Tech Brew Ride Home - Fri. 02/04 – Tech Earnings Whiplash!

Starting point is 00:00:00 On April 4th, 2023, around 2 in the morning, a man was found stabbed multiple times on a sidewalk in downtown San Francisco. Hey, who did this to you? What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Cash App. From Bloomberg Podcasts, this is Foundering, the Killing of Bob Lee, beginning April 16. Welcome to the Tech meme right home for Friday, February 4th, 2020. I'm Brian McCullough today. That crack you felt in your spine was maybe just the whiplash from the craziest 24 hours in tech earnings I've ever seen. Amazon has created a bigger advertising business than the entire newspaper industry. Apple once again shows it can adjust the App Store Vig when it has to, and of course the weekend long-read suggestions. Here's what you miss today in the world of tech. I've done what? 16 earnings weeks? for tech since this podcast began. And I swear to you, this one has been the wildest one yet. There were some issues and concerns about Netflix at the beginning. But then Apple and Google had

Starting point is 00:01:19 record quarters, so I felt like the narrative was largely unbroken. And then, of course, meta absolutely messed the bed. And the narrative suddenly became, maybe Apple had made things so difficult for everybody that a lot of people could be in trouble. You might remember that the stocks of companies like Twitter and Pinterest and Snap were all down. In fact, you might have been aware that Snap closed down after trading yesterday, 23%, largely in sympathy with Meta's 26% stock drop. And yet, this morning, Snap stock opened up more than 45%. So in less than 24 hours, Snap was down 23% to up 45%. Wait. I thought it was crypto that was so volatile.

Starting point is 00:02:08 First, let's see what gives here with Snap. Snap reported its first quarterly net profit ever, with $1.3 billion in Q4 revenue, up 42% year-over-year and $23 million in net income. Fiscal year 2021 revenue grew 64% to a total of $4.1 billion, quoting CNBC. It also provided a Q1 guidance range of $1.03 billion to $1.08 billion, higher than the 1.01 billion analysts anticipated, according to Refinitive. It expects daily active users

Starting point is 00:02:41 between $328 million and $330 million in the first quarter, beating analysts estimates of $327.8 million, according to street account. Snap has to contend with similar headwinds as meta, which warned that it anticipates a $10 billion revenue hit in 2022, resulting from Apple's privacy changes on iOS that make it harder to target consumers with advertiser content. Snap also distributes its app on Apple iPhones and serves advertising content to monetize its business, but Snap's direct response advertising businesses experienced a recovery from the iOS changes, quote, quicker than we anticipated, according to prepared remarks for CFO Derek Anderson for the company's analyst call. During the Q&A period, Anderson said that Snap has been mindful to make privacy inherent to its products,

Starting point is 00:03:27 and as a result, the changes caused by the iOS changes are, quote, likely to be experienced differently for our business than perhaps for others, end quote. So maybe this is just a meta problem and everyone else is going to leave them to take the brunt of the ATT changes. But also remember how I said another thing that was hanging over meta lately is the idea that TikTok seems to be eating its lunch. There's a video going around from analyst Rich Greenfeld where he makes the case that TikTok is eating into Facebook and Instagram and WhatsApp usage and even YouTube. And even YouTube, YouTube usage, but TikTok not as much because it's basically a different use case for most users. And quoting Jason Kint on Twitter. Amazing, good for Snap. They're significantly less dependent on tracking compared to Facebook who gets a majority of its data from third parties, according to regulatory investigations. This tale of two stocks in 24 hours absolutely demonstrates this.

