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Attention Economy Is a Malthusian Trap (theatlantic.com)
200 points by toufiqbarhamov 36 days ago | hide | past | web | favorite | 125 comments

It will be tougher for Amazon to squash grocery stories than it was to squash Sears.

Grocery stores are highly competitive because people go to the grocery store every week. For the grocery store it is a game much like "the iterated prisoner's dilemma". Every week they have a chance to uphold their brand image or make a quick profit. Every week they have a chance to lose big and make you switch to another grocery store.

So they choose to uphold their brand images.

Stores and brands in other areas where transactions are less frequent have more incentive to harvest. For instance, nearly all makers of major appliances have given up on upholding brand image and source their appliances from the same factories in the far east. They break down in a few years but they might not be in business again, or maybe they bought the brand that you're going to try next.

Grocery stores, from ALDI to Wegmans, are excellent in their own way, unlike mall stores.

> ...[grocery stores] choose to uphold their brand images

I'm not entirely convinced of this. ALDI grew and became popular because there was no fluff, just a limited line of cheap products sold efficiently in a store with a layout designed for efficiency. Now they are rearranging stores to be like everything else, creating "sales" to get people with poor impulse control to buy, and pushing their image of being the best "deal" while upping the price of their increasingly varied produce. They might be selling off their brand slower than manufacturers did, but the slow brand decay seems to be happening to me.

If Amazon can deliver food for cheaper than ALDI it will take off. Delivery is great in cities where driving and parking to shop are a pain.

In theory yes, in practice Amazon has a lot of catching up to do.

I don't know about the situation in the US, but by now every big food retailer in Germany has a delivery service, ALDI included.

These food retailers already have all the supply&logistics in place due to their physical stores, the delivery business is just an extension, all of it often heavily sourcing from local producers. In the long run, these companies can shift their main business to deliveries, turning their retail stores into mixtures of store and distribution center.

In that context, I don't see how Amazon will easily be in a position to get similar products, at similar prices, without having at least some physical retail presence. They got the logistics down, no doubt about that, but I think in terms of actually sourcing fresh, and local, produce the established food retailers have quite an edge on Amazon.

it’s probably impossible for amazon to actually deliver cheaper rather than accounting for the costs in a way that might make it appear so. last-mile logistics is expensive and can’t compare to the outsourced logistics model employed by traditional groceries.

instead, amazon will rely on other revenue sources (e.g, manufacturer incentives) and shopper analytics to eke out slim margins on greater volumes (economies of scale and all that) that groceries will have trouble competing with.

I don't know about that, the UK has a completely online supermarket that ships out of a giant warehouse. Amazon can easily do the same in major metros.

Makes sense but it reminds me of the argument people made against Amazon usurping clothing stores: people want to feel and try on clothes before buying them. While I think it's true that this served as a buffer for a while, it seems to me that it was a temporary one and as long as there's money to be saved, consumers will eventually change their buying behaviors.

Clothes is still a tricky thing because sizing differs so much between clothing manufacturers that you really do need to try things on to see if they fit you well. If you have the extra cash to tailor all your clothing, then it's not so bad, especially if you are buying high-end clothing that you can't find in stores.

That said, there is a company called ZOZO that is playing with the idea of having people wear a dotted suit to automatically detect their measurements with a camera: https://zozo.com/us/en/info/suit

> people want to feel and try on clothes before buying them

The "Amazon showroom" concept isn't really a joke, and it hasn't really been resolved. Some nontrivial amount of shopping, especially for fitted products like clothes, takes the form of trying things on in a store then checking Amazon for a lower price.

It seems possible that this is sustainable, with immediate-purchase customers sustaining 'showrooms' for price-sensitive customers. It also seems possible that it will crumble in one of several ways. Amazon might raises prices in pursuit of profit far enough to end this pattern. It might drive out (some) clothing stores, creating a vacuum where consumers rely on 'free' returns to make up for a lack of showrooms.

Or it might even drive new business models and branding changes. Levis are already widely discussed as a "don't buy online" product because they're weirdly high-variance; we could see products designed to be desirable but ineffective to buy online. The "Amazon store" model could gain ground, with Amazon offering low-inventory showrooms or cutting affiliate deals with brick and mortar stores. Or brands could offer online-only discounts to reduce carrying costs, while using showroom access as a selling point to fight Amazon's economies of scale.

None of these seems guaranteed, and I won't be surprised if Amazon and physical stores simply coexist in the clothing market. But I do think it's important to note that Amazon's current model is partly enabled by their physical competitors.

This showroom effect can work even for non-fitted items. I've repeatedly shopped in big box electronics stores then checked Amazon, NewEgg, and such on my phone from the store.

It works out great, actually, because most of these stores match prices including the major online sites and have for years. If Best Buy, Fry's, or MicroCenter are cheaper than online, I win and they win. If they'll match then I win and they get a smaller win than if I paid their full asking price, but it's still a win. If for some reason they can't match and it's a small difference I might buy locally anyway, especially if I want the item faster than the shipping on that item at the particular online vendor. If the online retailer is far cheaper and can't be matched, they win.

Interesting points however I disagree. The case for grocery stores is that it is immediate gratification. Food is something that you must take in on a regular basis. This cannot be netflix'ed.

Besides from that it is far more convenient to get your groceries delivered, you save time etc.

Sears would have probably died without Amazon's involvement. Its decline started a long time ago, when Amazon was a small fraction of retail sales.

Between that, and Lampert stealing every valuable bit of the company that wasn't nailed down, or could be pried off, while actively starving their core business - it never had a chance.

