Not Boring by Packy McCormick

Welcome to the 1,085 newly Not Boring people who have joined us since last Monday! If you’re reading this but haven’t subscribed, join 11,270 smart, curious folks by subscribing here!Hi friends 👋,Happy Monday! Thanks to all of you for your feedback! I’ve read through all of it, and I’ll be incorporating a lot of your ideas in the coming weeks. One of the biggest pieces of feedback you gave was to either a) shorten the essays or b) give a TL;DR upfront. I’m going to try the latter today with a short summary of the essay in slide form. You can check it out here, and I’d love to hear your thoughts. In Part I, we covered Tencent’s history, its current businesses, and its massive portfolio of investments. Tencent is undervalued based on its current operating businesses and the current value of its portfolio alone. But Tencent’s positioning for the future is even more compelling, and that’s what we’re going to discuss in Part II today. Full Disclosure: I own shares in Tencent after doing research on it for this two-parter.Let’s get to it.Tencent’s DreamsTencent’s critics argue that it gave up on its dreams by focusing on investing instead of product innovation. I disagree. Instead of building any specific product, Tencent is building an organization and ecosystem designed to be massively profitable in the short-term with asymmetric upside.Through its investments, Tencent is in the best position of any company to usher in and profit from the Metaverse, the misunderstood and potentially mega-lucrative evolution of the internet. I’m not the first person to realize that Tencent is in the lead. In his recent Invest Like the Best interview, investor Matthew Ball said, “So if you said ‘who is closest to the Metaverse today?’ the simple answer is not Fortnite or Minecraft, it’s Tencent.” But Tencent’s advantage extends beyond its lead position in gaming, because the Metaverse will be so much more than games. Look closely at Tencent’s portfolio and you’ll find a group of companies across gaming, ecommerce, and social that will bring the Metaverse to fruition and share in its massive upside. Tencent’s structure and strategy -- provide capital and traffic -- is the perfect model to profit from the decentralized, competitive, creator-friendly ecosystem that the Metaverse is likely to be.That’s a big claim, so here’s what we’ll cover to get there:* The Metaverse. What the Metaverse is, which parts of it are here already, and how big the opportunity is.* Tencent’s Strategy. Instead of building everything itself, Tencent invests. Its Capital + Traffic Flywheel is a smart way to bet on the Metaverse because while technologists are nearly certain that it will exist, no one knows exactly what form it will take. * Platform + Content. The Metaverse will comprise the Platforms on top of which it’s built and Content that users interact with for entertainment, socializing, learning, and commerce. Tencent owns leading Platform candidates - Epic’s Unreal Engine (VR), Snap (AR), Spotify (Audio), and WeChat (internet / super app) - plus companies through which people will play, shop, learn, and socialize.* Where Tencent Might Invest Next. Tencent has announced its intention to invest in infrastructure and “Smart Retail,” and it is likely to invest in remote work and collaboration products like Figma and Agora to round out its business offering.* Obstacles. Tencent faces government regulation and well-resourced competitors. This post is fun speculation combined with practical implications. Tencent’s valuation doesn’t properly price the Metaverse opportunity -- it can’t, it’s so early and so speculative -- which means that with Tencent, you get a business that is undervalued today and a free call option on the future. I want you to leave this post with a better understanding of the Metaverse, and an appreciation for the opportunity that Tencent has to make it a reality and profit from its rise. What is the Metaverse?Oh no, not another Metaverse thinkpiece… Hear me out. The term, first introduced by sci-fi author Neal Stevenson in his 1992 Snow Crash, makes the idea sound silly and game-like. It sounds a little like talking about the World Wide Web in the early 1990’s. Like the Web back then, the Metaverse is an important idea in need of a rebrand.So what is it?In The Metaverse, Matthew Ball says the Metaverse will be an always-on, real-time world in which an unlimited number of people can participate at the same time. It will have a fully functioning economy and span the physical and digital worlds. Data, digital items, content, and intellectual property (“IP”) will work across the Metaverse, and many people and companies will create the content, stores, and experiences that populate it.Epic Games CEO Tim Sweeney agrees, adding, “it will be a massively participatory medium of a type that we really haven’t seen yet,” with “ a fair economy in which all creators can participate, make money and be rewarded.”The Metaverse sounds a lot like the real world, layered with digital components at varying degrees of immersion. A participant might walk through a virtual mall and buy a digital Mickey Mouse costume in the Disney store for his avatar to wear, then pop over to the food court to pick something to eat to be delivered to his physical house via Uber Eats, and then pop into a live Beatles concert in the Spotify Performing Arts Center. He can keep the concert going in his AirPods on Spotify when he wants to go for a run in the physical world, racing against his friends in an AR Peloton-like experience.  The whole thing feels seamless - his data and purchases carry across and among physical and digital worlds.Ball, Sweeney, and everyone else I’ve read on the topic agree: the Metaverse won’t happen overnight. There won’t be a clearly demarcated “before the Metaverse” and “after the Metaverse” divide, and it won’t be built and run by one company. The Metaverse will be the result of the evolutionary convergence of many separate tools, platforms, and worlds underpinned by shared infrastructure, standards, and protocols. In fact, Marc Geffen makes the case that the Minimum Viable Metaverse is already here in games, the democratization of ecommerce, the rise of “premium” social media, and the adoption of decentralized, distributed, and remote productivity tech. The Metaverse won’t be any one thing. It’s not just one big video game. It’s not just Second Life. It’s not just a huge shopping mall. It’s not the scene from Wall-E that I like to include whenever I talk about the future.It’s all of those things, and the connections between them, and more. The Metaverse will be a way to blend the physical and digital worlds while allowing us to be fully present in either - it’s the real world, AR, VR, and the internet all rolled into one. With regards to Tencent’s business, three things are important to realize about the Metaverse: * The Metaverse isn’t science fiction, it’s an inevitability even if its final form is unclear. * Games and game engines are important, but they’re just one piece of the puzzle. * Owning large swaths of the Content and Platforms underpinning the Metaverse and of the content and commerce taking place within it will be highly lucrative.Ball believes that even in a conservative case, the Metaverse will be worth trillions of dollars. But it’s impossible to quantify, like trying to predict how big the “net” was going to be back in the early 1990s. We knew it was going to happen, and we knew that it was going to be big, but we couldn’t have imagined exactly what it would look like, or that it would spawn multiple trillion dollar companies and many more multi-billion dollar ones.While we can’t know the exact what or how, the Metaverse represents an unprecedented wealth creation opportunity. And Tencent, through its investments and consolidated assets, is in the driver’s seat. Which brings us back to Tencent’s dreams. Capital + TrafficA strategic decision nine years ago accidentally set Tencent up to create more value from the Metaverse than it does from its entire core business by focusing on investment over organic growth.After reading Part I, Rui Ma pointed me to the Tech Buzz China podcast in which she and Ying Lu discuss Pan Luan’s 2018 piece titled “Tencent Has No Dreams.” In it, he argues that a 2011 decision at a management team offsite caused Tencent to lose sight of its product-focused roots. Back in 2011, Baidu passed Tencent as the most valuable tech company in China, and Pony Ma called a meeting of his top management to chart a new course for the company. In the meeting, dubbed “The Conference of the Gods,” he asked his 16 top executives to list out Tencent’s core competitive advantages. Two winners emerged: capital and traffic. Led by President Martin Lau and his former Goldman colleague James Mitchell, who he brought on as Chief Strategy Officer, Tencent built its strategy on this flywheel of capital and traffic. Attract companies to build on its platform with huge traffic, invest in the winners, give them more traffic, invest more or acquire the winners, generate more traffic, attract more companies, and so on. It runs essentially the same playbook with foreign companies who want access to China.The strategy seems to be working. Since that 2011 meeting, Tencent’s stock has increased nearly 15x, from $44.5 billion to $660 billion. Luan warned, though, that “Hidden behind the ten-fold increase in market value is the investment banking thinking that focuses too much on short-term ROI.” He cites the fact that Tencent missed out on short-term video, kills internal projects quickly based on ROI calculations, and failed to internationalize WeChat. Luan also argues that Tencent’s intolerance of failure leads to a lack of innovation and talent development, painting the picture of Tencent as a place where, “Smart people just make PowerPoints and quarrel with each other.” Luan’s argument boils down to one that’s familiar to the American tech giants: they can’t innovate anymore, so they just copy and acquire. Facebook’s internal projects are flops, so it acquired Instagram and Oculus and WhatsApp and copied Snap Stories. Google can’t create anything new beyond search (remember Google+??), so it acquired Android and YouTube and DoubleClick. But Tencent’s focus on investment over organic innovation is really smart for two reasons. First, building a startup is an exercise in innovation; running a large company is an exercise in capital allocation (recall The Outsiders). At this point, Tencent creating all of its own products would actually be inefficient. The company’s best minds should be focused on building an organization and ecosystem that sets it up to catch the next major wave of growth. Second, investment versus full ownership is the right way to play the Metaverse opportunity. If the Metaverse is going to be decentralized and more profits will accrue to creators, it makes financial sense to spread bets across both platforms and content creators instead of trying to build one central platform, like a WeChat version of the Metaverse. Historically, Tencent has evolved its approach to meet evolving tech trends. It launched QQ to capitalize on the rise of the internet in China and it built WeChat to ride the mobile wave. Now it’s building a portfolio of companies that position it to profit from the shift that has the potential to create more economic value than either of the previous two. Tencent’s Metaverse DreamsThere are two big components of the Metaverse: Platform (where) and Content (what). Tencent owns stakes in more of the components of each than any company in the world. PlatformThe magic of the Metaverse is that it will seamlessly integrate the myriad platforms on which we socialize, work, and consume - merging Augmented Reality (AR), Virtual Reality (VR), audio, the internet, and the physical world. Tencent owns key players in each, including Epic, Snap, Spotify, WeChat, and even physical retail. VR: Epic (Unreal Engine)In Tencent’s Metaverse solar system, Epic is the sun. In many ways, its major title, Fortnite, is the closest thing we have to the Metaverse today. * Looks Like the Metaverse We Think Of: It’s a persistent, synchronous, live virtual world, complete with shared group experiences like the Travis Scott concert.* IP Melting Pot: Competing IP co-exists in Fortnite - you can buy both Marvel and DC skins, NFL jerseys and Jordan sneakers, or be John Wick or Ariana Grande (link)* Cross-Platform: Players can play against each other on competing consoles or platforms - players on Mac, Playstation, Xbox, and Android can all play against each other.* Participatory: In Creative Mode, players can build their own worlds, and Epic has partnered with creators from the community to develop and sell their skins. Epic is running the Traffic side of the Tencent playbook - because all of the players are on Fortnite, it can get consumer-friendly deals out of parties -- like IP holders and game console makers -- that others cannot. Fortnite is just a trial run for a bigger prize, though. It puts Epic’s Unreal Engine in the prime position to become the Platform on top of which many of the virtual components of the Metaverse are built. Game developers, filmmakers, and architects alike use its Unreal Engine to build rich, immersive digital renderings and worlds. Popular game Gears of War, Disney+ hit The Mandalorian, and leading architects Foster + Partners and Gensler all build with Unreal. A shopping mall designed in Unreal Engine, SourceAs more games, movies, cities, and buildings are built on the same engine, it becomes easier to stitch together a full virtual world. And more will build with Unreal and Epic, because the company is practically giving away its best-in-class tools for free. Epic has the lowest store fees of its competitors (12%), the most publisher-friendly publishing tools, and the most open ecosystem. If a competitor wants to work with Epic, Epic will work with it. Epic does all of this in service of the creators, large and small, who it sees as crucial to pulling the Metaverse forward in time, and to creating a massive Total Addressable Market. The more money creators can make, the thinking goes, the more likely they are to create, the more attractive it will be for users to spend time in the Metaverse, and the more lucrative it will be to be the engine building the Metaverse.Tencent owns 40% of Epic, which recently raised at a $17.3 billion valuation, and looking 10-20 years into the future, that 40% stake could be worth more than all of Tencent today. But it’s just one component of Tencent’s Metaverse Platform play. Another crucially important piece is Snap. AR: SnapTencent is Snap’s largest shareholder, with 12% ownership (although no outside investor has voting rights or control). If Epic is a leading contender to build the virtual world components of the Metaverse, Snap is a leading contender to build the AR components, or Mirrorworld. As I wrote in Oh Snap!:Mirrorworld, according to Kelly, won’t take place in Virtual Reality (VR), but rather in Augmented Reality (AR). It will blend digital and physical, layering bits’ infinite possibilities on top of atoms’ realness. Snap is employing the Amazon “First and Best Customer” strategy. It builds products for its own app first - like Lenses, its first AR hit - and then opens up the tools to both its community to create within Snapchat, and third-party developers to incorporate Snapchat’s features into third-party apps. Snap is building a wide-ranging set of products that build off of each other and work together to lead to a future in which Snap powers the Mirrorworld.Here’s a glimpse from Snap’s Partner Summit:Like Epic, Snap isn’t building a closed ecosystem. It’s building the tools that others can use to build and profit from AR experiences, inside or outside of the Snapchat product, so that it becomes the platform on top of which developers build the Mirrorworld. * Camera Kit: Gives any developer the power of Snap’s Camera, the most widely used piece of AR technology in the world. * Bitmoji: Snap owns Bitmoji, which gives everyone their own personalized avatar to use within Snap Games and Minis, and across many external apps, platforms, and OS’s. * Snap Kit: Powers 20 of the top 100 apps in the iOS and Google app stores. * Local Lenses: Allow users and businesses to build digital worlds on top of the physical one. Snap will be a leader in AR and continue to grow as its user base matures, which will put it among the tech giants in terms of valuation. Today, it’s valued at 1/70th of Apple and 1/30th of Google. If it catches up to where the tech giants are today, Tencent’s stake will be worth over $100 billion. (Insert $100 billion in 10 years meme here)Audio: SpotifyThere’s a version of the Metaverse that looks less like Ready Player One and more like Her. That is to say, audio-based. We are decades or centuries away from being able to do everything we need to do in the virtual world, which means that we will still need to spend plenty of time in the physical world. During much of that time, we will plug in via audio. Today, Americans spend four hours per day listening to audio, including one hour of spoken word content. Tomorrow, we will listen to even more, as the lines between conversation and entertainment blur. Spotify, of which Tencent owns 9%, is best positioned to capture that earshare. Spotify currently has 286 million monthly active users and is proving out its ability to deliver them different types of audio content beyond music, including podcasts, and soon, audiobooks. According to CEO Daniel Ek, Spotify has 10-15x growth ahead of it. As I wrote in Earshare, it is investing heavily today to ensure that it owns consumers’ ears as audio grows. In the Metaverse, Spotify will fill the space between - when people are not fully immersed in the digital world, they will be able to continue the conversation with friends who are, interact lightly with AR through audio, or just relax and listen to some music. At 10x where it is today, Tencent’s investment in Spotify would be worth $35 billion.Internet: WeChatTencent’s core asset today is WeChat. As we discussed in Part I, Chinese consumers do everything on WeChat - message, read the news, shop digitally, interact with businesses, communicate for work, pay for things in the real world, and more. With the launch of its Mini Programs, companies are able to build richer experiences within the WeChat ecosystem. In some ways, WeChat is a mini, 2D Metaverse. As Tencent quietly orchestrates the adoption of the Metaverse via its minority investments, it will be interesting to watch how much inspiration the Metaverse takes from the WeChat ecosystem. Snap has already started to look more like WeChat with the launch of its own Minis, and the super app’s influence will continue to shape the way that we build new digital economies.Infrastructure and Smart RetailTencent already owns stakes in the platforms of the future, and it has more cash to spend. The company said that it will invest $70 billion in infrastructure including cloud, AI, cybersecurity, blockchain, 5G, and quantum computing over the next five years. It will also be investing heavily in Smart Retail, further bridging the gap between digital and physical retail through payments and other shopping tech. Together, its infrastructure and Smart Retail investments will help build more of the underlying technology and connective tissue the Metaverse will need. ContentTaken together, Tencent owns stakes in the leading companies building the Platforms on which the Metaverse will be built: VR, AR, Audio, and Internet. Epic, Snap, Spotify, and WeChat are all building true platforms -- on which the majority of the profit is made by creators. For the Metaverse to be interesting enough for people to adopt, creators are key. There need to be games to play, music to listen to, rich social experiences, ways to make money, and things to buy with that money. In other words, there needs to be Content. Tencent’s Platform investments enable content creation, and it also invests in Content creators. Capital and Traffic for the next wave. When you lay Tencent’s investments on top of Geffen’s graphic, its Content play emerges. Tencent owns stakes in four of the companies that Geffen included in his original  graphic (circled in blue): Snap, Discord, Roblox, and Epic. I’ve added more of Tencent’s holdings to the chart to show that Tencent is already a leader in three of the Minimum Viable Metaverse categories, which are the early Content layer: Games, Premium Social Media, and Democratized Ecommerce. Virtual Worlds and Spatial Software (i.e. Games)Games are the first Metaverse Content that many people will engage with, and Tencent is the leading video game company in the world. * Its online games segment did $5.5 billion in Q2 revenue, more than any other company.* It owns Riot Games, which makes League of Legends, the most popular esports title in the world by over 4x as judged by Twitch streams and 40% of Epic Games, which makes Fortnite (350 million players). Unreal Engine is Platform, Fortnite is Content. * It owns 1.5% of Roblox, which has 164 million users and is played by half of people under age 16 in the United States.Matthew Ball talks about games as the “on-ramp” experience for the Metaverse, the thing that will get early adopters to try it out. Tencent owns that on-ramp, and the titles that will keep people engaged and immersed in early versions of the Metaverse. Democratization of Ecommerce For the Metaverse to become more than just an immersive game environment, it will need to support a functioning economy. For that to happen, people will need to be able to sell things in the Metaverse, which is to say, in a seamless way across the digital and physical worlds. Try on a shirt with AR, buy a digital version for your avatar, and have the physical version shipped to your door. Tencent owns stakes in some of the leading ecommerce companies in the world, many of which “arm the rebels” instead of vertically integrating, with publicly stated plans to add more:* WeChat allows companies to easily set up stores and experiences that reach over a billion customers, and WeChat Pay lets people buy things online or in the real world. * Paystack powers digital payments in Africa, Khatabook does the same in India, as do Gojek in Indonesia and SeaMoney in Singapore. Seamless payments will be crucial to power Metaverse stores. * Pinduoduo’s Customer-to-Merchant and social commerce models are reshaping ecommerce in ways that may work even better in the Metaverse than they do on mobile. Tencent’s current portfolio and future investments in Smart Retail will continue to blur the lines between digital and physical shopping. They will be crucial in defining the shape of the Metaverse economy, and its assets stand to benefit from the Capital and Traffic Flywheel across its Metaverse Platforms. Premium Social MediaThe Metaverse will let friends, family, and colleagues from across the world gather in immersive environments even more easily than walking next door. It will also let strangers with shared interests find and engage with each other. Tencent has an impressive portfolio of Premium Social companies: * Tencent owns 50.1% of Huya and and 38% of Douyu, China’s versions of Amazon’s game streaming product, Twitch. Game streaming mechanics may underpin broadcast activities beyond gaming.* Discord, of which Tencent owns ~2%, bills itself as a “place to talk and hang out.” It represents a proto-version of persistent hangouts in the Metaverse.* Snap is both a Platform and a Content play, and is a more intimate social network in which young users mainly interact with their closest friends instead of strangers.* Tencent owns ~5% of Indian education platform, Byju’s, the most valuable online learning company in the world.Like a party or a new social network, people will only hang out in the Metaverse if their friends are there. As the Metaverse comes into focus, these Premium social communities will continue to merge with the other aspects like ecommerce and gaming, making many of the things we do more social. We’ll go to the mall, movies, or concerts with friends, just like the real world pre-Corona. Through its Capital and Traffic approach, Tencent has built a portfolio of internal and external products, platforms, and services that perfectly position it to own the Platforms on which the Metaverse is built, and the Content with which Metaverse users will engage to play, build communities, learn, and shop. So what is it missing? Where Tencent Might Invest NextThe one area from Geffen’s map in which Tencent is underweight is “decentralized, distributed, and remote productivity tech,” particularly compared to Metaverse competitors Microsoft and Google. Assuming that remote productivity will be an increasingly important component of the Metaverse, I expect that remote productivity tech will be a main area of focus for Tencent in addition to previously announced infrastructure and Smart Retail plays. If I were doing corp dev at Tencent, here are a few companies I would be interested in: * Figma. The collaborative design tool that I use to make all of the beautiful graphics in Not Boring would be a strong addition to the portfolio because it is both a work collaboration tool and a potential on-ramp for people to design new worlds and experiences in the Metaverse. People use Figma to synchronously co-create shared environments, like WFH Town.* Agora. Tencent brazenly copied Zoom with VooV, which it launched in 100 countries on March 20th. Agora, which went public in June, allows anyone to embed video or voice in their applications. I think that the future of video will look more like use-case specific video environments versus everyone using Zoom, and Agora is both a good way to play that trend and a way for Tencent to spread into thousands of products as a Platform.  * Zapier. When I wrote that Google should acquire Slack, Schlaf replied that Zapier is more strategic because “it’s plumbing and glue. It ties together a whole ecosystem of applications, services, and developers.” In a Metaverse defined by the connection among platforms, worlds, and content, its connective plumbing may be even more important. * Remix Machines. In The Generalist, Mario Gabriele cited a wave of products unbundling the Microsoft Office Suite with slicker UI and more collaboration. Many of the companies he discusses, like Notion, Coda, Roam, Airtable, Causal, Canva, Projector, Kapwing, and Webflow are well-suited for the Metaverse, which will be largely multiplayer as opposed to one-to-one or solo. Many of these companies are too early in their lives and their trajectories are too steep for them to sell to one of the American tech giants that would swallow them whole. Tencent’s more passive investment approach is likely preferable to the companies. Within the Tencent portfolio, they can get access to capital, traffic, and a seat in the early Metaverse. Obstacles to Tencent’s Dream Tencent’s success in the Metaverse is not a foregone conclusion for three reasons: * Government. Tencent is a Chinese company, and the Trump Administration recently issued an Executive Order to prevent people in the US from using WeChat, which the Administration views as a security threat. Were Tencent to take a leading position in the Metaverse the government would very likely intervene. This is one of the areas where Tencent’s structure is advantageous. It’s impossible to imagine the American government (or Indian government, or many other governments) allowing its citizens to spend the majority of their waking hours in the Metaverse by Tencent™️, but it will be harder to prevent people from spending time playing Fortnite or League of Legends, interacting with the world through Snap’s AR, or listening to music on Spotify. Even still, world governments could force Tencent to divest ownership in businesses operating in their countries. Even the Chinese government has been an impediment to Tencent’s dream when it imposed restrictions on in-game purchases in 2018, driving Tencent’s stock down 20%. * Competition. Tencent will face opposition from bigger competitors and new entrants alike who have their own designs on controlling the next big platform shift. Facebook bought Oculus to own VR. Microsoft owns Minecraft and the Hololens, and may own TikTok, which is already stealing attention from Tencent’s properties. Google is gunning for cloud gaming with Stadia and won’t give up its place as the home page for the internet easily. Amazon is the world’s largest ecommerce business and its largest cloud provider, owns Twitch, and is the best of the bunch at developing new business lines. Apple is currently engaged in a battle with Epic over its 30% app store fee, and has shown that it is willing to play hardball to hold on to its hard-won place in the content ecosystem. * The Metaverse is Uncertain and Likely Distributed. Ultimately, no one company will own the Metaverse, and it’s important for Tencent to work with competitors, as Epic has done, in order to maintain its advantage. It will have to convince the other major tech companies that accelerating the arrival of the Metaverse will be positive sum for all of them, and then work arm-in-arm with competitors to convince regulators across the world that what they’re building, and how they’re building it, is good for society. Tencent’s OpportunityDespite the obstacles, investing in Tencent is the best way to invest in the Metaverse. It is the only way for you and I to invest in Epic, which many believe to be the most important Metaverse builder. If it ends up being more AR than VR, Snap will do well. If audio plays a larger role, Spotify will do well. If it blends multiple media, all three will boom together. Even if another giant or startup builds the infrastructure, many of its Content plays stand to benefit from a richer digital / physical economy. If Tencent can nudge its portfolio companies to work together, it will accelerate the Metaverse’s development and solidify its own leading role. Even if it can’t, many of its bets stand to perform well independently, and the likelihood of one or more massive winners is high.And if the Metaverse doesn’t emerge at all? If we continue to use the internet in the way we do today for the next century? Tencent owns a portfolio of companies that stand to benefit from the simple straight line continuation of existing trends towards more gaming, ecommerce, audio, digital communication, and digital healthcare. The more we do online, the better Tencent does. This feels like the kind of opportunity that most of us missed to buy a basket of Apple, Amazon, Google, and Microsoft in the early 2000s, buffeted by a massive, profitable, and growing core business. Ultimately, Tencent is an undervalued portfolio of many of today’s top internet assets and a free call option on a new world. Get Smart on Trends Early With Gen Z VoiceGen Z Voice is like having a cool younger cousin who tells you which products all his friends are into. I read whatever Tom writes so my old ass can catch the next Fortnite or Snap early, so I'm pumped that Tom wanted to sponsor today's Not Boing. Sign up here - it's free, and it will keep you young.That’s all for this week, see you on Thursday!Thanks for listening, Packy This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.notboring.co

