Was Snap, Netflix or Uber wrong?

Was Snap, Netflix or Uber wrong?

When evan spiegelSnap’s boss, Claude Sullivan, said in a leaked memo, that Snap had been “punched in 2022’s face hard by the new economic reality”. He might have meant to be referring to America’s digital darlings in general. The sector has been in a bull run for many years and is now experiencing a severe correction. It is currently experiencing a sharp correction. NASDAQ Index, which is home to many internet-related companies, fell by more than 30% over the last 12 months. The Dow Jones Industrial Average, which includes fewer techie businesses, however, has dropped by about 10%. Crunchbase is a data provider and estimates that American technology has lost more than 45,000 jobs in the past year.

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Partly, this is due to macroeconomics. Consumers are being forced to reduce discretionary spending due to rising inflation and increasing mortgage payments. Most digital offerings, however, are discretionary. Even though the trillion-dollar industry giants continue to make handsome profits, even they have been hit hard. In the last year, Alphabet and Microsoft collectively suffered a loss of $2trn market value.

Big tech is having a bad time, but think about the good tech. Three business models that were adopted by companies after 2001’s dotcom bust, and later by investors, are losing their steam. These include the movers which move people around the city or objects within the city; the streamers who offer music and video streaming. TV Online) and the creepers, who make their money selling highly-targeted advertisements and watching users. These business models have seen a dramatic decline in market capitalisation over the last year.

It could get worse. Uber posted strong growth on November 1, but another quarter of net losses, even though it is the world leader in ride-hailing. It has burned $25bn cash in its thirteen-year history, roughly equal to half of its market capital. DoorDash is still losing money, the market leader for food delivery. Furthermore, Snap and Spotify are losing money despite growing revenue. Netflix, which was founded in 1990 but has been a streaming service since 2007, turns a profit. However, its third-quarter revenue increased by just 6% compared to a historic average of over 20%. Meta’s revenue has now declined for the second consecutive quarter.

The movers, streamers, and creepers look very different. However, when you look closer, they all face the same major pitfalls. They have a lack of faith in networks, lower barriers to entry, and dependence on another’s platform.

You can start with network effects or, in Silicon Valley parlance “flywheels”, the idea that product value increases with increased user base. The argument is that the flywheel drives a cycle of self-perpetuating growth once the user base reaches a threshold. So startups are always looking for growth. They spend millions to acquire more customers.

These network effects can be real. They have limitations. Uber thought its ride-hailing experience was a key to success. More riders would bring more drivers and more people into a thriving network. It was instead faced with high unit costs, diminishing returns to scaling: To reduce wait times by two minutes, Uber would need twice the number of drivers. Most riders wouldn’t notice any difference. DoorDash’s customers are also limited in the number of Indian restaurants they can choose from. The network effects that DoorDash users enjoy are only local. A user in New York doesn’t care about how popular the app is in Los Angeles.

Spotify and Netflix are also trying to take advantage of network effects. Data on similar viewing and listening habits promised to create an unparalleled product. The belief that Netflix would have a trove of user data to give them an edge when creating content was shattered with flops such as “True Memoirs of an International Assassin”, which received a rare 0% rating from Rotten Tomatoes (a review site). The creepers, whose social media networks are a business that uses network effects. par excellenceThe concern is about what will happen if flywheels spin in reverse. Meta experienced a panic in its fourth quarter 2021 when it lost 1m customers. The company added more users after the loss. It may not happen again.

Low barriers to entry is another problem. All manner of startups were able to create consumer software quickly and cheaply thanks to technological advances, such as smartphones and cloud computing. However, copycats quickly arose and were able to make generous discounts in order to rapidly build the minimal scale.

Uber is the only ride-hailing company that Lyft has a real rival at home, but its international expansion quickly fought off local competitors like Didi in China, Grab, and Gojek South-East Asia. The combination of simple products with a free user experience can make it possible for new competitors to get momentum. Just try making a TikTok teenager.

For streamers, the barriers are more high. Spotify and Netflix spend large amounts of money licensing or making content. They aren’t impossible for the more wealthy competitors. Netflix, which spends a combined $30bn per year on content, must continue to splurge, at a cost of approximately $17bn annually. This is in order to fend off Disney’s challenge. Content costs, like customer acquisition costs, eat into the profits of streamers. The streaming service of Disney lost $1.1bn during the second quarter. Disney has also stated that Disney+ will continue to lose money up until 2024. Netflix’s free cashflow, which is the money that companies make after deducting capital investment costs, accounts for only 6 percent of its revenue.

A third problem common to these three wobbly models of business is their dependence on other distribution platforms. Uber and DoorDash both pay handsome fees to advertise in the Apple iPhone app store and Alphabet Android app store. Spotify charges 15% commission for subscriptions bought on iPhones. This tax is so irritating that Spotify has brought a lawsuit against Apple. Netflix skirts this commission and forces users to sign up through their browser. This shifts the burden to the customer, which could lead to them losing out on future subscriptions.

The creepers are most affected by this lack of rails. The creepers’ dependence on the iPhone/Android duopoly poses a serious threat to their existence. Apple’s recent requirement that iPhone users grant permission for apps to track activity on other websites and apps, which was also replicated by Alphabet may have cost Meta $10bn this year in lost revenue. Both Apple and Android temporarily suspended Parler, an app that is favored by far-right extremists. The rising star of social media may find itself in similar trouble if American national security hawks concerned about TikTok’s Chinese ownership force Apple and Alphabet expel the app from their stores.

Different business models face different challenges. If there were meaningful barriers for entry, the movers might be better off. If the network effect had been more powerful, streamers may have been able fend off new entrants. The creepers had been in good shape before Apple and Alphabet destroyed their party. Problem enough for one shaky support pillar. A disaster is waiting for three of these pillars. #

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The article was published in the Business section under the title “Bad technology”

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