What We’re Reading (Week Ending 24 April 2022) - 24 Apr 2022
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 24 April 2022):
1. Axie Infinity’s Financial Mess Started Long Before Its $600 Million Hack – Adi Roberston
Axie Infinity — whose creators refer to it as both a “nation” and “a bleeding-edge game that’s incorporating unfinished, risky, and highly experimental technology” — is sort of like hyper-financialized Pokémon. Players buy or rent three non-fungible tokens (or NFTs) linked to cartoon axolotls called “axies,” each of which has a set of associated stats and battle cards. Winning battles grants players a token called a “smooth love potion” or SLP, and axies can be “bred” with SLP and a third token called AXS to produce new NFTs.
Axie’s biggest selling point is the chance to turn these tokens into real money. Axies and SLP can be sold for cryptocurrency, and people can earn SLP by either playing the game directly or participating in the “scholarship” system, where they lend their axies to other players and receive a share of those players’ earnings. The result is a kind of tremendously popular in-game capital market, where axie-holders can earn currency through investment without necessarily playing the game.
The dream of Axie Infinity, like a lot of blockchain applications, is to get paid for something you currently do for free online. As Andreessen Horowitz partner Arianna Simpson told my colleague Casey Newton last October, “If I can play a game, and have an equivalent amount of fun, and also make money — well obviously I’d rather do that, right?” (We’ll leave aside the philosophical questions this raises about the nature of fun.)
But there is a fundamental problem: Axie Infinity’s in-game economy has so far relied on constant growth to keep it running, with inflation built into the mechanics. Even if the game can overcome the recent challenge of the hack, Sky Mavis hasn’t proven it can transition out of that phase.
Axie Infinity’s economy is built around three major resources: the in-game cryptocurrency SLP; the axies that live as in-game items as well as NFTs on Sky Mavis’ blockchain; and the “governance token” AXS. The game produces two of those resources in constantly increasing quantities. SLP is earned through player-versus-player battles, and, until recently it was also available by completing daily quests and grinding in single-player mode, the equivalent of printing money and handing it to players in large quantities. Axies can be bred several times to produce new creatures and are largely immortal, so the breeding mechanic increases the pool of NFTs.
Games often include economic “sinks” (like cosmetic items or in-game equipment maintenance costs) that burn resources without producing more. By contrast, Axie Infinity players had two main options: they could sell their SLP — which pumped it back into the ecosystem — or use it to breed axies whose main function is producing even more SLP. Either way, they were creating more resources and watering down the value of everything acquired in the game.
“From a macro[economic] perspective, you’ve created a positive feedback loop,” explains Mihai Gheza, the cofounder and CEO of Machinations, a consultancy that tests game economies with large-scale software simulations. Players (especially scholars) would use axies to produce SLP, the SLP would produce more axies, and the axies would bring even more SLP-producing players into the game. “It’s a guaranteed means of creating inflation.”
Sky Mavis said it needed a growing axie pool to let new players join Axie Infinity because, unlike a traditional game, the studio wasn’t supposed to simply create more characters out of thin air. Eventually it planned to introduce more sinks and hoped people would acquire axies for “the intrinsic value they can provide to players in the form of competitive, social, and progression-based fun and achievements.” In the short term, their primary use was generating currency that could create more NFTs for sale or rental, and that only worked if there were people around to buy. “By design the Axie economy will be dependent on new entrants,” Sky Mavis acknowledged.
But unless that intrinsic value materializes, the system requires players to keep joining up. In August, a cryptocurrency writer and decentralized autonomous organization operator who goes by M Goes wrote a widely cited Medium post calling Axie Infinity “the biggest Ponzi scheme in crypto.” He concluded that none of Axie Infinity’s potential long-term business models could support its biggest short-term selling point: letting a large number of people make a consistent full-time living playing games. The system was only sustainable with a huge demand for more SLP and axies, and maintaining that would require a functionally infinite number of new signups. “It is hard to predict when the collapse will happen,” he wrote. “But nevertheless, there are only so many daily players it can reach.”
As it turned out, Axie Infinity skeptics wouldn’t have to wait long. Around the end of 2021, the game suffered a dramatic decline in its token prices and sales volumes, with the SLP token crashing from an all-time high of 39 cents to a single penny. A report from research firm Naavik indicated that the typical player’s daily earnings had fallen below the minimum wage in the Philippines, Axie Infinity’s top market. Sky Mavis took drastic action, removing a large chunk of SLP-generating options and making player earnings dependent on winning competitive matches instead of just showing up to grind. “We know that this is painful medicine. The Axie economy requires drastic and decisive action now or we risk total and permanent economic collapse,” it warned. “That would be far more painful.”
2. Things not being said about Chinese tech management – Lillian Li
When Alibaba, Tencent and Baidu started in the 2000s, there was no concept of tech entrepreneurs. People have always started small businesses, but no one in living memory ever built a private business empire in China. VCs were mistaken for fraudsters — in fact anyone starting a business was mistaken for fraudsters. For a country undergoing the initial tremblings of liberalisation and digitalisation, two groups went to work for fledgling domestic startups— the crazy innovative self-starters and the people who couldn’t get a better job in either SOEs or MNCs. That’s a big gap in competence between the two.
This meant while the tech founders were impressive people, some of the early employees of these corporations were decidedly not. Talking to an early Tencent VP, he mentioned his co-workers did not have prestigious university degrees if they had university degrees. Before listing, the average coder in Tencent graduated from the Chinese equivalent of community colleges and was very average. This was not a localised phenomenon by any means. Some people get lucky by being at the right place at the right time. Their positions are more luck than merit. While this is also the unspoken rule in Silicon Valley much of the time, the difference is stark in China, given the heterogeneous distribution of education and the assumed inherent worth that accompanies education.
The early employees also tend to be missionaries relative to the mercenaries of the later cohort.2 Someone who joined Alibaba in 2012 joined an upstart on the cusp of changing the Chinese retail landscape. Someone who joins Alibaba in 2022 is entering an establishment potentially on the decline. The graduates who join tech firms are the best talent of their generation, but they join for the money and prestige more than the love of the mission. The intergenerational gap is stark.