I'm not sure Amazon really squashed Sears, any more than they squashed Toys R Us (which was operating with a gross profit despite their bankruptcy.)

In these cases, perhaps, in time, Amazon would have continued to eat away at their market share, but there's also the chance the they might have pivoted to offer a different unique value proposition that didn't require competing on price. The problem is that both fell prey to some of the perverse failure modes of capitalism, where those in charge of the company opted for self-dealing and short term gains, personal wealth, etc., instead of the viability of the company.

I think brick-and-mortar stores still have legs in this economy, though examples like Sears & Toys R Us amount to an own-goal, handing market share to online retailers on a silver platter.

Sears and Kmart were circling the drain for decades. Even before Amazon existed.

Remember that Montgomery Wards vanished pre-internet, as well as a number of more regional chains.

The future of the grocery business is web based ordering and automated delivery to the buyer. Amazon will crush other grocers due to first mover advantage and their massive technology workforce.

I live a block away from a “nice” Walmart in a nice part of town. We shopped at other more expensive grocery stores because we didn’t like the atmosphere at Walmart, it was big and overwhelming and dirty.

Walmart has online pickup now. You order your groceries using their app, schedule a time, and pull up to get your groceries. It’s amazing. My wife and I order all our groceries this way. Since the minimum order price is $30, we’re wasting far less food and placing more orders. Before we’d go to Costco every two weeks, buy a bunch of perishables that would then go bad before we ate them.

It has saved us money and we love it. If there’s a problem we can immediately go back to the store and get a replacement or a refund.

Amazon needs to compete with THAT, and the customer service for when there’s an error, if they want to “crush” brick and mortar stores. Frankly, I don’t see what value they’d add compared to this.

Amazon will win because they will be able to compete on price and convenience. They don't have the massive overhead of the stores weighing them down. You're also forgetting that many young people who work in economically relevant areas of the country don't have cars.

Demographics will work against these legacy retailers and grocers. The elderly who are stuck in their ways and like physical stores will become less mobile while the younger generations would prefer more convenient choices.

Speaking as one of those people without a car: I've got a backpack.

Grocery pickup is absurdly useful. You ever had a hiking pack to whoever is bagging or try and fill it while doing self-checkout? It's not bad in all honesty but it's still more annoying than just picking it up curbside. Plus the side benefit on not whipping some kid in the face with bag straps because I turned around too fast.

"They don't have the massive overhead of the stores weighing them down."

Amazon bought Whole Foods a few years back.

Amazon is subsidized by AWS. I'm sure the vendor relationships and existing supply chain have value too.

> They don't have the massive overhead of the stores weighing them down.

Is grocery store overhead avoidable for Amazon? Amazon's biggest wins have come in places where carrying costs are not just large but easily reducible.

Books are heavy, bulky, and have extremely high product variety, so physical stores are large and require heavy curation. They're also stable, nonfragile, and open for artificially discounted consumer shipping via media mail. Amazon started there and won heavily because a warehouse in Omaha can win on variety and price nationwide.

Clothes are bulky and high-variety too, with different sizes adding 3x to 10x multipliers on product count. Physical clothing stores generally involve large spaces (fitting rooms, backroom with stock), heavy employee presence (reshelving, customer service), and high loss (theft, damage). Online sales suffer from the inability to try things on, but clothes are stable, relatively nonfragile, and lightweight. Amazon parlayed cheap shipping into generous return policies and avoided all the other overhead.

Large appliances are a similar story; highly varied, hard to stock, hard for consumers to take home, easy to store and ship in quantity.

But groceries? They come with huge carrying costs, definitely, and making grocery stores presentable is quite demanding. But many of those costs are inherent. Frozen goods need to stay frozen; lots of produce is too unappealing to sell; bulk produce (e.g. broccoli) stays moist, needs to be investigated for decay before it spreads, and requires steady turnover; delicate produce (e.g. herbs, greens) can't be stacked or treated roughly and turns over incredibly fast. Further, much of it has to be sourced and distributed fairly locally - and god help you if you let mislabeled or fraudulent products into your supply chain.

None of that dooms order-for-delivery groceries, but it means the pickers for those products will be going on-demand to a relatively local destination which looks relatively like an existing grocery store. There are efficiencies to be had like not needing prime "on the drive home" real estate and discarding checkout lanes, but it's nowhere near the same efficiencies as warehoused national distribution like clothing.

What sounds more likely to me is an increasing split into three different classes of food sale. Stable bulk goods reward the centralized model with cheap carrying costs, whether that's CostCo or Amazon, and can be sold on price above convenience. Staple perishables (milk, lettuce, apples, etc.) get sold on demand with localized distribution where possible - we already see farmer's markets staying in business but including not-actually-local goods like bananas. And speciality goods get sold by dedicated retailers both in person and online; spices and hotsauce are already better bought online, while exotic perishables are best found at boutique stores that don't try to compete with chains on staples. There's plenty of room in all that for Amazon and delivery groceries, but no obvious market dominance like we saw in other fields.

> every two weeks, buy a bunch of perishables

Who expects veggies to last two weeks.

Nobody, but sometimes you buy them with the intention of using them for some dish you wanted to cook, then life gets between that, and they end up going bad before you get around using them.

Ain't helping that storing different kinds of veggies and fruit properly can be a science of its own [0].

[0] https://www.rd.com/health/healthy-eating/foods-never-store-t...

They only really have first mover advantage in the US, though. In many countries, internet ordering of groceries is pretty old; Tesco started it in the UK and Ireland in _1997_, for instance, and I'm pretty sure there were Minitel-based grocery delivery services in France before that.