Welcome to the 928 newly Not Boring people who have joined us since last Monday! If you’re reading this but haven’t subscribed, join 10,185 smart, curious folks by subscribing here!Hi friends 👋,I want to celebrate Ten k subscribers by going deep on the only company with the right name for the occasion, Tencent. Tencent is the Chinese conglomerate behind the recently-banned WeChat, and one of the world’s most successful investment funds. There’s so much to say about this company that I’m breaking it up into two parts: * Part I (today): Tencent’s history, its business, and its portfolio, including a bonus goody for the investing nerds out there: a link to a spreadsheet I made with the current value of 102 of Tencent’s investments. * Part II (Thursday): Where Tencent is headed - it’s building new cities in China, and it’s going to be at the center of building a whole new world. This post isn’t meant to be political or to pass value judgments. It’s just an assessment of a fascinating company that most of us know far too little about. Favor: if you enjoy this post, please click the little heart button to like it - it helps more people discover my writing - or share it with your most Sinocurious friend. Let’s get to it. Tencent: The Ultimate OutsiderTencent is the most important company that many Americans know the least about. When President Trump signed an August 6th Executive Order banning WeChat from the United States, a lot of people said, “What’s WeChat?” Even those who knew about WeChat know very little about the octopoid company behind it. Let’s fix that. You should leave this two-part essay with a better understanding of what Tencent does, what it owns, and why it’s one of the most significant companies in the world.The Chinese pager-based internet service that Pony Ma launched in 1998 is now the world’s seventh most valuable company, right ahead of Berkshire Hathaway and right behind its bitter rival, Alibaba. As of Friday, Tencent is worth $628 billion.In China, Tencent is like Facebook, Nintendo, Shopify, Netflix, Spotify, Slack, and PayPal rolled into one. Its flagship product, WeChat, has 1.2 billion users, and those users spend more time in the app every day than Americans spend on all social media apps combined. People use WeChat to message friends, shop, read the news, play games, pay for things in physical stores… pretty anything you can do on your phone, you can do on WeChat. Tencent turned the profits from its social networking, ecommerce, and gaming cash cows into a global investment portfolio that includes many of the world’s most popular video games, the fastest-growing internet businesses in China, meaningful stakes in Tesla, Spotify, and Snap, and a portfolio of international startup unicorns second only to Sequoia’s. It even financed A Beautiful Day in the Neighborhood. Americans don’t know much about Tencent because, in addition to being Chinese, it’s really fucking complex. It’s both one of the most profitable operating businesses in the world and one of the most ambitious investment funds. Tencent has been dubbed “The SoftBank of China” and “The Berkshire Hathaway of Tech.” Neither description does it justice. While it gets less hype, its performance puts SoftBank’s to shame. It’s going to be one of the most important companies in the world for decades to come. Today, in Part I, I’m going to explain Tencent in four sections: * What is Tencent? An entrepreneurial story just like the ones you hear in the US, with all of the highs, lows, and near-deaths. An improbable journey from pager-based internet service to the giant holding company it is today.* The Outsiders. William N. Thorndike’s 2012 book, The Outsiders, about eight of the most successful CEOs in US history, provides a framework for thinking about Tencent’s business. CEO Pony Ma shares all of the important characteristics with the eight that Thorndike wrote about.* Tencent’s Operating Businesses. Tencent’s core business makes money in six main ways, and each of its business units rivals in, both scope and revenue, massive, standalone public companies.* Tencent’s Investment Portfolio. There’s no great public source for all of Tencent’s 700-800 investments, so I created a database of 103 of its biggest and share insights around where it invests, in which types of companies, and the unfair advantages it has as an investor.  The founding stories of Apple, Google, Microsoft, Facebook, and Amazon are canon for the type of people who read Not Boring. They’re part of modern American mythology. It’s time for us to get to know Tencent.What is Tencent?Note: I’ve used Julia Wu’s summary of Wu Xiaobo’s book, Matthew Brennan’s presentations, and the excellent Acquired podcast on Tencent to piece together Tencent’s history. We’ve been conditioned to think of massive Chinese technology companies as shady, government-controlled businesses out to steal your data and try to take over the world. It might surprise you, then, that Tencent started out like a lot of US startups: as an entrepreneurial itch that one 26-year-old nerd had to scratch with the help of some friends. Ma Huateng was born at the right time and moved to the right place. Ma was born in the Hainan province in 1971 and moved to Shenzhen when he was 13. In the late 1970s, Chinese President Deng Xiaoping designated Shenzhen as a special economic zone as part of his “reform and opening policy.” Ma, whose family name meant “horse” and whose nickname, appropriately, was Pony, grew up in the one capitalist place in communist China. Ma was prodigiously smart. He scored high enough in college entrance exams to go anywhere in the country, but stayed close to home, attending Shenzhen University. The school didn’t have the astronomy major that Ma was most interested in, so he settled for his second choice: computer science. He was a natural. Ma regularly won student hacking contests, and built graphical user interfaces before they were a thing in China. While interning at one of China’s leading tech companies, Ma built a stock market analysis tool with a GUI as a side project, and sold it to his employer for 50,000 Chinese Yuan (CNY), or about 3 years’ salary. If this were a novel, the fact that Pony Ma’s first product combined tech and finance and his first taste of wealth came from an M&A transaction would be called foreshadowing. After college, Ma spent five years at a pager company, where he was exposed to the latest technology (pagers!) and became a manager. But Ma was living a second life in the early online chatrooms. He joined the growing FidoNet community, participating in and then hosting early internet bulletin board systems, where he met future billionaires like Xiaomi’s Lei Jun and NetEase’s Ding Lei. Inspired by Lei’s early success with NetEase (which today is worth $65 billion), in 1998, Ma left his job and convinced his friend, Zhang Zhidong, to start a company with him. They planned to combine the internet and pagers, which were popular in China at the time, to build a mobile internet on which people could send email, news, and more. Sticking with Ma’s equestrian nomenclature, they named the company Tengxun, which means “galloping message.” Tencent is the anglicized version of Tengxun. As Tencent was building its pager-based internet, Ma noticed the Israeli internet communication tool and Instant Messenger competitor ICQ, which sold to AOL in 1998, and decided to build a version for the Chinese market. Creatively, he called it OICQ, and built distribution and features necessary to serve customers who didn’t own personal computers, but increasingly accessed them in internet cafes. OICQ took off, and Tencent abandoned the pager internet. Users quadrupled every three months. After nine months, OICQ hit one million users. But this was pre-AWS (or Tencent Cloud) and servers were expensive. Plus, AOL sued Tencnent to change OICQ’s name. They were running out of money, so Ma launched a dual-track process to either sell the company or raise money. Tencent was aiming for 3 million yuan in a sale ($431k at today’s exchange rate), but the highest offer it received was for 600k yuan ($86,327). The lack of demand turned out to be a pretty lucky break. Today, it’s worth 1,454,929x its 3 million yuan asking price. With no acquirer, Ma sold 40% of Tencent to early US-based Chinese venture investor IDG Capital and Yingke, a fund led by Chinese billionaire Li Kashing’s son, for $2.2 million. But it wasn’t out of the woods.Soon after, AOL won its lawsuit, forcing Tencent to change the name of its flagship product. It chose QQ. Server costs continued to increase as the company crossed 100 million users with no revenue model. Tencent was back on the market. It approached Chinese search company Sohu and Yahoo! China. Neither was interested. Then, in 2001, the South African firm Naspers (literally) walked in the door and offered to invest at a $60 million valuation. So that Ma didn’t lose majority ownership, IDG sold 12.8% of its 20% and Yingke sold its entire stake for an 11x gain (not bad!), giving Naspers 32.8% of the company for $19.68 million. Today, that investment is worth $205 billion, good for a 10,436x return!With Naspers’ money in the bank, the Tencent team turned its attention to monetization. In 2002, a product manager discovered the Korean company sayclub.com, which monetized by allowing users to create personalized avatars. Tencent built its own version, QQ Show, and within 6 months, the product had 5 million users paying 5 yuan (a little less than $1) per month. As Julia Wu points out, the ability to personalize an avatar was such a hit because under communism, Chinese people had been “dull and collective” in their personal representation. Tencent also launched a “red diamond membership” for 10 yuan per month, for VIP status, monthly virtual gifts, and discounts in the QQ marketplace. This is a really important piece to understand. In the US, as we talked about in If I Ruled the Tweets, social media monetizes through advertising. In Asia, it mainly monetizes through digital gifts, subscriptions, and purchases. To this day, “Value Added Services” generate more than 3x the revenue for Tencent than “Online Advertising.” Avatars were big business. In 2003, Tencent hit a $100 million run rate and moved beyond messaging by building a portal, like a Chinese AOL. The team also realized that a lot of its users were chatting on QQ while playing games in internet cafes, so it added games to the QQ platform, both by acquiring small studios and building games in-house. Within a year, games added another $50 million in annual revenue. With monetization booming, Tencent IPO’d in 2004  at a valuation of 6.22 billion HKD, or $790 million USD. Cue Motley Fool headline: if you had invested $10,000 in Tencent at its IPO in 2004, you would have $7.9 million today. Oh, you didn’t invest in Tecent at its IPO? Damn. To be fair, it’s a very different company today than it was then, thanks to two 2005 hires: Martin Lau and Allen Zhang.After completing its IPO, Tencent hired the Goldman Sachs investment banker who took it public, Martin Lau. Lau had the pedigree - Chinese-born, undergrad at Michigan, engineering masters at Stanford, and MBA at Kellogg - and a skillset that was complementary to Ma’s. Lau became the English-speaking face of the business, taking on a role that the shy Ma hated, and the master capital allocator. In the beginning of his tenure, Lau focused on acquiring studios to grow its scorching games business as the Chief Strategy Officer. By the next year, Ma promoted him to President. Tencent also turned its attention to competitive threats to the portal business, including Microsoft’s increasing presence in China via MSN. To combat the threat, it acquired competitor Foxmail in 2005 to build QQ Mail. The product was successful, but more importantly, Tencent acquired the developer behind Foxmail, Allen Zhang. With Lau and Zhang on board, Tencent grew rapidly via desktop games and the QQ platform. Its revenue jumped 15x from $200 million in 2005 to $2.9 billion in 2010. But 2011 was the year when Zhang and Lau really made their mark. In 2010, early in the rise of mobile, Zhang noticed the popularity of Canadian messaging company called Kik, and convinced Ma to let him build a Chinese version for Tencent. The next seven years changed the trajectory of the company.2011: Working around the clock with a small team, Zhang launched Weixin in January. English speakers know it as WeChat. (They’re actually two separate products - Weixin serves Mainland China and WeChat serves the rest of the world, but we’ll refer to the two interchangeably as WeChat.) After early competition with Xiaomi’s Mi Chat, WeChat pulled away by tapping into QQ’s existing user base, and then launching “Friends Nearby,” which was like an early version of Tinder. WeChat began adding 100k users per day.2012: WeChat hit 100 million users. It took 433 days to hit that mark. By comparison, it took QQ ten years, Facebook 5.5 years, and Twitter 4 years. In April, WeChat launched the Moments newsfeed and Official Accounts, allowing publishers to distribute content and businesses to distribute products and services. By the end of the year, it had 300 million users. 2013: Tencent launched WeChat Pay to enable payment through the platform. 2015: WeChat crossed half a billion users. 2017: WeChat launched Mini Programs, allowing businesses to build full-functionality apps within the WeChat platform. Companies like Pinduoduo build on top of WeChat and tap into all of its customers’ existing social and professional networks. Mini Programs turn WeChat into a “super app,” and are the inspiration behind Snap Minis, which we covered in Oh Snap!. WeChat, for all intents and purposes, is the mobile operating system in China.Back to Lau. While Zhang was building WeChat, Lau was busy acquiring games, laying the foundation for the next stage of growth. Two investments in 2011 and 2012 were particularly important. In 2011, Tencent acquired 92.8% of US game studio, Riot Games, creators of League of Legends for $400 million (they acquired the remaining 7.2% in 2015). The next year, in 2012, it acquired 40% of Cary, NC-based game company, Epic Games for $330 million.Today, Epic and Riot are two of the gems in Tencent’s gaming portfolio. League of Legends is a cornerstone of a gaming division that brought in $5.5 billion in Q2 alone. As we will explore in “Tencent’s Future,” Epic may also be the engine (pun intended) that drives the next massive phase of Tencent’s growth and puts it at the center of a new, virtual world. Over the past decade, Lau and his team have acquired or invested in over 700 companies, funded by the massive pools of cash Tencent’s gaming division and WeChat spit off.WeChat has over 1.2 billions users today. And those users are incredibly engaged. WeChat users in China spend an average of four hours per day in the app, more time than US users spend on all social media apps combined. Chinese users do everything on WeChat. They communicate with friends, co-workers, and clients through WeChat. Businesses communicate with customers through Official Accounts. They can also sell things through those accounts. Thousands of businesses, including ridesharing (Didi) and food delivery (Meituan Dianping), launched on WeChat. Tencent monetizes WeChat mainly through transactions instead of ads.So putting it all together, what is Tencent? Tencent is a Chinese holding company that is the world leader in gaming and runs the largest messaging, social networking, and mobile payments platform in China. It uses the cash flow from those businesses to invest in the next generation of massive companies in China and around the globe. Tencent combines the diversification of an old school conglomerate with the growth and decentralization of an internet-native business into a company that may become the largest in the world.From its roots as a product company, Tencent has become the best capital allocator of any non-investment company in the world. It’s running The Outsiders playbook to perfection.The OutsidersIn 2012, William N. Thorndike unintentionally wrote the guide to understanding Tencent’s dominance: The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success.In it, Thorndike explores the things that eight CEOs -- including Warren Buffett, The Washington Post’s Katharine Graham, Teledyne’s Henry Singleton, and Capital Cities’ Tom Murphy -- did differently that made them more successful than their peers.How does he measure success? You really only need to know three things to evaluate a CEO’s greatness: the compound annual return to shareholders during his or her tenure and the return over the same period for peer companies and for the broader market (usually measured by the S&P 500).By that measure, Pony Ma has been one of the world’s most successful CEOs. Since Tencent’s biggest competitor, Alibaba, went public in September 2014, Tencent has returned 305% versus:* 182% for Alibaba* -48% for Baidu * 68%, 141%, and 10% for the S&P 500, NASDAQ, and Hang Sen Index, respectively.Over the past six years, Tencent has outperformed the index that tracks the largest companies in Hong Kong’s stock market by 30x.Why has Tencent outperformed? For the same reasons that Thorndike highlighted in The Outsiders eight years ago. Pony Ma and Tencent share the characteristics common among the most successful CEOs, and take some to extremes. Outsider CEOs were private, ran decentralized organizations, and masterfully allocated capital to the opportunities, internal or external, with the highest potential to drive their stock’s performance. Pony Ma is the ultimate Outsider! As a result, he’s now China’s richest man with a net worth of $56.2 billion. And the business that he built is a master class in capital allocation, as we’ll see by breaking Tencent down into its two main businesses, which often interact with each other: Operating Businesses and Investments.Tencent’s Core BusinessesTencent’s core business makes money in six main ways: * Payments* Subscriptions (like video and music)* Social ads* Media ads * Games* CloudHere’s a breakdown of how revenue maps to business lines from a 2017 presentation by China tech analyst, Matthew Brennan:  All clear? Ok good, moving on. JK, it’s super complex. Let’s break it down by looking at Tencent’s Q2 results, converted to USD:* Social Networks. Instead of ads, Social Networks includes Value Added Services revenue like subscriptions for video and music and in-game purchases. It has 114 million paid video subscriptions and 47 million paid music subscriptions. * Online Games. Games are Tencent’s biggest business. Tencent has 17 separate franchises that have exceeded 10 million daily active users, not including Epic Games’ Fortnite, in which it has a large, non-controlling stake.* Online Advertising - Media. It includes ads on Tecent Video’s properties, as well as in Tencent’s various other digital, news, and video media properties. * Online Advertising - Social and Others. This segment looks the most similar to US social media companies’ monetization. One of the biggest drivers is companies paying for ads in WeChat Moments, and analysts highlight the fact that WeChat still has a relatively light ad load and room to grow.* FinTech and Business Services. Tencent’s second largest segment, it includes all of TenPay, the largest online payments platform in China encompassing WeChat Pay and QQ Pay, as well as WeChat’s wealth management business. When consumers and businesses buy from businesses on WeChat, via Official Accounts and Mini Programs, the fee Tencent takes is captured here, as does the fee Tencent takes when people use WeChat Pay to pay offline and across the web. * FinTech and Business Services also includes its cloud business. Although it didn’t break cloud revenue out separately in Q2, it was a $2.4 billion business in 2019.To give you a sense for Tencent’s scope and scale, here’s how Tencent’s business lines compare to entire industry-leading companies based on Q2 revenue. * Tencent’s Payments business is nearly as big as PayPal’s entire business, and it generated five times as much revenue as Shopify in Q2. * Its subscription revenue alone is 62% of Netflix’s. * It has some catching up to do in Social Ads, where it generates only 12% as much as the leader, Facebook, although it did generate more than 3x as much social ads revenue as Twitter. * Its small media ads business is bigger than the New York Times. * Games revenue is 64% higher than the world’s most valuable standalone gaming company, Nintendo. * Breaking cloud out of Payments and Business Services, based on last year ($600 million per quarter), it’s far behind AWS in cloud, with only 6% of the revenue.It’s difficult to wrap your arms around Tencent, and as a result, the company likely trades at a discount to its more focused American counterparts. If you applied the same Q2 revenue multiples at which each of the businesses in the chart above is currently trading to the corresponding Tencent business segment, its operating businesses alone would be valued at $538 billion, 86% of the company’s current market cap.And that’s before you get to the part of Tencent’s business that excites me the most, its expansive portfolio of investments.Tencent’s Investment PortfolioDid you know that Tencent owns 5% of Tesla, 12% of Snap, and 9% of Spotify (including a stake through Tencent Music)? Those stakes are worth $15.4 billion, $3.9 billion, and $4.2 billion, respectively, and they barely scratch the surface. In The Outsiders, Thorndike wrote, “CEOs need to do two things well: run their operations efficiently, and deploy the cash generated by those operations.” In Q2, Tencent generated $5.4 billion in operating profit. Job 1: ✅  It’s how Tencent deploys the cash generated by those operations that’s so fascinating, though. Two of Pony Ma’s top lieutenants, President Martin Lau and Chief Strategy Officer James Mitchell, are ex-Goldman bankers. As one VC told the Financial Times: “When you put a basketball player in the room, you know what they’re going to do. If you hire Goldman Sachs bankers, you know what they are going to do.”The analogy is a bit of a stretch, but the answer is clear: they’re going to do M&A. On its most recent earnings call, Martin Lau said:Our M&A strategy has always been trying to invest in up and coming companies which have a great management, who have innovative products, and at the same time, they have synergies with our existing platforms. We now have more than 700 companies.More than 700 companies!There’s nowhere online to find all of Tencent’s biggest investments, their ownership stake, and the current value of the investments in one place… so I built it. I have only 103 of the 700 investments in there, but I think I have all the big ones, and it’s absolutely fascinating. When you add the current value of just those 103 investments to the operating business value based on standalone business comps from the previous section, you land at a 15% higher valuation than Tencent is trading at today. The math is rough and not meant to be investment advice, but it’s helpful in thinking through how to build a complete picture of Tencent.In Tencent’s Q2 earnings report, it mentions that the fair value of its investments in listed (public) investee companies, excluding subsidiaries (companies of which Tencent owns more than 50%), is $102.6 billion as of June 30, 2020. If you add that number to the $538 billion operating businesses value from the last section, you get $640 billion, almost exactly in line with Tencent’s current market cap of $628 billion. So far, so good.But that $102.6 billion is just part of the portfolio - the publicly listed non-subsidiaries. When you include investments in private companies, based on most recently announced valuations and some rough estimates, I get a current portfolio value nearly twice as big, at $187 billion. And that’s without 600 of the (likely smaller) investments that Tencent claims to have made. Tencent is a really hard business to value accurately for a few reasons: * Just in its operating business, it does a lot of different things.* In addition to the operating business, it’s also a venture fund, a late stage fund, a private equity fund, and a hedge fund. * Startup outcomes are so unpredictable, even with Tencent’s muscle behind them. But I have a sneaking suspicion that its venture investments are worth somewhere north of zero, so let’s take a closer look at its entire portfolio. Where does Tencent invest?Tencent’s investments are split fairly evenly between China and International. Of the 103 Tencent investments I’m tracking, 54 are in China and 49 are international. Including acquired subsidiaries, the current value of investments by country break down like this: Tencent uses the cash it generates largely in China to diversify away from China, which is particularly important given that, even with its largest companies, the Chinese government can be hard to predict. In 2018, for example, a government game review process slowed the growth of Tencent’s gaming business in the country and tanked its stock over 20%. Just this morning, it announced an investment in French gaming company Voodoo, and gaming analyst Daniel Ahmad pointed out that Voodoo’s ad-based games would get around Chinese regulations requiring reviews of any games that monetize through in-game purchases.What does Tencent own?Tecent’s largest holdings include investments in some of the largest and fastest-growing gaming, music, and technology companies.Tencent’s top 10 holdings span: * Familiar names like Tesla and Snap, * Chinese ecommerce giants Meituan Dianping, JD.com, and Pinduoduo (Turner Novak on Pinduoduo)* China’s largest digital bank, WeBank, * TikTok competitor Kuaishou, * Beike, a Chinese Zillow which just went public last week in the largest US IPO of a Chinese company since early 2018,* Sea Ltd, the Singaporean gaming, ecommerce, and payments company that looks like the Tencent of SE Asia (Julie Young on Sea)* Epic Games, the US gaming company, Fortnite creator, and owner of the Unreal Engine (Matthew Ball on Epic Games)By my count, Tencent has 83 companies worth more than $1 billion dollars in its portfolio. 