Implications from these factors are numerous. First, there is a generational disconnect where older employees believe in the notion that tireless hard work yields rewards. After all, they experienced this with vested stock growth. The younger generation is there for a job, not a purpose. They want to know when they can afford a house. Second, early mediocre employees who made it to middle management oversee more qualified and talented underlings. People do not scale with organisations, but growth hides many ills. Insecurity abounds when managers, alongside their employees, realise that they aren’t as qualified to be holding the positions they do…
…Management and organisation excellence was a luxury for companies with stable growth and a longitudinal timeline. It was possible to brute force solve a problem with additional bodies in the early days. Hiring more people is still the default modus operandi of many firms when they encounter operational bottlenecks on tight deadlines (and deadlines are always tight, there are no prizes for being slow to a market). It also stroked the leader’s ego to be overseeing many people. After all, being in charge of such resources was a direct approximation of power.3
The very distinct problem of organisational bloat and diseconomy of scale with hiring people is apparent here. Instead of having 1:1s with their direct report, management tells employees to write daily, weekly, monthly, and quarterly reports listing what they’ve been doing. Not to mention the inefficiencies caused by hiring – it takes time to get new employees up and running, often dragging down the productivity of others during the ramp-up. Communication and coordination get harder as group size increases. The inability to attribute direct outcomes to individuals creates visible principal and agent problems. Entire work culture arises where employees slack off (touching fish culture) and management makes countermoves without addressing the real issues — firms overhired during product sprints then have to deal with excessive headcounts.
The focus is for firms to get things done quickly, and the attitude is whatever that takes. Refinement of process and improving efficiency generally took a back seat. This approach afforded fluidity and agility. Work calls happen all day, every day. Project directions can change on a dime, and the teams will reorient. Less time is spent on strategy and more on execution and reiteration. Communication takes place over the fragmented synchronous WeChat more than email or work messaging platforms like DingTalk or Feishu. Calendar invites are getting wider adoption, meeting agenda-less so.
There seems to be a cultural background to the lack of optimisation. While Western firms credit their success to distilling and adopting industry best practices, Chinese firms credit their success to being one of a kind. Chinese management exceptionalism takes Western startup slogans like ‘move fast and break things’ and mixes them with the local customs of patronage linked to Jianghu culture. The assumption is that every firm’s process should be unique, and there is some resistance to change. This has been stalling the adoption of successful organisational processes like sales funnel across China, yet another reason why Chinese SaaS finds it hard to take off.
3. Christopher Tsai, is investing an art? Insight of a good investor – Peridot Capital Management
[00:07:04] Tilman Versch: Maybe this is a question that’s quite broad. For your 25-year-old self, what knowledge and strength do you feel that looking back, you’ve missed as a 25-year-old and you had to acquire maybe also in a bit painful way over the years.
[00:07:23] Christopher Tsai: You asked me about curiosity before. I think that’s also at the root of this question. Being able to constantly think about the world in different ways and not get trapped using models that you might have used or other people use is so important. It’s not a lesson that you can just teach. It’s an experience that one has to go through.
I’ve been reading this book. I’m not finished with it, because it’s a long book. It’s Marcel Proust’s In Search of Lost Time. Proust says that the real voyage of discovery is not seeking new landscapes but having new eyes. There lies the curiosity that we’ve been speaking about. It’s important to look at the world constantly with new eyes, particularly because the world is changing very quickly, right? Businesses don’t have the lifespan that they used to have.
In 1958, McKinsey did this study. And McKinsey showed back then that the average lifespan of a company was 61 years. That’s incredible. Sixty-one years, six decades. But today, that number is 18 years. And one of the reasons, Tilman, that it’s 18 years is because technology is encroaching upon old business models. So, if you’re not thinking about the world in new ways, if you’re not curious, if you’re not constantly looking at the competitive threat that technologies posed to traditional businesses, you might find yourself in a business that’s going out of business.
So again, being curious is not something you can just teach. It’s something that you, I think, have, and it’s something that you can foster over time. Eleanor Roosevelt, by the way, said something really wonderful. She said, “I think at a child’s birth, if a mother could ask a fairy godmother to endow it with the most useful gift, that gift would be curiosity. I wish I was endowed with that gift and was able to foster it from the very beginning. I think that something in business that you learn, you either have it or not that curiosity. But I love looking at different businesses, different business models, especially today.
[00:10:29] Tilman Versch: You have close to 25 years of experience in managing your fund. Which topics have you worked on since these 25 years to get better at? Are there any consistent topics that have kept you up at night? Let’s say it makes you stay late because you’re still trying to achieve and get better with?
[00:11:00] Christopher Tsai: Let me draw a parallel to answer your question between investment management and the Michelin Guide. We know the Michelin Guide for restaurants. Chefs work their whole lives to get one star and then two stars and three stars. What gets them there? Well, creativity gets them there, pushing the boundaries and being the best at what they do. They’re not doing things like everybody else, by definition. There are only a handful of chefs in the world that have three Michelin stars. The problem is that for those few chefs that wind up getting those three stars, what do they then want? Well, typically, they want to maintain those three stars. And so, everything else becomes subordinate to keeping those three stars.
I think that investment management is, unfortunately, very similar to that. And so, when I started, I was inundated with the idea of structuring a portfolio in a way that would get you those three stars, if you will. So that meant looking at beta, looking at Sharpe ratios, looking at standard deviation. And what I found over time is that if you start to behave like everybody else, your performance is going to be like everybody else at best. So over time, I have refined our process. In fact, we moved away from trying to worry what other people thought about how the portfolios looked. We moved away from that a long, long time ago. Maybe three-four years into managing capital for outsiders.
So today, it’s all about structuring the portfolio in the most optimal way. What do I mean about that? I mean, it’s about structuring a portfolio to maximize return and minimize risk. And that’s pretty much all I think about in terms of managing the portfolio—maximize return, minimize risk. I don’t worry about so many items that institutional investors worry about that wind up restricting a manager’s ability to have the flexibility and create alpha. I don’t worry about what other people might think of the portfolio. The key is to manage portfolios as if nobody was looking. So that’s how I’ve moved things over time…
…[00:24:55] Tilman Versch: Are there lessons you’ve taken directly from your grandmother.
[00:24:58] Christopher Tsai: She had a saying, “Don’t be a square table when you can be around one.” She intuitively understood Dale Carnegie.
[00:25:08] Tilman Versch: This means?
[00:25:10] Christopher Tsai: It means that there’s no need to be abrasive in how you speak with other people. I think that Fred Rogers, I’m not sure if many of your viewers know who Fred Rogers is, but he was the character Mr. Rogers, a popular TV show in the states geared toward children. And he said, “There are three ways to ultimate success. To be kind, be kind, be kind.”
