In this class, we discuss Didi, Luckin and Mobike and how to predict if they will be profitable.
Exercise for this class:
- For Mobike, Luckin or Didi, think about the following two aspects.
- Consumer view: What do they care about? What is their journey for buying and using?
- Competitor: Could a well-funded, well-run competitor take 10-20% of their business? Five forces and competitive advantage are useful here.
- Digital economics: Do any of the following really change their business? Or your answers to the above?
- Zero marginal cost of production
- Non-rival goods. Can be used by multiple customers simultaneously.
- Durable vs. consumed as a product or service.
- Low or zero distribution costs. Does it have global reach?
- Now make a decision: Will this business be profitable? Will the unit economics be positive eventually?
- Write 3 paragraphs with your answer. Do it on your smartphone. Or a PC. Or a piece of paper (take a picture and save it).
Articles cited in this class:
- An Introduction to the Sexy but Dangerous Economics of Digital
- From Didi to Mobike to Luckin: How Money and Hype Are Distorting Digital China
Concepts for this class:
- Money Wars
- Blitzscaling vs. Fastscaling
- Irrational Competition
- Digital and Information Economics
Companies for this class:
- Luckin Coffee
Welcome, welcome everybody. My name is Jeffrey Towson. I teach at Peking University, and this is Jeff’s Asia Tech Class. Now this is episode six, I believe, and the good news is I’m starting to finally upgrade my rather cheap equipment, so hopefully this microphone is gonna sound a lot better. And we’ve got a little studio being built in Bangkok right now, so in theory, all of this should get at least technically better very, very soon now. As for content wise, well, I’ll do my best. Now the question for this class is, can Mobike, Luckin, Didi, WeWork, can these companies ever actually make money? It’s a question you hear all the time. I get it like literally every week from, very usually press, and it’s actually kind of complicated. So we’re gonna go into that and I’m gonna challenge you to sort of make a guess on your own. But first, please I’m gonna ask you to go and subscribe on my webpage, which is jeffthousand.com, and you can sign up at iTunes and get the podcast there, or it’s also on my webpage. But very shortly I’m gonna be moving all this behind a paywall, so this might be a good time to do that, and I’d appreciate it if you would. Okay, on to the case. Okay, let’s talk about these companies because they are on the surface somewhat similar, but when you dig into them, you realize they’re actually quite different animals. Dee Dee was really the first one on the scene. This is 2015, 2016, and this is sort of classic venture capital type situation. It was a digital platform, a platform business model, which we started talking about a week or so ago. multisided platform, multiple user groups, you’re trying to connect them. What the platform is really doing is enabling interactions by dropping coordination costs. Okay, now this is sort of the kind of thing that venture capitalists really get excited about because it has the economics they really like. The first thing is, on these types of multisided platforms, you can do lots of cool stuff like subsidize, one side to the other. You can make it cheaper for writers, you can make it cheaper for drivers, advertisers. Newspapers did this forever. You get the newspaper for free because the advertisers pay for it. So you can do a lot of those sort of what I call soft advantages of platforms. And definitely, Didi could do that. So could Uber. Digital platforms also tend to have winner take all economics, or winner take all or winner take most, where We talked about this a little bit. I’m going to go into this a lot more. The idea of network effects, demand side economies of scale, where the more interactions, the more users you get, the better your service actually is. My standard example is if you go to KFC and I go to KFC, your chicken didn’t taste better because I went, but if you use WeChat and I use WeChat, my WeChat just got better as a service. So the company that’s in the lead that has more market share is not just more powerful usually because they’re bigger, but also because their service is inherently better. That’s network economics or network effects in a nutshell, but there’s lots of different types of that. Some are strong, some are weak. We’ll go into lots of the details of all of this, but there’s a lot of type of network effects. Anyways, Didi clearly had that going somewhat, although I’ll argue later, their network effects are actually quite weak, quite local. And most of the interesting stuff on that business is actually on the enterprise, the driver side. Okay, but they have that, so venture capitalists like that. And this is sort of, it has scalability, the other sort of thing people look for. It’s easy to grow this business without a lot of capital. You don’t have to open 100 hotels, you just keep rolling out your software in different locations. Okay, venture capitalists love this. This is sort of classic blitz scaling type. situation. You go in there, you throw a ton of money at it, you hit the afterburner or the turbo nitro if you want to use the Fast and Furious example. You race your car forward, get over the finish line first and you win and everyone else is shut down. Okay and you know I’m sort of going to keep citing back to concepts I’ve touched on before and I’ll be you know this is going to turn into a list. I’m trying to build out your toolkit. In that toolkit we’ve talked about blitz scaling versus money wars. Definitely Didi was a blitz scaling scenario. Spend a lot of money, waste a lot of money. It’s worth it because your biggest risk is not wasting money and running out of capital. Your biggest risk is a competitor getting to the finish line first, the market collapsing to them, and then you’re out and you basically shut down. That says more blitz scaling money war is more just like I got a lot of money. you got some money, I’m gonna throw money at you and subsidize usage and just drive you out of the market because I can bleed cash more than you because I got more. Those are pretty common as well, not to underestimate a money war. Okay, so that’s kinda DD 2015, 2016. We get right after that, right after Uber and DD merged, you had bike sharing and… Everyone got confused not everyone a lot of people got confused about this because bike sharing sounded like ride sharing it both had the Word had the word sharing in it. So it was like the new frontier of mobility services sharing economy is right bike sharing But you take a quick look at these companies mobile. Go vote. There’s no sharing going on at all. It’s not a multi-sided platform it’s a traditional service business that just happens to be fairly innovative and in I think the second or first podcast, I basically said, look, ignore the term sharing economy, ignore the idea that this is a platform, it’s not. The better way to think about this is access versus ownership businesses. That was one of the concepts on our list. And what Mobike was, was an access business. They’re competing on giving you access to an asset or a service short time. What consumers want in an access