What products get better over time?

By Jason Sedawie 2 September 2018 3 min read

Outline:

  • Cars and electronics are famous for depreciating in value;
  • But some technology products learn more about you every day and thus become more valuable.

Some would say that FANG (or high-performing technology stocks such as Facebook, Amazon, Netflix and Google (now Alphabet), are the face of the current market.

The reason?

Their products become better over time. Most products don’t improve with more use; cars and electronics are famous for depreciating over time. However, digital products become more useful the more they are used.

It’s a key difference, and it allows each of the companies within FANG to grow faster than traditional companies. As they get bigger, the services they offer and recommendations they provide become more valuable to users.

Think about Netflix and Alphabet’s YouTube - when you log in, recommendations are personalised. Amazon shows you products based on past purchases, and Facebook shows you content based on your interests and past interactions.

Traditional companies however, generally have a one size fits all approach, offering everyone the same experience, and products that aren't designed to get better with use. Once you have experienced personalisation, it's hard to go back.

The longer and more you use FANG, the more useful they become.

Don’t waste time.

Think about the TV guide, it has the same layout and content for everyone and can be hard to navigate.

You can waste valuable time and usually end up watching something you’re not overly interested in. Netflix improved this experience with recommendations.

80% of the shows watched on Netflix are based on recommendations it makes. Netflix knows is has 60-90 seconds to convince you. Luckily, Netflix has enough users and data to get it right.

You know Netflix has made it when it's the biggest button on a remote.

Providing personalised recommendations showing customer they might like but are unlikely to discover themselves is a source of major value add. It’s also a common attribute across FANG.

Netflix does not have one algorithm but a collection of different algorithms serving different use cases. Netflix knows a customer's habits, what devices they use, time, day, intensity of viewing, including recommendations shown but not played.

The data helps Netflix find audiences for niche videos that would not make sense for broadcast TV. Personalisation has reduced churn by several percentage points.

Superior model

In America, 55% of online shoppers begin their product search with Amazon.

Like Netflix, Amazon is able to offer personalised recommendations. It's been speculated that in the future they may deliver you two boxes: what Amazon thinks you need, and another box to return it in, in case they are wrong.

Compared with traditional bricks and mortar, Amazon is always open, has the widest selection, may make better recommendations, and because it operates very few physical stores has low cost.

Facebook’s newsfeed is also highly personalised based on your connections and interests.

It is arguable that its business model is superior compared to traditional media. It doesn’t pay for content, you create it. And because you're connected to people you know - there is also unique personal news that you won’t receive elsewhere.

Facebook’s services are popular because there are so many Facebook users, it feels like everyone is there - its community is larger than most religions.

As a community, in June 2018 Facebook’s 2.23 billion users only trail Christianity. Sixty-six percent of Facebook users log in daily, spending an average of 20 minutes on the social media platform.

Google’s model is similar.

Google has answers to many of our questions. The more a user searches, the more Google knows about the user, and the more directed the search results become.

Google has seven products with over one billion users, these products interact with each other. Gmail, Android, Chrome, Maps, Search, YouTube and the Google Play store. Once services have been personalised to you, the time investment required to switch to another service is a substantial cost.

Most products lose value over time, hardly any become more useful. FANG’s digital products become better with more use, generating more data and increasing personalisation - improving the services they provide to customers and improving results for shareholders.

Words by
Jason Sedawie Right Chevron

Jason is a Portfolio Manager at Spaceship. He tries to surf on the weekend and enjoys helping our customers achieve their financial goals by investing in where the world is going.

What products get better over time?