Everybody is going through the same kind of emotions. Everybody has difficulties. You don’t know what those difficulties are. Everybody has a bad day from time to time. Everybody has joys, desires, needs, wants to be loved. My grandmother understood that. She knew how to deal with people. Not to be abrasive, not to be square around the edges. Dale Carnegie espouses that way of behaving. And so did Fred Rogers, who was one of my mentors. I should say idols…
…[1:09:28] Tilman Versch: For the end of our interview, is there anything you would like to add that we haven’t discussed?
[1:09:34] Christopher Tsai: Was it Mark Twain that said, “It ain’t what you don’t know that gets you into trouble, it’s what you know for sure that just ain’t so.” I think we should all keep Mark Twain in our mind as we think about what we own, why we own it. And again, always remain curious, not judgmental. Try to understand that if something doesn’t make sense to us, or something doesn’t make sense on the surface, maybe it makes perfect sense, just not to us.
I’ll give you an example. If you go back to 2007, Apple had just launched its iPhone. Many investors at the time said, “Well, the market value of Apple makes no sense.” They said it didn’t make sense because Apple was worth more than Nokia, Palm, Research in Motion, all those companies combined. How can that be? And what people didn’t understand, or at least a lot of people didn’t understand, was that Apple was shifting to an entirely new business model. And it had a product that had tremendous network effects that were not understood. And the market didn’t understand that the other companies would actually be completely disrupted by this new business model, by this new product, by new technologies converging. So, the market as a whole got that.
And that’s why Apple was worth more than the competitors combined. But the short sellers didn’t get that. They were close-minded. They were looking at the world through a lens or with models that no longer made sense. They didn’t understand the changes. But if you think about it, if a company has a positive future, a bright future and its competitors don’t, the value of the company that is leading disruption in taking market share and growing profits will not just be worth one multiple of all its competitors combined, but as time goes on, it will be worth two times, five times, ten times, 100 times and ultimately an infinite number of times, as all the other businesses continue to lose cash flow, and the present value of those future cash flows decreased, and the intrinsic value of those businesses decrease.
We’re seeing that same argument today in certain areas, where the value of one company might be worth all the competitors combined. People are making the same mistake because ultimately, that one company boot will be worth two times, five times, and ten times and an infinite number of times of all the other companies combined that may no longer have any cash flow. It’s just mathematics. It’s a numerator over the denominator. But it’s catchy, right? It’s a very catchy thing when somebody says, “Heck, this makes no sense. This company is worth all the combined value of the other players.” It’s very catchy. And it’s powerful, for some reason. I haven’t figured out why that’s such a powerful argument, but it’s very powerful. We all have some cognitive bias there, or at least I have. It’s a powerful argument.
But if you actually break it down and you figure out, “Okay. What does that mean? What is the value of a company? How’s the math thing compared? Numerator over denominator. What’s happening to the denominators? What’s going down? What’s happening to the numerator? Well, it’s going up because the future cash flows are increasing. Right? The present value of those cash flows is increasing, and intrinsic value is increasing. So obviously, it becomes multiples, not just one or two times. So be curious, not judgmental, as Walt Whitman said, and always look at the world with new eyes.
4. TIP429: What Is Happening With Oil? w/ Josh Young – Trey Lockerbie and Josh Young
Trey Lockerbie (00:04:06):
One chart I noticed from your research shows global production and consumption rising together in this highly correlated fashion, basically since 2010. 2020 hits, and both declined dramatically from the pandemic, but similar to the stock market, they’re beginning to kind of bounce back. However, the chart indicates that the supply will severely lag demand moving forward. And I thought this was kind of interesting because I was curious as to why the supply wouldn’t bounce back just the same to where it was kind of in 2019 levels?
Josh Young (00:04:38):
I think there’s two different cycles that are happening simultaneously for oil. And I think that’s where a lot of the headlines have been kind of in reporters covering the space have been confused, along with a lot of the analysts that cover it. So there’s a long cycle, which is that oil has been in a bear market since roughly 2012. And really, oil never achieved the high price that was seen in 2008. And so arguably it’s been in a prolonged bear market, even since let’s say 2008. Then there was a shorter cycle boom and bust in shale investment that was primarily spurred by private capital, by endowments and pensions and whatever allocating to private equity funds and equity and debt, where they went and drilled shale which was a particular kind of oil field that has a very high initial production rate and very high decline and has been most economic here in the US.
Josh Young (00:05:29):
There was this mini cycle for oil shale here in the middle of this down cycle for oil. And so what you had happen was a lot of long cycle projects that take a while, but aren’t really low decline. They produce for a number of years without a lot of necessary reinvestment. And you had a prolonged and extended down cycle for conventional development for oil, partly because there was this shale boom and bust. And the boom and bust for shale has been heavily politicized. There’s lots of people that are anti-fracking. They don’t even understand what it is or what the real risks are. There’s a lot of people that are anti-pipeline and a lot of these things have gotten conflated.
Josh Young (00:06:09):
And I think when you remove the two and you understand kind of what’s happening, it becomes a lot clearer. And what we’re seeing is the impact of an arguably more than a decade downturn in long cycle oil investment, because we’ve been in this oil bear market, and that’s kicking in at the same time as this bust in shale where there had been three or 500 billion a year in, I think in some years, that had been spent, and in many cases lost, or much of the money was lost because of high declines of production at low prices.
Josh Young (00:06:43):
And so where you see those two meet, you end up with declining production, or at least production that’s not rising as much as you’d think, because you have this mini boom and bust along with this longer cycle. And it’s really, I think, messed up a lot out of the investment incentives. And I think it’s made this bull market for oil that we’re starting to see, way more powerful, as well as very misunderstood by many different sources.
Trey Lockerbie (00:07:09):
Well, on that note, maybe we just take a quick detour and debunk some of these things around fracking, because I’m not highly educated in it myself. And I could probably tell you that most people think fracking either creates dirty water because of the oil in the water, or the methane that could potentially come out of the fracking is bad, even worse for the environment than the carbon, et cetera. But I know there’s ways to burn off the methane now, even to say, power Bitcoin, which I think you have some familiarity with. So, what are some of these myths around fracking that we could debunk quickly?
Josh Young (00:07:39):
Yeah. Let’s address the two that you mentioned. So the first one is that fracking pollutes groundwater. And it’s hard to tell exactly where that started, but there was a famous movie, I think it was a decade ago called Gasland and they showed, I think it was Matt Damon going and finding tap water that was from a well in Pennsylvania. And they turned on the water on this one particular faucet and they lit it on fire. And this was a horrific misrepresentation of what’s happening. This was not at all related to fracking. There was zero relation. What happens in some places where there’s coal that’s naturally occurring near the surface is there’s a phenomenon called coal bed methane where if you pull enough water out from an aquifer that is surrounded essentially by coal, you end up de-pressuring the coal and you release natural gas from the coal.