business, renting a bicycle. taking a taxi, ride sharing, using a hotel is very different than what you want in an ownership business. I wanna buy a car, I wanna buy a bike. The consumer perspective is totally different and the company you build against that is also very, very different. So I find that’s an easier way to look at that problem. So I said, all right, look, Mobike and Ofo are very cool, very innovative business models that are… Access businesses and they’re they’re pretty disruptive But they’re not platforms. So When you saw these businesses jump up they they did a lot of the same behavior venture capitalists jumped in a lot of money flooded in It wasn’t really blitz scaling if this was just a a money war. It was a money war and the other Version of this is you can just think of irrational competitive behavior So when it comes to money, I’ll talk about those three ideas a lot. Blitz scaling versus money war versus irrational behavior. And, you know, let’s not kid ourselves here. People behave irrationally in business all the time. Not everyone is a cool strategist. Sometimes people just do crazy stuff. You know, it’s like rugby versus soccer. Soccer people are kind of playing their position. They’re passing, they’re running plays rugby. A lot of times the other person just running into you and knocking you down. Like there’s not a strategy involved, it’s just pummeling each other. Sometimes businesses like that. So what we saw in bike sharing early on was 30 plus companies jumped in, a ton of venture money went in, these companies scaled up very quickly, a lot of free bikes, rides, a lot of bikes everywhere. A lot of that was a money war, a lot of it was just irrational behavior. Irrational behavior doesn’t last long term. Usually it flames out, but it can put you out of business in the short term, so don’t underestimate it. Okay, didn’t have winter, take all economics and bike sharing. You could argue there’s a little bit of a demand side effect here that look, if I put more bikes on the street than you, my service is actually more convenient because there’s more bikes, you can count on it. So there is somewhat of a scale effect on the demand side. It’s not a network effect, but there is something there. When you look at people who want access businesses, this could be people renting bicycles, people taking taxis. Auto shops are actually a pretty cool example. Auto shops have this interesting situation where they need lots of types of tools every day to fix lots of types of cars that could come in, and they don’t keep those. They rent them from stores down the street. And what they count on is not so much convenience, which is what Mobike is about. They care about reliability, that they know the tools are available so they can take the car, do the work, get it out of their shop ASAP. Usually in these businesses, you hear low price and convenience on the consumer side. If it’s a B2B version, you tend to hear the word reliability, dependability. I know it’s gonna be there. And you can see this on the consumer side as well. If you’ve got a… flight to the, if you got a flight in the afternoon and you’re going to use DD or Uber, reliability matters. You can’t go out there and then not be able to get a car because, oh, it’s not available. So that’s part of it as well. Okay. So bike sharing jumps in very disruptive, not very disruptive, innovative on that. That shifts over to Luckin, which comes in later. Luckin comes in a lot of software. doing something I think is very innovative. I think their business model is very clever. I think they’ve eliminated a lot of the cost structures of retail coffee, which is the real estate and staffing. So that makes them cheaper. And they basically pitched the same thing Mobike pitched, which was convenience and low cost. That is actually pretty cool. The problem of course is it turns out coffee is hyper competitive not only is it not a platform business it’s not a winner take all business. It’s you know anyone can open one of these shops pretty easy so you have very little competitive protection and the one competitive protection starbucks has their biggest one brand is probably number two number one is the real estate footprint well are innovative business model just jettison that. So looking kind of traded. you know, defensibility for scalability. And they rolled out lots of stores very quickly, and we’ll see, there’s other questions there. But I would call that, they may say it’s blitzscaling, I don’t think it’s blitzscaling, they may say it’s a money war, I don’t think it’s a money war because I don’t think they’re fighting anybody. Money wars, you’re trying to put the other person down. I’m gonna spend money, bleed you, and put you out of this business. You know, it’s… This is a don’t draw your gun unless you can kill the other person scenario. Don’t wound what you can’t kill. You don’t want to get in a money war if it doesn’t put the other person out of business. Generally. I think this was just more a rational, we’re going to spend a lot of money because we can, because the money’s cheap and we can get it. And maybe there’s some financial engineering going on if we’re going to go public ASAP and we’re going to get a payday. Okay. So you’ve got these three types of businesses. Similar but also quite different. How do you take them apart? I teach a private equity course at PKU and SEABs and some other places in Bangkok a little bit, which is super fun. I’ll talk about that sometime. I taught P.E. Deal stuff to a bunch of students coming out of Nepal, who turned out to be some of the best students I’ve ever had. They were just the best. Really super focused. Anyways, I generally tell people, look, When you’re looking at businesses like this, you can focus on a thousand different factors. You can say, oh, I think this piece of information is what matters, it’s the regulation, it’s the venture money, it’s the management behavior, it’s the, you can be all over the map. You have to have a process, you have to have a system. And my system is nine questions, it’s always the same nine questions I’m trying to answer about any company or deal. And… In my class, I go through these nine questions kind of a lot, and it’s a process. You do it over and over, over and over, and by repeating the same process over and over, you get better and better and smarter and smarter. If you don’t have a process, you can spend your life bouncing from factor to factor and never really get anywhere. If you have a process, one, you’re going to learn what works, and if it doesn’t work, you can then go back and correct yourself and say, okay. I answered my nine questions systematically, my answer turned out to be wrong. Looking back two years later, what was wrong with my system? So it’s iterative, it’s corrective, you get smarter systematically over time. And so we’ll talk about that a lot in another class. Okay, in my nine questions, in question one I always ask, is this business, question one and question two on my list are always about the attractiveness and the economics of the business in itself. Some businesses are very attractive. Some businesses are really difficult. And within that, I always start to look at the consumer view. I focus a lot on consumer business, customer