s call it around 2005, and at that time you had two competing models. Let’s just take Twitter. There was an open protocol called RSS. That was the obvious thing to compete with Twitter.
I mean, it’s still around, but it’s not nearly as popular as Twitter and Facebook and everything else. There were sort of open ways to build social networks in the 2000s. Then, there were closed ways to build them. For a variety of reasons, I won’t go into all the details, the closed ways1, and a lot of it had to do with the ease of use. The way I think about it is Web2, the open protocols were just limited in what they could do…
…So Web3 is coming along. It’s a Web3 is like, just my definition is it’s an internet owned by users and builders orchestrated with tokens. This new concept of a token is the kind of the key concept of Web3. This comes sort of historically, from the movement that started with Bitcoin. Although, I think it’s sort of a different branch of the genealogy or something.
A lot of the stuff’s actually built on a different crypto network called Ethereum and then there are other kind of alternatives to it. The big kind of innovation with Ethereum was it’s fully programmable. It’s a computer. Just like a blockchain, it’s a modern blockchain like Ethereum, it’s a computer in the quite literal sense. It’s funny, this is like the most controversial thing I’ve said on Twitter, I got huge. When I said blockchains are computers, they are computers.
6. Interview with Tom Engle: Investing Legend – Chris Reining and Tom Engle
You might not have heard of Tom Engle. He was born poor in Louisville, Kentucky, where his family shared a two-bedroom house with his grandparents.
He watched his parents quickly climb out of poverty by investing, and learned at a young age to invest what money he could, and most importantly, to keep it invested. This mindset changed his life forever – after working just nine years at a gas station he was able to retire…
…New investors oftentimes feel overwhelmed and scared. How should they approach investing?
Corrections, bear markets, and recessions can look scary to new investors. I panicked during the 1973-75 recession and sold because it looked as if the world was going to end. The market recovered in a reasonable amount of time, and I learned a big investment lesson:
Corrections and recessions are great times to buy stocks, not sell them.
With this in mind, I was ready when the 1987 market crash occurred. Like a kid in a candy store I bought stocks under $4 that previously had sold for over $25. This crash was a picnic compared to the previous one, but people were again afraid.
Fear can be a powerful force. It prevents people from investing, and causes them to sell when they should be buying. The simplest way to become a successful investor is to make small investments. This way no matter what happens you’re determined to keep that money in the market.
I was forced to use small investments because I didn’t have much money, but because of that I learned another big lesson:
Small amounts invested in quality companies grow into very large amounts if you leave them alone.
So my advice is to attack the fear using small amounts of money, and be determined to keep it invested…
…How many stocks should an investor own to be properly diversified?
First you have to define diversification. Is it to provide safety or growth? If it’s safety then a stock like Starbucks and cash are sufficient. But if it’s growth, then buying a large number of companies shouldn’t be as important as diversifying over better value points, economic conditions, and greater levels of knowledge.
10 to 20 stocks provides plenty of diversification.
Investors shouldn’t attempt to add them all at once though. For example, in 2007 an investor could have purchased 100 different stocks. By November 2008, every single one would have been down. Owning more didn’t help. I don’t want to fill my portfolio with mediocre stocks for the perception of safety, because growth is sacrificed when the market recovers.
What are the top mistakes you see investors make?
There’s a few. Investors sell too soon, both their winners and losers, and they tend to look at the stock price when making decisions, rather than the valuation.
The biggest investing mistake is trying to out-trade a world of traders.
Let the traders take short-term profits. Instead, crush them by accumulating shares at better value points over time, and holding long-term.
7. Arman Gokgol-Kline – Universal Music Group: The Gatekeepers of Music – Patrick O’Shaughnessy and Arman Gokgol-Kline
[00:03:28] Patrick: We get to talk today about one of my absolute favorite topics, which is music and the business behind it. Been obsessed with music since I was right in that sweet spot of Napster. I was just cresting into my music fandom right as Napster came out and so, I think that’s the place we have to start. There’s this line in the sand in the history of music, maybe it’s late ’90s, early 2000s, when the whole business changed and we have to start there. Before we talk about UMG, maybe you can begin by just laying out what you view as the important points of history in the business of music.