The US market probably has special practical problems that European markets don't have (low population density outside about five cities, in particular), but it's hard to see how Amazon will automatically beat the likes of Tesco in this just because they're a tech company.

They don’t have the first mover advantage though. Walmart has rolled out their Pickup app for groceries and it’s super easy to use. My wife and I haven’t set foot in a grocery store in months.

> and Ireland in _1997_

That was SuperQuinn right?

I remembered ordering from them back in the day. They had their own dialup (not over Internet) and a Desktop App that really worked quite well!

They were serious innovators ... couldn't do enough to "Crown the Customer", as old Feargal would have said.

Too bad property prices overtook their business model!

Both of them, I think. Though actually Superquinn may have been first in Ireland; dunno if Tesco Ireland had it in the 90s.

EDIT: Yeah, Tesco online shopping only became available here in 2000. Superquinn was definitely first.

Was Tesco in Ireland in 2000???

Internet ordering isn't where the real value is, it's in a logistics network from warehouse to consumer that is almost entirely automated.

On the warehouse side, the incumbents are doing that. Funnily enough, I was at Amazon's AWS Summit in London a while back, and one of the presenters was a guy who'd worked on some European supermarket's automated warehouse fulfilment stuff, using AWS. Automating delivery to consumer (ie self-driving vehicles) is a long, long way off, and Amazon isn't a particular leader in the field anyway. If it's ever workable, Tesco et al will just license it from Waymo or someone. As will Amazon, probably.

And I think the ordering side is more important than you think. Doing a weekly shop with Amazon's awful website would be a miserable process; Tesco et al are already far ahead, there. I'm sure Amazon can catch up, but the idea that it has first mover advantage (except maybe in the US) is ridiculous. The big supermarkets also already have an extensive pre-existing warehouse system.

> On the warehouse side, the incumbents are doing that.

Near to me, in North Dublin (Nice and close to the Airport; good access to Dublin Port), Tesco have their distribution centre. It's massive. Clearly visible from just about anywhere [0]

If I recall correctly, Wallmart in the USA were doing this back in the 90s ...

[0] https://goo.gl/maps/NLcLneN5Bi92

I doubt they'll be able to compete on costs, on the retail front Amazon Go style stores are certainly the future. Legacy retailers (and grocers) are simply too labor heavy and their large retail footprint will come back to bite them.

Even if last mile delivery has a driver, operational costs will be far lower.

My local Tesco (I apologise for all the Tesco references; they seem to have totally taken over my area of Dublin) is a small urban supermarket with eight automated checkouts, and typically one employee on a manual checkout for people who want to buy alcohol and cigarettes, or who refuse to deal with the machines. At peak times maybe two or three employees, but one is normal. Big suburban supermarkets have a bunch of automatic checkouts, plus scanners for shoppers to take with them and self-checkout as they put their purchases in the trolley. Amazon Go type shops may be _slightly_ more labour efficient (if they work) but there's no reason the big chains can't just do that, too.

Weirdly, when I was in San Francisco recently, I went to a Whole Foods (an Amazon owned supermarket). It didn't have automated checkouts at all! I'm unconvinced that Amazon is actually a leader in automated supermarkets.

RE the large real estate footprint, that's usually leased (at least here). As demand for physical supermarkets drops, they can just stop renewing leases.

I've found checking out even with automated checkout to be a slow and a poor user experience. Kroger stores in Seattle illustrate this very well, waiting in line for 8 minutes just to pay isn't fun. Removing everything from the cart, scanning it, and putting it back is silly.

I really can't imagine younger people going to physical grocery stores in the future.

Walmart owns the majority of its store locations.

Amazon does grocery delivery in the UK and you're right, the experience is not on-par with the incumbents in this relatively mature online grocery ordering market.

Tho, all of that is optimized for non-perishable goods.

Food logistics is an entirely different ball-game compared to just shipping boxes full of entertainment electronics and plastic toys.

With food, you suddenly have to be mindful about things like the handling of the produce, storage conditions, uninterrupted cooling chains, health standards, best-before dates of products and a whole lot of other factors/regulations that don't apply to the current bulk of products sold by Amazon.

They need to get the quality control thing nailed first, which they can’t even do with their durable goods, don’t know how they’re going to do it with produce.

Except Amazon is already doing a very good job of destroying their own brand. Between how lazy they've gotten with packaging books, the supply chain ambiguity of mixed inventory, and the increasingly annoying ads for Amazon Basics products there are entire categories of stuff I will not risk buying from Amazon anymore.

I may be the exception for now, but everyone has their breaking point on lazy service. It's just a matter of when the goodwill runs out.

I find that difficult to imagine with perishable items. I don't want my milk sitting on my front porch at 30C for 2 hours until I get home, and neither do I want my lettuce sitting for the same amount of time at -30C (yes, I live in hell).

Here (Ireland), where online grocery shopping is common, you just select a two hour window when you'll be home for delivery.

And that's evening/weekends?

From tesco.ie:

> You can usually have your shopping delivered between 10am and 9pm Monday to Friday, 10am and 7pm on Saturday, and between 12pm and 5pm on Sunday.

I assume other supermarkets are similar.

Apparently the slots are one hour, not two hour. I live basically beside a supermarket so just buy stuff on my walk home, so I'm rusty on how these services behave.

Oh, that's actually quite convenient! Now can Amazon match that?

I'd be surprised, to be honest. Tesco and other conventional supermarkets have been doing this for decades, and they already have a more distributed logistics network (while many internet deliveries are serviced from 'dark stores' which exist just to do that, some are services from actual supermarkets!). Amazon has a lot of catching up to do.