view, in this case, consumer view. And I put the hat on of I’m the consumer. What is the process? What do I care about? And I walk myself through the process. Like, why do I buy a cup of coffee? Why would I buy makeup? What is the process? How do I hear about it? What’s my first interaction with a particular company? Is this something I do once and forget about? Like buying a microphone? Microphones are not a good business, by the way. You buy one microphone, you never think about it. Two years later, your customer is gone. A lot of these businesses are repeat. So I put myself in that framework and I walk myself through on the consumer side. Now, when you look at companies like Mobike and DD, The consumer picture, and within this, there’s sort of two sub-questions. There’s actually a lot of sub-questions, but there’s two I’ll talk about. One is, what does the consumer care about or need? And I try and get this down to two or three factors. Everyone will tell you it’s like 10 factors. If you look at the 10K, you’ll see like 10 factors. It’s always two or three big ones. And then I go through the process. What is the buy and use process? And Mobike and Didi, you actually get a pretty good answer to that. People like Didi they like uber they think it’s very convenient They think it’s easy to use on their phone It’s a heck of a lot better on a rainy day than waving out there with your hand on the street in Beijing Which is awful and everyone’s sort of moving up the street trying to get ten feet in front of the next person it’s not a pleasant process to get a taxi and When you’re in a taxi, it’s usually not awesome as well there’s a lot of great stuff happening on the consumer usage side. And Mobike, I would say it’s the same, that these bikes are actually great. Like people ride them all the time. I ride Mobike all the time. It’s super convenient, it’s negligible price. I can hop on when I get off the subway, pedal four blocks to my place, get off. Most people don’t live right next to the subway. So there’s a lot of real power on the consumer side when you take it apart with the consumer viewpoint on Mobike and DD in particular. And you could see this like this is always my question number one like Look, do people even like this thing and we could see dramatic usage on both of those services very very quickly That’s a great sign. And if you don’t have that you’re pretty much dead in the water anyways Okay, does Luckin have that kind of usage really? They say they do they released their their numbers a couple weeks ago and said that they hit operating operating store profitability, which if you look at the numbers, they didn’t include sales and marketing, which is, yeah, whatever. Because it turns out if you give away free cups of coffee with lots of subsidies, oh, look, people come. Okay. Not the same thing. I’ve been buying Luckin coffee this week just for fun. And my standard iced coffee is 22 quai. And depending on their discounts, I get it for between three and seven kway net. So they’re giving me a huge subsidy. They’re dialing it back now that I’ve ordered several times again. Now they’re trying to get me to pay full price again, which I didn’t do. I just walked down the street to the 7-Eleven and got it there, which was 50 feet out my door. Okay. So luck and I think the consumer question is still a question mark. Didi and Mobike are great and then WeWork which we’ll talk about briefly because it’s sort of out of my area. That’s a huge question mark. Okay, so that’s the consumer view. Then I move on to the competitor view. When you put on the competitor hat and you say, if I’m a competitor to this company and I’m well run and well funded, could I take them down? Could I take 10% of their market? Could I take 20%? Is that reasonable? How much would it cost and how difficult would it be? And those are usually my two questions. Cost and or difficulty. Some businesses it’s just about the money. If Jack Ma wants to take your local hotel business, he can do it. He can write the check and do it and it’s not that difficult. If he wants to take over your biotech company, he could write the check but it turns out doing clinical research is actually quite difficult. It turns out replicating a nationwide messaging service like WeChat is not about the money. It’s actually quite difficult to get the scale in place. So and cost and or difficulty. If I’m a well-run, well-funded company, could I take 10% of your business? How hard would it be? Okay, now we look at Mobike and I’m not that scared. I think I could take 10% of their business, not globally, but here in Pudong where I’m sitting, I think I could get three buddies together. We could buy a thousand bicycles. We could put them on this area of town, just this small neighborhood, and put an app up, put the QR code up, and I think I could take 10% of their business in this part of town. I don’t think they’re that protected. And I also don’t think they’re gonna, one, I don’t think they have a real competitive strength against me. They don’t have a barrier to entry, something keeping me out. And also, I don’t think they’re gonna respond with a vicious counterattack in this neighborhood. So you have to think about, are they gonna do a money war against me? And no, I think they’ll let it go because I’m in a tertiary neighborhood, not that important to them. Okay. Same thing for Didi. Could I take 10% of their business? I don’t see how I could do it. It would be incredibly difficult, it would be incredibly expensive, especially in somewhere like Shanghai. Okay, look at Luckin. Could I take 10% of their business? Yeah, I’m totally sure I could start a little coffee stand here. I could put a QR code. I could do an app and I could start to sell iced coffee in this neighborhood at 22 Kwai and do quite well. So you kind of look at the competitive strength. And I will go through in detail how to do this in other classes, but usually Michael Porter’s five forces is actually quite an effective tool for taking apart an industry that is in a relatively steady state. Porter’s five forces is, it’s kind of a steady state analysis where you’re looking for the balance of forces between competitors, rivals, new entrants, substitutes. bargaining power on the buyer side and the supplier side. The one thing the five forces, I think it gets two things wrong. No offense, Michael Porter’s like awesome, but I think there’s two things that are just not correct. One is it implies that all the five forces are equal. Doesn’t say that, but you kind of assume that, oh, there’s five forces, okay. Turns out one of the forces is dramatically more important than the other. Two of them really, which is competitive rivalry and barrier to entry. Those are much more important than anything else. The other problem is it doesn’t really address the situation of compliments, which we’ll talk about sort of the economics of compliments. That turns out to be a huge deal in the digital world. Your smartphone is a deep well of compliments. You get the phone, you get the operating system, and then all these millions of apps are basically free compliments, which creates what we call a consumer surplus. We’ll talk about that later. Compliments are a huge deal and I think he has pretty much acknowledged this