Starting point is 00:04:26 Congrats Evan Spiegel, end quote. P.S. Pinterest and Twitter stocks have both snapped back. subsequently as well. And then there was Amazon who reported yesterday as well, and they were, of course, another stock that has been down significantly in recent weeks from its all-time highs. It was down yesterday as well. Well, as I write this, Amazon is up over 10%. So you tell me what happened here, quoting the Wall Street Journal. Give Amazon this much. They know how to cushion a blow. The tech titans fourth quarter results and accompanying forecast on Thursday weren't the greatest on the surface, at least for those worried about the massive company's ability to continue

Starting point is 00:05:12 growing at a supercharged rate. Fourth quarter revenue grew 9% year-over-year to $137.4 billion, barely in line with Wall Street's forecast. The company also projected growth of 3 to 8% year-over-year for the first quarter below the 11% expected by analysts. Taken together, the two quarters would represent Amazon's weakest period of growth since mid-2001, according to data from S&P Global Market Intelligence. Online stores, the company's largest operating segment, saw revenue fall for the first time since it began reporting results for that unit in 2016. But in what may represent a new, more mature phase for the 27-year-old enterprise, Amazon showed strength on the bottom line. Operating income for the fourth quarter came in at nearly $3.5 billion, 51% above Wall

Starting point is 00:06:01 Street's targets. And most notably, Amazon is raising the price of its prime service for the first time since 2018. The annual price for U.S. customers will go up 17% to $139 a year compared with the 20% hike on the last price increase. Amazon also showed pricing stability in its crucial cloud segment. AWS operating income jumped 49% year over year and exceeded the unit's revenue growth of 40%. About that hit to our pocketbooks. Yes, Amazon will raise Primes U.S. prices by $20 to $139 per year. and by $2, if you're paying by month to $14.99. And that will be on February 18th for new members and March 25th for current members. So you could also speculate that investors think will all continue to pay for Prime,

Starting point is 00:06:52 and they're probably right about that. And Amazon has something super valuable to investors now. Pricing power. Amazon, by the way, says the Prime membership price change does not affect the Prime Video-only subscription, which will remain at a $1. $0.99 per month. But as ever, the real story for Amazon was AWS. And again, profit at AWS is exceeding the growth in revenue. From the Wall Street Journal once more, Amazon Web Services are AWS, which rents computing storage and networking capability to users

Starting point is 00:07:24 saw fourth quarter revenue rise by about 40 percent to $17.8 billion. The cloud computing unit accounted for more than $5 billion in operating income. Meanwhile, Amazon's advertising division has surged as a result of new ad opportunities across Amazon's array of businesses. Amazon for the first time ever broke out advertising revenue by name in its financials. The unit has typically been reported under a broader revenue stream, end quote. About that. Amazon advertising services revenue came in at $9.7 billion for Q4 up 32% year over year and $31.2 billion for the entire fiscal year 2021. Subscription services also grew 15% to $8.1 billion, but that advertising business, in just five years from a standing start, Amazon has built one of the biggest advertising

Starting point is 00:08:14 businesses in the world, which alone now makes as much per year in advertising revenue than the entire newspaper industry. And those ads, they have profit margins that might be bigger than AWS margins, so it's possible that advertising is adding more profit to Amazon than even AWS is. One more quick note today before we get to the long reads. Apple says it will charge a 27% commission for in-app purchases made using alternative payment systems in the Netherlands following a Dutch legal decision, quoting 9 to 5 Mac. Apple today provided some additional details about how it will allow dating apps in the Netherlands to offer alternative payment systems in compliance with a legal decision that Apple is simultaneously appealing. The biggest tidbit from this is the reveal of the

Starting point is 00:09:08 commission structure. Apple typically charges 30% commission on purchases made using its in-app purchase system. The commission levied on alternative payment systems has been set at 27% net of tax. Netherlands dating apps can choose to offer alternative payment systems by linking out to a website or using a native in-app flow. Apps wanting to take advantage of this functionality must include special entitlements in their app binary and call an Apple API before redirecting the user that presents a modal sheet that tells a customer they are being directed to a non-Apple payment service. On the face of it, a 27% commission does not exactly seem like a compelling option when Apple's own in-app purchase system is easy to use and deeply integrated into the system. And Apple says that the 27% cut is based