I do think it may be a slightly different question in the US; most US cities are much less dense than your average European city, which will presumably change things a bit. I don't see Amazon taking over the market in Europe, though.

Yes, Amazon Fresh does the same thing for grocery delivery in the UK (which is functionally equivalent to Ireland for this sort of thing).

Yes, though popular slots are more expensive. In the UK you might pay £5. If you work from home you can get a cheap daytime slot for £1.

Coop.dk (Danish site) will leave an isolated box on your doorstep that they guarantee will keep the food at the correct temp until 6pm.

Never used them, because their offers are a tad too expensive and their minimum is more than I spend a week, but it would pretty much be a no brainer if I had small kids to pick up.

Tech companies are valued based on future potential and as future becomes present, that potential is replaced by a reality that is often much less grand.

Netflix is a great example. It went from having a large library because the producers were its friends, to entering production itself, and alienating its former partners. Now, they have to offset investment into production with higher subscription fees which in turn reduces future potential. Netflix in 2015 is significantly more disruptive than that of 2019, which is just another HBO, and increasingly will be valued like HBO (Time Warner).

"Tech" here is actually just infrastructure; it's table stakes and not interesting at all.

> Netflix is a great example. It went from having a large library because the producers were its friends, to entering production itself, and alienating its former partners.

I always thought it's the other way around and Netflix was in a "if life gives you lemons" situation. The content producers in 2010 (or 2005 .. don't know) didn't want to bother with digital, so they just gave it all to Netflix and that's that. Then when time came to renegotiate the existing contracts (let's say in 2015) the situation had changed: Everyone and their dog now knew that digital was great, so half of them didn't want to give Netflix anything anymore. They wanted to be a competitor and Netflix had zero leverage (e.g. Disney), the other half now had a far better understanding of the value of their digital catalogue plus was able to shop around "so, you don't want to pay us our prices? Let us talk with Amazon over here ..".

At some point Netflix had to find a way out of that situation and while "we produce our own content" may have a higher initial cost and is not what the existing audience wanted in the long term it frees Netflix from their dependency on competitors.

If the content owners are sane at all they are going to license content on a "per seat" basis, that is, $X per sub.

If Netflix produces its own content, it is going to pay $Y to produce the content, and that quantity does not depend on the number of subs.

If the number of subs increases, eventually (subs) * $X is going to be more than $Y and in that case it makes more sense for Netflix to own rather than to rent.

Now content owners might have wanted to increase $X when they saw that Netflix was a good business, but I think the real driver behind the change was the increasing number of subs.

The problem is that content owners have often proven abundantly insane. They use staggered release schedules while piracy allows their "saved for later" markets to rot when they could do simultaneous releases trivially.

Their release schedules often obey no ryhme or reason like "all by language, all by highest cost per unit first", etc. This is the industry that referred to VCRs, a clear new market for their freely broadcasted releases as the Boston Strangler.

Many of the "insane" situations were rational in the past or involve a conflict between multiple parties.

For instance, there is not a lot of ownership between movie theaters and movie studios. For movie theaters, an end to theatrical windowing is seen to be an existential threat. Movie studios probably wouldn't care a lot but they sell a lot through theaters so they don't want to harm the interests of theaters.

Piracy during that window (seemingly people who want to watch a movie at home when it is not yet available at home) does seem to be popular. It staggers me how many people are connected to torrents with horrible audio and video quality (often in a language you don't know until you watch it) when they could wait a while and download a pirate Blu-Ray rip.

Windowing across countries was a big deal when it was expensive to produce film reels so it made sense to put the audio track on CDs that could be distributed separately from the film, then organize showings to minimize the number of reels.

The transition to digital in theaters helped with that but also revealed the kind of conflict their is between theaters and movie studios. The distributor pays to make the reel (and save money in digital) and the theater has to get an expensive digital projector. The costs and benefits don't match and the sides have to compromise to make it work.

It is like how movie theaters for a long time have wanted to lower ticket prices because they figure they'll make it back at the concession stand, but the studios won't hear it.

Producing content does give Netflix independence, but on the flipside it also means they stand alone. Their former partners are now competitors.

My understanding of this is different. Streaming services are at the mercy of the prices determined by those who own the content.

If they make lots of money, up go the licence fees.

The decision to create their own content seems like an inevitable consequence of that, and acts as a deflationary force on prices as licenced content has to compete for airtime with content commissioned by the streaming service.

Producers are dependent on distributors, and distributors are dependent on producers.

Producers thought they'd improve their position by going into distribution. Distributors (Netflix) thought they'd better themselves by going into production.

Perhaps they would have been better off focusing on either producing or distributing. A distributor improves their bargaining position by growing the audience they can reach. Producer, by making better films that more people want to see.

In this case producers have a strong upper hand. If a producer does not sell any license for a year it loses a lot of money, if netflix does not have any license for a year it loses all its audience.

It won't work with Netflix's model. The flat rate pay x and watch as much as you want doesn't work for the producers, the prices they can negotiate for their content are always capped based on the fixed subscription at netflix. Given that it's much more appealing for them to launch their own service and get 100% of a smaller customer base which they can potentially grow in the future.

For Netflix, it doesn't work to only show their original productions on their own platform. We will likely see them start to show their films in theaters to maximize revenue, and even offer one-time access for people to watch a film but not sign up for a subscription. What's more, they're probably going to have to turn their series into events by showing new episodes on schedule, once a week. By becoming producers, they are forced to completely abandon their old model, I believe.