Josh Young (00:08:32):
So they knew that. This was a total misrepresentation, but it looked really sexy and it fed into people’s fears, especially in New York City for their water system where they understand that there are some places historically where that water has come from that’s been really bad. Where there’s been all kinds of horrific industrial pollution and waste. Upstate New York there were historically all kinds of coverups and so there was a lot of sensitivity to this. But it’s also not a new thing. Fracking has been going on for decades and it’s been going on near population centers and near aquifers for decades. You look at near Dallas and you look in West Texas. This has been going on for a very long time in different forms, but essentially the same thing. And you can study these things and observe kind of the communication between different rock layers.
Josh Young (00:09:16):
And I think it was just this very easy kind of cheap hit. And unfortunately, as a society, we’ve been progressing from people that read books and long form essays, to seeing short kind of YouTube or Instagram or whatever clips. And it’s really hard to unsee the water being lit on fire, even though again, it’s totally unrelated. And maybe with like what’s happened with COVID and some other stuff, there’s more sensitivity to this where you see these videos of people vomiting blood and dying in China that were unrelated at all to COVID, but they were hard to unsee. So I think it’s a similar sort of thing. So I think that’s on the water pollution.
Josh Young (00:09:56):
And it’s not that it’s not affecting water at all. Any industrial process has externalities. So if you drill for oil or gas anywhere, you’re using stuff, you’re using equipment and supplying the equipment and running the equipment can cause small leaks. So you may have some engine oil that leaks. But it’s very similar to operating a commercial truck. And trucking, even trucking organic produce causes some amount of water pollution and some amount of emissions, but they’re not what they’re being described or being attacked or characterized. So there is a little bit of pollution, but it bears almost no resemblance to their critiques or the concerns that people have. And just the degree of risk versus the degree of concern is totally misplaced. And it’s really oriented towards anti-energy independence…
…Trey Lockerbie (00:19:53):
And as the price of oil increases, won’t that create a gold rush of producers to enter the market and with all these new rigs and eventually get enough supply so the price comes back down? Why would that not be the obvious case?
Josh Young (00:20:07):
Yeah. So that will eventually happen, but there’s a little bit of a couple of things going on that are going to make that hard. So one, we are at the tail end of a very long bear market for oil. We’re just starting this bull market. Prices, like you mentioned, in the last year have rocketed higher. And they’ve finally gotten to a point where it’s economic to start investing in these long lead time projects. The problem with long lead time projects is that they’re long lead. So in many cases you have to spend 10 years bringing your discovery onto production and developing it more. And there’s been too little activity in discovering oil fields. So you kind of need to start from the beginning. So in many cases you may need to spend 15 years in between now and bringing oil on. And oil prices have almost, I think they’ve doubled in the last year. So where do they go in between now and that kind of five to 15 year from now window for those long dated projects?
Josh Young (00:21:02):
And then on the short dated shale and other sort of conventional but short cycled projects, we’re just at the tail end of this giant boom and bust in that area too. And so there were many companies that misrepresented their economics and said, oh, we can break even at $30 oil or $40 oil or whatever their economics were. And many of those companies just reported their Q4 and they were profitable at $80 oil, but barely profitable. So it turns out that those companies require much higher prices too for their activity to be economic. And they’re only going to rush and drill a lot more if their activities are highly economic. So that whole, the setup both for the short cycle and long cycle, both of those are requiring much higher than historic prices in order to bring on new rigs.
Josh Young (00:21:51):
And then in the oil services industry, it’s even worse where there’s been even less capital available for even longer. I think people forget about this. They just kind of assume, oh, hey, there’ll be plenty of rigs. And there were more rigs running 10 years ago. The problem is that was 10 years ago and many of those rigs have been cannibalized. They’ve been scrapped. And many of the people that worked on them are no longer in the business. In many cases, they’re retired. And so getting the talented workforce, along with capable, additional rigs and frac stacks and other sort of equipment, it’s a real problem. And we’re not even at the point where it’s economic for those oil services companies to start. They’re starting to try to hire, but wages haven’t gone up enough yet, and they’re not even starting to build new rigs.
Josh Young (00:22:36):
So if you think about that from a lead time perspective, that’s a multi-year cycle on its own just for the short term stuff. So I think we’re set up for this multi-year bull market where the first thing you need to see oil services’ stocks go up 5 or 10 X. That way they can have an investment boom. That way they can go build over the next few years the equipment that’s necessary to have a drilling boom, to have drilling go way more than it needs over a multi-year period. And then you can have a big crash, but that might be coinciding with when these long lead time projects come on. So it’s really set up nicely I think for a very long, very strong bull market that’s really going to incent a lot of investment. But like you were saying, why can’t they do it? Well, there’s just all these logistical and investment problems that are keeping it from happening.
Trey Lockerbie (00:23:24):
Wow. Barely profitable at $80 a barrel. I find that very surprising. And especially when you’re considering the decrease in rigs, it’s not so much that the rigs are just going out of business and being scrap. They’re getting more efficient I think, say over the last 10 years. Or that would be the idea, right? Some innovation, they’re more efficient, and you would be able to run more profitably. So that kind of brings up for me, what is the actual marginal cost to produce oil today?
Josh Young (00:23:50):
So there is a cost curve. So it’s not like any one well. And I think that was the thing with shale where you had these various large cap or midcap companies with their CEOs getting on TV saying, oh, we break even at 25 or 30. They were talking about their very best well when they were drilling 500 wells and their 500th well was not economic at $150 oil. So there was a lot of this kind of snake oil-ish, charlatan-y, hey, we’re this, but we’re really that. And the truth was somewhere in the middle. And so I think it depends. I think the incremental well is going to be a lot less profitable than the average well. And since it’s a commodity, you really need that incremental well to be highly economic. So if there’s 500 rigs operating right now in the US for oil and gas drilling, to bring on that 501st rig needs to go somewhere. Needs to have a producer for whom the return is likely to be in excess of their cost of capital. And for producers right now, there’s huge pressure on them to return capital and not drill.
Josh Young (00:24:53):
Again, we’re at the tail end of this disaster where every company lost a ton of money that was active in the space. And so there’s this very, very high bar for them to bring on that rig. They have to find the rig, and there are some rigs left, and then they have to find the people for that rig. They have to find the oil field tubulars and other equipment, which is sold out in many cases. And then they have to have the drilling inventory. They have to have the rights to land that’s economic enough to exceed the costs of all of those different things.