Starting point is 00:09:57 on the price paid by the user net of value added tax. It says, quote, this is a reduced rate that excludes value related to payment processing and related activities, end quote. Each month, developers will have to send a report to Apple that lists their sales. Apple will then send out invoices for its commission that must be paid within 45 days. Some parts of the guidance appear in progress or incomplete, probably as Apple looks to comply with the Netherlands ruling as soon as possible in order to avoid being hit with another 5 million euro fine, end quote. Although on the good news front for Apple, this just came across my transom, a U.S. appeals court has vacated a $1.1 billion verdict that Apple and Broadcom lost against the California Institute of Technology over Wi-Fi-related

Starting point is 00:10:42 patents and has ordered a new trial. Time for the weekend long read suggestions, and I was waiting for someone to do this, a profile of OpenC, how OpenC became synonymous with the NFT boom, hiding the complexity of ERC 721 transactions for a mass audience, sort of how Coinbase did it with base-level crypto. And as Coinbase showed us, there's money to be made in doing that. OpenC apparently made $386 million from fees just last month. Quote, still many investors and analysts see the company's position as more precarious than you might think. It's easily the most successful company to emerge from the NFT boom of the past year, processing hundreds of millions of dollars in transactions on a daily basis. At a technical level, it's inescapable, as the outage dramatically

Starting point is 00:11:39 showed, but it's remarkably distant from the scrappy token drop culture that has fueled the recent digital art boom. And many aren't sure that Web3's decentralized future will have room for an intermediary platform like OpenC. I think the question is, is OpenC like an AOL or Netscape, or are they going to be able to maintain their hold on the market? said Brian Krogsgaard, who hosts a crypto podcast called Up Only. And I think that's a very open question, end quote. Next, I've also wondered in the past why this hasn't happened more sooner. Modern software-based businesses are all about leveraging the knowledge that they have about how people use their products to make them better.

Starting point is 00:12:21 And heck, in the age of Netflix programming based on viewing habits and data, why haven't game designers made more use of what they see their gamers are doing in their games and responding to that? Well, turns out more of them are, quoting wires. While there are no numbers on how many video game companies are surveilling their players in game, although as a recent article suggests large publishers and developers like Epic, EA, and Activision explicitly state they capture user data in their license agreements, a new industry of firms selling middleware data analytics tools, often used by game developers,

Starting point is 00:12:56 has sprung up. These data analytics tools promised to make users more amenable to continued consumption through the use of data analysis at scale. Such analytics, once available only to the largest game, studios, which could hire data scientists to capture clean and analyze the data and software engineers to develop in-house analytics tools, are now commonplace across the entire industry, pitched as accessible tools that provide a competitive edge in a crowded marketplace by companies like Unity, Game Analytics, or Amazon Web Services. Although, as a recent study shows,

Starting point is 00:13:27 the extent to which these tools are truly accessible is questionable, requiring technical expertise, and time to implement. As demand for data-driven insights has grown, so have the range of different services. Dozens of tools in the past several years alone providing game developers with different forms of insight. One tool, essentially Uber for play testing, allows companies to outsource quality assurance testing and provides data-driven insights into the results. Another supposedly uses AI to understand player value and maximize retention and spending with a focus on high spenders. Developers might use data from these middleware companies to further refine their games. Players might be getting overly frustrated and dying at a particular point, indicating the game might

Starting point is 00:14:07 be too difficult, or their monetization strategies, prompting in-app purchases such as extra lives at such a point of difficulty, but our data is not just valuable to video game companies in fine-tuning design. Increasingly, video game companies exploit this data to capitalize user attention through targeted advertisements. As a 2019 e-marketer report suggests, the value of video games as a medium for advertising is not just in access to large-scale audience data, such as the Unity Ad Networks claim to billions of users, but through ad formats such as playable and rewarded advertisements, that is, access to audiences more likely to pay attention to an ad, end quote. Also from Wired, a dude got hacked, and he figured out that North Korea was likely behind the hack,

Starting point is 00:14:54 and so like the vigilante hero from an 80s action movie, he's made it his mission to hack them back. Quote, responsibility for North Korea's ongoing internet outages doesn't lie with U.S. Cyber Command or any other state-sponsored hacking agency. In fact, it was the work of one American man in a t-shirt, pajama pants, and slippers sitting in his living room night after night, watching alien movies and eating spicy corn snacks, and periodically walking over to his home office to check on the progress of the programs he was running to disrupt the internet of an entire country. Just over a year ago, an independent hacker who goes by the handle P4X was himself hacked by North Korean spies, P4X was just one victim of a hacking campaign that targeted Western security