52 are unicorns, private companies worth $1 billion, which places it in the number two spot right behind #1 Sequoia Capital, which has invested in 109 according to the Hurun Global Unicorn Index, and ahead of third place SoftBank, which has 51. (In a January speech, Lau said that that company has 160 companies in its portfolio worth more than $1 billion, which would put it #1.)At home, Tencent’s biggest investments are in ecommerce, and it plans to double-down on “smart retail” given the success of its WeChat Mini Programs. Abroad, almost half of the value of the portfolio is in gaming companies. In both its Chinese and international strategies, Tencent has unfair advantages, and those advantages shape what types of businesses the company invests in. How do they do it? ChinaBusinesses in China run on WeChat. They can communicate with customers on Official Accounts, get distribution through group chats, build entire functioning products with Mini Programs, and accept payments through WeChat Pay. WeChat is Tencent’s unfair advantage in China. It’s the top of Tencent’s acquisition funnel. Three of Tencent’s four largest holdings - Meituan Dianping, JD.com, and Pinduoduo - are Chinese ecommerce businesses that run on top of WeChat. Tencent uses data from WeChat to source investments, and then provides preferential placement to its investees’ Official Accounts and Mini Programs within WeChat. For example, when Tencent invested in JD in 2014 to take on Alibaba’s Tmall, Reuters wrote: The deal gives JD.com a headline slot on Tencent’s WeChat app that dominates China’s smartphones, an entry into eBay-style consumer-to-consumer shopping and a backer with the muscle to help it make the most of a logistics infrastructure that Alibaba lacks.Today, Tencent’s investments in JD.com, Meituan Dianping, and Pinduoduo are worth $68.5 billion.No one else has the transaction data or the ability to boost a company’s distribution the way that Tencent does with WeChat. This will continue to be an advantage - in just three years, there are over 1 million WeChat Mini Programs. Tencent can cherry pick the best, invest, and practically guarantee their success.  International Whereas Tencent’s China portfolio is top-heavy with ecommerce unicorns, its international portfolio includes everything from an 86-year-old American music label, Universal Music Group, to 7-year-old Brazilian neobank, Nubank. Its’ biggest investment category, though, is games. It owns stakes in the companies behind popular titles including League of Legends (Riot Games 100%), Fortnite (Epic Games, 40%), Clash of Clans (Supercell, 81.4%), PUBG (Bluehole, 10%), Path of Exile (Grinding Gear Games, 80%), Call of Duty, Overwatch, Starcraft, and Candy Crush (Activision Blizzard, 5%). It even owns 1.3% of Roblox, which lets kids build their own games, and 2% of Discord, a chat platform used mainly by gamers. Tencent invests in international game companies and distributes their titles to the Chinese market. This is Tencent’s unfair advantage: companies essentially need to partner with Tencent or Alibaba to operate in China. This is true beyond games, too. The Canadian version of Dunkin Donuts, Tim Hortons, wants to expand into China, so it recently took on an investment from Tencent. Tencent invested in Universal and Warner Music Group in part to control the licensing of their catalogs in China. In addition to strategic investments in games and music, Tencent makes venture-style investments in fast-growing companies that have the potential to win large markets. It has shown a particular affinity for non-gaming investments in India, the only other country with as large a population as China’s. It has invested in ecommerce standout Flipkart, transportation unicorn Ola, education startup Bydu, food delivery app Swiggy, and fintech darling Khatabook, among others. In the US, Singapore, and Indonesia, it has invested in the companies building super apps most similar to its own core product, WeChat -- Snap, Sea, and Gojek. Tencent’s international portfolio is large, diverse, and complex, with bets at all stages, in all categories, and for all sorts of reasons. As a result, I think that investors undervalue it. But while the world catches up, Tencent keeps zooming further into the future. The real magic in the portfolio is just beginning to bloom. It’s that future that has me most excited about the company. Tencent’s FutureWe’ve gone on quite a journey today, covering Tencent’s history and what it’s up to today, including its core operating businesses and how it invests the massive profits that those businesses generate to participate in the internet’s growth at home and around the world.In Part II on Thursday, we’ll get our crystal balls out and talk about what Tencent’s investments tell us about the future, and how the company has positioned itself to sit at the center of the next world: the Metaverse. That means we get to explore some hairier subjects, like the influence of the Chinese Communist Party, Epic’s fight with Apple, the threats to its current business and long-term mission, and much, much more. Thanks Dan and Puja for editing, Sid for input, Turner for investment accounting help, and Julia Wu, Matthew Brennan, Ben Gilbert, and David Rosenthal for excellent background info.Thanks for listening, Packy This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.notboring.co

Welcome to the 367 newly Not Boring people who have joined us since last Monday! If you’re reading this but haven’t subscribed, join 9,255 smart, curious folks by subscribing here!The Hard Thing About Easy Things“Amazon is building an empire, and Shopify is trying to arm the rebels. So maybe some of our customers might compete with Amazon, at some point, but that would be like super cool, and we’re not there yet.”-- Tobi Lütke, Shopify Founder and CEOShopify’s stock keeps doubling and doubling, so everyone wants to know its secret. The most fun explanation is Shopify CEO Tobi Lütke’s claim that the company is “trying to arm the rebels.” But it’s not true, really. By giving everyone access to the same tools, Shopify isn’t arming the rebels as much as it’s profiting off the chaos created by arming everyone. Here’s the hard thing about easy things: if everyone can do something, there’s no advantage to doing it, but you still have to do it anyway just to keep up. By making Direct-to-Consumer (“DTC”) easier, software like Shopify increases entropy and lowers the probability that any specific company will generate sustained profits. Tobi borrowed the phrase “arming the rebels” from a geopolitical strategy in which a big, powerful country, safely separated by miles and oceans, supports rebel forces fighting for change in a smaller, poorer, less powerful country by giving them money, arms, and implied support. Think the US backing the Contras against the Sandinista Government in Nicaragua or the Soviet and Cuban support for anti-apartheid forces in South Africa. If you want to put on your tin foil hat, think the US funding Osama bin Laden and the Afghan Arab fighters in the Soviet-Afghan War.  Shopify is an amazing company full of great people, but Shopify isn’t really arming the rebels. When every rebel is armed, none really is. It’s like when you played GoldenEye 007 as a kid. Getting the Golden Gun the hard way was dope. Everyone getting the Golden Gun with a cheat code made the game suck. When everyone has the same plug-and-play tools, the profit flows away from the rebels, and towards the arms dealers, forcing rebels to devise new guerilla tactics to take back profits.Arming the rebels involves picking one side and backing it. Armed rebels often win. Apartheid ended. The Sandanistas lost. The Soviets withdrew from Afghanistan, and then the Soviet Union fell.Shopify’s merchants, on the other hand, are still in the midst of a bloody battle for customers and profits. So what is Shopify doing?Shopify -- and Stripe, Big Commerce, Google, Facebook, FedEx, UPS, Flexport, Anvyl, Boxc, Kustomer, Returnly, Alibaba, and hundreds more ecommerce infrastructure companies -- is arming everyone. Using off-the-shelf software and services, anyone with an internet connection and a credit card can set up an online store and sell things to people. In many ways, that’s a great thing. Particularly in a period of high unemployment, starting an ecommerce business is one potential way to keep paying the bills. Extremely low upfront costs and easy-to-use tools mean low barriers to entry.This has major drawbacks for DTC companies that want to achieve scale and profitability, though: First, low barriers to entry mean more competition, and everyone running around with arms means chaos. It means that it’s a great time to be an arms dealer, and a tough time to be a rebel. Second, now that nearly every piece of the value chain has become modularized, the battle has concentrated in one place: marketing, via paid acquisition and brand, the only moat left for the vast majority of DTC companies.Looking at the DTC landscape as a battlefield on which thousands of well-armed rebel groups compete lets us explore a few things: * Why everyone gets rich in ecommerce except the DTC companies themselves* Porter’s Five Forces and Value Chains* Who competition is good for* What DTC brands can do to succeed in an increasingly chaotic space* The Innovation → Software → Curation Cycle that impacts most industries(Note: I know, I know, DTC is just a channel, etc… but I’m using it loosely here to refer to all CPG-esque ecommerce retail businesses)Let’s kick things off with a paradox. Why Does Everyone Get Rich in Ecommerce Except the DTC Companies?Let me let you in on a little secret that the ecommerce industry is very excited about: COVID pulled ten years of ecommerce penetration growth into three months.When the pandemic began, we bought 16% of our things online. Now, we buy nearly 34% of our things online. That’s the kind of hockey stick growth investors like to see, and the ecommerce infrastructure companies’ valuations are skyrocketing accordingly. In just the past two weeks: * Shopify crushed earnings. 97% YoY revenue growth, led by 148% growth in Merchant Services Revenue (payment processing and transaction fees that go up when overall spend to Shopify merchants goes up). Crossed $31 billion in Gross Merchandise Value.* BigCommerce, a Shopify competitor, went public and popped 292% in its first day of trading. * Square announced Q2 revenue of  $1.92 billion (up 64% YoY) on a 50%+ YoY Gross Payment Value increase. Ecommerce stocks have popped over the past six months, too: * Etsy is up 169.7%* Shopify is up 118.8% * Square is up 83.1% * Paypal is up 65.1% * Amazon is up 53.4% (to a $1.5 TRILLION market cap) * eBay is up 44.3%. * Even UPS, which delivers so many DTC products, is trading at all-time highs. Wow - hot space! The whole world is moving online. There must be a ton of hugely successful ecommerce brands, too, right? Ummm…DTC as we know it was born when Andy Dunn founded Bonobos in 2007. Then came Warby Parker in 2010, Harry’s in 2012, and Casper in 2014. As Len Schlesigner writes in HBR, “The direct-to-consumer startups’ rise was enabled by an environment of abundant venture capital, low competition, and above all, the advertising arbitrage that could be exploited on under-priced social media platforms.” These early DTC companies were genuinely innovative. They used new technology to invent a new business model. By cutting out the middleman and selling directly to end consumers on their own websites, DTC startups could lower costs, build relationships, and increase lifetime value through repeat purchases. Investors were e-nam-ored! Bonobos raised $127mm in VC, Warby Parker raised nearly $300mm, Harry’s raised $475mm, and Casper raised $355mm. But while funding came easy, strong exits have been harder to come by. Two of the big VC-backed DTC companies have gone public in the past three years. Casper’s last private valuation in March 2019 was $1.1 billion. It IPO’d at a $470 million market cap in February 2020, and is currently trading near a $350 million market cap. Blue Apron, which raised $200 million in private markets, reached a peak valuation of $2 billion in June 2015. Its market cap is currently $120 million, a 94% decline. Casper and Blue Apron were too easy to copy. According to CNBC, there were over 175 mattress-in-a-box companies as of last summer. When Amazon filed a patent for “prepared food kits,” Blue Apron’s stock price plummeted 11% in one day. Increased competition led to more expensive customer acquisition. Well-funded and thirsty for growth, Casper and Blue Apron turned to paid spend and discounts to acquire customers. I know a lot of people who ate free for months by signing up for each meal kit company’s free trial and then canceling and moving on to the next. Scott Galloway pointed out that Casper’s economics would have worked better if they sent you a free mattress stuffed with $300 in cash. Of course, in typical Prof G fashion, that math is hyperbolic and incorrect -- the $761 COGS plus $300 cash would mean a loss of $1,061 per mattress, while Casper only lost $349 per mattress at the time of its IPO -- but the point stands. Without a differentiated product, forced by their capital structures to grow, and faced with a wave of Shopify-armed competitors, Casper and Blue Apron had no choice but to unprofitably spend their war chests to acquire customers. The razor industry is the exception that proves the rule.Razors have really been the only ecommerce category that has had multiple meaningful exits. First came Unilever’s $1 billion acquisition of Dollar Shave Club. Then P&G bought women’s grooming company Billie for an undisclosed amount. Harry’s nearly had the biggest exit of the three when Edgewell bought it for $1.37 billion. I’m biased because Puja worked there, but the fact that the FTC opposed the deal on antitrust grounds is, if anything, proof of Harry’s success. There’s a reason razors are the exception that proves the rule: you can count with your fingers the number of factories in the world that make high-quality razor blades -- P&G owns one, Edgewell owns one, Harry’s owns Feintechnik, and there are like two or three more in the world. That’s it. Because of limited and hard-to-obtain supply, first-movers in razors had a huge advantage. The unique value chain leads to unique outcomes. In The New Consumer, Dan Frommer made a chart of all the billion-dollar DTC exits. Somehow, despite massive secular shifts and a lot of noise about rising ecommerce penetration, the DTC products themselves have produced only one billion dollar outcome: Dollar Shave Club (two if you count Harry’s). How can you harmonize those two seemingly contradictory ideas? It comes back to what happens when all the rebels have access to the same weapons, and of course, to Michael Porter. Five Forces, Value Chains, and DTCBack in the 1980s, an HBS professor named Michael Porter wrote two foundational strategy texts. In 1980’s Competitive Strategy: Techniques for Analyzing Industries and Competitors, he introduced his Five Forces. In the 1985 follow-up, Competitive Advantage: Creating and Sustaining Superior Performance, he introduced the concept of the value chain. Both are as relevant today as they were then. Porter’s Five Forces describes an industry’s competitive dynamics by looking at … five forces: Competitive Rivalry, Supplier Power, Buyer Power, Threat of Substitution, and Threat of New Entry. Oversimplified: the weaker each of the five forces is, the better your competitive position.Porter’s Value Chain insight is that:“Competitive advantage cannot be understood by looking at a firm as a whole. It stems from the many discrete activities a firm performs in designing, producing, marketing, delivering, and supporting its product."Breaking a company’s value chain into its discrete components allows you to think about how the whole business fits together -- what should the company build, what should it buy, where should it differentiate, where is it OK to use modularized or commoditized inputs, and how is each component linked to the others? Getting the combination right means sustained profits. Value chain analysis and the Five Forces explain the DTC landscape today and provide strategic frameworks support to the Hard Thing About Easy Things. First, let’s look at the DTC value chain, the set of discrete but linked activities companies perform to deliver products direct to consumers.Back in 2013, Harry’s integrated R&D, Manufacturing, Retail, and Marketing by designing its own products, buying its own razor factory, selling directly to consumers from its own website, and building a referral engine from day 1 to drive tens of thousands of signups. It is able to create and capture profits because it has a differentiated value chain. Think about the value chain for a DTC company today, though. Over the past decade, companies have sprung up to build software that allows anyone to do each of the unique things that Harry’s did in-house. There are so many high-quality, modularized inputs, that one person with a computer can spin up a company and start shipping product in under a week. One more time, just to be clear: you don’t need to know anything other than how to use a few pieces of software to start a DTC brand. If I were a rebel starting a sunglasses company, let’s call it Rebel Sunglasses, and didn’t want to go through Amazon (the empire), here’s what I would do. I could find and order product wholesale on Alibaba, set up a store on Shopify, drive customers to the site by buying ads on Facebook, Google, and Instagram, either myself or by hiring a growth marketing contractor on Marketerhire, take payments via Stripe, drop ship directly from China with Boxc or import with Flexport and ship with USPS, answer customer questions on Zendesk or Kustomer, and return items via Returnly. Not all companies do it this way, of course. Many do their own R&D, set up their own supply chain, lease their own warehouses, and acquire customers in novel ways. Some roll their own tech stack to make sure that their tech meets their companies’ unique needs. But the fact that competitors can easily launch a DTC product means that any one brand’s strategic position, and ability to generate profits over the long-term, is weakened. To understand why, let’s take the second tool out of Porter’s toolkit: the Five Forces. By giving all of the rebels and incumbents access to the same weapons, Shopify and the rest of the DTC-enabling software and services make the environment more competitive, and weaken the ability of any individual company to become profitable, particularly at meaningful scale and over a long enough time frame to exit.Rebel Battle RoyaleLet’s go back to my hypothetical company, Rebel Sunglasses. Big things have been happening while you read the past few paragraphs: I launched successfully, used that success to raise money, and used that money to build a big team and acquire a lot of customers. I sold a lot of sunglasses, and proved that customers do in fact like less expensive, well-branded sunglasses delivered directly to their door. But as Biggie and Puff predicted: mo’ money, mo’ problems.Attracted by my success, More Rebellious Sunglasses launched using the same tools and supply chain that I did, and then MOST REBEL SHADES followed them with the same playbook. Each company stole my look, copied my website pixel-for-pixel, and even priced their products exactly the same as mine. To add insult to injury, Rebel Visors launched a line of visors that, although not an exact ripoff, do the same thing for customers: keep the sun out of their eyes. All of a sudden, my current and potential customers have four choices: three sunglass companies and a visor company. We’ve all built the same value chain, and we can all move just as quickly. I add new colors, they add new colors. I drop my prices, they drop their prices. I plug in Affirm so customers can buy my sunglasses on credit at a 0% interest rate, theyfollow suit. This is Entropy Theory to a “T”. Shopify and the ecommerce infrastructure tools create chaos, and that chaos will reign until a company comes in to wrangle it. This is what Shopify’s Shop app may try to do, and certainly what Amazon does on a larger scale. For companies that don’t want to rely on Amazon, there’s only one place left to compete: paid acquisition. Rebel Sunglasses, More Rebellious Sunglasses, and MOST REBEL SHADES turn to Google to find new buyers, competing for keywords like “Stylish Sunglasses.” We even compete with Rebel Visors for “Keep Sun Out of My Eyes.” AdWords get more expensive for all of us. Then, we all go to Facebook to bid on 18-35 year old American males who live near the beach and like White Claws. Same thing happens - more competition means more expensive customer acquisition, but it’s the only thing we can do to grow. What’s worse, because my competitors’ marketing teams are run by mom and pop founders, inexperience and optimism drive up the prices I need to pay. It’s like playing Black Jack at a table full of drunk amateurs.This is why 40% of venture dollars go to Google and Facebook - when every piece of the value chain is modularized and easily copied, companies are forced to compete by outspending each other to acquire customers. It’s also why it’s so much better to be the companies arming the rebels than to be the rebels themselves. Who wins and loses here? * Shopifywins - there are now four paying customers instead of one, and we’re all spending money to grow the market. Shopify takes a subscription fee and a cut of revenue.* Google and Facebook win - we’re all spending a ton of money on ads. * UPS, FedEx, and USPS win - we’re fighting to bring customers online, and more customers shopping online instead of in store means more shipping. * All of the tools and services in the DTC value chain win - more competition means that each of the rebels needs more powerful weapons. * Customers win slightly - they have more choice on the surface, but we’re all offering the same thing, and because we’re paying so much to acquire them, we don’t have room for major discounts now that venture capital isn’t bankrolling us as heavily.* Sunglass and visor companies lose - by fighting against each other, we erode profit margins and enrich suppliers.  There’s a reason powerful countries arm rebels, and a reason platforms do the same: it’s a whole lot easier than getting in the trenches and fighting each fight yourself. Shopify and the other ecommerce tools have an added advantage. Unlike governments, who need to use their own taxpayers’ dollars to support foreign rebels, Shopify gets paid by every side. Shopify has good intentions, but it’s more akin to a war profiteer than a rebel-armer.The Sunglass Wars are a fictional example of a real battle that plays out every day. Unlike tech companies, which spend a lot of money upfront and then make a lot of money by selling a differentiated product with low marginal costs, DTC brands’ upfront spend proves out what works and then sends out pheromones to new entrants. This isn’t just a hypothetical. Away, the luggage company, has raised $181 million, most recently at a $1.4 billion valuation. It was noteworthy not just because of its fantastic growth, but because it got profitable very early. That success, of course, attracted copycats, like Monos. According to LinkedIn, Away has 481 employees. Monos has 24. Away needed to do the hard work to understand what customers want, develop product, educate consumers, figure out merchandising, and even work with the FAA to get suitcase batteries approved. Monos just needed to look at everything Away did, copy it, and buy some ads. Notably, Away is built on Spree Commerce and has a big team building and maintaining its website; Monos is built on Shopify and I can’t find any engineers on their LinkedIn. The websites look and feel the same. And it’s not just Monos. July, Arlo Skye, Roam Luggage, and Paravel all do the same thing, as do countless cheaper knockoffs. After tens of millions of dollars and the hard work of 481 employees, the only unique weapons that Away has against Monos are brand and bank account. It’s forced to compete with a copycat on the level playing field of keyword bidding and trade margin for growth. So What’s a DTC Brand To Do? The Arming of Everyone means that massive scale is likely out of reach for any one DTC company. There won’t be another Nike or Coca-Cola built direct-to-consumer. But there will be thousands or millions of small, profitable DTC businesses built online in the coming years that will make their owners very comfortable, and in some cases, rich. When all of the rebels are armed, and empires like Amazon and Walmart have scale that new entrants can’t compete with, there are only a few places where startups can win. The first question to ask is whether you want to go venture-backed or bootstrapped. Neither choice is right or wrong, but everything you do needs to align with the choice that you make and your desired outcome. BootstrappedNine times out of ten, the answer should be bootstrapped - don’t raise VC, grow slowly, get profitable before all of your credit cards are maxed out. If you’re targeting small niches that you know how to reach without giving all of your margin to Google or Facebook, you can build a really nice business. If you’re starting from scratch without an audience, focus on high-margin, high Average Order Value (AOV) products that give you a lot of room for costs and let you achieve profitability without reaching a scaled customer base. If you have a built-in audience that trusts you, you can sell that audience anything that fits your brand and what fans expect from you. Kylie Cosmetics is the canonical example. Kylie Jenner leveraged her massive following to enter the crowded cosmetics space and become a billionaire (kinda, almost). JoJo Siwa sellseverything from bows to dolls to juice boxes to her tween fans. Linear Commerce is a response to overcrowded markets and expensive paid acquisition, and it’s not just for celebrities. Most bootstrapped DTC entrepreneurs should build an audience before they build their first product.Venture-BackedIf you want to raise venture capital, you need a really good reason besides “to spend money acquiring as many customers as possible via Google and Facebook.” You need to spend that money developing differentiated tech or IP, or a brand that captures a very particular audience that you can sell to an incumbent. Differentiated Tech or IPEight Sleep is a sleep fitness company that has raised $70 million, which should set off alarm bells after reading the Casper section. But Eight Sleep sells more than a mattress, it sells a tech-enabled a sleep system, including a mattress, automated heating & cooling, sleep tracking, and HRV monitoring. Eight Sleep spent its venture money building tech and has five patents that it has used to build a differentiated product to compete on features, not price.Casper and Eight Sleep’s branded search results tell the story. When someone searches for “Casper mattress,” the first thing they see is a set of ads for competitors’ products. Casper even has to pay for its own link to show up when someone searches for it. That’s because when someone Googles Casper, what they really mean is “a mattress-in-a-box,” and competitors are willing to spend money to entice the customer to buy their mattress-in-a-box. When you search for “Eight Sleep mattress,” though, the page is clean. The organic link appears first on the page, and there’s not an ad to be seen. That’s because Eight Sleep’s product is differentiated enough that if I’m searching for it, it’s because I want the Pod sleep system, and a Nectar or Purple mattress won’t do the trick. Brand That Captures a Particular AudienceThe other venture-backable approach is building up a specific audience in hopes of selling it to an incumbent that struggles to reach that audience. This is the approach that minted Dollar Shave Club its $1 billion exit to Unilever, and on a smaller scale, the reason that P&G bought Bevel, which was aiming to be the “P&G for people of color” for $40 million. At this stage of the DTC game, Bevel’s $40 million exit is more typical than Dollar Shave Club’s now that each of the big CPG companies has made its splashy early play to acquire the DTC skillset and are buying brands mainly for their audiences.In this approach, companies need to build a product, experience, community, messaging, and ethos that resonates strongly enough with certain customers that they aren’t tempted to buy the knockoff version. If they need to decide between profitability and acquiring a target customer, these companies should choose acquisition, as long as they are able to retain and grow with those customers. Expect to see multiple $10s-to-low-hundred-millions acquisitions that help aging brands acquire Gen Z customers in the next few years. Ultimately, when everyone is armed with the same tools, differentiation, brand, and audience/community matter for DTC brands more than ever. We’re All Armed Rebels NowThis cycle holds across industries and verticals: * Innovator does something innovative. * A brave few try to copy the innovator.* Someone builds software to let everyone do that innovative thing. * The innovative thing is no longer innovative. * Everyone does what the innovator did, making it hard to stand out and shifting the battleground to audience-building and brand. * Curation becomes important. * Next innovator comes along and does something innovative, and the cycle starts again.It’s happening in newsletters, where Substack gives writers an easy way to try to become the next Ben Thompson. It’s happening in video games, where Epic Games is building the tools and literally giving them away for free to expand the Total Addressable Market. It’s happening in AI, where OpenAI is giving everyone GPT-3 to build on top of. Substack, Epic, OpenAI, and Shopify don’t need to pick the winners. They benefit from their customers spending their own time and money to bring audience to their platform. They sit back and happily take a cut. It also happened in video, when YouTube made it easy for anyone to become a creator. Then TikTok came along, and became the curator, and is capturing the massive value that comes with wrangling all of that entropy. The best way to make money in a war is to sell weapons to everyone. It creates its own demand. If the enemy has the best weapons, you’d better have them too. Once everyone is armed, the next opportunity to make money is to bring order to the chaos. I’m long Shopify -- arming everyone while convincing each of them that they’re the rebel is great business -- and I’m on the lookout for the curation innovation that lets the best DTC companies go around Facebook and Google and rise to the top. Thanks to Puja and Dan for editing and helping me sound like less of an idiot on ecommerce.If you enjoyed this piece, help spread the word by sharing it on Twitter, LinkedIn, or wherever you talk ecommerce with your rebel friends.Quick note: this week, we’re not going to have a Thursday edition. See you next Monday!Thanks for listening, Packy This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.notboring.co