[00:03:59] Arman: Yeah. First of all, thanks for having me. You’re right. That was a pivotal point for this industry. Prior to this industry, prior to 2000, when Napster and the ripping services emerged, it was an interesting model for this business. You had a few dominant, large labels that controlled every aspect of music from the discovery of the talent, to the producing of the songs, to the recording of the songs, because they own the studios because it was so expensive, to the production of physical distribution, putting it was on CDs and records, to the marketing, to the distribution channel controls. I mean, it was just all controlled by these few groups and as a result, they were affected by the gatekeepers and the way they monetize the music was interesting. If you want to think about it, it was kind of like an upfront perpetual license.
You bought an album, it was a bundled product. Back in the days, singles weren’t even a big part of the business. So, you had to buy 12, 15 songs from an artist in an album format. You had to pay upfront for the perpetual use of that and every incremental piece of music you bought cost you money. You had to have this high threshold for wanting to consume incremental music beyond just listening passively on the radio station, if you want on demand access to your product. And for the record labels and for the industry, that meant profits were heavily front end loaded. And so, the whole system was set up to not drive consumption through life, but to drive initial sales after launch. That’s when almost all the profits for the industry were made.
The other thing it did for the industry is basically five markets drove the great majority of the revenues and profits. US, UK, Germany, France, Japan were three quarters of the revenues of the entire industry because you had respect for IP rights in those markets and then you had a willing and able consumer base to pay for those rights. That was the model that was set up by the industry and by the labels of, let’s call it, 50, 60, 70, 80, 90 years. I mean, that was basically the way it worked.
If you want to think about it though, is that really the best consumer proposition? Which is hey, you have to buy a bundled product. I control what comes to market. Once it comes to market, you have to pay a pretty sizable upfront cost to buy it. Then you can use it forever as long as you keep the physical product with you, but every time you hear something new and want to listen to it a second time or third time, fourth time on demand, you have to go pay me for it. And that’s what the ripping services to me were.
It was two things. One is it was trying to solve a consumer problem with the industry and then two, is technology was enabling this digital consumption of music and the industry just was not forward on that. iTunes was a reaction, if you will, to the ripping services, whereas you could have argued actually it should have been what drove the consumer to the digital format. Late ’90s, the world says, “Hey, we don’t like this model. We want to be able to listen to individual songs when we want and we want to not have to pay a whole lot of money every time we want to consume a new piece of music,” and so you have the Napster’s of the world show up and try to break the mold.
Now interestingly, that wasn’t actually a great format for consumers either. First of all, it was actually a time-consuming process. I am also a product of, I was in college in the late ’90s, without incriminating myself, I may have known people that and it would take a fair bit of time to find the content. Yeah. It was like a job. Try to burn the CD if you wanted access to it on-
[00:07:36] Patrick: CDRW.
[00:07:36] Arman: Right, exactly. And then beyond that, the quality consistency was not there. It was just actually not great quality. By the way, it was illegal. And so, there was these three consumer problems with that as well, but it was the first sign to the industry that hey, this old model that you have, which worked great for you when you controlled all aspects of it. As technology emerged and we were able to try to find ways of pushing back on this not so great consumer proposition, consumers were basically like, “We’re going to change the way this works.”
Not surprisingly, profits for this industry globally peaked in 1999 and believe it or not, in nominal dollars, we’re still not back to those profit whether it’s 20 years later, much less in real dollars. From the late ’90s to mid-teens to mid-2010s, the industry was in decline, partly because of this ripping issue coming to the fore, but partly because they weren’t offering the consumer a product they wanted that was increasingly becoming digital in the consumers buying, but not so much digital in the industry’s mind.
The first attempt by the industry to solve that was iTunes. Essentially said, “Hey, we’re going to try to get past this issue of you having to buy physical media. We understand you want digital and so, we’re going to offer you consistent quality, a good UX, and we’re going to be able to deliver the product to you. Oh, and we understand that you don’t like this bundling idea and so, we’re going to offer you the ability to buy individual songs as opposed to just buying albums.”
And so that certainly helped a little bit with demand, but it didn’t solve this more monetization issue that consumers seem to have, which was why do I need to pay every new piece of content I want to consume? And in fact, if you want to think about the original price when it was like 99 cents on iTunes, it eventually went up from there, but effectively if you think of an album as 14, 15 songs and an album cost 14, $15, all they did is they just divided the number of songs by the price of the album, that was the price point for Apple. The consumer proposition wasn’t fully resolved. It was just a step by the industry in the direction. It also wasn’t great for the industry because you had essentially one distribution channel that controlled the market. And so, it was a powerful model for them.