Starting point is 00:15:39 researchers with the apparent aim of stealing their hacking tools and details about software vulnerabilities. He says he managed to prevent those hackers from swiping anything of value from him, but he nonetheless felt deeply unnerved by state-sponsored hackers targeting him personally and by the lack of any visible response from the U.S. government. So after a year of letting his resentment simmer, P4X has taken matters into his own hands. Quote, it felt like the right thing to do here. If they don't see we have teeth, it's just going to keep coming, says the hacker, end quote. Then from the Wall Street Journal, anecdotal evidence that concerns we've been raising about startup valuations pulling back after the Wall Street pullback itself are starting to manifest.

Starting point is 00:16:20 Quote, investors say several large startup backers are cutting back their investors. investments, curtailing a flow that sprayed a full blast for most of the pandemic, particularly for older, more mature startups. And venture firms say they are advising their companies to prepare to conserve cash in a tougher funding environment. Tiger Global Management, one of the most prolific startup investors of the last two years in recent weeks has been renegotiating investments that had been under discussion for numerous companies reducing the valuations people familiar with the deal said. Venture capitalists say other investors are doing the same, end quote. Slate looks at how IBM's Watson went from the future of health care to being scrapped and sold off for

Starting point is 00:17:02 parts. It turns out Watson's greatest success was in branding, quote, there were a lot of internal discussions, even a presentation that indicated that the technology was not as far along as they'd hoped, that it wasn't able to accomplish what they'd set out to accomplish in cancer care. There were probably a lot of people that believed that truly did believe that they would get there or that it was closer than maybe some people realized, I think the marketing got way ahead of the capabilities, end quote. And finally this week, given this week's seismic tech earnings news, the substack Ludig's learnings makes the compelling case that, if this were possible, Microsoft is now the most overlooked company in big tech, and if you were going to place bets on who will be the

Starting point is 00:17:45 first company to be valued at $10 trillion, Microsoft might be your horse. Quote, so what is Microsoft It was the Windows company in the 2000s, became the office company in the 2010s, and is becoming the cloud company in the 2020s. It is the sum of its core advantages, enterprise distribution, user trust, and an engineering talent vortex. With these advantages on its side, my money is on Microsoft as the first $10 trillion company. Azure alone has a path to hundreds of billions in revenue and would be one of the largest standalone companies in the world today. Getting to $1 trillion in revenue will require ruthless expansion across product and M&A in every software market. And in the startup context, Microsoft is a treasure trove of lessons. It teaches us the power of distribution, product bundling, M&A, and compound growth, end quote.

Starting point is 00:18:38 So this weekend, I've got something for you and also I've got an ask from you. First of all, there is no bonus episode this weekend for reasons that I explained yesterday. but remember that Tools episode we started off the year with. Well, a listener threw up a Notion page that listed every tool, every app, every book we discussed on that episode. And, geez, I did realize we mentioned so many. So if you loved that episode but couldn't keep track of everything we were mentioning, maybe jump over there and refresh yourself on some of Oprah's, I mean, our favorite things. The link to that is at the very bottom of today's show notes.

Starting point is 00:19:27 And the ask, there's something that I'm taking a look at as a possible investment for the fund that is in the crypto space. It's a new kind of decks. Anyone that can hear my voice that might have some deeper experience in crypto than I, especially in decentralized exchanges and defy and all that stuff, could you hit me up on Twitter or email me at brian at ridehomefund.com? I just need a quick consulting job done. It'll literally take like 10 minutes of your time and I will compensate you either in cash or shared carry if I end up doing the investment. Seriously, I just need someone to take a quick look at something and tell me if it's BS or not. Simple as that. Nothing more complicated.

Starting point is 00:20:12 Get in touch if interested. Talk to you on Monday.

Tech Brew Ride Home - Fri. 02/04 – Tech Earnings Whiplash!

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