David Rosenthal: preference

Transcript context

…Yeah let's do it. For folks who are new to the show the way the power works is it's a Hamilton Helmer framework. He’s the author of 7 Powers and a friend of the show. It is technically defined as the way to achieve persistent differential returns or put another way to become more profitable than their closest competitor and do that on a sustainable basis. I actually think—before we classify what types of power Airbnb has here, it's actually very interesting to think about this relative to the stock price. One thing that after reading 7 Powers always stuck with me was Hamilton makes the point that the markets are not short term focused. Everybody who's accusing Wall Street of valuing a company based on last quarter's results, that's not all that they're doing. They're using that as a bellwether for the next 30 years of results. Sure, they may swing too far in one direction, but really the way that a market cap works is, of course, it's an extrinsically defined market for the equity in the company. Intrinsically, what it is it's a representation of what people believe the sum of all future positive cash flows in the businesses will be discounted to today. As you think about power and market cap are intrinsically linked because whatever you believe the power that allows them to generate persistent profit margins, overall those future years are the way that you would calculate the market cap. If you're someone who's excited about Airbnb as a $100 billion market cap company today, to what power do you attribute that? Why do you believe that they are able to do that? David, with that preamble aside, I’m curious, what types of power do you think show up in Airbnb? The totally obvious one—just like scale economies were the totally obvious one for DoorDash—for Airbnb is network economies. This is a two-sided network effect. It is global in nature. It is as powerful as I have ever seen in a business. I think, generally, you think about network effects, single-node network effects like a social network like an Instagram or Facebook—those tend to be the most powerful. Dual-sided network effects where you've got one class and another class, buyers and sellers, hosts and guests like you would have in eBay Amazon, or here in Airbnb, tended to just generally be a little weaker because you're bifurcating the types of participants in the platform. This is amongst the most powerful of the dual-sided network effects I've ever seen because it’s global, it’s not local, and you really care. The way you measure network effects is you ask each participant in the system how much do I actually care about the other nodes in the system being there? For Facebook or Instagram, it’s like, I really care that my friends are there. Having more people in there, I actually really care about that. That’s the whole point. For eBay, do I really care about the 16,000th seller of the latest iPhone? Maybe it drives the price down low, but I don’t care that much. For Airbnb, I care quite a bit because I really like having a variety of listings. Another way to frame that is, for things like iMessage where I really only iMessage with like 10 or 15 people, as long as the 10 or 15 of us are on the same thing, it's okay. It's not that strong of a network effect because you don't need to interface with lots and lots of nodes in the system. Whereas with Airbnb, I don't care who owns the place that I'm staying at. I just want the most choice with the most interesting options such that there is sufficient density where I want to go in the price tier that I want when I get there. That is a truly amazing network effect where—exactly to your point—every node that's out of the system has meaningful additional value rather than this concentration where my friends around me provide value, but everyone else that’s on the network provides me none.…

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