> We will likely see them start to show their films in theaters to maximize revenue

Seems unlikely to me. They're doing it on a very limited basis right now, but that's not for revenue; it's to get the movies in the running for awards.

> offer one-time access for people to watch a film but not sign up for a subscription

Seems unlikely. The number of people who think Netflix is expensive enough to avoid, and don't have friends they can mooch off of or get a group buy with is pretty small.

> they're probably going to have to turn their series into events by showing new episodes on schedule, once a week.

I'm really curious about this one. I have no idea why they would possibly want to do this.

In network TV land, broadcasters have time slots for shows so they can more efficiently sell advertising slots. Even if Netflix decided to start advertising, they can just tie ads directly to videos being watched.

> I'm really curious about this one. I have no idea why they would possibly want to do this

Traditional tv shows can also get buzz by people chatting and theorizing about them week to week as the episodes trickle out. This isn’t really possible with the Netflix binge model.

They can also release faster since episodes trickle out as they are done. Not sure how often this happens vs editing and releasing later.

Whether this type of “buzz” actually is that important from an economic perspective or if it just generates a bunch of noise online and at the water cooler, I don’t know. So far Netflix seems content to drop content using the binge model.

They started to be competitors when they entered the streaming business: Hulu, Disneys new service, ..

Yes this is true, but the point is that Netflix had to enter the content production industry, or risk having no content. Netflix had dominated online streaming but once it was clear that it was a popular thing, the content owners started taking their content away. For Netflix the choice was "make our own good stuff" or just give up.

> Netflix is a great example. It went from having a large library because the producers were its friends, to entering production itself, and alienating its former partners.

This is the opposite of what happened: they had a large library because they were able to cut some deals in the early 2000s when streaming was a niche due to bandwidth and hardware limitations and most of their business was DVDs in the mail. That became popular and the large content owners decided that they wanted a greater cut and especially to avoid what had recently happened in music where iTunes had such a large share of the market that Apple was able to negotiate less consumer-hostile terms with the music industry.

Developing their own content is how Netflix is trying to even that up - they profit directly and it makes it harder for one of the large rights-holders to setup a competitor and lure most of their customers over.

I think content producers weren't going to give netflix a free lunch forever, so they had to start producing their own original content.

I dont own netflix, but I do think it's a great idea and a smart investment by them. One thing netflix does with this disruption-wise is the way they think about content.

companies like comcast (NBC) still got their heads in broadcast television style producing content, where-as netflix takes a lot of risks, and is ok if a show has a niche following, so long as they have something in their library for everyone.

edit: its sad, if content producers thought like this in the past, we'd have more episodes of firefly.

You're right that they probably weren't going to be able to license all that content indefinitely, so they had to move on and create some other competitive advantage.

But then they lost the advantage they had. The subscribers they have today subscribed to the variety it had in its catalog, not Netflix Originals that have replaced it.

Netflix is an organization built around distribution, where dependability and efficiency wins. I am highly doubtful that Netflix can produce great stories, whether in movie or series format. They do take a lot of risks (and arguable they would have to because do they have leaders that understand story?) but that in itself is not an advantage. It is only an advantage if it produces better stories and we haven't seen that.

In fact, there is a company that is much, much more exciting and successful when it comes to production: Blumhouse Productions. I recommend reading up on their model.

> I am highly doubtful that Netflix can produce great stories, whether in movie or series format. //

I have UK Netflix, I see no difference in the quality of the stories on Netflix and those on terrestrial TV (which costs more due to BBC license fee). The stories in the Netflix movies are as compelling as other movies IMO, though they don't have the budgets and sometimes that shows more clearly than others.

AFAICT we're looking at content producers all having their own walled-garden distribution channels; so they can keep more of the money and squeeze more cash out of consumers as an industry.

To fix this it seems we could require content producers to release to any channel if they release to one, giving a global per stream price. So, you release it to your own platform they pay X to the production arm and Y users view it; end of the year everyone else can pay you at a rate of X/Y per stream (plus an admin cost). Maybe that would homogenise streaming channels too much?

Remember copyright is an entirely UNnatural right, in theory we get to set its terms to be whatever is best for the demos.

> ... we could require content producers to release to any channel if they release to one, giving a global per stream price.

Just imagine if, in the physical rental DVD/VHS era, stores could have obtained monopoly distribution rights. Star Wars only at Blockbuster Video. Your suggestion appears worthy of serious consideration.

I am highly doubtful that Netflix can produce great stories

I think Netflix is banking on the fact that great is on the whole unnecessary and pretty good is good enough. Every mediocre TV show is someones favorite and if they just throw out enough different things something will stick for enough people. In the short to medium term at least they don't have to make you super engaged with their content, all they have to do is have enough OK stuff that you don't bother unsubscribing.

> I am highly doubtful that Netflix can produce great stories

If we are talking about tv series then there is a really low bar for what is considered "great stories".

> "Tech" here is actually just infrastructure; it's table stakes and not interesting at all.

Agreed. Especially when tech becomes commoditized enough that anyone can pick and run with it. And that is what has happened with Netflix. Most companies have realized that getting a streaming service is easy and are trying to get a slice of the OTT pie.

But Netflix might actually be valued less and less as time goes by. This is simply because producing content was not their forte and now that they are into content production it will take a concentrated effort to maintain both, good quality of content and a great streaming service. They will be able to pay for content production using the money from streaming but couple of mistakes and both businesses will be affected.

This similarly applies to content producers as well. Their forte was to produce great content and not the OTT service. So, they might be able to pay for their OTT division using the profits from the media division. But on a longer time frame many, if not all, streaming services will be unable to replicate the success of Netflix.