And so it helped, but we didn’t see a major reaction in terms of return to growth and monetization in the market. That really started to change around 2014, 2015 as streaming came to the market and streaming, to me, solves not only the first point, which is around the UX and the digital experience, but it solves the monetization point too, which is now you have product coming to market where you’re saying, “Hey, not only do you have digital consumption, consistent quality of product, and you can digitally carry around your product, listen to it on demand, but I’m going to give you access to almost every song ever recorded in the Western world for a fixed, all you can eat, platform.”
And so that solves to me, the bigger part of the consumer proposition which again, potentially led to the initial issues that the industry was having in 1999 with people saying, “Hey, why are we having to consume the content you were trying to sell us in the way we are, but on top of that, why are we having to pay for this in the way that we are? I don’t want to listen to the same song 50 times. I want to be able to listen to different songs, but what about being able to do it on demand?”
And so if you want to just think about pricing on a per capita basis, back in 1999 in the US the average consumer spent about $80 a year on music. If you look to today and look at the including promotional price plans that the major streaming companies offer today, it’s about $80 a year. In the Western world and the big markets, we’ve come back a little bit full circle to say, “Hey, we’d like you to consume music at the price points you were comfortable with,” and this is nominal. We haven’t gotten into real yet, but for that price we’re not going to give you a vastly better experience.
The market has reacted. So just to give you an idea, I mean 2014 was really the year where we started to see Spotify was the leader in this industry scale. It was founded in 2006, but it’s first five, 10 years of existence, it was a much smaller business, just trying to A, get the access to the content that it needed and then B, just to build it out. From 2014 to 2021, we’ve gone from a very small percentage of Americans consuming music streaming, to last year, 60% plus of Americans are now consuming music through streaming. So, the markets reacted in a very positive way and good news for the industry in a way that now starts to bring this idea of value and price to music content.
[00:12:11] Patrick: Absolutely amazing history that involves something creative that we all consume probably on a daily or weekly basis and also technology disrupting and making possible a new consumer value proposition. It begs the question, I come at this conversation as a very biased, enormous fan of Spotify, the service and the business and the leadership there. And so, it’s fun to talk about sort of the other side of the equation. You mentioned that prior to, let’s call it 1999, that major music labels, they were sort of vertically integrated, controlled the entire value chain end to end and obviously profits reflected that back in 1999.
We haven’t gotten back there, which is wild to consider because it feels like music has gotten, if anything, more ubiquitous as part of our daily life and TikTok and all these different places, there’s more and more soundtrack to our lives. And so, I’d love to understand what the industry of music labels itself looks like. I promise we’ll get to Universal here not too long from now, but was this and is this an oligopoly? How did those businesses evolve from the heyday of the late ’90s through to how they look today as businesses and how they monetize?
[00:13:18] Arman: We are kind of in an oligopoly today. Over two thirds of the market is controlled by the big three. This is Western music. I’m talking about that part of the market. Just to be clear, 60% of consumption of music in each individual country tends to be local content. So it is important to understand that when we talk about Western music, we’re talking about Western markets and excluding some markets that are emerging and it’s something we should talk about later, which is in the old days, as I mentioned earlier, five markets drove the entire business. We are seeing that start to break down with the emergence of streaming as well. But it is effectively an oligopoly today and it was an industry that really started to consolidate pre-1999, so that you had some major players emerging because there are real scale benefits to this business.
But to your point, they were the gatekeeper. As we just talked about, if you wanted to have the money to record a song before an album before, you needed them in terms of production assistance, you need them in terms of studio time, you needed them to burn your CDs and distribute your CDs and market your products and get access to the retailers, the Targets, the Walmart’s of the world or Tower Records, if we can all remember that, and put your content so it had a prominent place and sell through. To your point, technology fundamentally changed that and so, not only did it change distribution which we’ve been talking about with the Spotify’s of the world, but technology changed other things.
Today, with a decent software program on a laptop and a few hundred dollars of equipment like this mic that I’m talking on now from Amazon, I can produce studio quality sound. I don’t need a label anymore to go produce a high quality soundtrack. Using social media, I can now market my product and I can actually communicate with my fans globally, forget locally. Technology has not only disrupted the distribution side, which is I can push a button now and push it out on streaming platforms to the world over and when we talk about this, there are services that will do that for you for 20 bucks a year or something, but I can actually produce the content. I can actually do some basic marketing and all of that.