Welcome to the 1,315 newly Not Boring people who have joined us since last Thursday! If you’re reading this but haven’t subscribed, join 9,130 smart, curious folks by subscribing here!JoJo's JuiceA guest post by Ali MontagAudience is the New STEMIn the late-2000s, career advice for young people sounded ambitious. Study math. Learn to code. Take engineering classes. Get a job in Silicon Valley. Apply for Y Combinator. Make it big. Make a difference. The hacker-coder image of a 20-something, idealistic Mark Zuckerburg—that was success. Tech was The Dream. But the dream needed to be financed. The answer? Ads. "The best minds of my generation are thinking about how to make people click ads." Jeff Hammerbacher, a 28-year-old Silicon Valley engineer told Business Week in 2011. The attention economy was born. Then, our career advice for young people started to shift. Businesses were built on top of Instagram. Elections were won on Facebook. Brands were launched on YouTube. Suddenly, the most valuable skill became commanding an audience. Who follows you? How loyal are they? What can you promote to them? The advice became: Build a community. Grow a following. Share a message.The best minds of my generation are thinking about how to make people click “Subscribe.”  One result is the rise of linear commerce—audience-centered brands built to sell products. Linear commerce drives many of the fastest growing consumer brands today. Here’s the definition of linear commerce, from 2PM’s Web Smith: “The lines of demarcation between media and commerce are fading ... Brands will develop publishing as a core competency, and publishers will develop retail operations as a core competency.” Last time, we took a look at Magnolia, a linear commerce company selling home goods out of Waco, Texas. Magnolia’s Chip and Joanna Gaines rose to fame through HGTV’s Fixer Upper, and built a sprawling business on top of their Southern, middle-aged audience. This week, we’ll look at the business of JoJo Siwa. Siwa uses her audience on YouTube, TikTok, and Instagram—which she started building as a 12-year-old on the Lifetime show Dance Moms—to sell millions of dollars worth of merchandise to children and their parents. Jojo’s WorldIf you’re not familiar with the JoJo Siwa empire, let’s break it down. Media:* 11.6 million followers on YouTube* 26.9 million followers on TikTok* 9.7 million followers on Instagram* 903 million views on her first music video, released in 2016 at age 12* A talent management deal with Nickelodeon that includes an animated show about her dog, The JoJo & BowBow Show Show* A 52 city live concert tour in 2021. Commerce:* Hairbows. Siwa’s line with Claire’s has over 7,000 varieties* A line of children’s clothing with Target called JoJo’s Closet* A line of toys with Build-A-Bear* Birthday party decor at Michaels* Dolls. Lots and lots of dolls* A line of fruit juices called JoJo’s Juice* $30 per month toy subscription boxes* $19.95 monthly hairbow subscription boxes* 16 published children’s books* Merch. The merch is never-ending. JoJo Siwa’s YouTube channel is awash in glitter, rainbows, and high top sneakers. It’s fun. It’s loud. It’s age-appropriate for her audience, which ranges from age three to nine. Siwa’s YouTube popularity sold 40 million of her signature hair bows in 2018. In a 2020 interview, Siwa said her brand has sold 80 million hair bows over the last four years. Each bow costs ~$10. That’s big business. So how did Siwa turn a two-season appearance on Dance Moms into a merch machine?Step No. 1: Build an audience. Siwa began gaining traction in 2015 with a boost from cable TV. “JoJo’s YouTube and Instagram followings were thriving thanks to Dance Moms. She also had a signature look: the bows and the Lisa Frank-esque color-vomit fashion sense,” according to Rolling Stone.Step No. 2: Get licensing deals. Siwa’s first licensing deal in 2016 was a line of hair bows for Claire’s. The bows were sold as a test in a few stores. “The test took off immediately,” Julie Splendoria, Claire’s senior global license buyer, told Rolling Stone. The sales caught the attention of Nickelodeon. In 2017, Siwa signed a multi-year talent deal with Nickelodeon, allowing the cable franchise to manage all aspects of the licensing of her brand.  Nickelodeon brought global distribution and direct connections to brand partners like Target, Walmart, Michaels, Payless, and Build-a-Bear. 500 people at Nickelodeon contribute to managing the JoJo Siwa brand, Siwa said in a March 2020 interview. Nickelodeon also promotes Siwa to its own audience. Here’s where the linear commerce flywheel really starts to turn. “[Siwa’s] live appearances drive sales of her branded products,” according to Viacom, the parent company of Nickelodeon. “Last summer, bow sales increased by 40% in Chicago after she performed at SlimeFest and 60% in the Anaheim area after VidCon.” Both events are owned by Viacom.Last but not least, there are the events Siwa creates for herself. Siwa sold 506,184 tickets for her 2019 DREAM tour, a live concert series performed across the country, netting $26.9 million according to Billboard.And, of course, Siwa never neglects her YouTube channel (which prominently features her merch.) More concerts, TikToks, and YouTube videos mean more followers—more followers means more JoJo Siwa hair bow sales. It’s a classic linear commerce business. But the business is unique for one critical reason: Siwa’s audience is children. And the business of selling to children is tricky. For one thing, children have increased privacy regulations. Congress passed the Children’s Online Privacy Protection Act, known as COPPA, in 1998 to protect the identities of children under age 13. It prevents ad targeting and is enforced by the FTC. The rules apply to any websites or platforms that “collect, use, or disclose personal information from children.” Kids under 13 aren’t allowed on Instagram. YouTube was fined $170 million in 2019 for COPPA violations. TikTok was fined $5.7 million for COPPA violations.  Brands can’t target digital ads at kids. Kids can’t sign up for newsletter campaigns. Kids don’t listen to podcasts. Kids don’t watch much TV. Kids don’t read news or magazines. What kids do is watch a lot of YouTube. “YouTube is the most popular babysitter in the world,” Eyal Baumel, the CEO of a YouTube celebrity management company, told Forbes. The licensing agreement with Nickelodeon helped Siwa dominate this market, growing her audience of kids online while placing toys on the shelves of the stores parents shop. Ryan Kaji, the 8-year-old star of Ryan’s World, and YouTube’s top earner two years running, has a similar licensing deal with Nickelodeon and pocket.watch (a portfolio company of Viacom) to develop toys for Walmart, Target, and more.Creating content for kids is also tricky. How do you make content that continues to be relevant to five-year-olds when you yourself are aging? Siwa, now 17, is often asked when she’ll be too old to keep making videos for kids. Even Kaji, still in his single-digits, is asked the same question. And there’s a deeper question about the toll of kids running linear commerce businesses. The business is entirely dependent on the audience. The audience is entirely dependent on the creator. What if JoJo turns 18 and decides she’d no longer like to wear neon pink hair bows? What if she decides she’s tired of the barrage of negative comments below her videos? Lessons for GrownupsSilicon Valley is obsessed with growth, virality, scale, and influence. Adults on Twitter marvel at the rise of TikTok stars like 16-year-old Charli D'amelio, 19-year-old Addison Rae, and other members of the LA Hype House. “What were their strategies? What can we learn from their growth?” adults muse. Brands see dollar signs. Retailers see partnerships. Spotify sees new podcast ideas. Parents have no grounds to argue against it; their kids’ earning potential is higher on TikTok than it could ever be at a nine-to-five job. But these kids are just kids. And other kids are watching. American children were three times more likely to aspire to be YouTube stars than astronauts, according to a 2019 survey."Every time I go to schools, the most said thing from 90% of kids is, 'I want to be a YouTuber,'" the YouTuber DeStorm Power told Business Insider."They want to be social-media stars."Today, with kids stuck at home, uncertain when they’ll be able to go back to school and isolated from their friends, relationships with creators like JoJo Siwa matter. Math textbooks, science experiments, and history lessons feel far away. YouTube is right there. The pressure to “be a star” is immense.What will be the repercussions of adults confirming that audience-building is the most valuable skill kids can develop? What will be the experience of the millions of kids who never go viral? Billion dollar brands will be built. But what will be the cost to everyone else? Adults operating companies or managing brands can learn a valuable lesson from Siwa. The flywheel she’s created to turn YouTube videos, TikTok dances, and live concerts into merchandise sales is enviable by any consumer products company. It’s the same strategy media businesses like Food52 use to sell skillets, and magazines like Hodinkee use to sell watches. It’s why Buzzfeed sells muffin tins, and why the Wall Street Journal sells a wine subscription. Grow thine audience. And then sell things to them. But when it comes to children, it’s worth asking: What ambitions are we modeling? For Siwa at least, the merch business is exactly what she wants to build.“I love what I do, but I think a lot of people are in it at such a young age, and they didn’t really have the choice, and they don’t genuinely love it,” Siwa says. “I genuinely love it.”Major thanks to Ali for sharing her knowledge with us! If you like Ali’s style and want to read her weekly book reviews, you should really subscribe to Letters From Home and Away.Thanks for listening, Packy This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.notboring.co

Welcome to the 1,309 newly Not Boring people who have joined us since last Monday! If you’re reading this but haven’t subscribed, join 8,888 smart, curious folks by subscribing here!We have a referral program! Share your unique link to win stickers, t-shirts, and fame!Hi friends 👋,Happy Monday! We’re bringing back an old favorite format today: Fantasy M&A! Let’s get to it. Acquisition in the Key of G SharpBack in 2013, when he was just starting Slack, WIRED asked Stewart Butterfield, “What’s your ambition?” Stewart: (Straight Faced): “Be the next Microsoft.”This essay is about how he can achieve that ambition. Welcome to M&A CountryOn Friday afternoon, the internet lit up with rumors that Microsoft might buy the most exciting company on the market: TikTok. It doesn’t seem like a natural fit. Microsoft is the 45-year-old purveyor of such office productivity mainstays as Word, PowerPoint, and Excel while TikTok is a short-form video app for Gen Z and Young Millennials. The deal spent all weekend on-again-off-again after, on Friday night, President Trump suggested that the United States would ban TikTok altogether instead of allowing a sale to go through. His reasoning? “We are not an M&A country.” With all due respect to the Art of the Deal author, mergers & acquisitions drive growth at many the nation’s largest companies and provide founders and employees the most capitalistic realization of the American Dream. The United States is very much an M&A country. While Microsoft is distracted with the biggest acquisition in company history, Google should strike at its heart by making its own largest acquisition ever. I feel like I’m walking my daughter down the aisle right now, giving my baby away, but it’s for the best:Google should buy Slack.(Full Disclosure: I own shares and call options on Slack. It’s my biggest position.)A Google/Slack combination — I call it G Sharp — bolsters both companies’ offerings in the productivity and collaboration battle against Microsoft today, and more importantly, sets the combined company up to own the future. Ultimately, the acquisition comes down to three main things: * Slack needs distribution and patient capital. Google can help. * Google needs growth outside of Search and a boost in the Cloud. Slack can help. * Slack fills the biggest hole in G Suite’s offering. Together, Google and Slack would own the work productivity and collaboration market for young companies, setting them up for Office-level dominance as those companies and their employees grow. Plus, because Microsoft Office is so dominant, this deal likely wouldn’t trigger the regulatory scrutiny that comes with doing M&A as Google, Apple, Facebook, or Microsoft in 2020.In this M&A country of ours, Microsoft and Google, with combined market caps of $2.5 trillion, are the biggest buyers. Each company aggressively spends income from its respective cash cow to bolster its offerings, diversify its revenue streams, and hunt for the next big growth engine, but each takes very different approaches to M&A.Microsoft uses M&A to build a portfolio of standalone businesses that are profitable and growing today that might help bring in future Office 365 customers.Among Microsoft’s biggest recent acquisitions are professional network LinkedIn for $26.2 billion, engineering network GitHub for $7.5 billion, and Mojang, the maker of the popular worldbuilding game Minecraft, for $2.5 billion.As unnatural as it seems, a $40-50 billion TikTok acquisition fits within that strategy. Unlike a Facebook acquisition, TikTok won’t become TikTok by MICROSOFT. It will remain independent, drive meaningful growth for a company that brought in $143 billion in 2019, and potentially bring the cool kids over to Office at some point. The #excel hashtag is surprisingly popular on TikTok. Google, on the other hand, uses M&A for two main things:* To bet on moonshots that have a small chance of becoming massively impactful and carrying the company after Search revenues fade away. * To pour fuel on the fire of its fastest-growing businesses.Google’s moonshots, which it calls “Other Bets,” are so out there that the company restructured itself in 2015 to separate them from the core business, creating Alphabet as a holding company that owns Google and Other Bets. They’re fascinating for what they might become -- bets include life extension, self-driving cars, internet balloons, cities, and drone delivery -- but they’re even more fascinating for what they tell us about the way that Google thinks. They’re happy to lose $1 billion per quarter on Other Bets today for the chance to build tomorrow’s next big thing. We’re not talking about Other Bets today, though. The Google/Slack deal is the other kind of M&A - it would pour fuel on the fire of Google’s fastest-growing business: Google Cloud.The marriage of Google and Slack would create the most powerful kind of combination in tech: the best product and the best distribution into the most important customers. The Battlefield: Product v. DistributionThere’s this debate in tech about which wins: product or distribution. Is it more important to have a) a great product or b) a great way to get your product in front of potential customers? If you use Google Calendar, you’ve likely noticed this battle playing out on your screen.Zoom, the video conferencing software, has exploded during the pandemic. Google, which has its own video conferencing, Meet, got jealous and fought back. Google owns some of the most valuable real estate in tech -- people’s Calendars -- and it’s tired of Zoom using that real estate to direct people to its competitive product. In late April, Google also dropped the pricing hammer, making Google Meet free for everyone. Where Zoom limits people to 40 minute meetings on the free plan, Google gives them an hour, and it’s not even enforcing that limit until October. Zoom has the better product, but it’s just so easy to schedule a Meet, and plus, it’s free. Anecdotally, distribution seems to be winning. I’ve gone from 90% Zooms / 10% Meets early in the Quarantine to 10% Zooms / 90% Meets over the past couple of months. Zoom vs. Google is important, because it shows us that Google is willing to use its distribution might to win the office, and because it mirrors another battle happening for the enterprise -- Slack vs. Microsoft Teams. Slack vs. Teams Microsoft Teams is flexing its reach into Office users’ computers in an attempt to extinguish Slack’s growth. The market is reacting as if Microsoft’s plan is working, but look a little deeper and Teams looks more defensive than offensive. Slack, launched in 2013, makes the best workplace communication product on the market -- fast, well-designed, playful, and open to thousands of integrations. While it has recently built out an enterprise sales team, much of its growth has come from bottoms-up adoption. A technical person in a company uses it in another context, brings it to the company to test on a small team for free, and then expand to the rest of the company and a paid account. That go-to-market strategy is predicated on building a product that people love enough to advocate for. (For a deeper dive on Slack’s business model, see While Zoom Zooms, Slack Digs Moats.)Microsoft, on the other hand, launched its competitor, Teams, in 2016, as the result of a reactive internal hackday, and it shows. The product seems like it was built with a simple mandate: give the over 1 billion people who use Microsoft Office or Windows something good enough, for free, that they never try Slack. It’s distribution over product.More concretely, Microsoft installs and auto-starts Teams on existing Office users’ computers. Two weeks ago, Slack brought an antitrust complaint against Microsoft in the EU, claiming that “Microsoft has illegally tied its Teams product into its market-dominant Office productivity suite, force installing it for millions, blocking its removal, and hiding the true cost to enterprise customers.” My wife, Puja, still uses a Windows laptop. Every time she turns on her computer, Teams starts up, even though she never installed it and doesn’t use it. It’s the PC equivalent of Google’s growing Meet button. As a result of its aggressive intrusion, Teams has grown from zero to 75 million Daily Active Users (DAUs) in under four years. The last time Slack reported DAUs in September 2019, it had only 12 million. But as Slack wrote in a blog post, Not all daily active users are created equal. Microsoft is myopically winning the battle and losing the war. It’s putting up big numbers right now by giving a free product to older buyers who don’t know any better. That’s a major difference between Zoom vs. Google Meet and Slack vs. Microsoft Teams. With Meet, Google is actively competing against Zoom for the same customer, whereas Microsoft is just trying to keep its existing customers from switching to Slack. It won’t be able to steal existing Slack customers. As I wrote in the piece on Zoom vs. Slack:Once a team has onboarded to Slack, it’s really hard to leave. As a company’s Slack usage approaches 100%, it becomes possible to replace e-mail, those awkward texts from your boss, and even meetings with Slack.Since I wrote that piece, Slack introduced Slack Connect, which allows different organizations to collaborate and work together. The move potentially deepens its moat by building cross-organization network effects, eating away at email’s dominance, and becoming the central artery for professional collaboration and communication. As Ben Thompson wrote in The Slack Social Network: Not only can you have multiple companies in one channel, you can also manage the flow of data between different organizations; to put it another way, while Microsoft is busy building an operating system in the cloud, Slack has decided to build the enterprise social network. Or, to put it in visual terms, Microsoft is a vertical company, and Slack has gone fully horizontal:Microsoft’s positioning against Slack is defensive. It knows that there are better products out there, and that the closed Office ecosystem won’t win head-to-head product battles, so it’s trying to make sure its customers never even look elsewhere. Slack’s press release on the antitrust complaint gives the company’s (obviously biased) perspective on why Microsoft feels threatened enough by Slack to try to stop it with Teams: * “Slack threatens Microsoft’s hold on business email, the cornerstone of Office, which means Slack threatens Microsoft’s lock on enterprise software.”* “Slack ... is a gateway to innovative, best-in-class technology that competes with the rest of Microsoft’s stack and gives customers the freedom to build solutions that meet their needs. We want to be the 2% of your software budget that makes the other 98% more valuable; they want 100% of your budget every time.”The way we collaborate and communicate at work is changing, becoming more entropic. Office is yesterday, Slack is tomorrow. Slack is built for the early adopters, tech employees, and young people who will become old, big budget-controlling people one day. The Compounding Power of Young UsersOn a long enough time horizon, Slack has already beaten Teams. It’s true for the same reason that I’m so bullish on Snap, and it’s a really important concept to understand broadly. If you can acquire the youngest users, retain them as they get older, and continue to attract the new cohorts of young users, you will win over time. It’s the Compounding Power of Young Users. Microsoft knows this. It’s how they got to where they are in the first place. When Excel came out in 1985, it wasn’t the 50-year-old Managing Directors using the product, it was the 22-year-old Analysts. As those Analysts became Excel whizzes, got promoted, switched companies, became Managing Directors themselves, and forced their own Analysts to use Excel, the product gained ubiquity. The same is true for Word, PowerPoint, Outlook, and even Windows. Start with the youngest users and grow with them as they age. That’s why Microsoft acquired Minecraft and Github, and why they’re pursuing TikTok. The market doesn’t fully grasp this concept, or isn’t patient enough to put its money behind it. It views the opportunity set as stagnant, when really, it’s dynamic. Slack’s current customers are startups and small businesses full of young and tech savvy people. These people aren’t going to suddenly switch to Teams when they turn 50. Slack will become the new paradigm. Slack just needs to retain these people, keep them engaged, and continue to acquire every new startup and small business that pops up. The market rightly yells at Slack to acquire enterprise customers, but it also misses the fact that it’s already acquired tomorrow’s enterprise customers. This is why I’m bullish on Slack whether it gets acquired or not. As I wrote about, they’re built for steady growth and high retention. The market wants what the market wants though, and Microsoft’s moves are putting a damper on Slack’s stock performance. While Zoom has popped 273% YTD, Slack has only grown 31%. The most oft-cited reason for Slack’s sluggishness is that investors are worried about Teams. Slack needs two things in its fight against Microsoft: * More patient capital that understands The Compounding Power of Young Users.