Josh Young (00:25:23):
So on the marginal well, there’s a pretty good argument that you’re just getting your kind of 10% return on a cost of capital adjusted basis when you factor all that in. So the rig count is rising, because you are getting to that point, but you’re not so far beyond the point that you have these companies going and ordering more rigs or getting longer contracts from anymore. And in general, I think there’s this trajectory of a slow build, but it’s definitely not boom time, even with oil, as we’re talking around $96 WTI.
Trey Lockerbie (00:25:57):
So you have these green energy ESG initiatives underway, COVID shutdowns, labor shortages, as you mentioned, a lot of people exiting the space and it’s leading to this gap between drilled uncompleted wells, and completed wells. And this might sound very technical to a lot of people listening, but I’m having fun nerding out on this stuff with you. And I feel like it’s really setting up this bullish argument for this commodity here. So I want to kind of quickly walk us through what that means, the difference between the uncompleted and the completed wells, and why that is and the incentives driving these decisions from producers to kind of curb the investing in additional production.
Josh Young (00:26:35):
That’s a great, really kind of important choke point for the industry. And I guess I’ll just say it’s similar to the rigs where when you had under investment, you didn’t have, especially in the last couple years, you didn’t have companies building more rigs. And since they weren’t building more rigs, there’s a certain number of hours that a rig can work before you need to replace the engine, you need to replace various other components, you need to replace filters. And at some point you just hit your useful life on a rig and you’re done. And so that’s kind of an analogy to the process from a producer’s perspective, going from undrilled land to a producing well. And one of the steps is after you drill the well, then bringing the right equipment on to frack the well and tie it into a pipe and bring it on production.
Josh Young (00:27:21):
And so as a part of this giant boom and bust and the short cycle shale stuff, there were a lot of wells that were drilled that weren’t completed and brought on yet. I think some of it was a capital budgeting and timing thing. Some of it was some of these wells were not very good and they knew they weren’t good. And so they didn’t even bother fracking them and bringing them on. And what you’re pointing out is a white paper we talked about, and there’s various other sources that have been focusing on this because it is an issue, where we noticed that the number of these wells that were prepared to be fracked but hadn’t been fracked yet, was falling a lot. And what that told us and what it tells us in terms of why things are going to struggle to scale how you would expect in a boom, is that there’s been essentially this underinvestment, essentially burning the furniture where the wells that were drilled already are being completed faster than new wells are being drilled.
Josh Young (00:28:13):
And that means that you need to drill a lot more wells in order to be able to complete the same number of wells that you’ve been completing. So if you think about it, step one, step two, oil. Well, they did too many step ones to start, and now they’re doing too many step twos and you need to kind of coincide step one and step two in order to get to a completed well that’s on production. So it’s a sequencing issue, but it’s also a budgeting issue and we’re seeing many producers now subsequent to that white paper, we’re seeing them come out with guidance where they’re raising their capital budgets anywhere from 20% to 25% without raising their production guidance at all. Some of that’s cost inflation, but some of that’s also replacing. They’re recognizing they did not enough step one drilling wells. And so now they have to do more step one in order to catch up with the step two, which is completing wells.
5. Morgan Housel – The Best Story Wins (EP.100) – Jim O’Shaughnessy and Morgan Housel
Jim O’Shaughnessy:
That’s fantastic and it’s another thing we share. I generally think of myself as unemployable, other than by myself. Sometimes even I don’t want to hire me because I’m such a pain in the ass for everyone involved. But that’s a really cool situation to have and at least my impression is that your colleagues understand the new world we’re in. By that, I mean like some lawyers get when Patrick wanted to do, Invest Like The Best. They were like, “Yeah, but this isn’t OSAM business.”
Morgan Housel:
Of course, it is. It’s a key integral OSAM business.
Jim O’Shaughnessy:
Exactly.
Morgan Housel:
People don’t understand. The quirk that people don’t understand about what I do in Collaborative Fund too, is I never write about things we do at Collaborative Fund. I never say here’s the deals that we did, here’s why we’re so much better than everything else. I could, I have those stories that I genuinely believe but nobody wants to read that. That’s the truth. People don’t want to read what is clearly marketing but they will want to read and share with their friends and forward onto their coworkers an article about something that has to do with investing or history or psychology. I just want to write things that people will want to share. If I do that and gain the largest audience, cast the widest net, people will learn through osmosis about what Collaborative Fund is. That is so much more effective than force feeding them by saying here’s why we’re so great, here’s why we’re so great. I feel like a lot of asset managers that have finally woken up to we need to have a blog, we need to have a podcast. They still do it wrong because what they write about is how good they are and why you should give them their money. Nobody wants to read that.
Jim O’Shaughnessy:
I could not agree with you more. Luckily, Patrick and I are so simpatico on this. It’s just like you know what? Nobody gives a fuck about you. Really if they do, they want to know how can you help them? How can you give them something that’s interesting that might not be in their toolkit? You’ve got to be useful and the way to be useful, in my opinion, is to be an honest broker. About hey, have you thought about this, this or this? So whenever, for example, when I’m commenting on anything about OSAM, I always lead in with talking my book. I want people to know with that line, I’m going to throw a little marketing at you here…
…Morgan Housel:
No, I think it’s obvious too and I’m happy to admit this. There’s nothing new or groundbreaking in the slightest in the book. The book’s message is like don’t be greedy, compound interest is awesome, save some money. This is not rocket science stuff. But if I think why it may have connected, it’s because I tried to tell a story around that. A thing that I really believe is true for all, everything in the world is that the best story wins. It’s not the best ideas, it’s not the right ideas, it’s not the complex ideas. It’s just the best story wins. I’ve used this example before of Ken Burns, the documentarian. His documentary on the civil war came out in 1990. When it came out in 1990, it was such a success. More people watched the civil war documentary in 1990 than much the Super Bowl that year. It was just like a ridiculous blowout success.
This is a documentary on the civil war, which is like one of the most documented. How many books are there on the civil war? Thousands and thousands. There is nothing new in Ken Burn’s documentary, nothing new. This is not like he was the guy to uncover Gettysburg. There’s nothing new in there, he just told a really good story about it. An amazing story with captivating music and amazing editing. Because of that, he took an event that everyone had known about, and everyone has known the detail about. He got more Americans to tune in than watch the Super Bowl that year.