On a longer timeframe I expect Disney or someone to acquire Netflix or some companies selling their streaming services back to Netflix.

Tech is no longer a differentiator in many enterprises, but most small-medium businesses are still barely utilizing what the tech world has made. For example, smooth and useful tech integration is a major differentiator in industries like hospitality, healthcare, logistics, PDR, etc. Mobile/tablet point-of-sale has exploded and enabled a wave of lifestyle entrepreneurs to accept card payment. Smartphone ubiquity has made it much easier to transact with people in your area and abroad, and to help organizations collaborate internally. Still, many people scratch the surface of these capabilities, because their existing low-tech approach has been working for them. With this comes the opportunity to differentiate with solid tech.

You're right. Many industries still haven't digitalized, and there, adopting "tech" gives a temporary advantage. But it's really just one infrastructure replacing another. It's a hurdle to get over, not a lasting advantage. Tech is commoditized just like it commoditizes other industries.

Netflix’s original content has been lackluster, in my opinion. I would not be surprised if their long-term future potential drops dramatically in the nearer future.

Netflix has about as many original great shows as I remember HBO having 10-15 years ago: two to three a year. They just produce A LOT of stuff, and for people with a habit to consume TV four times a week, it runs out.

They have the advantage of being able to use consumer viewing patterns to optimize their new shows, but then the seams are too often visible. Often the shows with better plots suffer from bad acting too. The best of their shows are the ones they seem to have bought as an entire proposition, like "1983" and "Suburra".

> “They have the advantage of being able to use consumer viewing patterns to optimize their new show”

From a cultural or art critical point of view, this is a negative though. Movies end up being made to appeal to lowest common denominator tastes or themes for a broad audience.

The recent movie Bird Box is a great example. Total garbage, derivative movie, clumsy, contrived villains, manufactured tension with no actual plot driving any of it. Yet became somewhat of a viral hit.

If this is what Netflix’s data lets them optimize towards, count me out.

It is.

I must have expressed myself really badly, since people are reading the opposite of what I intended.

Netflix bet the farm on computer-generated plots, which is partly how they have such an immense quantity of content - yet the badness shines through. OTOH the handful of decent shows they have are all fully fledged concepts that they bought.

Like most people I really have to rethink the value-per-$ of this proposition, but if Netflix just erased all the crap maybe 10 up-to-snuff and 2 to 3 really good shows a year would remain. Worth paying what it is? If every new show was like "1983" or "Fauda"...

"Computer-generated plots"? What? That's bizarre. Tell me more!

Netflix isn't outsourcing all of it's script work to computers literally, of course, but they can definitely do "People like historical drama... people like boats... let's do a historical drama on a boat!" sorts of things, which may not literally be coming straight out of a computer, but it might as well be.

When my kids were younger, my wife and I used to joke about some of the kids shows that way, too... "kids like dinosaurs... kids like trains... Dinosaur Train!" If you don't have kids or aren't in the US or something... I'm not just making up a joke: https://en.wikipedia.org/wiki/Dinosaur_Train

> When my kids were younger, my wife and I used to joke about some of the kids shows that way, too... "kids like dinosaurs... kids like trains... Dinosaur Train!" If you don't have kids or aren't in the US or something... I'm not just making up a joke: https://en.wikipedia.org/wiki/Dinosaur_Train

Netflix is literally doing the exact same thing: https://en.wikipedia.org/wiki/Dinotrux:

> Dinotrux is an American computer-animated web series. It features a fictional prehistoric world inhabited by hybrid characters that are part dinosaur and part mechanical construction vehicle. The larger Dinotrux are accompanied by Rotilian Reptools who are smaller reptiles combined with mechanic's tools.[3] The series debuted on August 14, 2015 on Netflix...

> they can definitely do "People like historical drama... people like boats... let's do a historical drama on a boat!" sorts of things

They can do a lot more than that. They know precisely at what points people pause episodes or give up viewing a series entirely, for example. I'm sure someone must have thought of using that to determine what plot structures and pacing captivates viewers.

>they can definitely do "People like historical drama... people like boats... let's do a historical drama on a boat!" sorts of things,

Which is the Achilles Heel of all recommendation engines. Just because I watched one historical drama doesn't mean that I want all historical dramas all the time. Take a show like Stranger Things. The campy nostalgic thing worked for it, but that doesn't mean I want my next 5 shows to be campy and nostalgic. I want my next show to be something original like Stranger Things was.

Ken Liu wrote an enjoyable short story ("Real Artists") about exactly that. Just looked it up and it was published in 2011. One of those unusual bits of SF that becomes, if anything, more credible over time.

I think that was hyperbole for "plots that are to some degree based on datamining Netflix' amazingly detailed knowledge of people's viewing habits".

> From a cultural or art critical point of view, this is a negative though

And keep in mind, this isn’t actually an advantage they have - scroll through any channel list and you’ll find a TON of crapware tv entirely designed to hook the lowest common denominator for as cheap as possible. That is reality TV. Yes they have fewer barriers to entry for promotion vs having to get it onto a tv schedule, but data points overall just select for optimization along one or two axes (cost, viewership numbers being the most frequent).

Shark week is an example of a viral hit - it’s not that Netflix makes more because they have more genre data.

It's highly questionable that you can produce _great_ shows based on data.

You can't just go to a producer and tell them, make something about Japan, because it's trending, and use these two actors because they're the most popular at the moment. Creatives don't work based on directives.