now that that Five Forces didn’t really address compliments terribly well. Okay, so to wrap this all together you look at these businesses, you take them apart systematically. Consumer view, very useful. Competitor view, very useful. These are not really my approaches. These nine questions I’m going to talk about, the consumer view, the competitive view. This is Warren Buffett and other people, how they talk about this stuff. And that brings us to the question of can they make money? Unit economics, profitability. And I think this basically, this is the thing you don’t control. This is out of your control. It’s determined by the consumer behavior. It’s determined by the competitive dynamics. And then you are going to live more or less in the economics of your business. So you do the consumer view, you do the competitive stuff, and you start to get a sense for the business, and then that tells you your profitability economics. And here’s the theory for today’s class. The digital aspects of this are changing the unit economics. It changes the consumer view, which we’ll talk about, it changes the competitive view, and it changes the economics because it turns out the digital goods, information. things made of software, things made of bits and bytes, not atoms, not people, have very strange economics. And that’s gonna be sort of the key theory for today is what I call the sexy but dangerous economics of digital. And that brings us to sort of the important theory of this class, which is the sexy but dangerous economics of digital. So simple as question. This is actually from an article I posted as part of this class. I’m gonna put the link in the show notes. You can go see it there. I also am gonna link to the article, the thinking on mobile DD and sort of the hype versus the money aspect of those. Okay, so the question I pose is look, why are things free on the internet? Why is every, like why are so many things free on your smartphone? Like we get given free stuff all the time now. The world didn’t used to work that way. You don’t walk into the mall and people are like, here, I have a bunch of free stuff. But I can go online and watch YouTube all night long, which I did last night, for free. Doesn’t cost me anything. I can use all these apps on my phone for free. I can surf information for free. Everything is free is crazy we chat free i can make international phone calls through we chat or skype or whatever you know from here to the us for free you used to pay for all of that. So why is that is kinda the question and. My answer is that it’s the economics of digital and up there’s basically four to five things i think are really important. And economic ideas here and. They are just changing the nature of particularly services we use as more products become more about software as they become more about bits and bytes ones and zeros and not Adams and not people. The economics of services are changing to reflect that and they are particularly powerful there’s a great mark and recent article. Call how software eats the world and i mean this is two thousand and eleven. Really, it’s really good article, but he was dead on. Software is just powerful and it’s changing things. And the companies I just mentioned, the Luckin, Mobike, WeWork, DD, these are all cases of either pure software companies, like DD, or they are traditional service businesses that are being sort of mixed in with software to some degree. And now they will all argue that they’re tech companies. They all say this, especially we work. We’re a tech company. Turns out a lot of that’s just getting a high valuation, and it’s not true. But to some degree, they are. OK, so five ideas within this. Zero marginal cost of reproduction, non-rival goods, non-consumed goods, often cheap distribution, and then platform business models. I’m not going to talk about number five, platform business models. because I did that already and we’re going to go into that more and it’s kind of a huge subject anyways. Alright let’s talk about the first one which is digital goods have zero or almost zero marginal cost of production. Everybody knows this. I send you a document you can hit copy and paste and now you have two copies of it. That’s crazy because I can send you my book I got a couple of these. I can send you an ebook version which is a PDF. It took me and my co-author six to nine months to write. We published it. It went into bookstores. It actually did pretty well as a book, although the business side of that is terrible. I can send it to you. You can hit copy and paste on your desktop and now you have two copies. That’s crazy. You can’t do that with anything in life. I can’t copy and paste employees. I can’t copy and paste physical books. I can’t copy and paste an Apple, but you can do that with a lot of stuff. Um, and that’s kind of a big deal. Now the caveat to this is I said the marginal cost of production, not the total cost. The total cost is let’s say for a book, you have to write the first version, which takes labor, time, energy, and that one actually costs money. The second one is the one that’s free. It’s the copy of the first one. So, you know, the Avengers movie costs. I have 200, $300 million to make, but the second copy costs zero. You know, you can just get the mp4 and copy and paste it. No, and I have the Avengers movie. So the total production cost is different than the marginal cost. And what you see happen a lot is businesses try to avoid the first one and capture the second one. Facebook is awesome at this. You do some communication connectivity but it’s mostly about content. You scroll down your news feed and there’s a comment from your friend that’s user generated content and right below that is a New York Times article. That’s what we call PGC, professionally generated content. Well you know the New York Times article in particular costs money to create but Facebook doesn’t do that part of it. They just do the replication cost. So they share it. let you see it, read it, but they don’t create content. And user-generated content as well. So the best business models are big into the marginal cost, but they avoid the first cost. TikTok does this. TikTok isn’t sharing professionally generated content, not yet. It’s mostly about user-generated content, but it has made user-generated content very, very simple to do. So everyone with a smartphone, can take a 10 second video of themselves and just throw it online. The same way Instagram take a photo, throw it online. They’ve really made it easy for users to generate content for them, and then they share it and take advantage of that zero marginal cost. YouTube is not quite as effective because it turns out making YouTube video actually takes some work. You gotta buy a camera and some lights and all of that. It’s not as easy for users to do, although they do. So you can make it easy. You can capture money other people spent like journalists and and magazines Or you can kind of pay people in stuff. That’s not money You can people on YouTube don’t make money most of them they get paid in other ways. They get recognition they get reputation They get attention. They want fame a lot of things LinkedIn where I like to put stuff up people overwhelmingly get paid in reputation, which is if you’re a