I think there’s so many examples of that, of things that everyone knows, have been discovered for centuries. Nothing’s new but if you can tell a good story about it, you’ll get people’s attention. That is what I think a lot of academics, in particular, miss. Is that they have all the right answers but they are the worst storytellers. I think a lot of the times they go out of their way to be bad storytellers. They want to use big words to fit in with their colleagues, to fit in with the academic tribe. I think there’s so much room to take what academics know and explain it to a layperson in a story that they’re likely to remember and likely to hook onto. There’s so much room doing that.
I think you could also write a book, not just Psychology of Money but you could write the Psychology of Medicine, the Psychology of Politics, the Psychology of Sports, the Psychology of Relationships. Just talk about things that people intuitively know and tell a story around it in a way that would really connect with them. So that’s what that I’ve always tried to do in my writing. Is like I don’t have the intelligence, the brain power, the education to discover new things in finance. Even for the people who do, I think there’s probably not that much to discover left. We’ve overturned almost all the rocks but I think there’s still a lot of room to be made and progress to be made. Connecting with these people by just doing a better job telling the story.
Morgan Housel:
I would, because this is the magic wand. I’ll make this ridiculous. I would show people exactly in their life when the things that they admired about themselves were actually due to luck. And I would show everyone a movie of like, “Hey, this point in your life that you think you did this.” Actually, here’s what happened behind the scenes. You didn’t know about that actually led to that thing. I think that would instill a degree of humility in people that would be so beneficial. It would help, it would not depress them. It would be so beneficial to know. And also I would, so this is a magic wand. I would show them every one else in the world’s movie too. I’d be like, “Here’s all the areas where Jim got lucky and Morgan got lucky.” And then they would stop idolizing people for just some level of success. And they would look at individual actions that led to what actually they did on their own volition to actually get to where they were.
Because I think one of the biggest problems in the world, not one of the biggest problems that’s exaggerating, but a problem in the world is that we underestimate the role of luck in a massive way. And even there’s that saying of like, “The harder I work, the luckier I get.” I think that’s bullshit too. I think luck is just luck. And I think if you are working hard to become luckier, then that’s actually a skill, luck is just luck. For you and I, you and I are white American males born in the latter, half of the 20th century, that’s just luck you. You and I did nothing to do that, it’s just what happened. And I think everyone has some story like that they under appreciate. And to make them aware of it would be a huge help in the world.
6. Amazon CEO Andy Jassy Speaks with CNBC’s Andrew Ross Sorkin on “Squawk Box” Today – Andrew Ross Sorkin and Andy Jassy
SORKIN: You talked about chips being a major issue. What do you think we should be doing here in the United States about manufacturing those chips and does Amazon have a role in that long-term you think?
JASSY: Well, I think it’s, it’s, it should concern people that so much of the chip production is concentrated in one place, and there’s, you know, there are a lot of geopolitical things that could happen. And so I think it’s quite wise for the US to be thinking about creating more production here and, you know, I’m very happy about the CHIPS act that we’ve been working on in the country. It’s a lot of money, it’s $35, $40 billion and yet, it’s probably not enough. I think we probably are going to need even more than that to have the ability to withstand some kind of shock to production in a particular part of the world. But I think it’s very important. I, you know, we design our own chips and we’re big buyers of chips and we’re big customers of some of the big chip companies as well as producers ourselves so there could be a role for us to play. We certainly want to help and we certainly want to partner.
SORKIN: Do we believe that the companies in America and I know Intel is trying to do this, but do we have enough know how in this in the country to actually do the manufacturing piece of this do you think?
JASSY: I think it’s a good question. I think we have a start. I mean, Intel obviously has been doing this for a long time. And you know, Pat Gelsinger has been a partner, you know, first on the VMware side now with Intel for a long time and I have confidence in their ability to produce and but they have work to do as they know and and we’re going to need additional providers I think to be where we ultimately want to be…
…SORKIN: In that context, how do you see the union movement that’s taking place, frankly, around the country, but clearly aimed in certain places and I’m thinking about New York, where I’m from at Amazon?
JASSY: Well, I mean, I’d say a few things. You know, first of all, of course, it’s its employees’ choice whether or not they want to join a union. We happen to think they’re better off not doing so for a couple of reasons at least. You know, first, at a place like Amazon that empowers employees, if they see something they can do better for customers or for themselves, they can go meet in a room, decide how change it and change it. That type of empowerment doesn’t happen when you have unions. It’s much more bureaucratic, it’s much slower. I also think people are better off having direct connections with their managers. You know, you think about work differently. You have relationships that are different. We get to hear from a lot of people as opposed to it all being filtered through one voice. If you want to keep the construct that we’ve had for for this long, you have to have, you know, competitive and compelling benefits though for for employees and it’s why we champion the $15 minimum wage a few years ago and we’re up over $18 now. It’s why we have full insurance, why 401k, 20 weeks of paid leave and our Career Choice Program where in our fulfillment center for our employees who want to get a college education, we’ll pay for their full tuition, so those things really matter. The one thing regardless of how it all evolves is we just won’t compromise on the customer experience. That for us, you know, is paramount…
…SORKIN: When you look at one of the issues that the unions have raised as you know so well are safety issues, and you’ve addressed this to some degree in this morning’s letter. But I’m hoping you can speak to it because there was some data out just about two days ago that seemed to suggest and this was data put together by I think some of the Union advocates that there were more, even double the number of injuries at Amazon facilities relative to their peers.
JASSY: Well look, there’s a lot of ways you can spin the safety data and some special interests folks like you’re talking about with this case, will do it for their own interests. That that data is not really accurate. You know what I would say is a few things. You know, first of all, for anybody that had hired a lot of people during the pandemic like we did, and there are plenty of others who did as well, their incident rates, their recordable incidents which what OSHA asked everyone to report on, went up in 2021 versus 2020 because he had a lot of new people. In our case, we hired about 300,000 people just in 2021, most of whom had never worked in this type of manual and industrial space, and who had to be trained and all the data we have says that the incidence of injury in the first six months is always much higher than thereafter. So we have a lot of new people, you’ll have more incidents. But that said, if you if you look at the the injury data and safety data, you know, for us, we we have a few macro areas in which we do work. We have what OSHA calls warehousing. We have what OSHA calls messengers and couriers, messengers and couriers, and then we have grocery and if you look at the industry average versus our numbers, we’re a little bit higher than average in warehousing, we’re a little bit lower than average in both messenger and couriers and grocery. So we’re about average, which, frankly, I take no solace in. We don’t aspire to be average.
