David Rosenthal: recommendation

Transcript context

…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. Totally can't see it. I think there's another theme to highlight here that Epic first stumbled into with the Unreal Engine, but then Tim Sweeney really got religion around and has driven his whole vision now of letting a thousand flowers bloom. This is related to the marginal cost aspect of what you're doing, but it's one thing to make games yourself and invest lots of resources into doing that. That's making an assumption that you are going to be right and know what the market is going to want. Tim has a pretty good track record of that, but as we've seen, even he can slip up sometimes. Those three titles that they started working on in 2012, 2013 didn't work. A much better aspect is if you can find a way to just enable entrepreneurship and creativity writ large and be able to say, hey, I don't know what's going to work, but I'm going to let lots and lots of people try and have their shot. That can be way more powerful. Yeah, what was the phrase we used with Chetan when we had him on the LP Show? Leverage on tinkering, which is any time you can empower a creator to do more with their same skill set, it can be really powerful. What you were describing right now, my notes here are steady platform revenues to smooth hit-driven spikes from games.…

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