* Distribution power to win as many young users today as possible. Google has both of those things. G Sharp vs. TeamsGoogle and Slack (“G Sharp”) fit perfectly together. * They have the same target customer in the enterprise -- growing tech companies and small businesses -- Google just has more of them. * G Suite has 6 million paying customers, Slack has 122k. * Google has Chat, but it does not have a real workplace communications solution beyond Gmail. * Slack fills in G Suite’s major hole. Google owns the backbone of startup email, Gmail, and Slack owns the backbone of startup internal communications today and external communications tomorrow. * Google gives Slack immediate distribution and confidence that they’re not afraid to use it. Bundling software and forcing it down users’ throats is what Microsoft does best, much to the chagrin of antitrust regulators. Together, Google and Slack can beat Microsoft at a modern, user-friendly version of its own game. I’m no designer, but I mocked up one of many ideas for distributing Slack through Google: In addition to reminding people to move conversations to Slack at every opportunity, Google can bundle Slack with G Suite. Overnight, Slack could nearly 50x the number of companies using the product, cutting off Teams and securing users that the company will grow with. From Slack’s perspective, a Google acquisition would solve its major growth impediment and help it do what it does best - acquire and grow with young companies. But at a price tag of between $30-50 billion, would Google do it?Google is the UAEOne way to think about Google is like a tech version of the United Arab Emirates. The UAE is ridiculously wealthy right now because of oil, but it knows the oil money won’t last forever, so it’s investing heavily in new growth opportunities like tech and tourism. Search revenue is Google’s oil - it’s making them rich right now, but one day, that well will dry up. The company is constantly on the lookout for the thing that will keep the growth alive after the Search revenue slows to a trickle. There are signs that we might be approaching Peak Search already.Google never made less money in a quarter than it did in the same quarter the previous year… until Q2 2020. Google generated $38.3 billion in Q2 2020 revenue, down from $38.9 billion in Q2 2019. The biggest culprit? Search revenue, which dropped by nearly 10%. Google Search is one of the greatest cash cows in history, and outside of the pandemic, it’s still growing. Over the past 10 years, Google ad revenue has grown at a 16.9% Compound Annual Growth Rate (CAGR). Growth did slow from 22% in 2018 to 16% in 2019, but for context, it grew ad revenue by more than Slack’s entire market cap in 2019. It will be many years before the search ad well runs dry for Google. In the meantime, the company is investing its Search revenues in businesses that show the potential to grow faster than 17% per year and carry the company into the future. Using acquisitions to expand its capabilities within its best business segments is in Google’s DNA.The history of Google is the history of an ingenious page ranking algorithm paired with a brilliant business model, some strong internal product development, and a whole lot of smart acquisitions.Since 2001, the company has made 236 acquisitions, making it the second most acquisitive of the five largest tech companies, only six behind Microsoft, which had a 14 year head start. Alphabet CEO Sundar Pichai and Microsoft CEO Satya Nadella are such aggressive buyers, you could call them the… Indian Matchmakers. (I’m writing this with a Rakhi on my wrist, happy Raksha Bandhan!)Google acquisitions have become some of the company’s most successful products, and among the most widely-used in the world.* Android (2005): Google bought Android for $50 million fifteen years ago. Today, Android runs 74% of the world’s smartphones.* YouTube (2006): Google bought YouTube for $1.65 billion, a number that people thought was crazy at the time. YouTube brought in $3.8 billion in revenue in Q2 alone.* DoubleClick (2008). Google acquired DoubleClick for $3.1 billion to build out its display advertising network. Network Member Properties, which DoubleClick helps power, did $4.7 billion in Q2 revenue.Software acquisitions are what Google does best, and these days, it’s turning its $121 billion acquisition cannon on software acquisitions in its fastest-growing segment: Google Cloud. Growth in the CloudGoogle Cloud is the fastest-growing segment of Google’s business. While Google’s Search revenue fell, its Cloud business grew by 43% YoY, from $2.1 billion to $3 billion in the second quarter. Slack would immediately add nearly $1 billion in annual top line revenue to Cloud by rolling into the G Suite business segment.Google Cloud is made up of two parts: * Google Cloud Platform (“GCP”) is Google’s cloud computing services product, like Amazon’s AWS or Microsoft’s Azure. GCP is for developers. * G Suite is the much catchier name for what the company used to call “Google Apps for Your Domain.” It’s a suite of collaboration and productivity apps, including Gmail, Meet, Chat, Calendar, Drive, Docs, Sheets, Slides, Forms, and Sites. G Suite is for businesses.Google used acquisitions to build G Suite, a veritable Frankenstein of acquired technology: * XL2Web (2006) and DocVerse (2010) --> Sheets* XL2Web, DocVerse, and QuickOffice (2012) --> Docs* Tonic Systems (2007), DocVerse, and QuickOffice --> SlidesUnder the leadership of former Oracle exec Thomas Kurian, Google Cloud is looking to get spendy to catch up to AWS and Azure. At an event in February 2019, Kurian said, “You will see us accelerate growth even faster than we have to date. You will see us competing much more aggressively as we go forward.” Just four months later, Kurian made his first big move, acquiring analytics startup Looker for $2.6 billion to become part of the GCP offering. Looker is the crown jewel in a recent Google Cloud acquisition spree. Of Alphabet’s last thirteen acquisitions, six are for Google Cloud. Google’s new focus is unsurprising. Like Greek gods, the tech giants are battling in the clouds, and for good reason. The market is huge -- Allied Market Research estimates that the cloud services market will reach $927 billion by 2027, nearly quadrupling from its current size of $265 billion -- and it requires such huge upfront investments to compete that only a handful can pay the entry fee. Cloud is also the ultimate grow-with-your-clients space. As a result, the big three are doing everything they can to attract young clients -- free coworking, partnerships with incubators, prizes, and hundreds of thousands in free credits. These companies aren’t being altruistic. Once a company builds on one cloud or another, they’re likely sticking with that cloud for the rest of their lives. Unlike Microsoft, which breaks out Intelligent Cloud and Productivity and Business Processes (where Office sits) into separate business units, Google houses G Suite and Google Cloud Platform together. Google realizes that both products are selling the same idea to the same people at the same companies. The better G Suite is, the more compelling the offer is to the CTO, and the more likely it is that Google wins the business. Currently, G Suite offers a lot. The biggest hole in the entire offering is chat. That’s where Slack comes in. G Sharp: The Modern Office SuiteTogether, Google and Slack could finally build the Microsoft Office killer. It won’t be a quick death -- Microsoft is too ingrained in too many companies that are too slow-changing -- but within ten years, by growing with today’s most innovative companies, G Sharp will be the default workplace collaboration and productivity suite.Today, many startups run their companies mainly on G Suite (although, notably, most still build their product on AWS): * Buy the domain from Google Domains * Set up the first firstname@company.com email address on Gmail * Schedule the first meetings on GCal * Start collaborating on their business plan in Docs. * Anxiously watch real-time users in Google Analytics.* Build out the first dashboards in Looker (technically GCP, not G Suite). With so much in Google already, users make do with the products in G Suite that aren’t quite as good as competitors’. * Meet is good enough to preclude Zoom when it comes bundled, for free, with G Suite. * Sheets is good enough for everyone except for a few people on the finance and BI teams, for whom the company buys a couple of Office 365 licenses. (I genuinely love Excel and still use Sheets for most things, like the charts in this piece.)* Slides is good enough to make most presentations, and Keynote comes free on MacBooks anyway for the occasional external deck. The one thing that’s missing is a channel-based messaging tool to serve as a hub for the company’s communications. Today, the first non-G Suite product that most startups sign up for is Slack. If G Suite and Slack came bundled, there is almost zero need for a company to look beyond Google to get up and running. At that point, why not buy the upgraded bundle that gives you all of that for the price of Google Cloud Platform? G Sharp would become what Microsoft Office was in the 80’s - the one-stop productivity and collaboration bundle. G Sharp would easily facilitate cross-company collaboration and productivity better than Office can. The combination is horizontal and vertical. Slack Connect would serve as the cross-organization hub, and facilitate the usage of G Suite tools - shared Docs for partnership agreements, shared Looker dashboards to track progress, Rimeto directories for the teams to get to know each other, Meet for video conferences. Instead of each company having to buy Office 365 licenses to collaborate, they would either both already be on G Sharp or buy an all-inclusive G Sharp Connect package. Additionally, Slack is an open platform that already works with 2,200+ apps. If there’s anything that a company needs to collaborate -- either internally or externally -- it’s all in one place. Importantly, a Google/Slack combination would create a better user experience. As just one example, Google recently added an “Email” option within Google Docs. As email becomes less relevant, particularly for collaborative docs, wouldn’t it be nice to be able to share to Slack directly from inside the Doc? It’s a little thing, but dozens of small improvements like it would add up to such a seamless user experience that it would be very hard for customers to leave. Slack is the missing piece in G Suite’s efforts to overthrow Office, and a more complete G Suite + GCP bundle is Google’s best chance to steal cloud services market share from AWS. One acquisition gets Google closer to capturing two of the biggest prizes in tech.Why Wouldn’t This Happen?I’m getting excited about this deal happening already, but there are a few reasons it might not happen: * Slack is going to want a hefty price tag. In early June, before earnings, Slack’s market cap crossed $22 billion, and Slack bulls and insiders understand that as a sticky workplace collaboration SaaS business in an increasingly remote world, its best years are ahead of it. I don’t think Slack sells for less than $30-50 billion, which is 3-4x more than Google has ever paid for an acquisition. * Given that the prize is Microsoft’s $1.5 trillion market cap, I think Google will be able to get past the sticker shock. * Amazon might get there first. In June, Slack announced a partnership with Amazon in which Amazon will move hundreds of thousands of employees onto Slack and Slack will increase its usage of AWS and use Amazon’s Chime for voice and video. The move was seen as a way to team up against Microsoft Teams and potentially as the early stages of a courting process that could end in Amazon acquiring Slack. * The multi-year partnership might make a Google deal a little hairier, but Slack and Google are simply a better fit than Amazon because of Google’s distribution into Slack’s target customers and its existing G Suite product. * Stewart already resigned from a big search company once. After selling his photo-sharing company, Flickr, to Yahoo!, Butterfield resigned as soon as his four years were up with a memorable resignation letter highlighted in this 2014 profile. It’s hard to picture the billionaire once again selling to a big search company. But that same profile contained the reason that Butterfield might roll Slack up into Google. The author, Mat Honan, wrote: Stewart Butterfield is a Worldbuilder. Everything he’s said in that 2014 profile has come true so far, except for one thing: Slack isn’t yet 80’s-era Microsoft. But it can be, if it teams up with Google to take down today’s Microsoft.This time, Stewart will be more than the Senior Director of Product Management he was at Yahoo! post-acquisition. With Google’s resources behind him, Stewart will be tasked with redefining the new, open, collaborative way we all work in a post-COVID world.Big thanks to Puja & my brother Dan for editing this into shape. As a thanks, I’m shouting out his new company, Parade (he doesn’t know I’m doing this). If you’re in the market for women’s underwear, head over and show Dan your thanks - without him, this would have been painful!We’re getting SO CLOSE to our 10k subscriber goal! If you enjoyed this post, I’d really appreciate it if you shared with your smartest, most curious friend. Thanks for reading, Packy This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.notboring.co

Welcome to the 513 newly Not Boring people who have joined us since last Thursday! If you’re reading this but haven’t subscribed, join 7,815 smart, curious folks by subscribing here!Hi friends 👋,Happy Thursday! One of the things we’re trying to do with Not Boring is to build out a toolkit that gives forward-thinking companies and investors the things they need to succeed. Often, it’s new ways of thinking about strategy. Last week, it was money. This week, it’s talent. And let’s face it, the way that top companies hire can be boring. Today’s guest post is here to change that. A couple of months ago, my friend Taylor texted me after reading my post, A Pause: Black Lives Matter. The gist was, “Great that you’re writing about systemic racism, but a good friend of mine is actually doing something to fix it. You guys should talk.” Taylor introduced me to fellow Duke grad Reuben Ogbonna. Reuben is an educator and founder of The Marcy Lab School, which “prepares low-income students of color for full-time careers in fast-growing tech professions” through an immersive one-year program. Reuben is also a force - he’s one of those people that you meet and get jealous of immediately because you know they’re destined to do big things.Reuben and I hit it off immediately, and we’ve since had a series of conversations that have been among the most fun and thought-provoking I’ve had, covering everything from remote education to community to Stripe’s documentation. He provided feedback on and context for Hamilton & Disney’s Education Flywheel. Taylor’s initial assessment of the writer/doer dynamic was spot on - I sometimes write about the future of education, Reuben is building it every day. Today, though, we’re putting Reuben in the writer’s seat. During our last conversation, Reuben mentioned that his biggest focus right now is placing his students in engineering roles at growing tech companies, either directly or by working with funds to place Marcy Lab graduates in portfolio companies. There are a lot of Not Boring readers in a position to make that happen. So I asked Reuben to write something that does three things: 1) Educates us on the state of education, from an insider’s perspective. 2) Explains the work that he’s doing at The Marcy Lab School and why it’s important.3) Shares the opportunity to hire Marcy Lab School grads with people looking for well-trained, highly-skilled, determined, diverse engineering talent (read: every tech company). If that sounds like you, get in touch with me or Reuben by replying to this email or emailing Reuben directly at reuben@marcylabschool.org. Let’s get to it.Expanding the Talent PipelineWhy Non-Traditional Talent is a Competitive Advantageby Reuben OgbonnaOn September 27, 2010, Peter Thiel announced what would later become the Thiel Fellowship on the stage of TechCrunch Disrupt. He committed to awarding $100,000 dollars to 20 promising college students to incentivize them to drop out and pursue an entrepreneurial endeavor. For the past decade, he has funded approximately 20 college dropouts per year, including the likes of Dylan Field of Figma and Vitalik Buterin of Ethereum.Since then, a number of venture funds have emerged around the thesis that college campuses are prime recruiting grounds for start-ups that could deliver outsized returns. Funds like DormRoomFund and Contrary place early bets on young entrepreneurs and provide them with the network and coaching necessary to turn their ideas into viable start-ups. Their investments include Brooklinen and DoorDash (two of my quarantine essentials!).This brand of fund tends to have a certain irreverence for our higher education system that I have come to respect. Their existence implies a belief that college’s unique value proposition is its ability to select not to develop potential entrepreneurs. They invest capital on the belief that a college diploma is not a prerequisite for success in the world of entrepreneurship. I particularly enjoy this bold declaration from 1517 Fund, named for the year when Martin Luther nailed his Ninety-five Theses to the door of All Saints Church in Wittenberg, Germany. These funds source deal flow from a predictable set of colleges: typically those in the nation’s top 25. This strategy is understandable, as the prevailing wisdom is that these colleges are home to our country’s best and brightest young minds. Thus, limiting top of funnel recruitment to these schools will yield the best return on investment. However, I would argue that by having a singular focus on our nation’s most elite universities, funds are missing out on the leaders that are best equipped to solve some of the world’s most pressing problems, particularly those that are facing underserved communities.College Admissions is BrokenIn March of last year, Felicity Huffman became the face of the largest college admissions scandal in recent memory, sparking a national debate about the equity and efficacy of our country’s higher education system. We began to ask “who actually gets to attend our nation’s most well-resourced institutions and why?” This is a question that the National Bureau of Economic Research had been investigating for twenty years prior to Huffman’s arrest. In a paper titled, Mobility Report Cards: The Role of Colleges in Intergenerational Mobility, researchers from Stanford, Brown, and Berkeley highlighted the correlation between household income and admissions to our nation’s top universities. Children of families in the top 20% of income earners account for 70% of students attending elite (“Ivy plus”) universities while those from families in the lower quintile of earners represent only 3.8%. Students whose parents are in the top 1% of the income distribution are 77 times more likely to attend an elite college than those whose parents are in the bottom income quintile.We have been conditioned to view an 18 year-old’s admittance to a top-10 university as purely a signal of their intelligence, potential, and ambition and a leading indicator of their likelihood of launching a successful venture. However, we do not often consider just how much one’s success in the college admissions process can be attributed to familial wealth, access, and influence. No matter how much talent, curiosity, and intelligence exists in low-income communities, they do not stand a chance against the advantages that wealth affords, with respect to SAT prep, admissions counseling, feeder high schools, and familial networks.What this means is that every year, budding scientists, student leaders, and prodigious entrepreneurs with all of the potential in the world will be overlooked for opportunities that would otherwise allow them to actualize it in the market.The Need for ChangeFor the past decade, I’ve been able to witness “the college problem”, first hand. I’ve worked as a math and computer science teacher, instructional coach, and school leader in some of the highest performing low-income public schools in the country. I’ve been fortunate to help countless students gain admission to the schools of their dreams. And I have seen many of these dreams deflated as students come to terms with financial aid packages that make it infeasible or impossible to attend. In these cases, students are forced to choose between the lesser of two unpleasant options:* Close the gap financing their education with a precariously high amount of student loan debt. Our country’s $1.6 trillion student debt crisis is well-documented; though, we often do not talk about how it disproportionately impacts Black borrowers. Across all institutions, Black borrowers default on these loans at a rate of 32%. Among those who fail to complete college, the rate increases to 55%. This is largely driven by the fact that Black graduates hold approximately $50,000 in student debt upon graduation, compared to the national average of $30,000.* Make the financially prudent decision to forego their dream school in favor of the more reasonably priced local option. The tradeoff is that their local state or city university likely does not offer the support, career development, and networking opportunities that their financially out-of-reach dream school affords. They often have graduation rates and average starting salaries that are significantly lower. Thus, these students fail to reach their potential due to a completely different set of factors.This data supports a growing narrative that I have experienced personally: college is broken and it is underserved communities that experience its negative impacts most acutely. This is what inspired me to begin seeking out new solutions.A New Option: The Marcy Lab SchoolIn March of  2019, we launched The Marcy Lab School. We are a Brooklyn, NY-based non-profit company with two goals (1) to build a viable alternative to traditional college for high-potential young adults from underserved backgrounds and (2) to create a pipeline of diverse talent to the tech sector, in hopes of producing the next generation of start-up entrepreneurs from Black and brown communities.We recruit young adults who would otherwise commit four years to collegiate studies at a traditional university and ask them to spend one year with us in an accelerated study program. During our yearlong, full-time program, students are immersed in a curriculum that includes:* Computer Science Fundamentals* Foundational Principles in Software Engineering* A Social justice and professional readiness curriculum that we simply call Leadership Development.This training is followed by a three-month apprenticeship where fellows have the opportunity to apply their learning in a “real-world” context as a contributing member of an engineering team that is shipping software at scale. This is their opportunity to showcase their ability to learn, adapt, and add value to teams working on complex problems. Our curriculum is grounded in theory but drives toward practical application. It is continually informed by the needs of our target industry. Our program is designed to foster autodidacticism, create lasting bonds between students, and point them toward big problems in the world while emboldening them to create new solutions to solve them. Our ResultsIn our first Fellowship year, we have seen astounding results. Of our inaugural Fellows:* 55% are women* 100% are Black and/or Latinx* 100% are from low-income households. Our Fellows have accepted job offers to build software at startups, non-profits, and publicly traded tech companies. Thus far, they are earning average salaries of $93,000 per year to do so.Our work has been funded by a diverse group of stakeholders, including JP Morgan, Lyft, Lenovo, and the Mayor of New York City - institutions that are all invested in the success of this overlooked student group and in the fight for greater diversity in tech.We are looking ahead to next year, where we will grow to serve nearly three times the number of Fellows as we did this year. We will be doubling down on distance learning as a strategy to more efficiently scale our impact and expand into new markets.A Success StoryMeet Mark Griffith. He is the son of hardworking West Indian immigrants. He is a gamer, a hardware nerd, and an incredibly empathetic human being. He is one of our inaugural Software Engineer Fellows.Mark graduated from a selective public high school here in New York City. He was a stellar student who engaged in extracurricular activities that fed his interest in technology. During his senior year, he was admitted to his dream school, Drexel University. He even received a partial scholarship. However, at an all-in cost of $70,000 per year, he still would have had to take out approximately $30,000 in student loans per year in order to attend. Wary of the financial strain that this would have put on him and his family, he decided to postpone college matriculation.Mark spent two years out of school, somewhat aimlessly searching for a pathway into a meaningful career. He found us in May of 2019 and began his fellowship that following September. Motivated by an insatiable curiosity and a desire to succeed for his family, Mark approached his fellowship with an inspiring amount of ambition and discipline. From building an app that used NLP to help users find Reddit communities based on their Spotify library to experimenting with WebGL to create 3D games, he viewed every project as an opportunity to stretch his learning boundaries. An aspiring entrepreneur, he was never afraid to take on the Product Manager role for his group projects.Over the past twelve months, he has developed the skills and mindsets that would make him an invaluable asset to any growing engineering organization. Last week, he landed his first full-time software engineering role. Had he chosen to attend Drexel University back in 2017, he would be $120,000 in debt, preparing for a semester of courses on Zoom. Instead, he will be getting paid $102,000 per year to build scalable APIs for a growing company with 4.6 million users around the world. Why You Should Partner With UsIf you’re a founder or VC and, like the funds I mentioned in the beginning of this essay, your portfolio’s early talent pipeline is solely reliant on graduates from the elite universities, you are missing out on talent like Mark. You are putting yourself at a competitive disadvantage. Among his many gifts, Mark brings two traits to any organization that hires him (1) a level of empathy and understanding for a diverse cross-section of potential users and (2) a level of grit, competitiveness, and determination that can only come from a desire to lift oneself into a new position in life. In order to land this position, Mark had to outperform 32 of his peers from institutions such as Stanford, Berkeley, Cornell, and NYU. I am confident that he will do so again in the next phase of his career, when he might be competing against these same peers for funding or market share.The AskIf you are a VC investing in world-changing startups or a founder growing a team to solve meaningful problems at scale, I would love to talk with you. I want to work with you to kickstart a pipeline of outstanding engineering talent from underrepresented backgrounds that will add immediate value to your start-up or portfolio companies. Moreover, you will be investing in your company’s future. In the long run, these individuals will grow into your team’s engineering and product leaders. Or they may take the lessons they learn in hypergrowth and engineering for scale and point them at novel challenges that only they are suited to solve and you will have the privilege of funding the start-ups that emerge from these solutions. If you are bold and forward thinking enough to share this vision with me, I encourage you to reach out directly at reuben@marcylabschool.org or on Twitter @reuben_ogbonna. I’d love to connect with you and introduce you to some of our Fellows directly!Reuben Ogbonna is the founding Executive Director of The Marcy Lab School, an innovative post-secondary education model seeking to address inequity in higher education and the tech sector by training the next generation of engineering leaders from underrepresented backgrounds.Thanks for listening, Packy This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.notboring.co