Which is why the best shows Netflix has tend to be full fledged pitches that they acquired. Compare "Great News" to "The Kominsky Method" or that utterly-unwatchable-beyond-the-second-episode Australian dystopian political show with the Polish dystopian political show "1983".

It probably will. Compare their challenge before - paying to acquire users with a huge content library - to what they have to do now - pay to acquire users with a content library that does not really exist, that they have to pay to build out. I can't imagine how they can manage this financial burden, not to mention actually producing good stories, and recognizable IP.

Interesting perspective. I've felt that Netflix has gotten better. I've certainly been enjoying it more as it makes lots of enjoyable shows and films.

"But if Netflix and Walt Disney both use technology to stream video, why is only Netflix trading at infinity-times earnings? And if Tesla and BMW “both use battery technology to power luxury cars,” Deluard writes, “why should the former trade at 42 times forward earnings when the latter fetches 5.6 times trailing earnings?” Good question."

Incredibly flawed argument. BMW's earnings come from a huge variety of products and services. Not purely battery-powered electric cars. Tesla's entire business model is producing battery-powered vehicles.

So to compare each company's P/E directly under the assumption that they are both making identical products would be wrong. Instead you would need to somehow isolate the P/E ratio of BMW's battery-powered car business in order to draw a meaningful comparison.

In general, this article is trying to group all of tech into one basket and draw conclusions which apply universally. A company has a high P/E ratio for a very simple reason: investors believe its earnings growth will outpace the market. That will seemingly always be true for companies which are focusing on growth over profit.

You are technically correct, but the author still gets the important point right. The premium in valuation between these companies should and will shrink (unless there is a reason to believe that Netflix will kill Disney or that Tesla will be dominating the automotive market at the expense of Fords and Toyotas.

The high P/E values for these companies are usually giant signals they are overvalued.

Probably the only company that can legitimately sustain a ridiculous P/E is Amazon, and it’s because Amazon is the only large company willing to try weird shit and actually take product risks. I’m not a big fan of Amazon’s company culture, but I have to hand it to them that at least they try to do shit and see what works. Most companies beyond a certain size fall victim to in-house risk aversion through manager ranks to such a high degree that all innovative ideas are killed and only incremental product changes are allowed.

P/E is a backward focusing metric, stock price is a forward looking metric. So, unless the company is static they don’t correlate that well.

Look a BMW’s shrinking US / EU sales for the last several years and compare that with Tesla. You don’t want to pay a premium for a sinking ship do you?

PS: The stock market may be irrational, but it’s rarely dumb.

BMW sales do not seem shrinking to me: They boast 35 consecutive quarters of growth [1] and sold more cars year over year, at least in 2014-2017 [2], don't know about 2018, as it's not yet in the statistics.

[1] https://www.press.bmwgroup.com/global/article/detail/T028306...

[2] https://www.statista.com/statistics/264342/global-sales-volu...

Global numbers look fine, US and EU numbers don’t.

  2017	305.685	1,77%
  2016	313.174	1,79%
  2015	346.023	1,98%
  2014	339.738	2,06%
Looks like 2018 numbers are up slightly in the US, though still below 2016 sales.

2018 311.014 1,79%


This sounds tone deaf to me. Having worked in quant finance myself for many years, I can safely assure you that investors look at price to intrinsic value metrics as a way to gauge overpriced stocks, not as a consensus metric of belief over future earnings.

For underpriced stocks the correlation is more obvious.

I’d you see a P/E of 5 that’s not a good sign.

Not true. For example, in low-beta investing, low P/E values for some sectors are super common, and seen as a sign of a deal on an undervalued stock.

A P/E of ~10 is a value stock. Entravision Communication has a P/E of 2.11, that’s not a suggestion that it’s going to keep that ratio over time.

Sure, ultra low P/E is a reason to investigate, but it’s not inherently a good sign. A common cause is a company splitting which makes the old P/E meaningless.

I agree nothing is inherently a good or bad sign, there’s no deterministic rule for where to find stock returns. I was just disagreeing that high P/E is commonly veiwed as a positive signal of future earnings.

Tesla is effectively a battery company with an automobile division.

The applicability of Tesla’s batteries beyond automobiles (such as grid-level storage in South Australia) justifies the high valuation.

Looking at Tesla purely as a car company misses much of the bigger picture.

I find these passages thought-provoking and persuasive. They ring True:

> ...Tech died by conquering the world. Netflix is leading a global transition from linear to streaming television. Tesla accelerated an electric awakening among auto companies. But if Netflix and Walt Disney both use technology to stream video, why is only Netflix trading at infinity-times earnings? And if Tesla and BMW “both use battery technology to power luxury cars,” Deluard writes, “why should the former trade at 42 times forward earnings when the latter fetches 5.6 times trailing earnings?” Good question.

> ...Some of the largest tech companies have exhausted their main markets. Apple and Samsung may have reached the smartphone plateau, as phone sales seem to have peaked. Facebook and Google have grown to dominate digital advertising. But in the U.S., overall ad spending has historically averaged no more than 3 percent of GDP. How do you grow [faster than the economy] in a sector that isn’t growing [faster]? That’s easy: You don’t. There may be a Malthusian trap in the attention economy. Eventually, revenue growth bumps up against the natural limitations of population and waking hours.

> ...Tech stocks have fallen, because the media mountain has been scaled. Now the largest tech companies aren’t standing at a pinnacle; they’re plotting on a plateau. The challenge of owning the entire life cycle of our spending habits—that’s the real summit. And it’s just up ahead.