So, the model of the major labels certainly has changed, but by the way, after 15 years of decline and pressure, we are now in a world where the major labels continue to be the dominant players in the market and so, a good question is why is that? What is their value today to the consumer and to the artist? Democratization of music has done some things that are scary for the labels. It’s also done some things that are scary for artists.
So in 2000 a report I saw a little while ago, talked about roughly one and a half million songs a year came to market. Last year, 22 million songs were uploaded on Spotify. We have 60,000 songs a day and growing being uploaded to Spotify and Spotify is, like I said, the leading platform, but there are other platforms out there certainly outside the US, in the Western world in particular, but that is a scary proposition for any artist, including the biggest artists because in the old days, yes, you had these gatekeepers that you had to get access to, but once you got there, you didn’t have quite as much competition. And if they featured you, you were what the world listened to. Today, you’re like, “How do I cut through 22 million soundtracks a year so that I get listened to?” And that’s a challenge for the industry and that’s a challenge for artists and that’s a challenge for everyone.
Secondly, your strengths to distribution increasingly get fragmented. So in the early days of streaming Spotify as the leader was the dominant platform, but we’ve seen not only other large leading streaming platforms develop and we can get into that dynamic because that’s a very interesting part of the market as well, but we’ve now started to see distribution channels beyond just streaming develop. So, Spotify’s share of major label digital revenues has actually dropped over the last few years, not grown. That’s because you’re starting to see use cases like Peloton, like TikTok, like Roblox, like all these, to your point that you made earlier Pat, you’re starting to see new use cases emerge for this content to becoming more ubiquitous. And the owners of the IP are starting to generate revenues beyond just the pure streaming.
Now streaming is still the most important digital channel by far, but you’re starting to see these new things emerge. So for an artist, there is a lot more complexity to distributing your product now. It’s not just about what are my CD sales in the various retail channels. It’s that, retail is still a not insignificant part of the market. It’s streaming and by the way, there is a handful of streaming companies depending on which country you go to that dominate those markets that you need access to. And now there’s all these new channels emerging on top of that and so, you need someone who can help you with that. And beyond that, the traditional roles of I’d love to have my content featured on video. I’d love to have my content featured in live and these kinds of things. So, there’s a lot more complexity to it.
Third, global reach, as we talked about, it used to be five markets. So, if I figured out what US, UK, Germany and Japan, what my strategy was, I basically cover the market. That is now starting to break down where we’re starting to see other markets. So, the top five share has gone from about 75% to the high 60s in just the last five years because we’re starting to see monetization of the other channels emerge and so, that’s yet more complexity for these artists to deal with. And then finally, even though the top artists as a group drive the majority of streams, over half the streams come from the top 50 artists, which is not surprising if you think about it. No individual artist over multiple rolling years is a significant part of the market. In any one year, the leading driver of streams in a market is usually low single digits market share and it’s rare that you see over five years the same person headline every year. And so, it’s hard for an individual artist to be able to go to these distribution platforms and say, “Hey, you really need me,” because the distribution platforms are like, “Hey, that’s true. It’s great. You’re awesome. You’re 3% of my streams, and that doesn’t help me a whole lot.” Just step back to the role of the majors today, they still have this traditional VC and production ecosystem role, which they’ve always had. They fund the production of music. They have a big portfolio of superstars that they can say, “Hey, why don’t you guys do a song together,” or they can bring in superstar producers, give you a little bit of an edge as you bring to market. On top of that now, they still have all the guts of the physical. They have this marketing promotion organization globally that we just talked about that’s being set up to deal with this complexity. And perhaps most importantly, they have scale in a way that no one individually has.
So, UMG is the largest global label, major label, and they have a high 30 share of streaming overall. And when you walk into Spotify with a high 30 share versus a two to 3% share, and you’re in the high 30s every year, it’s a different conversation, not only for the label, but for the artists who they’re putting together, and then… Who they’re representing. And then finally is data. Data’s becoming a hugely important aspect of this business. Again, an individual can tie into data streams from various outlets, be it social media, be it streaming, but the ability to capture a full picture, looking at the physical, looking at the global data, looking at every outlet, again, when I have 39, 40% market share in a market, I get data in a way that is very hard for even indie labels to get. We’ve talked to indie labels who will tell you the majors have a data edge in this business.
Disclaimer: None of the information or analysis presented is intended to form the basis for any offer or recommendation. Of all the companies mentioned, we currently have a vested interest in Apple, Meta, and Twilio. Holdings are subject to change at any time.
