Outline:
- Capturing the value of new technology is key;
- Renting services allow for precise data collection and personalisation;
- Spotify and Netflix have captured this value in their algorithms;
- The switching cost is high and widens the investment moat.
Sometimes just having a great invention isn’t enough; you’ve got to actually extract value from it.
Take 3D-printing for example. It’s a significant technology, but we question whether some businesses can truly capture the value.
The barriers to entry are really low (it’s cheap and easy to use) and there isn’t much of a moat (other companies can 3D-print whenever and whatever they want).
Spaceship’s “Where the world is going” investment process is based on two major factors:
- Growth trends; and
- Moats, a competitive advantage that helps the company capture the value created.
We look for companies that not only create value (by inventing something new and powerful) but also capture it (by actually making money) and can keep competitors away (by offering a solution that is unique and difficult to replicate).
In the case of 3D-printing, we think shoe companies like Nike and Adidas are more likely to benefit from the technology, rather than 3D-printing companies themselves.
Using the tech, these businesses can whip out new products - like Adidas’ Futurecraft 4D sneakers - and create prototypes faster than ever - like Nike’s Flyprint.
They can customise and engineer their textiles precisely when they want and the way they want, which reduces waste and shipping costs. It also means they can prototype much, much faster.
They are capturing the value that comes from a powerful technology like 3D printing.
Where the world is going
This kind of thinking extends towards a number of broader trends.
For example, we believe the world is moving towards renting services vs owning products.
(Others include electronic payments vs cash and computer games vs traditional sports.)
Strong trends can lead to strong moats creating a competitive advantage.
Renting vs owning
We are most excited about the move from owning products to renting services.
Our investments in Netflix and Spotify are at the core of this trend.
Rather than collect thousands of DVDs and CDs, an entire library of quality products are condensed into an app and the user is happy to have access to the service without owning any of the material.
What makes this trend so interesting - and where the value is really created - are the recommendation systems.
Around 31% of all Spotify’s listening comes from programmed playlists. And in an interview last year Netflix said a whopping 80% of Netflix viewing is based on algorithmic recommendations.
Rather than endlessly trawl a library, these recommendations offer users a tailored, relevant suite of content and provides suggestions they might otherwise miss.
Unlike most business offerings, these services are designed to get better the more they are used, providing customers with more useful recommendations. This backlog of information about someone’s viewing habits is where the value is.
Recommendation? Don’t switch.
The music and media industries are notoriously competitive, but having a treasure trove of usage history is giving both Spotify and Netflix a strong moat or competitive advantage.
Their personalisation/recommendation engines have created a large “switching cost” moat.
Leaving Netflix or Spotify and switching to a new service means users would forfeit their previous recommendations. To discover the same level of personalisation they would have to start listening/viewing from scratch.
To switch, users will need to invest not only money but time (years for some people!) in what may initially be an inferior recommendation system.
We believe more companies could turn their products into services, like how Microsoft switched Office from an upfront cost to a subscription model. This belief underpins the idea that the subscription model will become the business model of the future.
Services provide companies with subscription/recurring revenue and customer data to improve the customer experience.
Direct to consumer servicing is key, but it's hard for companies to personalise a service if they don’t know their customer.
Disney as a service
In the United States, Apple has a monthly payment which gets you a new iPhone every year.
Imagine, Disney as a monthly service (where you could have access to their parks, TV shows and movies).
It would be quite a different model to the one that exists. Though we are seeing a slight shift towards this service-based idea.
Apple has started to focus on services like Apple Music and Apple Pay, and Disney is releasing a direct to consumer streaming service next year. Both these products allow the companies to learn more about their customers.
While this is encouraging, it’s hard for companies to pivot directly towards their consumer needs. Convincing your customers to change how they interact with your business risks messing up the existing relationship.
It comes down to the, “if it ain’t broke don’t fix it” idea. While the existing set up is working, it means these businesses are missing out on valuable information on customer behaviours.
More broadly, as incumbent tech businesses begin to pivot, we note that newer companies like Netflix and Spotify have an advantage in data usage and personalisation.
Renting = data = personalisation = high switching cost.
All up, renting is a valuable trend that creates a moat or competitive advantage.
The “access over ownership” course has created a strong moat with data and subscriptions leading to greater personalisation. This creates a switching cost moat.
Personalised services that scale globally are huge moats against competitors, a reason why we own Netflix and Spotify in the Spaceship Universe Portfolio.
This post was published on Tuesday, 7 August 2018.
Important! We’re sharing with you our thoughts on the companies in which we may invest for your informational purposes only. We think it’s important (and interesting!) to let you know what’s happening with the companies in your Spaceship Voyager portfolio. However, we are not making recommendations to buy or sell holdings in a specific company. Past performance isn’t a reliable indicator or guarantee of future performance.
The Spaceship Universe Portfolio holds shares in Adidas, Disney, Netflix, Nike and Spotify.
The Spaceship Index Portfolio holds shares in Disney, Netflix and Nike.
Additional information about Spaceship's "Where the world is going" investment process is set out in the Spaceship Universe Portfolio and Spaceship Index Portfolio Product Disclosure Statements and section 2 of the Additional Information Document.