Welcome to the 826 newly Not Boring people who have joined us since last Monday! If you’re reading this but haven’t subscribed, join 7,579 smart, curious folks by subscribing here!Already subscribed and want to climb up the Verified Not Boring leaderboard?Juul: The SPAC 2020 Deserves SPACs are hot right now. First, in the markets, and then, of course, among business writers. Matt Levine, Alex Danco, Byrne Hobart, Anuj Abrol, and more have written about SPACs recently, and they’ve done a great job explaining what they are. I’m throwing my hat into the ring, too. This is Not Boring, and the best way to learn about SPACs is by playing Fantasy SPAC on what would be the least boring SPAC to date: Juul. Party Like It’s 2018Let’s travel back to December 2018. Altria, the sterilized, market-friendly name for the Marlboro-maker formerly known as Phillip Morris, has just invested $12.8 billion in three-year-old e-cigarette giant Juul, valuing the company at $38 billion. The investment makes Juul the third most valuable private startup, right behind two Softbank-backed companies, $72 billion Uber and $47 billion The We Company, and ahead of Elon Musk’s rocket company, SpaceX, at $31.5 billion, and one half of my favorite fantasy merger, Airbnb, at $31 billion.Big private funding rounds were so common in 2018 that many wondered aloud whether the IPO was dead. The Atlantic wrote about The Death of the IPO, for example, in November 2018. With easy access to large sums of private capital, the argument went, why would companies subject themselves to all of the regulations, disclosures, and headaches associated with going and being public?Led by Uber, the buzzy startup IPO made a comeback in 2019, as Uber, Lyft, Zoom, Beyond Meat, Slack (technically a direct listing), Pinterest, Peloton, Medallia, Datadog, Crowdstrike, and more offered shares to the public for the first time. But many of 2018’s largest private unicorns are still private. Some are doing better than others.The Good: In April, Stripe raised $600 million in a round that valued the payments company at $36 billion. SpaceX captivated the world when it launched astronauts into space in late May, and is currently raising money at a $44 billion valuation. Early in July, Palantir filed to go public (confidentially, of course). The Down Rounds: Softbank owns the majority stake in a trimmed-down, scaled back $8 billion WeWork that’s once again promising it will be profitable next year. Airbnb raised $1 billion in debt from Silver Lake amidst Coronavirus troubles, and the attached warrants valued Airbnb at $18 billion. And what about Juul? For a brief moment last year, after Uber’s IPO and during WeWork’s failed attempt, Juul was the most valuable private startup in the United States.Then, on Halloween 2019, Altria wrote down the value of its investment from $12.8 to $8.3 billion. In January, it took another $4.1 billion charge, bringing the value of its stake to $4.2 billion and Juul’s valuation to $12 billion, a 68% fall. But there’s good news for Juul: if 2018 was the Year of Private Market Froth and 2019 was the Year of the Unicorn IPO, 2020 is the Year of the SPAC. And a SPAC may be the only way for Juul to go public.A Juul SPACquisition is the most 2020 deal imaginable. I’m not saying it should happen - there’s a non-zero chance that selling Juul stock to retail investors through a SPAC is the thing that finally convinces the Devil to reveal that he/she won a bet with God and has just been fucking with us for the past few years. But it makes just enough sense to propose a Fantasy SPAC, and a Fantasy SPAC is a great way to learn some fascinating things:* What the hell a SPAC is* What happened to JUUL* How Juul is like Peloton’s evil twin* Why a SPAC should target Juul* Who the ideal Sponsor for a Juul deal would beThe Year of the SPAC… wait, what’s a SPAC?If you’re reading this newsletter, you’ve probably heard of a SPAC, and you probably kind of understand it but don’t really understand it. A Special Purpose Acquisition Company (“SPAC”) is a blank-check company that raises money from the public markets and then has a certain amount of time (typically two years) to acquire an actual business.  Here’s how it works: * Well-respected investor, operator, or group of investors and operators (“Sponsors”) announce the SPAC, how much they’re raising, and (sometimes) for what.* i.e. Not Boring Acquisition Corp is selling 100 million shares at $10/share to acquire a majority stake in an unprofitable, high-growth US technology business. * SPAC sells shares to public market investors and trades on public markets, without actually having a real operating business. It has two years to use its “blank check” to acquire a minority or majority stake in a private company.* SPAC finds a target company to buy and makes an offer. Target company accepts. * Deal closes, and the SPAC turns into shares in the acquired company, which then trades on the public market without having to IPO. * Sponsors often get founders shares and warrants to buy the stock cheaply, and make a lot of money. SPACs have been around since the 1990’s, but recently, SPACs are on fire. According to SeekingAlpha:So far this year, 48 SPACs have raised $17.1 billion, representing 40% of all dollars raised in the 2020 IPO market. More SPACs have gone public than any other sector, leading healthcare (45 IPOs; $11.1B), technology (14; $4.0B), financials (7; $2.2B), and industrials (6; $4.3B).As Danco points out, SPACs have three advantages over traditional IPOs that make them well-suited for the kind of uncertain market we’re in today:* Price Certainty. A SPAC looks more like an acquisition than an IPO. Two parties negotiate the price up front, and that’s the price. No long underwriting process.* Speed. The IPO process can take well over a year, which leaves a lot of time for things to go wrong - either at the company, in the markets, or both. WeWork certainly would have benefited from a faster process (although the longer one saved investors). * Brand Halo. Well-respected sponsors can lend their trustworthiness to a company. SPACs aren’t just good for uncertain markets; they’re good for uncertain businesses, too. SPACs allow companies with an otherwise difficult path to IPO to access public market liquidity as easily as getting acquired. To whit, the three highest-profile SPACs of 2020 acquired Draftkings, Nikola, and Virgin Galactic. What do those companies do? Draftkings is a daily fantasy sports, sports betting, and online casino app that faces regulatory uncertainty in terms of which states will legalize online gambling and betting, and at what tax rates. Draftkings is the least risky of the big three because it has customers and makes money.Nikola is an electric truck company with zero revenue and no product that went public via SPAC and hit a market cap near $30 billion by drafting on retail investors’ love of Tesla. Virgin Galactic is Richard Branson’s human space tourism company that earned $238,000 in Q1 2020 revenue from “providing engineering services” and hit an $8 billion market cap in February, good for a casual pre-product 8,000x revenue multiple. Part of the reason that SPACs have been so successful is that the retail investing maniacs on the WallStreetBets subreddit love SPACs. I first invested in Draftkings when it was Diamond Eagle Acquisition Corp, and a friend who frequents the penny stock subreddits told me that it was going to explode when the deal closed and the ticker switched from DEAC to DKNG… and he was right.These SPACs work in part because of the reasons Danco laid out, and in part because they feed frenzied retail investors exactly what they’re looking for: stocks that are too risky to go public via traditional channels. SPACs were in the news again last week because famed activist hedge fund manager Bill Ackman just launched the biggest SPAC of all time: the $4 billion Pershing Square Tontine Holdings (PSTH.U). Rumors are swirling that Tontine is eyeing a minority stake in one of 2018’s big private unicorns, like SpaceX or Airbnb. That got me thinking: what about a company that was valued higher than either of those two in 2018? What Happened to Juul?You know Juul. As recently as a few months ago, it was hard to walk down a single block in New York without seeing at least one person puffing a slender black or silver stick and exhaling mango vapors into the air. The product was ubiquitous, attracting hardcore smokers looking for a satisfying way to quit and curious teens looking to look cool. That was a problem. If there’s one thing regulators hate (rightly), it’s companies marketing nicotine or alcohol to kids. Just ask Four Loko. Juul’s arc should be familiar to anyone who’s been reading Not Boring for a little while. It’s the Gartner Hype Cycle. Launched in 2015 by Pax Labs, Juul sales skyrocketed 700% to over $322 million by 2016. By 2017, the company had already sold 1 million units, and that December, Juul raised $112 million. Things got choppy in 2018. Early in the year, the FDA began cracking down on the sale of Juul to minors, and in June, San Francisco became the first major US city to ban Juul. Undeterred, the company raised $1.2 billion at a $16 billion valuation in July. In the fall, as Juul passed 70% of the US e-cigarette market, the FDA seized documents from Juul’s headquarters. Juul responded by volunteering to stop selling its sweet and fruity flavors in stores. Then, amidst all of the regulatory turmoil, Altria stepped in. The cigarette maker, threatened by e-cigarettes’ rising popularity, invested a whopping $12.8 billion in Juul at a $38 billion valuation. “We have long said that providing adult smokers with superior, satisfying products with the potential to reduce harm is the best way to achieve tobacco harm reduction.”-- Howard Willard, Altria CEOSurprisingly, instead of a Nobel Peace Prize for Medicine, Altria won a lifetime supply of headaches. In 2019, the FDA, Senate, House of Representatives, and US Attorney’s Office were all investigating Juul. Then China halted Juul sales and India banned vaping, cutting off the two biggest smoking markets in the world. Juul halted the sale of sweet and fruity pods online, and laid off 500 people.After all of that, Altria’s Halloween 2019 writedown of its Juul investment, from $12.8 billion to $8.3 billion, came as no surprise. Nor did its January announcement, one quarter later, that it was writing down the investment by another $4.1 billion, to $4.2 billion. Juul and Altria also modified their original agreement - instead of providing marketing and distribution to Juul, Altria will be providing legal and regulatory support.In the four weeks ended January 25th, the company’s in-store sales fell 25% compared with the same period a year earlier, according to Nielsen. And all of that before Coronavirus - a respiratory disease from which smokers are more likely to die than non-smokers and against which the best defense is to not exhale our germs onto each other. Try Juuling through a mask. Things look bleak, but remember this arc from Oh Snap!? Juul has gone through the first half of the Gartner Hype Cycle.Sometimes companies recover and emerge from the Trough of Disillusionment. Snap has. Other times, though, they drop all the way to oblivion. Sometimes, the product was a fad, a Meme Startup without a second act. Juul doesn’t suffer from poor product-market fit, though. If anything, customers love it so much that the government feels it needs to step in to protect them from themselves. Peloton’s Evil TwinOne of the past year’s most successful IPOs, Peloton is almost as addictive as Juul, but regulators aren’t trying to stop it. Peloton makes its customers healthier, using high-energy classes, star instructors, and good old fashioned competition to keep customers working out.Peloton’s magic is that it sells customers expensive hardware upfront, and then sells them a monthly subscription to fitness content. The bike costs $2,245 and the All-Access Membership, obligatory for the first year, costs $39/month. It’s high AOV hardware plus software subscription. Once someone has invested in the bike, they’re not going to cheap out on the $39 subscription. Juul is Peloton’s evil business model twin. I remember talking to a friend at a hedge fund about Juul a couple of years ago. His fund purchased aggregated credit card data to inform trading decisions, and he told me he’d never seen anything like Juul. People bought Juul pods so consistently and often that the company behaved like a subscription business with low-to-negative churn. Here’s how Juul’s business model works: * Pay $50 for a Juul device. * Pay $20 for Juul pods, the little plastic things that hold the nicotine juice. * Pay $20 for Juul pods* Pay $20 for Juul pods* Pay $20 for Juul pods* Pay $20 for Juul pods* …. forever* Pay $20 for Juul pods.Juul, too, sells more expensive hardware upfront and then essentially generates sticky subscription revenue for years and years. Despite the fact that a Juul costs just 2% of what a Peloton bike does, Juul customers can actually end up spending more than Peloton customers over five years. How sticky are Juul customers? The company found out when it tried to appease regulators by pulling its sweet and fruity flavors, including its most popular, mango, from US shelves. Retailers got creative and started importing mango pods from Canada. Customers who were used to paying $20 for a four-pack of Juul pods happily paid $30 - $50 for the North of the Border Mangoes. Juul pods had almost no price elasticity of demand - because they’re addictive, customers are willing to pay almost anything to get them. That’s the type of sticky cashflow that investors love to buy, and why smart investors like Tiger Global poured so much money into the company despite regulatory and moral risks. A company like that will survive until the government shuts it down, and the product, in one form or another, will survive even that. Juul’s business model is solid, its problem is regulation. It did an evil thing by marketing its product to teens, and it needs to make amends. The company needs to work with regulators, continue expansion into friendlier markets, and wait for the US, Chinese, and Indian governments to come around to its arguments that e-cigarettes are safer than cigarettes, and that Juul’s products are safer than competitors’ knock-offs. To do that, it needs cash. In February, the Wall Street Journal reported that Juul had raised $700 million in debt, to keep it afloat and allow it to make long-term decisions. (Wait, what about the $12.8 billion it raised from Altria? It paid $2 billion in employee bonuses and returned all but $1 billion of the rest of the money to investors. Whoops!) Debt is certainly one way to fund a company with a ravenously loyal customer base that would inevitably face too much scrutiny, including around its recent slowing performance, to go public via a traditional IPO. But it’s 2020, and debt is nowhere near wacky enough. A SPAC Should Acquire JuulJuul is a high-risk target. There’s a real chance that the company isn’t around in two years. But that risk is why a SPAC’s Sponsor and Investors might get the deal of the century, and why a SPAC is the only way to take Juul public. A deal stands to benefit all of the parties involved: the Sponsor, Juul, Altria, and the Investors. The SponsorIn Juul, the Sponsor has an opportunity to acquire a large stake in what was recently the most valuable private company in the United States at a deep discount, and take it public with almost no downside. SPAC Sponsors (Ackman is a notable exception) typically receive founder’s shares worth 20% of the acquisition amount for a nominal fee (like $0.05 to buy a $10 share). The Sponsor, and public market investors, also receive warrants, which allow the holder to purchase more shares by a future date at a specified price. For setting everything up and attracting capital, the Sponsor receives a piece of the company (the 20% founders’ shares) that makes them money even if the deal goes poorly, and warrants that pay off if things go well.The Sponsor will be negotiating with Juul from a position of strength. Juul’s valuation has plummeted by more than two-thirds in under a year, it is battling regulators and angry parents, its reputation is deeply tarnished, and it has no other means of accessing public markets. That means that a Sponsor could end up with founders’ shares and warrants in one of the stickiest, fastest-growing businesses in history for less than a third of what it would have cost them a year ago. It’s too tempting not to try.JuulIt would be really hard to take Juul public via traditional IPO, but the company will continue to need cash as it fights regulatory battles and works towards getting its products on more shelves. Going public would give Juul access to bigger pools of capital. A SPAC might be the only way to do it, and investors have never been hungrier for a deal like a Juul SPAC.Juul is at a regulatory low point that makes the company hairy and uncertain. The company is being made an example of while more harmful cigarettes and less popular e-cigarette products roam free on bodega shelves. There is strong demand for the product, though, and it is likely healthier than cigarettes, so there is a compromise to be made with regulators in the coming years. Through a SPAC, Juul would just need to find one Sponsor who sees the business’ potential versus needing to convince a series of institutional investors in a traditional IPO roadshow. Once Juul and the Sponsor strike a deal, the company will have a powerful ally in its battle with regulators and its campaign to convince the public that it does more good than harm. AltriaAfter two consecutive writedowns, Altria seems like it would be more than happy to get out of its shares. Currently, Altria is not allowed to sell. As part of Altria’s investment in Juul, the two sides agreed to a “standstill agreement” which says that Altria can neither buy more of Juul or sell its shares for six years. Juul should be able to let Altria out of the agreement, though, if it does a SPAC deal, and I can only imagine that Altria would be OK getting out of a portion of its shares for the right price.Investors Now is the perfect time to take Juul public. The WallStreetBets crowd and Robinhood traders are bidding up shares of SPACs and anything with a good meme attached to it. Juuling is a meme among the same type of people who frequent WSB, and I think a stock trading under the JUUL ticker would go crazy.More than the frenzy, though, investors would get the opportunity to buy an incredibly sticky business at a deeply discounted price. Juul makes a product that people love, and repurchase over and over again. If it can get past regulatory hurdles (a big if), it has a model similar to Peloton’s, which public market investors, who don’t need to tie their name to a company as publicly as private market investors do, will love. Of course, this deal is risky! Regulators are coming after Juul hard, the company is hated by parents, educators, and many others who believe that it is ethically bankrupt, and the time and money it spends fighting legal battles is time that competitors have to catch up or pass them. Normally, I’d view this risk as a bad thing, but in this market, investors seem to love risk for its own sake. With a SPAC, they’re doubly rewarded for taking the risk in the form of the warrants that SPAC investors receive. For example, the warrant might allow them to buy more shares for $10 in the future, even if the price rises to $30. Taken together, this means a SPAC might be able to acquire Juul cheaply, sell shares to a market that has never been more friendly to meme stocks, and retain upside in the form of warrants and cheap founder shares if Juul is able to regain the momentum that made it the most valuable private startup in the world for a brief moment last year. So which Sponsor is crazy enough to acquire Juul? I have some thoughts, which I dropped in the comments, and I’d love to hear yours. Join the conversation: Unfortunately, I don’t think the Devil is going to let 2020 end until someone steps up and makes this deal happen. Luckily for whoever is crazy enough to try, Juul represents an opportunity that is tailor made for 2020 SPAC-ing. It’s definitely not normal, and it might not even be moral, but if Juul can get past regulatory concerns, there’s actually a great business hiding under all of the red tape. A SPAC offers enough upside to the Sponsor that someone should step up and try. If there was ever a time for this, it’s now. The WallStreetBets crowd is going to go mangoes for this one. Thanks for listening, Packy This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.notboring.co

Welcome to the 582 newly Not Boring people who have joined us since last Thursday! If you’re reading this but haven’t subscribed, join 6,753 smart, curious folks by subscribing here!Already subscribed and want to climb up the Verified Not Boring leaderboard?Entropy Theory🎧 If you prefer listening, bring your ears over here: Entropy Theory (Audio Edition)Everything tends towards chaos and disorder.This isn’t a quarantine-induced panic thought, it’s an inexorable fact of the universe. The Second Law of Thermodynamics states that all closed systems tend to maximize entropy. The universe tends to get messier and more disordered all the time.Like the universe, the market also gets messier and more chaotic all the time. Every industry is on a parallel journey of increasing, accelerating entropy. New tools create more optionality. More choice, speed, and flexibility create more chaos, which in turn creates opportunities for companies to capture value by temporarily bringing order to the ever-increasing entropy. The companies and people that create order from the chaos are Entropy Wranglers. The upward-sloping push and pull between entropy and its opposite, negentropy, is responsible for humanity’s forward progress. Each new burst of entropy creates more surface area for innovation. This idea explains so much - from business theories to industry evolution to company success - that I’m giving it a name: Entropy Theory.Entropy Theory explains industry evolution as a story of ever-increasing chaos and suggests that the most successful businesses are those that use the latest technology to wrangle that chaos, until entropic forces unleash the next set of opportunities.Entropy Theory sits on top of and connects so many of the other theories that we talk about here: Aggregation Theory, Disruption Theory, Creative Destruction, Coase’s Theory of the Firm, The Law of Conservation of Attractive Profits, and more. It adds a directional vector to Jim Barksdale’s oft-repeated quote: “There’s only two ways I know to make money: bundling and unbundling.” Bundling and unbundling is Sisyphean -- bundle, unbundle, start over again, repeat. Ever-increasing entropy gives work verve. We’re not just bundling and unbundling, but unleashing energy, organizing it, and then unleashing new energy on the next thing.Entropy Theory explains global progress, industry trends, and company success and failure. One example: last week I wrote about Twitter, and said that it captures less of the value it creates than any company in the world. Another way to say that is that by deciding to play whack-a-mole with trolls instead of better facilitating search, conversation, and creation, it has insufficiently wrangled the conversational entropy unleashed by the internet. There are a lot of ways to take this, and many posts to be written, but to flesh out the idea, we’ll cover how Entropy Theory explains Aggregation Theory, two long-term industry trends, one successful company, and one failure: * Aggregation. Aggregators like Google, Facebook, and Uber succeed by wrangling the supply entropy created by the internet for consumers.* Office Real Estate. The history of the office - from government-owned to remote work - is the history of increasing entropy. * Employment. The rise of One Person Businesses is the natural progression of increasing employment entropy.* Spotify. Spotify wrangled music industry entropy created by the internet and file-sharing, and is running the Entropy Wrangler playbook again on podcasts.* Quibi. Quibi’s failure can be explained by its inability to realize how entropic short-form, mobile entertainment creation has become. Increased chaos isn’t good or bad, it’s just a fact of the universe. Entropy creates more surface area for innovation. Understanding and applying Entropy Theory can help you see and seize opportunity in the chaos. Aggregation and Entropy TheoryAggregation Theory provides one answer to entropy in our internet-enabled world of abundance. In Thompson’s words: “Aggregation Theory describes how platforms (i.e. aggregators) come to dominate the industries in which they compete in a systematic and predictable way.” Here’s the first graphic Thompson drew to explain it, back in 2015.Aggregation Theory only applies to digital businesses and doesn’t try to explain the trends in something like office real estate. Entropy Theory can handle both. Here’s Aggregation Theory explained through Entropy Theory.Look what happens to supply. It becomes more entropic. Instead of your local newspaper, all the articles in the world. Instead of whatever books your local bookstore stocked, all the books in the world. Instead of a taxi dispatch, anyone with a car, a smart phone, and free time. That created the need for new ways of ordering, and the opportunity for Aggregators like Facebook, Google, and Uber to use technology to bring order to the chaos. Aggregators are Entropy Wranglers. Take Google for example. The internet changed the way that media is created and consumed. Instead of consuming content from a few, trusted sources, suddenly, there was content coming from everywhere. It was hard to find content, and even harder to tell what was good. Google became the powerhouse that it is today by bringing order to that mess. With Google, instead of flailing about the internet in the dark, consumers could search for the topic they’re interested in, and instantly receive an orderly, ranked list that uses entropy - millions of people creating and billions of people clicking links - as an input.So if entropy is always increasing, where is the disorder in the system being created to offset the new order? I have three hypotheses that work together.* Entropy Wranglers both wrangle pre-existing entropy and enable new entropy. Google wrangled the entropy of the early internet and more people and companies create more content and products because Google exists.* Entropy Wranglers capture such a large amount of the value in the ecosystem that they create new energy that can be used to spring new entropy. For example, the influencer economy is supported by companies’ search for cheaper ways to market their products than paying Facebook and Google 40¢ of every dollar they raise.* Competitors see the opportunity and counter-position themselves against the Entropy Wranglers, definitionally adding more entropy into the system. No one is seriously trying to compete with Google in search or intent marketing; they’re trying to move the battle for ad dollars to new playing fields. I’d be remiss if I didn’t mention GPT-3 here - making sense of all of the internet’s information contextually might be a way to bypass Google altogether at some point.As these three things happen, entropy increases in new places, and new opportunities to wrangle entropy emerge. You can frame each one of the Aggregators that Thompson lists in his original post - Google, Facebook, Amazon, Netflix, Snapchat, Uber, and Airbnb - in a similar way. Each uses technology to bring order to a recently disordered industry. I think that Entropy Theory can also help explain and connect other theories and frameworks like Disruptive Innovation, Coase’s Theory of the Firm, Creative Destruction, the Bundling/Unbundling cycle, and more, and I’m excited to explore the connections in future posts.  