16: Etsy Post-Pandemic, Upside Decay, Dagobert, the Scrooge McDuck Bandit, Asian-Western-Funk Fusion
“When I got home, my wife was ironing, and she asked me if I could rent a crime thriller from the video store. She couldn’t have known that my whole life was a thriller.” - Arno Funke a.k.a "Dagobert"
Investing & Business
Revisiting Etsy post-pandemic
Reading time: ~10 minutes
Interesting post by Saber Capital Management on Etsy, and the combination of the network effect and a marketplace model which allows for gatekeeping.
Network effect is a concept that has recently discussed at length with regards to bitcoin and other cryptocurrencies (or even Facebook in its time) to try to find a proxy to value intangible assets/business.
The term “network effect” gets too often ascribed to businesses that don’t really possess one, but a true network effect is one of the most valuable advantages in business, and something I always watch for when studying companies. When combined with a marketplace business model, the result can be a toll road, taking a high margin royalty on the commerce that happens on its platform. […] The most important feature of a true network is that it gets stronger as the business grows. Network effects defy the nature of capitalism — profit margins expand while simultaneously becoming harder for competitors to attack.
Here, the figures point out to the fact that the network effect is live and running, even in a business that had been highly inflated during covid and was faced with the risk of seeing the fad go away:
Etsy’s network has grown from 2.7 million sellers and 46 million buyers at the end of 2019 to 4.7 million sellers and 91 million buyers today. Also, each member of the network is more engaged, and spending more money on average. This network is exponentially more valuable than it was pre-pandemic, and the future cash flow is in my view going to be much greater and also more predictable.
To summarize, Etsy has been getting bigger AND more stable as an investment since the pandemic, contrary to what most could have forecast.
Etsy is still growing near 30% in the core business and its most valuable customer segment is accelerating their shopping frequency. The network has gotten bigger, the users are participating more often, and the profitability has exploded higher with operating margins going from 11% to 27% in just a year, even as the company continues to invest heavily in marketing and product development. Etsy did $2 billion in revenue over the last year, of which $700 million turned into cash flow.
P.S. - John Huber also was interviewed in the Graham and Doddsville newsletter from Columia Business School in the Winter 2021 edition, where he goes more into depth with his thesis if you’re interested in reading more!
Thought-provoking stuff…
Upside decay
Reading time: ~10 minutes
Interesting article by Brian Lui on the topic of “upside decay”.
Basically, upside decay is what happens when the best positive outcomes sart to disappear or reduce in proportion:
What’s the cause of this and what are the consequences?
GDP per capita has increased for two centuries, driven by improvement in Total Factor Productivity, also known as technological inventions and breakthroughs. This comes from many people trying out different things, each of them individually unlikely to succeed. The ones that do succeed, though, create an outsized impact. Like in venture capital, one big discovery creates enough progress to subsidize all the others that didn’t work out.
This means that progress happens in bursts, when everything goes right and a new invention or discovery happens. For example, we might need six things to go right for a successful discovery
Because of the relative independence of each new discovery, even a slight reduction in the probability of achieving success in any of these inventions will trigger a dramatic drop in the probability of reaching the most positive outcome (a high proportion of discoveries achieved).
China as an example of upside decay in international relations
China was free of upside decay for decades, rapidly growing its economy while enjoying relative social and political stability. In recent years, though, the Chinese Communist Party (CCP) has found its goals being thwarted […]. The United States now treats it as an enemy, with the destruction of Huawei as a recent example […].
Even Germany, long focused on the money it makes from transferring its technology to China, is having second thoughts. The political landscape has worsened even more. In its pursuit of stability, the CCP has applied its Tibetan repression techniques to other peripheral areas,
According to Brian Lui, upside decay has a lot to do with virtue favorizing international cooperation (for countries) and healthy corporate cultures (when it comes to companies). In the corporate world, the two prime example of the extremes are Facebook (whose executives always made choices based on the expected increase in advertizing revenue) and Berkshire Hathaway (which succeeded in establishing a culture of trust, illustrated by the widespread validation of the announced leadership transitions):
Arts & History
Dagobert, the Scrooge McDuck Bandit
Reading time: ~30 minutes
A great longread by the New Yorker on a German criminal who crafted his persona after Scrooge-McDuck
Funke grabbed the package and scampered to safety. When he opened it, he saw that only four thousand marks were real; the rest was Mickey Mouse money. He had threatened the store with another bomb if it didn’t pay up. Meanwhile, it didn’t take the police long to connect the two bombings: both involved voice changers, a treasure hunt, ingenious gadgets, and money thrown from a train. They were dealing with a serial bomber who appeared to take inspiration from the capers in comic books featuring Scrooge McDuck. From that moment on, they called him Dagobert.
[…]
Berlin’s Tagesspiegel newspaper later crowned Dagobert the “gangster of the year,” writing that he had raised the cops-and-robber game “to an intellectual level never before seen in German police history.”
[…]
”Dagobert was the underdog, the lonely hero who fought an equal fight with the great state power,” he told Der Spiegel. “He was resourceful and imaginative.” Speaking to Die Zeit, Daleki admitted, “It was almost a shame that everything was over. As strange as it sounds, it was also fun.”
Treat for the Ears
“When you say gracias to the waiter at the sushi restaurant”
"what kind of music do you like? - it's complicated"
Other Interesting Links
Until next week!
Antoine