You know, we’re trying to be the best in the industry and it’s why we’re spending, you know, we have we spent about $300 million on safety last year alone. We have about 8,000 people who just work with safety and we’re trying all sorts of things and work in all sorts of all sorts of things. We have a rotational program we built where we’ve built sophisticated algorithms to try to predict when somebody’s doing something too, too frequently and rotate their jobs and rotate what they’re working on. We have wearables that we’re investing in that send haptic signals when we believe you’re making a dangerous movement. We have, you know, new shoes that we’ve had everybody wear that, you know, protect your toes and avoid slips. We do training on body mechanics and wellness. So we’re working on a lot of those things, but the reality is that we will not be happy until we’re the best in the industry and and even then, I won’t be happy because I’m gonna know there are things that we could be doing better. This is important to me, it’s important to—
SORKIN: How do you think about this? So one of the things that Jeff said in his letter last year was that one of the missions of Amazon now is to be Earth’s best employer and Earth’s safest place to work. How do you think about that relative to the priority of serving the customer?
JASSY: I don’t think they have to be at odds. And in fact, I think they’re very complimentary. When you take care of employees and employees are safe and they love working where they work, they stay longer. They tend to be happier, they tend to be more productive. And all those things improve the customer experience. So I see them as very complimentary…
…ORKIN: On the platform. Before we let you go, it’s been 10 months now in this new role. And I’m curious what the relationship is like with Jeff, how much time you guys spend together, what does he think of all of this? We were actually mentioning we thought your letter was a little Bezosian in some respects. What’s it been like?
JASSY: Well, I have a great relationship with Jeff and, you know, I’ve known him for a long time and I have an unbelievable amount of respect for him. And we talk regularly, we talk weekly and it’s great to have a sounding board and he’s got so much wisdom. And you know, I think both of us share a lot of excitement and optimism for the future. We’re so early in all of our businesses. I mean, even in our retail business, which people think as kind of our most mature business. You know, we’re about 1% of the worldwide retail market segment and 85% of retail still lives offline. So we’re so early in all of these areas. You know, AWS is a $70 billion revenue run rate business growing, you know, about 37% year over year in 2021. And still 95% of the world’s IT spend is on premises and not in the cloud. So, all of these areas you go through it with Alexa has the chance to be kind of, you know, the best personal assistant which changes your life. And entertainment as we just talked about. Our advertising business is early. Kuiper, you know, we’re building a low Earth orbit satellite. And Robotaxi business in Zoox. I mean, we’re so early in these areas that I think we both share a lot of optimism that there’s an opportunity to change a lot of customer experiences over a long period of time.
7. An Interview with Adam Mosseri About Creators, Blockchains, and TikTok – Ben Thompson and Adam Mosseri
What was this exactly, though? I mean, on one hand you are obviously the head of Instagram, so you don’t say anything publicly on accident. On the other hand, I don’t think that there was any sort of product announcement here. What was this talk, in the broader context of your day job?
AM: I believe that a lot of these conversations are going to happen with or without us. You see me out there a lot, probably on Twitter and elsewhere, doing talks sometimes but often engaging in other ways, because I just think it’s important to engage in the conversation because it’s going to happen with or without us.
I think one of the more interesting conversations over the next five to ten years is how power is going to continue to shift. I think technology has shown over and over, over centuries, that it tends to take power from the establishment and give it to people. It’s not a direct line, there are always detours, but if we assume that’s going to continue to happen, if you look at the fierce competition out there, particularly for creators, you assume more challengers are going to be interested or willing to hand more power over to creators. I assume the incumbents will follow.
Then, I think we should be part of the conversation of what that world looks like. I think, as uncomfortable as it might be, we should embrace it. I think ultimately, over the long run, we should take a view that what is best for creators is best for platforms, because there’s going to be more creativity in the world. There’s going to be more exchange of ideas, there’s going to be more art, there’s going to be more content, and we should try and figure out what that world looks like. The main idea here is just to throw out two longer-term ideas and hopefully influence that conversation…
…You talked at the beginning of your talk, and you reference it here, about how the Internet broke down gatekeepers but then “unexpectedly”, your words not mine, we ended up with even larger platforms like Instagram. Obviously that’s been the core thesis of Stratechery, is that actually all this stuff goes in the opposite direction people think.
AM: Aggregation Theory.
Yeah, exactly, that’s exactly what it is. Is Instagram a gatekeeper? Is it just a super-gatekeeper?
AM: I think that the Internet has very clearly pushed power into two directions. It’s pushed power into the hands of more and more people, not just creators, but I mean it’s enabled all sorts of businesses like yours, and it’s also pushed power up into really broad platforms like Instagram. I think the big companies, or what we used to think of as the big companies, have suffered the most. There’s just been these über-sized companies. I do think, though, that large platforms, if you look at the next ten or twenty years, they’re going to rise and they’re going to fall. When they fall, they’ll fall slowly, but I think they will fall. They’ll slowly lose cultural relevance, and —
But why? What’s going to be the driving factor? This is the big question. You talk about this as if it’s a law of nature, that creators are going to take over, but what’s the causal function here?
AM: Probably I think it’s really going to be competition. Take TikTok, for example. TikTok is a behemoth, I actually don’t think most people realize how big and relevant TikTok is, if you look at how much time people spend or how total minutes on TikTok in a day compare to most of the competition.
I was told you have no competition, you’ve killed it all.
AM: (laughing) Oh, yeah. Well, it doesn’t feel that way on my side! I know there are a lot of people who disagree with me, it certainly doesn’t feel that way over here! YouTube is also a behemoth. Actually I think’s TikTok’s a really good example, I’ll give a lot of credit to them for some things they’ve done well.
I think the newer platforms are going to see how important creators are. I’ll talk to a couple of reasons why I think creators are important. We’re in a world where clearly we’re inundated with more and more information, and there’s value in aggregators to help us find the most valuable information, that is sort of an adjacent concept to Aggregation Theory. One effect of that is, yes, aggregators have value, but another is that people are less and less interested in processed content, they want to get more of a sense of authentic content. I’m not saying creators are all authentic, obviously people bring a certain part of their identity, not their whole identity online, but people are much more interested — and we see this in engagement data — in seeing what it’s like to be in someone else’s shoes, seeing what it’s like to be backstage before a political debate or warming up before a football match or in a green room before a TV spot. They want to see the world through other people’s eyes and they’re more interested in creator-focused content, someone’s point of view, whether it’s you sharing your analysis on a business or The Rock pontificating or a small country artist from Nashville showing a song that she’s working on.