Offices, Employment, and Entropy TheoryOne of the things about Entropy Theory that tickles my brain is that it’s more broadly applicable than Aggregation Theory, albeit potentially at a lower resolution. The same theory that explains Google’s success can also explain trends in two slower-moving areas: office real estate and employment.Office Real EstateIt’s hard to imagine something less entropic than office real estate. Office buildings are large, heavy, and expensive, and once built, stand for decades or even centuries. But the history of the office follows the same forces that gave rise to Google. Before I became a full-time thinkboi, I worked at Breather, a real estate startup that allows people to book office space for as little as an hour and as long as two years. From the perspective of someone 250, or even 50, years ago, the idea of thousands of people renting offices for an hour seems inconceivable. Through the lens of Entropy Theory, though, it seems inevitable. The first modern office was built in 1726 in the UK to house the Royal Navy. Three years later, the East India Company built the East India House, the first non-governmental office. The first office leases - which allowed tenants to rent space from the building’s owner - appeared in the late 18th century. Leases dramatically increased entropy by introducing a lower-commitment way to use an office.Since their inception, leases keep getting shorter -- a necessity in a world in which corporate lifespans are dramatically shrinking (another example of increasing entropy). In 1958, the average lifespan of a company on the S&P 500 was 61 years. Today, it’s under 18. The typical office lease dropped from 30 years in the 1950s to 5 years in the 2010s.Over the past decade, co-working and flexible office gave companies the option to sign leases as short as a month. Breather, which makes one-hour bookings possible, is the natural continuation of the increasing office entropy trend, and even shorter options emerged after Breather.With each major increase in entropy, new players sprung up to bring order to the new reality. Brokerages, for example, helped tenants make sense of the various options available to them. JLL, one of the world’s largest brokerages, began its life in London in 1783, around the time of the first office leases. WeWork attempted to spend and grow its way into being the lowest-entropy way for companies to access high-entropy office space -- co-working -- but may have just increased entropy in the market.Today, COVID has created massive entropy, and correspondingly huge opportunities for Entropy Wranglers. Remote work is a thing now, and even though it’s imperfect, anti-social, and lossy, major shifts don’t generally reverse. Companies aren’t rushing to buy their office building, or even going back to thirty-year leases; similarly, remote work, once out of the bottle, is here to stay. It’s the highest-entropy state for office yet, and the prize for wrangling that entropy will be massive. It’s why Zoom has so dramatically outperformed the market, why I’m so bullish on Slack, and why there will be multiple multi-billion dollar companies created that take advantage of the new remote-first office paradigm. Entropy has shifted the definition of office.EmploymentEmployment has come a long way since The Man in the Gray Flannel Suit. We no longer spend our entire career with one company, working 9-5, five days a week for forty years until we can retire with the pension and the gold watch. In fact, many people don’t work for just one company, and an increasing number don’t work for a company at all. Viewed from one angle, Uber ushered in the era of the Gig Economy in the 2010s, forcing disruption on an established, corrupt taxi industry through sheer force of will and determination.Viewed through the lens of Entropy Theory, though, Uber, Lyft, TaskRabbit, Postmates, DoorDash, and dozens of other companies captured value by wrangling natural employment entropy. In that view, people were always going to go from one job for their whole career to working for multiple companies, temporarily, at-once. The intersection of the technological entropy trendline, from mainframes to mobile, enabled the Gig Economy leaders to wrangle and capture value from the employment entropy trendline. An even more recent trend, the Passion Economy is one current expression of increasing employment entropy. Instead of working for one company forever, or one company at a time for shorter amounts of time, many talented, creative people have decided to strike out on their own to pursue their passions. It was inevitable. The Passion Economy-enabling companies that Li Jin writes about, like Substack, Discord, and Teachable, are attempting to capture value from increased talent entropy. Similarly, Nikhil Basu Trivedi’s The Rise of the Solo Capitalists speaks to increasing entropy in venture investing, and as Brett Bivens points out in One Person Companies: The next L’Oreal started as a blog, the next ESPN as an Instagram page in a dorm room. The next McKinsey, Harvard, or Benchmark might start on Substack, with a Teachable course, or as a podcast.So what type of Entropy Wranglers might form around this higher-entropy form of employment? In Will Joe Rogan IPO?, Mario Gabriele and Aashay Sanghvi point to the new tools, financing methods, and mediums available to individual creators. They even suggest that GPT-3 and its successors might enable creators to reproduce themselves, providing scale and an answer to key man risk where none existed before. Entropy Theory suggests that the tools they list are just the beginning.A keen observer might notice that the trend towards self-employment feels like a return to the way that humans worked for centuries, and suggest that maybe entropy is cyclical. I think the big difference between being a blacksmith in the 15th century and an Instagram influencer today, though, is the global scale and optionality afforded to one person businesses today. Working in one job from your teenage years to your grave and serving a captive audience in a non-competitive environment, even if you work for yourself, is a much lower-entropy career.Word limits prevent me, but we could analyze the history of so many industries through the same framework. Media. Food. Transportation. Finance. Rest Stops. Energy. Hospitality. Even before the internet, each of these industries has been defined by the inexorable march of entropy and valiant attempts to harness it using the latest technology of the day. Company Success and Failure Through Entropy TheoryEntropy Theory is useful in explaining why certain companies have been successful where others have failed. Often, it comes down to whether the company is victimized by increasing entropy (worst), creating entropy (better but too early), or wrangling entropy (best). Spotify, one of my favorite companies, is a perfect example of the latter. SpotifyThe music industry exhibits the same increasing entropy as real estate and employment. Musicians throughout most of history made a living from performing live concerts. Thomas Edison’s 1877 invention of the phonograph paved the way for Emile Berliner’s 1894 7-inch gramophone records, and in the 1920s, the earliest record labels sprung up to wrangle the increased entropy created by the ability to distribute the same track to many people. The music labels went on an uninterrupted tear from records to tapes to 8-tracks to CDs right up until 1999, when Napster dramatically increased entropy in the music industry by allowing people to illegally share and download music, for free. Napster increased the entropy of the music industry (creating entropy) and was shut down in 2001 under legal pressure. The music industry (victimized by entropy), wielding lawsuits in an attempt to go back to the way things were, fared no better. Whether via Napster, Limewire, or any other number of online music file sharing services, the genie was out of the bottle and the entropy had increased: people wanted to listen to what they wanted, when they wanted, online. Two companies wrangled the entropy and captured the value. In 2001, Apple launched iTunes, and sold individual songs for $0.99 each. Spotify, launched in 2006, wrangled musical entropy further, into the form in which it’s still consumed today: one monthly subscription for access to all of the songs. Spotify is the music industry’s Entropy Wrangler.Today, Spotify boasts 286 million Monthly Active Users, 130 million of whom pay for a subscription, good for $6.8 billion in 2019 revenue. Spotify’s stock has nearly doubled since March as it continues to make strides towards harnessing the high-entropy podcast industry, bringing its market cap to $50 billion. Why has Spotify been able to adapt and wrangle entropy multiple times? One theory is that its organizational structure - organized into squads, tribes, and guilds - is appropriately entropic to move quickly and nimbly.Entropy Theory also explains why competing attempts at subscription music services, like Deezer and Tidal, haven’t worked. Spotify wrangled the Napster-induced entropy, and hasn’t created enough entropy to create opportunities to attack it. Spotify has very little entropy leak. The threat to Spotify won’t be another subscription music streaming service. It will be a company that takes advantage of the next big increase in entropy to deliver audio content from a new set of creators in a new way. The Counterexample: QuibiWill you allow me a brief moment to shit on Quibi again? It’s a cautionary tale of what happens when you don’t realize what entropy level your industry has reached. Entropy Theory actually perfectly explains why Quibi failed where TikTok has succeeded. Quibi tried to apply a paradigm from entertainments’s previous entropy level, but entertainment entropy has increased past the point at which Quibi’s model makes sense. It’s not enough to get the mobile trend right by itself. To succeed, you need to ride an industry-specific entropy wave. Quibi realized that because of mobile’s ubiquity, anyone can consume content on their phone at any time. They didn’t realize that that same technology means that anyone can also create high-quality short-form content at any time. That makes the video content creation more chaotic, and leaves anyone trying to apply the old paradigm, like Quibi, in the dust. Short-form mobile video content is past the point where a central studio can play tastemaker without the help of an algorithm. Netflix still works in this world for three reasons: * Not everyone can create high-quality, longform, big screen content… yet. * Netflix has years of data that helps it make smart decisions about which content to create and which content to serve to each user. * Its huge user base means that it spends much less per user to create content (compare that to Quibi’s $100k per minute content budget!).But TikTok might be best-suited of all. TikTok is built for the current level of video entropy. People everywhere are creating better and better content, all the time. TikTok’s algorithm wrangles that entropy to surface the signal from all of the noise and reward creators for their creativity in the form of virality, fame, and ultimately, influencer money. Applying Entropy TheoryI’ve been on a brain-high for the past three days as I’ve thought of examples, tested whether they fit into Entropy Theory, and realized that they did. Again, I’m a nerd. This is my idea of a fun weekend. Part of me thinks: of course they fit; increasing entropy is the Second Law of Thermodynamics and a natural law of the universe. The other part of me thinks: this is actually a really useful way to make sense of business and industry trends, and we’re going to be revisiting it often in Not Boring. Nailing a backtest is an important start, but for this thing to really get legs, it needs to be actionable and predictive. So how might we apply Entropy Theory to our careers and investments? If you’re a founder or operator, you should be looking for pockets in your industry where entropy has increased, and look for ways to wrangle that entropy without trying to go back to the way things were. Be wary of timing, and of not trying to increase entropy yourself: companies that try to force it too early take all the arrows; companies that hold on too long at the end throw away money trying to go back to the way things were; companies that bring new tools to industries in which entropy has naturally increased stand to capture enormous value. If you’re an investor, it’s helpful to understand broad trends and where the companies you’re looking at fit in. One practical implication: worry less about TAM when looking for Entropy Wranglers. Uber rode increasing entropy to a larger-than-anticipated ride-sharing market. Stripe is doing the same with online payments - its mission is to “Increase the GDP of the Internet.” Entropy Wranglers see that something has changed before others do; in a way, they’re Worldbuilders.What kind of predictions can we make with Entropy Theory? We should be able to predict that more entropic outcomes are more likely than less entropic ones over time, and that valuable companies will be created that bring order to the chaos. * Instead of going back to one office for one company post-COVID, employees are likely to work remotely and even for more than one company at the same time. Short office / long tools that facilitate remote collaboration and multi-company employment. * Education will become more a la carte. The best students won’t get a degree from one school. Instead, they’ll study with the best professors from across the world and combine the disparate credits into one degree. This presents opportunities for new forms of credentialing and ways of matching the right students with the right teachers. I think Entropy Theory is going to be foundational to the way that I think about and analyze businesses, and I hope you feel the same. But it’s still messy, and I’m looking forward to wrangling it with all of you. A few questions I’m looking forward to digging into in the coming weeks and months ahead:* How does Entropy Theory play with Network Effects, and with Hamilton Hemler’s Seven Powers more broadly? h/t Nikhil Basu Trivedi* What are the implications of Entropy Theory for Disruption Theory and incumbents? h/t Sari Azout* Are businesses with decentralized org structures like Amazon, Spotify, Stripe, and Uber better positioned to evolve and capture value as entropy increases? h/t Brett Bivens* Is there a velocity component to Entropy Theory? i.e. Does a faster entropy release lead to more innovation than a slower one? As Aggregation Theory turns 5, Entropy Theory turns 0. It takes a village to raise a theory. I’d love to hear your feedback, confirming examples, counterexamples, challenges, and questions in the comments.  Thanks to Dan, Mike, Sari, Brett, Brett, Leon, Puja, and Nikhil for their input and edits.Thanks for listening, Packy This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.notboring.co

Welcome to the 583 newly Not Boring people who have joined us since last Thursday! If you’re reading this but haven’t subscribed, join 6,483 smart, curious folks by subscribing here!Already subscribed and want to climb up the Verified Not Boring leaderboard?Remember Ringtones?The lo-fi pocket songs that sparked the mobile revolutionby Gil KazimirovBefore the iPhone, Venmo, or Spotify, there were ringtones. You might remember them fondly as those lo-fidelity sounds we used to communicate our highly refined music taste every time someone called our cell. But ringtones were so much more than that. A billion dollar industry silenced seemingly overnight, ringtones laid the foundations of modern mobile consumer technology and set the stage for the App Store and mobile commerce as we know it today. And they are proof that even silly-seeming products can have an impact long after their meme fades away.    The Rise of the RingtoneThe first mobile phone call was made not by a silk-shirted Miami cocaine dealer in the 80s, but by a driver in St. Louis in 1946 from a heavyweight wireless system installed in an automobile. It took another 40 years to make it portable, reliable, and affordable enough (relatively speaking) to offer to the mainstream consumer. Literally the size of a carEven then, it didn’t quite go “mainstream”. A common reaction was: wow, that’s slick (it being the 80s and all), quickly followed up with but, like, who really needs a portable phone? The President... maybe? At the time, it was hard for ordinary people to imagine having to be reachable at any minute of the day. Lol.Anyways, it wasn’t until the 90s that owning a cell phone became relatively commonplace in the West. But then another problem reared its head. In the early part of the decade, phones came with preset, annoying, monophonic ringtones. Never ones to miss an opportunity to spend R&D dollars on minor inconveniences, humans manufactured a feature that allowed users to input custom ringtones. The Digital Minimo D319, released in 1996, was a Japanese-made device on which users could program custom ringtones by entering combinations of boops and beeps associated with keys on the number pad.Pictured: groundbreaking innovation.And people LOVED that shit. A book that taught users to recreate popular songs sold 3.5 million copies in its first year. Then, in 1998, a Finnish dude tired of Nokia’s preset monotone interfering with his weekday hangovers (no joke) found a way to transfer audio files directly to his phone through text message and the ringtone revolution began in earnest. By 2002, 30% of all SMS traffic was requests for downloadable ringtones.The rise of the custom ringtone, like many things, happened gradually, then all at once.The ingredients were mostly in place by the mid-90s. You had network operators hungry to make back their deep infrastructure capex investments and diversify their revenue streams. You had a device literally manufactured to make sound with the capacity to send and receive digitized data. And you had MVPs -- customizable ringtones enabled by number pads in Asia and text messaging in Europe -- that proved demand.Consumers jumped on custom ringtones because they represented the first, mainstream way of getting portable music, on-demand. No store, no CDs, no desktops. That was revolutionary -- imagine the possibilities! People could make an identity statement in a unique way, becoming an audio fashion accessory that users, young ones in particular, loved.The only problem was, selling custom ringtones constituted explicit copyright infringement which, as they probably say in the South, strangled the turkey before it hatched (maybe?). But two things happened in the late 90s: 1) the rise of music piracy and 2) the development of digital micropayment technology. The former sank music publishing revenues as CD sales plummeted; the latter created centralized micropayments platforms that could effectively collect royalties to be paid to music publishers in a way the web could not.When music publishers and labels saw the potential for ringtones to reverse declining sales, they entered into royalty agreements with telecoms and ringtone providers. And so the stage was set. We blasted into the new millennium frantically searching our pockets for the 8bit renditions of Smash Mouth and Shaggy that emanated from them. By the early 2000s, all the major record labels partnered with mobile operators to distribute and monetize the ringtone. At the time, observers proclaimed the ringtone to be the new single, and hailed the trend as “an industry shift no less important than the shift from the radio to the internet”. Haha.Although that view didn’t age well, you can’t blame industry analysts for espousing it. The custom ringtone industry in the US grew from $68m in 2003 to $600m in 2006. So many ringtones were sold  -- an estimated 520 million ringtones between 2001 and 2007 -- that the Recording Industry Association of America instituted ringtone charts and awards associated with them (Lil Wayne’s Lollipop went platinum 5 times). And how could it not with lyrics like these?Ringtones seeped deep into culture. Instead of music influencing ringtones, ringtones began to influence music. A wave of chart-topping rappers, including Soulja Boy, T-Pain and J-Kwon made music designed to sound good as polyphonic ringtones. Ringtones became a popular way to promote music as teasers, and served as cultural currency, offered as marketing incentives tied to a variety of promotional campaigns.The world’s needle fit snugly with the ringtone’s polyphonic groove. But as quickly as they jingled into our pockets, consumers hung up on them. Bye, Bye, ByeAs humans, we are really, really bad at predicting things, so few of us saw the fall of the custom ringtone industry coming. From a 2007 peak of $1.1 billion in global ringtone sales, the industry shrunk by 97% in the following decade. “Admittedly, it was a little sad,” recalled an executive with BMI, a music publisher. “In BMI’s early digital days, we made more money from ringtones than anything else; it accounted for more than half of our income stream. And now when you think about it, it’s basically zero.”There are a few likely reasons for its decline:* People stopped calling in favor of texting each other. Between 2008 and 2010, ringtone revenue declined 25% just as the average voice minutes used by 18-34 year olds, the ringtone’s main customers, declined by roughly the same amount.* The novelty of being able to customize phones wore off. As our phones evolved to offer web access, videos, games and social networking (especially with the rise of the smartphone) downloading and configuring ringtones no longer appeared particularly novel.* The ubiquity of ringing devices forced us to develop cultural mores around our phones.With cell phones going fully mainstream, our culture evolved to solve for the cacophony of sounds they blasted in social settings -- conference rooms, dinner tables, movie theatres -- with a simple switch of the phone to vibrate.* And my favorite theory: Crazy Frog killed it. In more eloquent words than my own: The eventual ubiquity of a Swedish teenager’s imitation of a two-stroke moped engine applied to an ambiguously genitalled cartoon frog may finally have exhausted what little patience the consuming public had for overpriced novelty call alerts.The “ambiguously genitalled” bane of quiet afternoons the world overGiven the rapid pace of innovation in mobile technology, it’s not surprising that a pop culture meme like the ringtone fell prey to the digital world’s inexorable thirst for innovation. But that we almost completely erased its role in our digital evolution from our collective memory -- that is less excusable.How Ringtones Shaped the Modern WorldThe custom ringtone made today’s digital age possible in a way that few other technologies can veritably claim to: * Ringtones were the precursor to the App Store.* They introduced people to the idea of on-demand anything. * Ringtone pioneers were the first to capitalize on the internet’s economics of abundance, a primitive version of the formula that TikTok employs today. * Ringtones connected our phones to the rest of our electronics for the first time. * They contributed to the failure of the Motorola/Apple partnership that brought Apple software to mobile phones for the first time. First, ringtones introduced the concept of a digital store… for digital things. Today we call it an App Store, a concept that didn’t really exist 20 years ago but that has since become a fundamental building block of the digital world. When NPP, Japan’s pioneering telco, made ringtones available for their customers to purchase, they realized that a) there’s very little marginal cost to “storing” digital products on their platform, b) that it’s therefore in their interest to have as much content as humanly possible and that c) relying on ringtone providers alone constrains the amount of content they can offer. With this in mind, NPP developed the world’s first App Store as we conceive of it today: a platform that provided tools for developers to develop content, a system for micropayments and digital services, and an application environment that users valued and trusted enough to open their wallets. By opening the platform to developers, a whole ecosystem of digital products sprung up around the ringtone app stores, including pre-recorded, humorous voicemail greetings (humorous being generously defined), custom wallpapers, ringback tones (remember when some people had songs play when you called them?), custom alarm sounds, and more.The technological breakthroughs needed to bring a mobile app store to life, combined with ringtones’ popularity, cemented the app store’s role as critical infrastructure for the coming Digital Age. Particularly prescient here was the introduction of micropayments and frictionless e-payment mechanisms. The effectiveness of that combination is hard to overstate: the offerings were both cheap and easy to buy without pulling out your wallet -- it was simply tacked on to your monthly bill -- amounting to a frequent and frictionless purchase experience. Custom ringtones showed technologists the power of frictionless payment; frictionless payment enabled software to eat the world. It incentivized creators and developers to create, while building consumer habits around digital purchasing that underpin today’s digital economy.Custom ringtones were also most people’s first exposure to the magic of on-demand anything. Never before could the average consumer order something with the press of a button and get it immediately, regardless of where they were. This facilitated impulsive buying behavior, and stoked the public’s imagination with the possibilities of the new digital frontier.With the establishment of on-demand digital stores and the trivial marginal costs of adding more content, consumers suddenly got mobile access to the long tail. Musicians without record deals could make their content available to a wide audience, on-demand, and make money off of it. For the first time, creators were able to skip pay-to-play channels like record stores or the radio to market their content. Disintermediation is a peach of a narrative and Spotify, Soundcloud, TikTok and others gobbled it whole, without realizing that the custom ringtone germinated its seeds years earlier. The founder of Jamster, a German ringtone provider, said it clearly in 2006:[Jamster] gives incentives for generating new content every day. The more content there is and the better I can sell it, the more the whole industry - and particularly the artists - will profit. I live from the long tail.There was another conceptual role that ringtones played: connecting our phones to the rest of our electronics. When phones came out, they were perceived as a standalone piece of consumer hardware, much like a dishwasher or a radio might be. There wasn’t much linking the cellphone to other parts of the consumer electronic ecosystem, like the personal computer. You used one to make calls and the other to draw portraits of your turtle on Microsoft Paint (I think?). But a defining feature of the digital world is the intricate link between all of our smart devices. It seems standard today to think of our phones as an extension of our computers or tablets: our data syncs automatically, we bookmark content on the phone to finish watching or reading on our computers, we share music libraries, respond to iMessages on our laptops and so on. That was hard to imagine back when Gorbachev showed off his Nokia.That’s not a metaphor.The custom ringtone showed both consumers and innovators the potential of redefining the phone as an extension of the computer, which was foundational for the development of the smartphone. First, one popular way to get ringtones (especially if you wanted them for free) was to download them onto your computer and then transfer them over to your phone, usually via bluetooth. Second, to set up or change a ringtone, one had to dive into the phone’s operating system, a snorkeling adventure that, while not particularly complicated, involved the concept of nested folders, settings menus, and choice architecture. It exposed consumers to the shared operating principles common to both computers and phones.There was another subplot that, inadvertently, drew a causal link between the ringtone and popularization of the smartphone which has become the cornerstone of the Digital Age. In the early 2000s, Apple had a plan to grow iTunes, their music app. On the heels of the global success of the iPod, they would partner with Motorola, then the industry leading manufacturer of the RAZR, to develop a cellphone with iTunes built-in. It got people very excited. But the result of that now unfathomable tryst was the Rokr E790 Candy Bar:Now only imagine, ladies and gentlemen... our terrible music library, on an even worse phoneThe phone turned out to be an abject user experience failure. It had a 100 song limit regardless of how much space you actually had left, and it was painfully slow at uploading songs from iTunes. Crucially, you couldn’t use it to buy ringtones or music remotely. Distributors had to slash its price within 2 months of launch. For Jobs this was an eye-opening reminder: own your damn hardware. He took his intended strategy -- develop a phone that had the iPod’s music playing capabilities as a way to capture a piece of the mobile segment while building a moat around Apple’s music business -- and built the iPhone, the vanguard of the smartphone revolution to come.Ringtones’ Everlasting LegacyRingtones remind me of childhood. Of the time I showed my mom how her device could bleat a monophonic rendition of Brahms’ Hungarian Dances, of how incredulous she seemed, how her eyes glimmered with wonder and curiosity. Of how she kept it as her ringtone for years to come.Of how I learned to download ringtones for free onto my parents’ phones, of how proud I felt. I would scroll through the recent downloads in waiting rooms, in bank lines, in backseats, my mom nearby worrying about whatever grown ups worried about. I’d play my new acquisitions on her phone -- Backstreet Boys, System of a Down, Black Eyed Peas -- just loud enough for others to hear but quiet enough to avoid her scolding.Yes, it’s great we aren’t living in an endless menagerie of electronic sounds competing with each other for attention. But in some ways it’s sad they’ve all but disappeared from our lives: little packages of sound like parcels of identity sent from pockets and handbags, announcing someone else needing you, or thinking of you, or inviting you to something.So I guess it is some consolation that we chose to walk through the doors that the world of ringtones opened for us and live today in the possibilities it presented.If you enjoyed learning from Gil as much as I did, subscribe to That Damn Optimist.Thanks for listening, and see you on Monday! Packy This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.notboring.co