consulting business, that makes great sense. If you can position yourself as a thought leader in a subject like digital marketing or who knows what, you can publish on LinkedIn and really that does help your reputation and that drives your consulting business. So there’s ways to get paid other than money. Goods that have zero marginal cost digital goods tend to be intangible assets, physical tangible assets, desks, chairs, things like that. They’re harder to replicate that way. Intangible assets also tend to be created mostly by people, although now you can increasingly create them with software and with AI, which is a huge deal. So it tends to be a lot about labor costs, creating an intangible asset, which is then replicated at a zero marginal cost, although the total production cost is a different question. So that’s kind of number one, is this zero marginal cost effect. Now, does that affect a company like Luckin? Luckin is infusing a traditional service business, retail coffee, with a physical product, so the cup of coffee, with software economics, software effects. Is that changing the cup of coffee? Not really, a cup of coffee is a cup of coffee. Is it changing the delivery? A little bit, what you’re really doing is your, the mobile app is the aspect that is benefiting from this. Once you create the app, the Luckin app, you can give it away to everybody for free, which they do. You can download it for free. And you can take orders for free. and you can process payments more or less for free. So certain activities within the business are benefiting from this. And then the production of the asset, making the cup of coffee is not. So you can see if you break it down by sort of a Porter’s value chain, you can see that a certain aspects of the business are benefiting from this, particularly marketing, ordering, processing the transaction, and then other assets and customer service really, but there isn’t a lot going on there. And then other aspects, the creation of the cup of coffee is not, and the delivery, the distribution is not. Didi, on the other hand, is mostly a digital business. That the app, the information, the matching, all of these activities are critical to this business. Those are all entirely software. And the physical aspects, buying cars, driving cars, is handed off to a user group, which is the drivers. So that’s a very clever split between the tangible and the intangible assets of the business. DD keeps the intangible stuff, benefits from the marginal cost, and the drivers and all them, they buy the cars, they run around doing that. So that’s a pretty clever split. Bikes are pretty much like Luckin that you can order, and the app is like this, but the bikes themselves are not. Okay, second effect. Non-rival goods. Digital goods can be non-rival. This term, people use it a lot. Rival means only one person can use it at a time or only one person can consume it at a time. Non-rival means multiple people can watch it, use it at the same time, without seriously limiting the ability of others. It’s usually kind of a sliding scale. You can watch YouTube I can watch YouTube my watching the video doesn’t prevent you from watching the video You can listen to the song I can listen to the song You can drive down the street I can drive down the street you driving down the street doesn’t limit my ability to drive down the street But only one person can drive my car at a time So it’s actually kind of a sliding scale there As more people get on the street, it turns out the street does congest at a certain point. And so it’s only non-rival within a certain boundary. Broadband usage is like this. You can stream videos. I can stream videos. But at a certain point, there’s not enough bandwidth and we start to limit ourselves. Music is interesting. You buy headphones. That’s a rival good. I can listen to them. You can’t. but the music we’re both listening to is non-rival. You can listen to it, I can listen to it. I just bought a pair of headphones, which I’m gonna use for this. Really not a very good business. Anyways, but what you’re seeing is a lot of mixing of physical assets. Physical books are rival, eBooks are non-rival. Interesting. Point number three, consumed versus non-consumed goods or durable goods, depending on what business you’re in, people will use different phrases. A lot of the strength in a company like Coca-Cola is that it’s a fast-move consumer good. It’s consumed. You buy the Coke, you drink the Coke. So you need a constant, rapid movement of inventory. And it turns out there’s some good scale effects when you have higher volume in a sort of rapidly moving supply chain. Other goods, books, you read the book, whether it’s physical or digital, it doesn’t consume it. I can buy the book, read it, I can give it to you, someone else can use it, even though it’s both sort of a digital asset in many senses, it’s not consumed, it’s more durable. Headphones are durable, music is durable, other things are consumed. So that’s kind of interesting to think about. Often how that plays out is the ability to reuse things, the ability to sell things secondhand, even electronic goods, the ability to share goods. I have a book, not only can I copy and paste it on my desktop, I can send it to you and it lasts forever. This is why I get questions all the time, usually from publisher people saying, hey, we’d like to publish your book in Mongolia, which happened. They said, would you send me a PDF? And I always say, no, I never send out PDFs under any circumstances. And they say, well, don’t worry, I won’t copy it. I said, my problem is not that you can copy it for free. My problem is it’s a durable good. Once it’s out there, it’s out there forever. It never goes away. And you can actually track these things. You can track when people use your documents. And the truth is, documents you send out live forever. They get replicated forever. uh… even if you only send it to one person so i never send out that sort of stuff someone just asked me this the other day and i can apply said yeah i don’t do that ever so think about consumed versus durable goods digital goods can be one or the other uh… this actually is going to be important when we start talking about data because data isn’t consumed but it’s also not durable that data becomes obsolete If you’re doing Waymo or something and you’re providing real time mapping, nobody cares about the data of traffic yesterday. That is totally obsolete almost immediately. People who do digital news, news is really a tough business. Like the print news is basically dead. So people go to digital news like New York Times, Wall Street Journal. The problem is that. information that data becomes obsolete almost immediately. Nobody reads last week’s news. Anyways, okay, point number four, digital goods often have small or close to zero distribution costs. Now, I think this is one people get wrong pretty frequently that, okay, if I have an ebook, it’s a durable good. well at least non-consumed. It has a zero cost of marginal cost and it has effectively a zero distribution cost. I can literally email you all of my books in one email because they’re each like four megabytes or something. My distribution costs are zero. That’s not really true. It turns out distribution is not just