David Rosenthal: belief

Transcript context

…Media doesn't have the advantage that software has. Aside from maintenance cost, once you make it, then people keep finding value in it over a pseudo infinite time scale. Media generally has a shelf life and then you have to create more media, which is the same thing in Fortnite to be fair. It's multiple types in the media business. There's the content part of the media business that you're talking about. There's also the distribution part of the media business. Now, this has vastly changed with the internet, but I think about John Malone, TCI, and the cable business. That was a business that had incredibly high fixed costs to literally run the cables and launch the satellites for the distribution of signals. But then once you were a cable operator and you had those lines laid into people's homes, it was literally zero marginal cost to keep charging them $100 a month every month. Once you start to see this, it really helps me to evaluate business models and start to foresee what a business model of a company is going to be. No matter how successfully you operate—Hamilton talks a lot about this in 7 Powers. Operational excellence is super important, and table stakes for becoming a great company, but you have this ceiling of how great you can be based on the economic characteristics of your business and your industry. It comes down, often, to this marginal cost aspect. And if you just look at the FANG, and I don’t want to say FANG because I don't think Netflix deserves to be in it. Let me get to my horse for a moment because I slipped up. FANG should refer to high-paying jobs in the valley at big companies, and people have used it to refer to a set of stocks that should actually include Microsoft, and should not include Netflix, especially from a market cap perspective. Anyway, if you are looking at the big five tech companies by market cap, much of the same characteristics are present in all of them. Online advertising, the Google model, the Facebook model—that's zero marginal cost, zero distribution costs business. You look at the virtue—virtue is very much the wrong word. You look at the advantages that even Instagram has over YouTube, Instagram doesn't have to pay creators. Whereas YouTube has to pay a cut out to creators. Any business where you are able to charge to distribute something that costs you nothing, and it also costs you nothing to distribute it, that is present in a lot of these companies. Now, fascinatingly, which I’ll foreshadow before grading, Apple is one of these companies that does not have zero marginal cost, and definitely does not have zero distribution costs. Their—for the longest time—business model is making 35% operating margins on shipping goods to you that are really, really expensive to produce even on a variable basis. Obviously, the R&D is expensive, but the crap in an iPhone is really expensive. It's not like a digital hat. It's no wonder they're trying to get into these services businesses that are creating this clash. An interesting takeaway here is Epic has the best business model of all time, and Apple is jealous. That is a little bit of what we are seeing here. But yes David, I think you're exactly right that once you see it, you can't unsee it.…

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