Welcome to the 486 newly Not Boring people who have joined us since last Monday! If you’re listening to this but haven’t subscribed, join 6,171 smart, curious folks by subscribing here!I’m trying something new today and including the full post with the audio edition. Let’s get to it.If I Ruled the TweetsOn April 7th, just weeks into the Coronavirus pandemic, Twitter and Square CEO Jack Dorsey announced that he was giving away $1 billion to fund global COVID-19 relief. The world applauded Dorsey like this level of generosity was something new for him. Anyone who’s been following Twitter, though, knows that Jack Dorsey has been giving away value for years. Twitter is the most undermonetized product in the world, because it doesn’t know what it is. For someone so into meditation, @jack’s lack of self-awareness is a surprising error with major implications. * Twitter’s ads business struggles to support the entire company.* Twitter doesn’t know who its customers are, or what its Job To Be Done is for them.* Twitter captures almost none of the value that it creates. * Creators are left without features they would happily pay for.* Twitter Profiles are the most underdeveloped real estate on the internet.But Twitter still has a shot. One decision in 2015, and the company’s soporific product cadence since, was a blessing in disguise that gives Twitter a blank slate to build the product that it was meant to be all along.Sliding VinesIn her recent book on Instagram, No Filter, Sarah Frier includes one paragraph about the 2015 battle between Vine, Twitter’s six-second video app, and its biggest stars: Twenty of the top Viners banded together to negotiate with Twitter, saying that for about $1 million each, they could post every day for the next six months. If Twitter rejected the deal, they would instead start posting Vines to tell followers to find them on Instagram, YouTube, or Snapchat instead. Twitter refused, the stars abandoned the app, and eventually, Vine shut down entirely. That short paragraph represents one of the major Sliding Doors moments in recent tech history. What does the app world - Facebook, Instagram, Twitter, TikTok, Netflix, and more - look like if Twitter had given into its biggest stars’ demands? Sliding Doors moments are what-ifs based on small tweaks to the timeline, popularized by the 1998 Gwenyth Paltrow banger, … Sliding Doors.The movie runs two timelines in parallel, split by one moment in which Paltrow’s character, Helen Quilly, either misses or catches her train home. In Timeline 1, Helen misses the train, gets mugged, hits her head, and finally gets home just as her fiancé’s ex drives off, none the wiser that the two had just slept together.In Timeline 2, Helen jams her shoulder between the “sliding doors,” catches her train, and makes it home to catch her fiancé in bed with another woman. As the short-form video app TikTok sweeps the world - it is expected to generate $500 million this year in the US alone - Twitter’s critics are running the sliding doors scenario on the company’s 2015 decision to effectively kill its own short-form video app. In Timeline 1, Twitter plays ball with the Viners. It pays them what they want, listens to their product feedback, and turns Vine into what TikTok is today. Twitter is an engagement powerhouse. We’re living in Timeline 2. Twitter says no to the Viners and ultimately shutters the app. Its main product stagnates and its stock price follows suit. TikTok fills the void and its parent company, ByteDance, is worth 4x as much as Twitter, with a valuation rumored to be between $105-110 billion on 2019 net profits of $3 billion - nearly as much as Twitter’s total 2019 revenue!But there’s a twist in Sliding Doors, and it applies to Twitter, too. In Timeline 1, the one in which she stays with her fiancé, Helen is miserable. In Timeline 2, after a couple of days of deep sadness and lots of drinks, Helen cuts her hair, starts her own PR firm, and falls in love with a much better guy. Timeline 2, the one that seems like it would be worse for Helen, allows her to rediscover who she is. Her new path ends up being so much better than the one she was originally on, because Timeline 1 Helen wasn’t her best self after all. (Let’s ignore the part where Helen gets hit by a van and dies. Life is unpredictable!) Twitter’s Timeline 2 has the potential to be so much better than Timeline 1, but the company is still in the midst of a five-year post-breakup funk. Since it hasn’t rediscovered itself yet, I’m going to play the role of “concerned best friend” and help Twitter snap out of it. If Twitter had kept Vine alive, it would have set a bad precedent, giving into creators’ demands and paying them off while failing to capture value itself. Even worse, it would have allowed Twitter to continue to delude itself into thinking that it’s a social network. Here’s the thing: Twitter thinks it’s Facebook, but it’s LinkedIn. Twitter thinks it’s an ad product, but it’s a subscription product. It thinks it’s an Aggregator, but it’s a Platform. It thinks it’s a social network, but it’s a professional network: one built for the Passion Economy, based on the strength of ideas instead of past experience.That realization should be liberating for Twitter and Jack Dorsey. Instead of being the world’s least innovative social network, it can be its most innovative professional network. Twitter should be the beating heart of the Passion Economy, and begin capturing some of the tremendous value it creates. Today, we’re going to give Twitter a makeover with its new identity in mind. * What’s wrong with Twitter and why?* Who is Twitter’s customer and what is its Job to Be Done (JTBD)?* What would Twitter look like if I ruled the tweets? Twitter is the most undermonetized product in the world. IT’S TIME TO MONETIZE!What’s Wrong with Twitter?Twitter is simultaneously my favorite product and the company that most frustrates me. As a Twitter user, I love the product. According to my Weekly Screen Time Report, I spend 5x more time on Twitter than I do on any other app. Not Boring would not grow the way it does without Twitter. I meet and talk to people I would otherwise just read about and admire from afar. If anything, I want to be able to do more on Twitter.As a Twitter shareholder, I can’t stand the company. Twitter’s stock has underperformed all of its peers… significantly. Twitter is down 14% since its 2013 IPO. Its next closest competitor, Google, is up 186% over the same period. Facebook, lacking scruples in its pursuit of Rubles, has more than quadrupled. So I have a lot of thoughts about what Twitter should do. I’m not alone. On Friday, I asked this question (on Twitter of course): I’ve never gotten more engagement on a tweet. Twitter users love talking about what they would do to fix Twitter. Responses ranged from “Sell the company” to “Ban the Nazis,” from “Remove the bots” to “Fix search.” Nikhil begged: “fix DMs holy shit nothing else matters please jack i beg you why are they so bad.” People asked for a podcast app, the ability to write longer-form content, and verification.  Even Y Combinator founder Paul Graham got involved: Reading through all of the responses, a pattern emerged: Twitter is terrible at being an ad-based social network, and isn’t giving Creators a pro subscription product they would happily pay for.Social versus Professional NetworksIncentives shape behavior, both on the company and individual level. Social networks - like Facebook, Instagram, and Snap - work by getting you and all of your friends in one place, keeping all of you engaged, and selling your attention to its real customers - advertisers. Facebook generates 98.5% of its revenue from ads. To PG’s point, engagement-chasing leads to toxicity. Social networks are incentivized to show user growth (which disincentivizes, say, removing bots from the platform) and to keep users in the app (and outrage is a great way to keep people glued to their screens).  Professional networks - like LinkedIn - like engagement and ad revenue, too. Who doesn’t? But ads are not their main source of income. Before Microsoft bought it for $27 billion in 2016, LinkedIn made money in three ways: Talent Solutions (recruiting and learning tools, 65%), Marketing Solutions (ads, 18%), and Premium Subscriptions (want to see who viewed your profile? 17%). Only 18% of LinkedIn’s revenue comes from ads; 82% comes from subscriptions.Professional networks aim to deliver measurable value to as many of the best companies and top people as possible, and get them to pay directly for that value. Bots and outrage are harmful to professional networks, because they make it less likely that users achieve the things they are willing to pay for to achieve - hiring, partnering, and selling.Twitter makes money like a social network: Advertising Services (ads, 86.5%) and Data Licensing (selling companies a firehose of Twitter data, 13.5%). It generates revenue by keeping people engaged, generating data on them, and either using that data to sell ads or selling the data itself.But Twitter isn’t very good at the business of being a social network. Twitter has long struggled to grow or monetize its user base. In 2019, Twitter made $3.4 billion from 330 million users. Facebook made $70.7 billion off of 2.5 billion users. Facebook is for everyone who has friends, family and an internet connection, which is pretty much everyone. Twitter is not for everyone. It’s for knowledge workers who rely on Twitter to exchange ideas, promote their work, and take place in the global, real-time conversation. That is definitionally a smaller target market than Facebook’s, but that doesn’t mean that Twitter needs to be a smaller business. Twitter’s audience is more targeted and professional; it should be able to generate more revenue per user than Facebook does. Arguably, Twitter actually does create more value than Facebook. Its lack of self-awareness, though, prevents it from capturing that value. The Informal Bill Gates LineTwitter is a charity masquerading as a for-profit business. It’s nearly impossible to calculate the total value that Twitter has created for its power users - both individuals and companies - by giving them a place to build an audience, connect directly with fans, and promote their work. And Twitter keeps almost none of that value for itself. Let’s take Substack as an example. Substack would not exist, at least not in its current venture-backed form, without Twitter. I surveyed a group of newsletter writers about how they grow their audiences, and 95% of them use Twitter. For Substack, that’s incredible. Its customers - writers - write on Substack, share what they write on Twitter, and take advantage of Twitter’s graph to find new subscribers. Some percentage of those subscribers pay the writer and Substack takes a cut. Other writers see Substack on Twitter and decide to start their own Substack, and the cycle starts again. Who’s capturing the value here? The writer captures value in the form of a new free or paid subscriber.Substack captures value in the form of new paid subscribers and new writers. Twitter captures almost zero value. You could argue that it captures a little in the form of increased engagement that it can sell ads against, but when one of its users sees a Substack post and clicks the link, she leaves Twitter and gives her attention to Substack. This happens millions of times each day, for thousands of non-Twitter products - YouTube, Medium, The New York Times, Spotify, podcasts. Don’t get me started on podcasts. In-app podcast discovery is notoriously awful. You know where people discover podcasts? Twitter. Countless media and tech companies and personalities amplify themselves on Twitter, for free, and then bring users off of Twitter and into their product. This is how Aggregators work. They aggregate demand, and collect a tax for sending that demand to its final destination. Every time I search on Google, for example, if I find what I want, I leave Google. But Google collects money from the company to whom I divert my attention. Twitter is terrible at collecting that tax. Its Promoted Tweets are a hard-to-use joke. Twitter is a very bad Aggregator.The other way of looking at Twitter is as the Platform that is further above the Bill Gates Line than any other platform on earth. The Bill Gates Line is a phrase coined by Ben Thompson based on a Bill Gates quote about Facebook Platform: This isn’t a platform. A platform is when the economic value of everybody that uses it, exceeds the value of the company that creates it. Then it’s a platform.By that measure, Twitter is definitely a platform, but it’s an informal one. Whereas developers build directly on top of traditional platforms, like Windows, the businesses built “on top of” Twitter, like Substack, do so informally and without Twitter capturing any value. Twitter is so far above the Bill Gates Line that it’s much closer to another Bill Gates Line - the world-record $35 billion that Gates has given away through the Gates Foundation.It is time for Twitter to start capturing the value that it creates, improve its experience for its customers, and get its stock moving. For that, it needs to understand who its customer is, and what the Job to be Done is for those customers.Who is Twitter’s Customer?There’s a phrase that goes back to the pre-internet era that people apply to social media: “If you’re not paying for the product, you are the product.” It means that ad-supported businesses sell your attention (the product) to advertisers (the customer). On social networks, users are the product, and advertisers are the customers. In non-ad supported businesses - from subscriptions to hardware to food - the product is the product, and the buyer is the customer. On professional networks, like LinkedIn, most users are the product, but power users are the customers. Anyone can use LinkedIn for free, but users who need more capabilities - who want to recruit beyond their own network, see who’s viewing their profiles, or reach out to qualified leads - can pay for additional functionality. Like a social network, everyone on LinkedIn benefits from more people being on LinkedIn, but certain people and companies can pay to benefit more. For Twitter, Creators, the 10% of users who generate 80% of the tweets, are its customers. Twitter should adopt LinkedIn’s model - keeping the current Twitter product free and open for casual users, and charging its customers - the Creators who rely on Twitter to build and grow their businesses.What is Twitter’s Customers’ Job To Be Done?The "Jobs to be done" (JTBD) framework, developed by Clayton Christensen, says that customers hire products to do a certain job for them. For Netflix, the JBTD is “I need to be entertained.” For Facebook, it’s “I need to connect with friends and family.” For Google, it’s “I need to find something on the internet.”What is Twitter’s JTBD for Creators? “I need to get my ideas in front of people.” Twitter is the Platform for Ideas. Its customers are the Creators who create and share ideas. It should diversify its revenue stream away from ads-only by adding a subscription product and monetization options for those Creators.  I’m not the first to suggest that Twitter should launch a subscription. Last week, a Twitter job posting suggesting that the company is hiring for a subscription product shot around the internet. Its stock popped 7%. Professor Scott Galloway previously wrote that Twitter should buy up dying media companies and also charge verified users a monthly fee based on their follower count, or something. But the Prof is just as confused as Jack. A half-baked subscription product that extorts Twitter’s top users based on the follower counts they’ve spent years building up doesn’t make any damn sense.  Thanks to the 300+ replies with suggestions for improving Twitter, though, we’re ready to Play Fantasy Jack. If I Ruled the TweetsAs @Post_Market said, “Twitter is the town hall.” That’s a wonderful thing, but real business doesn’t get done in the town halls. It gets done in the back rooms. Currently, those back rooms are off of Twitter. Jack needs to take them back. The Fantasy Jack Twitter Roadmap is all about making it easier to create, share, and monetize great ideas, build communities, and capture value:* Table Stakes: Verify identity to clean up the conversation. * Twitter+ Subscription: Paid tools for Creators to find, create, and share ideas. * Twitter Create: Twitter should be the place to build subscription businesses.* Profiles as Creators’ Home: Develop the most underdeveloped real estate online.This roadmap seems like a bold departure from the Twitter we know and love, but it really just represents Twitter getting out of its own way and building better versions of the things that happen outside of its control today. 1. Verify Identity and Allow Filtering by VerifiedThis is table stakes. A social Aggregator might not want to verify users, creating two classes, one of which is far less valuable to advertisers, and exposing that its user base is smaller than it looks. A professional Platform for Ideas absolutely should. Twitter used to verify its users - giving them a blue check on their profile - until it caused an uproar in 2017 by verifying a white supremacist. Now it only verifies some people, occasionally, through a non-public process that involves getting in touch with someone at Twitter. It’s messy.Dror suggests that Twitter should “give people a chance to verify their identity, even for a small fee” and “allow filtering of posts, comments, and notifications by verified.” The ability to filter by verified solves the bot problem, squashes trolls, and raises the level of discourse on Twitter. To PG’s point, when you’re not optimizing for Daily Active Users (DAUs) and engagement alone, you can lower toxicity.2. Build Twitter+, a Subscription Product for Creators Charging the most popular Twitter accounts a monthly fee based on their follower count is a progressive tax that could lead to a mass exodus. That’s not the move. But Twitter should absolutely build a Pro subscription offering for its Creators. The subscription product should enable creators to do the JTBD better - generate, create, and share ideas - spark conversations around those ideas, and get paid for them. As a Twitter Creator, I would pay for:* Bookmarking → Note-taking and Networked Thought. Marc Geffen’s idea is my dream. My Twitter Bookmarks is where things that I really want to read go to die - there’s no structure, no way to annotate or add notes, no way to connect ideas. Twitter should buy mymind or Roam, and integrate it into the product, making it easier to collect, organize, remix, and share ideas.* Better Search. Twitter search is terrible. Chris Muscarella wants search that works across messages, DMs, and bookmarks, with cached links in all of those sources. It can also greatly improve tweet search - it knows, for example, how many times a tweet on a given topic was liked and retweeted, and by whom. It can assign weight to certain people’s engagement, and build its own TweetRank.  * DMs That Work. Please, Jack. Help Nikhil here. Currently, you can only search by name in DMs, not by any of the content in the messages. So many good conversations happen out of the main feed and in DMs, and Twitter should make it easier to spin up (and then search) group DMs, conversations around certain topics, and ongoing 1-1 chats. The fact that I’m in Telegram chats with people who are so active on Twitter is a fail. * Comment CRM. Twitter Creators receive a lot of comments and questions. Twitter should build an easier way to track and manage them.* Who Viewed Your Profile. I recently canceled my LinkedIn Premium (being unemployed and not looking for a job, and all). “Want to see who viewed your profile?” is LinkedIn’s #1 reactivation tactic, and it almost gets me every time. * Early Access to New Features. In this new world, Twitter is a product company again. Early access to new features would be enough to get some power users to pay on its own.* Monetization Options. See next point. Twitter is in a position to create the ultimate Creator bundle, and add to it over time. Live presentations, Superpeer functionality, free promoted tweets - the bundle would only get more valuable over time.    At $20/month (Roam alone is $15/month), Twitter+ is a $1 billion annual opportunity, without assuming that the improved offering attracts new users. 3. Build, Buy, or Partner on Products for Creating, Sharing, and Monetizing IdeasThis is where Twitter takes back the value that it creates for so many other companies. It needs to get a little mean to make that happen.Twitter is the place that Creators go to grow subscription businesses. Twitter Create should be the place that they go to build subscription businesses. To start, Twitter should build a monetization product for Creators to easily collect subscription or one-time payments, from which Twitter takes a small cut. Instead of a Memberful plug-in on a Squarespace website, Creators should just build it all on Twitter.Some people have suggested that Substack, which makes it easy to create a subscription newsletter, is the paywall for Twitter, and that Twitter should buy Substack. That’s crazy. Substack has raised $17 million dollars, which means that it would cost Twitter well over $100 million to acquire the company. Twitter can recreate Substack for much less than $100 million, with better functionality. Twitter should build its own blogging and newsletter product, with a text editor, email send, analytics, referrals, custom domains, an ad-network, and easy ways for writers to grow their lists by selling promoted tweets based on follower and subscriber lookalikes, and the interest graph. Additionally, Alex Carter suggested that Twitter should build a standalone podcasting app. That’s one approach, and it makes a lot of sense. It’s hard to share clips, notes, or anything other than an entire podcast, and Twitter could improve that. Another approach would be to team up with Spotify. Spotify has spent a lot of money to acquire valuable IP like Gimlet, The Ringer, Joe Rogan, Kim Kardashian, and The Obamas, and is working on building out a podcast ad network. Spotify would expand its reach and improve targeting, and Twitter would earn some of the revenue it helps Spotify generate. Why would Spotify do that? Remember, Twitter’s mean in this scenario 😈. Spotify links don’t preview anymore? Oops. Podcast discovery happens on Twitter, and Twitter should capitalize on that. Beyond newsletters and podcasts, Twitter can give Creators myriad ways to monetize: storefronts, an expert network, paid communities, access to audio-only rooms, online events, and more. Creators might even sell bundles of their own offerings to superfans, and automatically give discounts based on retweets and referrals. Twitter is in the strongest position to integrate payments and growth, and let Creators do the rest.Based on very rough math, this could be a $2 billion opportunity for Twitter almost immediately. Nothing would expand the Creator TAM more quickly than Twitter getting this right. 4. Make Profiles Incredible Places to HangoutTwitter Profiles are the most underdeveloped real estate on the internet. Right now, when you click on someone’s profile, you see 160 characters on them and their most recent tweets. It’s such a huge miss. Because it’s not in the main feed, Twitter should be a lot more experimental with Profiles. Someone’s Twitter profile should be a glimpse into their world, and Twitter should both create its own features and open up its API to make that happen. Imagine clicking on my Profile and popping into a Roadtrip experience. I’m DJ’ing my favorite songs and we’re having a conversation about the day’s tech news. People that I follow can join for free, non-follows could pay me a small fee. I could highlight what I’m reading (assuming someone finally makes a better Goodreads), my NewsletterStack, my favorite Spotify podcasts, and the products I recently hunted on ProductHunt. I could invite accredited investors to join the Not Boring Syndicate, and show off the performance of the Not Boring Portfolio. My Twitter Profile would be what a LinkedIn Profile would be if it were a living, breathing thing, created in and for 2020, based on what I’m currently creating and consuming.Of course, since I’d host my newsletter on Twitter Create, there would be a subscribe button front and center, with links to the three most recent posts. If you enjoy your experience in my little corner of Twitter, you could hit a button to tip me so that I can keep creating. Oh yeah, and with all of that engagement, maybe Twitter could even build an ad network to let relevant companies sponsor my profile, finally creating an ad product that makes sense 😉Hit the Road(map), Jack!Twitter dodged a bullet five years ago when it refused to pay Vine’s stars. It’s not a social network, and it’s not a product for passive entertainment. By not building in that direction for the past five years, Twitter left itself a clean slate on which to build a product for its real customers.Twitter is a professional network for the Creators whose ideas and products shape the conversation and the world. It should be proud of that. Twitter needs to get its swagger back, and a full reset on priorities and a bold new vision would do just that. The path that I laid out has the potential to double revenue in short order, and we didn’t even have time to cover how companies might engage with all of the new functionality that Twitter builds for its creators. Company profiles with Shopify integrations would be so clean. I’m bullish on Twitter if for no other reason than how much I and so many others still love and rely on it, despite all of its shortcomings. Twitter creates so much value, and it’s time that it captures it. @jack - if you have any questions, you can find me @packym, on Twitter.Thanks as always to Dan and Puja for reading and editing! If you liked what you read, I’d really appreciate if you hit the heart button, leave a comment, or share the post!Reminder: Join me on July 14th (tomorrow) for a conversation with Compound Writing on how to write and grow a newsletter by not being boring. The event is available to Compound members and Not Boring subscribers. Signup here:Thanks for reading, and see you Thursday,Packy This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.notboring.co