moving things something from place to place. It’s reaching a customer and It turns out in the digital world, controlling the customer, most of a lot of the power is there. So if you want to sell an ebook, what you really have to do is you have to go through Amazon. And Amazon controls the demand and Amazon’s distribution cost is 30% of whatever price I set the book to be, depending what, how you set it up. Now that’s not a physical distribution problem, but it is a real cost. And if I offer the book for free somewhere else, let’s say on my own webpage, Amazon knows that and they immediately say, you have to offer the same price in both places. So yeah, I could offer it and I could avoid the cost there, but I can’t drop the cost significantly without Amazon noticing and sort of calling foul on me. So distribution has typically been, I’m moving a physical good from the factory. to the warehouse or to the distributor, to the retail store, and I incur certain costs. More and more distribution as a cost is becoming about accessing the customer. And you could argue that the app store on Apple, the iOS system, is a distribution cost. Because the app store on Apple does nothing for you. If you have an app up there, they don’t do anything for you. But they charge you 30%. So… Is that a distribution cost? Is it a customer reach cost or a marketing cost? Is it just a tax? I mean, is that all that’s really going on? Are they just gatekeepers and they’re charging you a toll? I would argue Facebook is, that’s what they’re doing. They are adding no value of any kind if you are publishing on their platform and then they charge you to reach your customers as a marketing cost and it’s just a tax. And there’s nothing else going on there. So. There is this idea that distribution costs are looking more and more like marketing costs. And the interesting contrast to this is that a lot of physical stores, you could argue, I think very effectively, that a retail store is no like, if you open a retail store in let’s say Chongqing, I’m going to the JD’s new eSpace store in Chongqing in a couple weeks. brands are opening stores for experiential retail, where you go in and you play with Samsung’s products and all their fun games, you buy goods. You could argue that’s not really a distribution cost, that that’s actually a marketing cost now. So, like in many cases, distribution is looking more like marketing or customer reach and physical stuff is starting to look more like marketing. Because your only way to reach your customer anymore and to have a direct interaction, maybe through a physical retail space, which kind of makes it like marketing. Anyways, it’s all changing, it’s pretty fun. But distribution costs are not really free, even though people say they are. However, they are global. That part is true, that I can put my book up, I can email my book as an attachment to anyone on the planet, so I have global distribution. That’s actually pretty powerful. And even if I put it on Amazon, they’re going to charge me 30%. But I have global reach except for China and a couple other places. So, yeah, there’s a lot going on there on the on the distribution side. You also avoid some simpler costs like packaging. Packaging costs can be a big deal if you’re selling like ketchup and Snickers and all of this. People spend a lot of money on packaging and making the box appealable as you walk down the aisle of the supermarket. Why do you think cereal boxes are the way they are with the big crazy rabbit? Because they catch your attention when you’re walking down the aisle of the supermarket. Well, a lot of those packaging costs are going away. And it also turns out when you have low marginal costs, zero marginal costs, low distribution costs, you can start to make money at very small dollar items, which means you can move away from mass market. We have to sell stuff in bulk. because that’s the only way we can get a customer base and make money and you can start to aggregate tiny little niche markets. I can make money on my book reaching a thousand people all over the world. Well, that’s a tiny number of people, but I’m still profitable because I don’t have much of a cost structure, so I don’t need to reach a hundred thousand readers. I can reach a thousand and do quite well. So it allows you to do these sort of niche strategies and that’s actually pretty great. So if you look at a lot of the stuff I’m doing, whether it’s videos or articles or books or even this class, I’m really focusing on niche audiences that are scattered throughout the world. And I’m avoiding the mass market, which is nice. So anyways, that’s kind of the four I want to talk about for today. There’s a lot in there. We’re going to come back this again and again and again. But you know, just to recap. Zero marginal costs. Durable versus consumed versus non-consumed goods. Very low distribution costs. And what was my last one? Platform business models, which I didn’t talk about. and rival versus non-rival goods. Those are really important ideas. They are very important in digital goods, information, bits and bytes. And as we start to look at more and more companies, what you’re gonna see is these businesses adding more and more software to their business, becoming smart and connected. And these four sort of crazy economics of software are gonna start to change those businesses. Smart bikes. Bikes used to be stupid, now they’re kind of smart. You put a chip in them, you put a GPS, you put a smart lock, and the economics start to change. Smartphones, phones used to be kind of dumb items. You make phone calls, basic stuff. Steve Jobs made them smart, which basically meant infusing the economics of digital into these businesses, and they became very, very powerful. So yes, the economics of this are very powerful, as we’ll talk about in, I think, the next podcast. is they’re also very, very dangerous. Because it turns out when you remove the costs of things, most things in life are priced based on the marginal cost of production. It costs me a dollar to grow the next apple, I sell the apple for $1.20. Well, if those costs go to zero, the prices go to zero. So it turns out a lot of these businesses are really dangerous and they can wipe out the profits. And in many cases, that’s why things are free. because there’s no cost so things the price drops to zero. Everything becomes free and if you’re in a business that wasn’t like that before, this is absolutely brutal. So how you make money in this, what I call sexy but dangerous world is very, very important. Okay. So let’s talk back about Mobike, Luckin and DD. Now, I sort of said, look, you wanna take the consumer view. then you wanna take the competitive view. And then within this, that is going to determine the unit economics and whether these companies are actually profitable or not. Are their unit economics positive? Okay, but the digital economics I just talked about are changing that dramatically. So that’s what makes this picture so interesting. And you can kind of go company by company and… determined how this looks and in some cases it’s predictable and in other cases it’s really not predictable. Things are changing too fast on the digital side to know what’s what. Example, I’ll give you one and then I’m going to ask