Strategic Movements: March 2019

Investors as the product? Or just stupid price wars?

Charles Schwab Corp. doubled the number of ETFs that can be bought and sold at no cast on 12 Feb. Within an hour, Fidelity Investments expanded its number of commission free ETFs to over 500. Echoing the ad-people of the 70’s, “if you’re not paying for the product, you are the product”. So how do Schwab and Fidelity plan to productize investors? The other take on this implies that even bankers don’t know how to price. I am not sure which is worse: bankers that can’t price or banks productizing people, just like a Facebook. Intellectually, I prefer the latter while acknowledging it creates a new hazard.

The Market for $2,600 Smartphones

The Samsung Galaxy Fold will launch at $1,980 per unit. Huawei Mate X is announced to be launched at $2,600 per unit. Both are folding smartphones and priced well above the Apple iPhone XS Max, which costs $1,099 -$1,449, depending on memory requirements. Is this necessary? More specifically, is there a market for these expensive smartphones? The Xiaomi Redmi smartphone handset goes for $139. This implies a nearly 20X price difference between the bottom and the top of the market.  Will the Galaxy Fold and Mate X sell?  IHS Markit research anticipates 1.5 billion smartphones to be sold this year, of which 1.4 million will be foldable. That implies 0.10%, 10 basis points, or one part per thousand (1PPT) (choose your language). While most of the world will look on in wonder, it seems reasonable that, across the planet, the market for these expensive gadgets is more than 100,000, and potentially in 1.4 million range. The new top-dogs will sell.

Tesla: ‘Go Fast and Break Things’ is Risky

I know Elon Musk is a Silicon Valley type person, but is he being rational with distribution and price?  Tesla announced in late February a plan to end all physical dealerships and move to an online-only distribution. Their justification: to reduce vehicle price to the mythical $35,000. Is this smart?

Even if we ignore the likely legal ramifications related to empowered local dealerships and state-level legislation in the U.S., we have to ask if dealerships are useful in the first place.  Without a salesperson to explain the vehicle, would you know what you are buying?  Would you be as likely to buy?  Tesla is saying “yes, customers are fine online and no, dealerships aren’t needed any more.”  (Ford, GM, Toyota, and Volkswagen U.S. haven’t made that claim.)  Do you believe Tesla is Right? Do you value seeing and touching a car before buying?

Some don’t, but most do. The shift may be coming, but you can’t force immediate cultural change as one company in a competitive marketplace.

And as for that mythical $35,000 price tag: is it researched that the market will suddenly accelerate purchases of a Tesla at that price over another?  What was the incremental sales associated with the last two price cuts? Does a volume hurdle justify this choice?

I know: “go fast and break things” is a known Silicon Valley mindset.  But this mindset is also why Gov.com failed and Uber had to ditch a CEO.  Investors: beware.  Tesla is a $50 billion bet on an unproven and unstable business.  Entrepreneurs: Elon demonstrates it doesn’t take a currently viable business to get investor’s money – only the promise of one in some distant future, and a good set of friends.  Pricers: watch and learn. Tesla Price Cut Backlash?

Chinese customers, who are current Tesla owners, are complaining after Tesla announced price cuts. Their issue:  feeling cheated.  Reportedly, Liao Zongyl got a Model X that he could now buy for $30,000 less. Liao’s response: I feel like I wasted my money.” Tesla response: an offer of a 50% discount on a further purchase of autopilot or self-driving options to customer that purchase a Tesla before the price cut. Actual prices varied from a high on Model S of $126,800 shortly after the initiation of a tariff war, to $109,000 as of March. Tesla is reported to have dropped prices after raising them because demand wasn’t there.  It concerns me when management shifts prices down just to stimulate demand.  Did they do their research in the first place?  Are they buying market share in hopes of future profits?  As they would say where I grew up: That ain’t smart.

Tesla to Produce an SUV

Tesla will be facing up against BMW and Daimler AG’s Mercedes-Benz in making all electric SUVs. The projected Tesla price: ~ $50K.  Very competitive price, but will it be profitable? Hard to justify a business that uses shareholder money to subsidize customer purchases in the name of driving up revenue and unit volume. How long will investors buy customers for Elon?

Instacart, Grubhub, DoorDash, Waitr…

Delivery executives suspect the next wave of growth to come from serving smaller towns with as few as five to 10 restaurants. Cowen & Co. research demonstrates that people in cities less than 200,000 order delivery only half as often as their big-city neighbors, and this is a number that has been holding steady.  Will their growth plan work, or are they aiming to serve a naturally unprofitable market?  Likely the business model (with a few tweaks) will work, but expect growth to slow to the rate at which Gen Z enters the market.  Demographics are one of the few predictable parts of business, even if business ignores demographics.

MoviePass Tinkers with Business Model

MoviePass will work with a film-production unit to boost box-office performance of those movies.  Since movie studios get around 50% of the box office revenue, this model better fit the requirements of a sound subscription strategy more adequately than their first model.  (It lowers the effective variable cost per movie seen by the subscriber.) Challenge: how many films will participate in revenue sharing with MoviePass?  Expect to see pressure by MoviePass to get Studios to advertise on their platforms.

Subscription Delivery to Counter Chur

This one makes sense. People who order delivery are likely to continue to do so, at least for a while.  It is a lifestyle choice.  DoorDash uses coupons to get customers to repurchase.  Challenge: coupons are discounts and discounts take out profits.  Blue Apron Holding, Inc. has already discovered that using promotions to attract customers isn’t sustainable.  (Academic marketing research would have told them that.)  Instead of using coupons to stimulate the next order, why not just give the customer a subscription for ordering that lowers the delivery cost?  Subscriptions encourage customers to consume more, and this is good for an industry subject to customer churn. Grubhub is out.  Instacart and DoorDash are in. Expect Grubhub’s CEO Matt Maloney to see the light as competition forces industry shifts.

Tesla: Go Fast and Break Things is Risky 2

I know Elon Musk is a Silicon Valley type person, but is he being rational with management?  Days after Tesla announced a plan to end all physical dealerships, move to an online-only distribution and reduce the price to the mythical $35,000, Tesla stated it would roll back those plans. This is better than continuing Elon’s plan, but speaks volumes to Elon’s willingness (or lack thereof)  to think before speaking, and collaborate with his management team before choosing a route. Is this really the traits of a person that deserves your investment money?