You’ve seen that one of TikTok’s strengths has been how strong they have been at breaking new talent, how well they have done by the little guy, the small creator. They have leaned much more into exploration-based ranking than pretty much all the competition, or least earlier, and they’ve helped new talent break. Now, it’s not all perfect over there, I think that there’s a lot of volatility and there’s a lot of downsides too, but they’ve done really well by particularly smaller creators and I think you’re seeing the competition follow. You’re seeing the other major platforms that you can think of, or you would’ve thought of two years ago as incumbents, which now I think you might actually even think of as challengers, follow, and I think you’re going to continue to see that.
My take is, and I could be wrong, but my take is that over the next five years, ten years, you’ll see more platforms, both challengers and incumbents, be willing to hand more power over to creators. I think that’s the causal relationship, is competition, but I think there’s also some extrapolation of existing trends…
…I think you just got into what I see as one of the issues here, because the Web2 people tend to have Web2 solutions, the Web3 people have Web3 solutions, when it’s always been at least clear to me that this token idea has always been the most attractive and interesting thing about blockchains. You can pay for a token with a credit card, there’s no reason why it has to be an all-in-one system, and this idea that it has to be full stack up and down all Web3 under the blockchain doesn’t make sense. Believe me, I know a lot about database performance — that’s why there’s been very little news about Passport over the last year, fixed now — but you’re not going to be doing a lot of this stuff, certainly not on a blockchain.
The idea that you could have all Web2 infrastructure, but this one piece that to your point, you can carry around from place to place, I mean, I’m not being a very good questioner here because I’m sort of making the point, I think this is what is very attractive, having this piece that no one controls. But to your point, someone needs to build it. You didn’t do a product announcement, you just painted a vision, is this though sort of a backdoor announcement of Meta’s new blockchain play? Are you going to help sort of build this infrastructure?
AM: I think we’re definitely interested in it. To be totally transparent, part of the reason why I want to talk about it publicly is to apply some pressure and get some excitement around the idea and build some momentum. I can’t talk about or I’m not going to talk about the specific companies I’ve been talking to, but I’ve been trying to talk to as many people as I can at all the different levels; at the payments level, at the authorization level, at the platform level. There’s a lot of interest, but to make this happen is far from a sure thing. It’s like you’re trying to align a bunch of different cultures and a bunch of different sort of philosophies around this idea.
The biggest risk to the idea, I think, is, is there enough of a market fit for creator subscriptions that this idea would create enough incremental value that those involved, particularly the platforms at the Instagram layer, not the sort of payments layer, will believe that it’s going to create enough incremental value that they won’t need to over-worry about their particular share.
It’s not lost on me that a lot of people don’t trust the company that I work for or me even. And so in all of these conversations, they’re trying to figure out what my angle is and I’m like, “No, no. I just think this should exist. I think it’ll be good for us indirectly over the long run.” I think if we get critical mass, if we get enough platforms to do this, then there’s pressure for the holdouts to do it because the creator community will put pressure on platforms to support this. But the question is, “Can you get to critical mass?” And I think the biggest risk with getting to critical mass isn’t the technical one. Like you said, we don’t have to build a whole thing on-chain, sure, you could pay with this with coin if you wanted to, but you could totally pay with it with fiat.
The stack should be 98% Web2 technologies and like 2%, or actually probably more like 0.2% on-chain. People, when they talk about blockchain, you only want to use it for what it is uniquely suited to do, and what it is definitely uniquely suited to do is to be a neutral arbiter between platforms where it is the one place you can go that no one controls, no one touches, and you can stick a token there and that token has the minimum amount of information necessary. Believe me, I’ve thought a lot about this, but no product announcements for Passport here either!
AM: The question is what’s the token? What’s that protocol? What exactly does that token entail and how do we make sure that it supports enough use cases that enough platforms and businesses will be interested in supporting it, right?
Let’s drill into this point because I think this is the biggest question. So from my perspective, the value that Instagram brings to the creator ecosystem is, Meta in general is by far the best customer acquisition platform, period. There’s no one even close. And I would say that’s the case, even post ATT. It’s instead of a thousand times better, maybe it’s a hundred times better, but it’s still really good. TikTok, you have discovery of new talent, Instagram, you can acquire customers, and YouTube is where you actually make money.
I think you talked about creators start on Instagram, and they go to platforms like YouTube, and to me this is because YouTube monetizes so well. One of the brilliant things that YouTube did and Google did, and it took many, many years to build up, is they shared a huge chunk of the revenue with creators, and every single creator in the Internet knows that outside of subscriptions, the way to make money is to get on YouTube.
And so the question is, given YouTube is so dominant here, to me, they’re the great white whale, I would love to have a Passport integration with YouTube, they’re so far ahead in this particular area, why would they ever want to partner with anyone, number one? Number two, that suggests that Instagram needs to get way better at monetizing its creators so it’s a competitive counterweight, but then we’re back in, “Well, you’re in your walled garden, they’re in their walled garden.” There’s a valley of disconnect here, and how do you think about crossing that chasm?
AM: So a few different things. On the Instagram side to start, I think there’s two ways it can benefit our business. Certainly we’re a customer acquisition channel and we’re good at that, but also, it’s the same idea, but not paid ads, we are a marketing channel for a lot of creators. Creators share a bunch of content and tell a story, build an audience, and then they monetize that audience, whether it’s through rev share on YouTube or branded content deals on Instagram or subscription on Twitch, and they drive a lot of impressions for us. So you don’t even need to pay us directly for you to create value for us and for us to create value for you. If we are a great platform for you to build an audience, then you’re going to be creating compelling content and we can advertise against that content the same way we advertise against everything else. So it doesn’t even have to be ads.
I agree. Just to say it’s just an ad platform — an ad platform only exists in the context of great organic reach.
AM: Well, I want to point out both because I think this is true for any of the platforms like us. I think YouTube is I think one of the big questions because they are — if TikTok is the best at breaking new talent, YouTube is the best at driving direct dollars into creators’ hands. I think if you look at the branded content ecosystem on Instagram, it’s probably about the same size. It’s many, many billions of dollars in your industry.
The same size as YouTube money or YouTube-branded content?
AM: I don’t know what YouTube pays out creators, I’m just talking about rev share. I don’t know what the total is because I don’t think they’ve released it, but I’m just saying, there’s other big things, but I don’t think anyone who’s a creator who sells branded content on Instagram thinks of that as Instagram service. They think of that as like, “No, that’s my deal. I made that happen on the side,” even if we help.
Even though it’s definitely an Instagram thing.
AM: Yeah. We’re just not going to get credit for that.
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 Amazon, Apple, and Meta Platforms (parent of Facebook and Instagram). Holdings are subject to change at any time.