you to take one of these companies and take a shot at it. This is where we’re shifting from passive listening. You’re a student. You’re sitting in the back row. you’re leaning back in your chair, you’re probably looking at messenger on your screen, you’re kinda listening to me, okay, I’m walking down the aisle to you, I’m gonna stand next to you and put you on the spot a little bit, okay, wake up, wake up. Now, pick one of these companies, DD, Mobike, or Luckin, and I want you to do a three minute pitch to a CEO or anyone to answer the question of, is this business gonna be profitable? And I want you to answer that question by answering three sub questions. Question number one, well not really sub questions, look at it three ways. Number one, look at it from the consumer view. Walk yourself through what do people care about in this business? Do they care about price? Do they care about convenience? Do they care about reliability? When you buy a coffee, what do you really care about? When you get a ride sharing on Didi, what are the three things you care about? or when you take a mobile bike, what are the three things? Bam. Next wave of questions is, okay, could a well-funded, well-run competitor attack this business and take 10%? That’s number two. Now I’m not gonna go into the details of, that’s a whole lot of theory, we’ll go into that in more classes. and I’m putting these in the show notes, so don’t worry about writing them down, they’re right there. So number one is the consumer view, number two is the competitor view, number three, do the economics of digital change this business significantly? And the five factors I’ve just mentioned, the four versions of that, I’ll put that in there. I want you to take one of these businesses and do those three aspects of it, and from that, I just want you to make a call, make a decision. This business is gonna be profitable. This business is not gonna be profitable. Just make the call. And you’ll probably be right, maybe you’ll be wrong on part, right on part. But by making the decision, you’ll get comfortable with the ideas in a way that you won’t by just listening to me. And as we do this over and over, you’ll get better and better at your predictions. So stop the podcast right now, look in the notes, you’ll see that laid out, do the questions, and then when you’re done, write it down. If you didn’t write it, You don’t really know it. Just tap it on your smartphone or tap it on your computer. Couple paragraphs, three paragraphs, one for each. And then at the bottom, make your decision about one of these companies. This will be profitable. It won’t be profitable. When you’re done with that, you can either just keep it in your file. Please keep these or post it in our little form, which is not really going yet. We’re kind of, it hasn’t really started yet, but there is a discussion form. And then come back to this podcast and I’ll give you my take, but don’t go on. Stop it right now, okay? All right, did you do it? I’m gonna keep pushing. I told you early on in this podcast, I’m gonna push you every week. The more active you are, the more you will learn. I promise you, if you stay with this and you kind of do what I ask you to do, I promise you, you will make a lot of progress. That’s on me. Your, on you is listen, spend about 15 to 20 minutes per week as part of this writing and. taking an attempt at this. That’s your responsibility. My responsibility, if you do that, it’s on me to move you up further and further in your expertise. So I’m the trainer, you have to show up at the gym and kind of do what I say, but I’ll get you, you know, I’ll move you from where you are, I promise. Okay, now the answer to this, I’ll give you my short answer. When I look at say DD, I love the consumer side. I think it’s great. I think it’s compelling. I think it’s a great service. I think the huge adoption is not surprising at all. If I look at the digital economics aspect, which is the third factor there, it’s also pretty impressive because it captures a lot of that, which is, it’s mostly a software business. You can always tell, you know what you do, you just look at the company’s 10K or you go visit them and you look at what their people do all day. If they’re sitting in a warehouse making stuff, if they’re in a factory making stuff, if they got hundreds of consultants, that’s a different business than if everyone’s just sitting at computers typing. That’s a software business. So they are overwhelmingly a software business, doing data, doing AI, stuff like that, and the physical aspects of the business, the cars, the drivers, they have sort of, the users are doing that for them in the same way that all that content on Facebook. is not being created by Facebook. They don’t have thousands of reporters. That’s all being done by other people and users generating the content. They’re just doing the interaction. So I love the economics of it. I love the consumer side. The part that’s a big red flag for me is that second question of competitor. Here’s why economics of digital is sexy but dangerous. If you don’t have a competitive barrier, if you have a competitive barrier, then you make an obscene amount of money. That’s Bill Gates, that’s Mark Zuckerberg. Because you have a massive gross margin and you scale up beautifully and you just throw off cash like crazy. But if you don’t have competitive protection, those economics are absolutely ruthless. You know, I’ve got a new digital encyclopedia, I put it online. I’ve got a new digital calculator. It’s, you know, I’ve got all these things on your smartphone. They’re all free, the people that do that stuff make no money. because if you can code a calculator for a smartphone, a calculator app, so can a million other people, so it becomes free and nobody makes any money. So you’ve got to have a competitive barrier if the economics of your business are overwhelmingly digital. Okay, Didi has some problems on the competitive side. Number one, they have a network effect. I’ll go into that more in another thing. It’s not super strong. It’s mostly local. It’s what we call asymptotic network effects where they actually do have some competitive protection is on switching costs with the drivers. I think that’s the most interesting part of that business. Um, you know, it’s, it’s a problem to make money in this business. And I think Uber has this problem. Their, their business is now public. You can see their numbers. The part that gets my attention is the five forces because it turns out they. One of Warren Buffett’s standard questions is, does this business have low cost or free substitutes? Are you competing with generic private label? Because if you are, if someone else is making soap and you’re making soap and they’re making it private label generic and people accept that, it puts a real ceiling on what you can ever charge. Unfortunately, I think for Deedee and Uber, they have a very low cost substitute that consumers will go for, which is public transportation. If they try and raise their prices too much, ultimately people just say, I’m gonna take the Metro, I’ll take the bus. That does put a ceiling in many cases on what they can charge. And then they have a sort of floor in what they can drop their cost structure because they have to pay the drivers. And if they try and pay them less, the drivers all switch. So they may be stuck in a band of unprofitability there where they can’t raise their prices to make money and they can’t drop their cost structure to make money. So. That’s kind of what I’m looking at for them. It’s not clear to me, at least Uber, as long as there’s another viable competitor, which is Lyft, whether they can make money. Now, Didi’s different because they don’t have a direct competitor yet, but Alibaba and them can jump in. So I think the profitability of that one is still a, we don’t know yet because it’s a new business. We know how much dentists make. because we can study dentists, they’ve been around forever. My brother’s a dentist. We don’t really know ride sharing yet. It’s still a new business model. We don’t quite know how, when the dust settles, what it’s gonna look like, but I have a big question on their profitability. Mobike, I think Mobike’s great. I think the consumer picture is great. I think people love these bikes. I think they’re daily habits for people, that’s all good. I think their competitive barriers are not awesome. other people could start these bicycle businesses, but that’s true for most businesses. I view them more like a vending machine business. I like vending machines. I go, I spend a dollar, I pick a Coke out of the vending machine because I walk by it. That’s kind of like Mobike. I go, I walk by the bike, I pay a dollar, it’s right there. Fine. It doesn’t make you a rock star, it doesn’t make you a tech god, but vending machines are very good business. Mobike is a very nice business. The unit economics work out. billions but you do find and most businesses that’s that’s how most businesses really are so i think the competitive pic you know picture is okay they don’t have huge barriers but you know they’re there most businesses don’t. And the unit economics to me look fine it’s gonna be a marginally reasonably. Profitable small business which is fine couple billion dollar business that’s nothing wrong with that the people who won’t be vending machines you see everyday. It’s like them. They’re not on the front of Wall Street Journal every day, but those people make okay money. That’s kind of how I view Mobike. I think it’s great. Luckin. My biggest question for Luckin is on the consumer side. Oh, I’m sorry about Mobike. The digital aspects. They’re capturing some of the digital aspects on that front end of the business. Acquiring customers. Doing the transactions. Doing payment. They’ve got some… efficiencies going on there and the bikes aren’t really that expensive so they’re getting some of the benefits of the digital economics and because they’re not a pure digital creature they’re actually not as exposed to the ruthlessness of the digital world that’s kind of an interesting thing like they’re getting some of the benefits of being digital but they are not being exposed to the hyper competition of a pure software business because you gotta put all those bikes on the street. Their tangible assets actually protect them, even though it kind of takes away a lot of their profitability. Luckin, sort of the same, but I have real questions on the consumer side of Luckin, that first bit. Are people actually going to these stores and buying the coffee or not? And I keep looking at their numbers and I can’t tell. I keep walking into the stores, I can’t tell. They may be rocking and rolling, usage may be going up. Or they may be doing big marketing spend to keep people coming in the door and as soon as they dial back that marketing spend, the traffic’s gonna fall off, I don’t know. The competitive picture, it’s okay, it’s not awesome. They don’t have big barriers, but you know, sometimes it’s not about having a big barrier, sometimes it’s just about which management team can execute better and run faster. And that’s fine. So we’ll see on that. They look to me like a fairly good management team, very aggressive, they can execute fast, they’re opening outlets like crazy. They can execute, and I like that about them. The digital side, same as Mobike. They’ve got some aspects of digital there that are nice. They’ve got some aspects of physical, tangible assets that protect them, fine. For me, the big question of whether they’re gonna make money is on that consumer side. And that’s about where I am. Okay. Oh, WeWork, I didn’t really talk about WeWork. Yeah, WeWork, I don’t understand at all. Like, I can’t even answer those three questions because I don’t understand what business they’re in. I don’t understand if they’re a management company, if they’re just signing contracts, if the customer demand is really there, or if people are just taking advantage of the fact that they seem to be selling. The best description I’ve heard about them was from a real estate. really top real estate guy who basically said they appear to be selling put options on risk that are mispriced and and companies are just shifting their risk especially people who own buildings companies are just shifting their risk to them of hey we may need to cancel this this lease and and we work as just mispricing those put options i don’t know i can’t figure out the consumer side I don’t think they’re a tech company in any real way. I don’t see the digital economics at all. It looks like a real estate business. So that third one, no. And the competitive picture is terrifying because it turns out real estate people are really good at real estate. This is a well-established, very competitive business. So for me, the answer to them is no, no, and no. And yeah, I don’t think it, but I’m not really a real estate guy at the end of the day. So we’ll see. But yeah, that one’s the one that’s like, yeah, I don’t get this business at all. So I put this in the I can’t figure it out category, either because, I can’t figure it out for one of two reasons. Either I’m not smart enough to figure it out, or I can’t figure it out because it just doesn’t make any sense. So anyways, that’s where we are. And that’s the class for today. Okay, other stuff, nah, nothing really going on. I am, I’m in a tremendously good mood because I’ve been living out of my suitcase for a month. It’s been a month-long haul. That’s why I’ve been a little bit off schedule wise with these I’m finally heading back to Bangkok in two days very very happy about this I’ve got no more major long haul trips For at least three to four weeks. So yeah, I’m in a spectacular mood So anyways plus Bangkok is awesome. I just love living there, you know Life in Asia is amazing Lifestyle of Thailand is amazing Anyways, I’m doing particularly well this week. Next week, who knows? Anyways, that’s the class for today. One last request, go to my webpage, jefftowsend.com, sign up for the class. If you haven’t done so already, there’s a 30-day free trial, so not really a big commitment at all. And see how it goes. And you give me 30 days, I will try my best to convince you. Hey, stay with me, stay with me, and hopefully you’ll see progress. So sign up. Also, please go to iTunes. That’s where this podcast is hosted under Jeff’s Asia Tech class. If you could do that, I’d appreciate it. Anyways, I hope everyone is doing well. Have a great week. Keep going, keep going, and I will talk to you next week.