The implication for investors is obvious. If "tech" is no longer really a separate fast-growing sector, but rather something that has become pervasive and cannot grow for much longer at a faster rate than the rest of the economy, then "tech" valuation multiples will converge with "non-tech" valuation multiples, and there will no longer be a clear-cut distinction between the two groups.

It’s a cycle.

Everything begins as tech, and ends as just another part of the economy. Heavy industry was once high-tech: Ford was the biggest tech giant of its day. Even something as basic as steel manufacturing was once novel technology.

Technology is only innovation which has yet to reach ubiquity.

I'm a big fan of the argument that there is significantly less to differentiate companies like TSLA from their traditional competitors. Which is basically the take from the first half of the article (which I think the author is arguing is wrong), but using evidence like P/E change in the last two years is quite frankly bollocks. There has been a big dip in the stock market in the last few months and there's very likely a slow down in China occuring - Apple's stock alone is down 30% from peak.

But moving on to the interesting second half: what this guy is describing - yet somehow not noticing - is a trend towards massive mergers to form monopolies. That's nothing to do with Tech. In fact what this article is suggesting is basically what we're going to do is re-create all these destructive monopolies and rather than protecting consumers like we used to, we're going to just label it 'tech' and bend over for it.

I'm not sure I agree - I think workforce is the ultimate differentiator in any case, and the tech companies - over the last decade at least - managed to be seen as the employers of choice. That could really create a strategic advantage, though perhaps not a long-lasting one.

This article is using its terms in a specific way. By "tech sector," it sounds like he's talking about large technology companies that have been valued by the market at higher multiples than the older "blue chips," big stable companies.

By Malthusian, he means "large and mature enough to be limited by the size of the market."

The trigger for the thought seems to be that some newer "tech" companies are operationally more similar to traditional blue chips. Tesla is more like BMW and netflix is like hbo.

So, anyway idk....

Tech is valued so highly for a bunch of reasons. But, those aside, there are factors unrelated to sector.

Tesla, netflix and such are new companies. Coca Cola, GM & BMW are old. They run gradualist, conservative starters.

Netflix and Tesla are far more likely to pull a rabbit out of a hat. It's in their culture. The whole company was in the hat 5 minutes ago. Assuming that Tesla and BMW have similar future potential is (perhaps) academic, because they'd never pursue them anyway. Netflix might attempt a pivot to being a game company, if the opportunity was attractive. HBO probably couldn't.

Even IBM is a good example, the one tech company that's old-ish and has a "blue chip" persona. They managed to pivot into consulting. Would coca cola have successfully pivoted into fresh food delivery?

There's a flexibility in tech that doesn't exist elsewhere.

Also, I suspect, the way most large companies are growing is overly risk averse. Tech can't be derisked to that extent, so the companies pursue the higher value, higher risk strategies.

The best example to sum this up is Amazon and their 2nd act Aws twist. You might compare amazon of 2016 to other retailers. Walmart never had the potential to launch an Aws.

When tech is everywhere, the article thinks the tech sector doesn't exist. The opposite is possible too. When everything is tech, the tech sector owns everything.

Ultimately, coca cola is a legacy company.

Did you mean "compare Amazon of 2006", that was the year AWS was released.

yep :)

Tech has been synonymous with growth. That is why it was trading at a premium and that is why high growth tech companies continue to be priced at a premium while non-growth tech companies do not.

As a professional investor, I only care about three things: - Long-term stabilized return on capital - Pricing (P/E; EB/EBITDA) - Long-term growth.

The list of companies that check all of those boxes are extremely small

Would you mind sharing the list of these companies?

I’m not OP, but Microsoft is one of a handful of stand out tech companies for me. They are paying a decent dividend (almost unheard of in tech) and have a very solid enterprise product lineup that has gained traction, with a huge amount of the market left. Furthermore they have a strong consumer and gaming footprint, and generally are positioned well across their entire portfolio.

He is basically describing a large percentage of companies in the VYM ETF.

This is one of those articles that feels like it’d be unthinkable a few years ago - now there’s a lot to nod along to like this is almost common knowledge. It’s a big deal! This is the “crunch” in the tech sector - expect a fair amount of qualified engineers in the streets competing for work in the next few years. Not out of some downturn, but as investors demand cost cutting instead of investment to get their returns.

The only good news is that the “surviving” companies from old industries will continue to need to grow their tech platforms.

> Now it has to gnaw through the harder, crunchier parts of the global economy. Software eating life sciences? Software eating elderly care? Software eating household construction? Software eating money? Good luck.

Wow, so much pessimism. Tech has still loong way to make inroads into these sectors, and i don't see anything stopping it. In some cases it is harsh regulation and established interests that prevent people from innovating (e.g. money), but it is happening. "Good luck"? this won't age well. Anyone who thinks that tech is just for "selling ads" is , hm, short-sighted.

It is easy to cherrypick the high tech that has large p/e s such as tesla and netflix, but these are companies that disrupt existing markets, not create new ones. Apple (which does that often) has a tiny p/e. So maybe, it is a good thing that the fangs are being deinvested. Plus 2019 is the airbnb and uber IPO...

It's the way of innovation that the new sector if successful grows rapidly and then plateaus when everyone has the new whatever. The web/mobile tech companies are not the first. The early motor car tech boom in the early 1900s looked similar, then the electrical tech boom I think around the 1920s and so on. I imaging the early industrial revolution and textile companies in England went the same way and I guess maybe AI is next? I'm a bit of a skeptic on blockchain being the next big thing.

I wonder why the author does not include Cloud services in his analysis. Cloud is just getting started, has massive potential (business IT spending), can be delivered online (duh) and can be shown to be done effectively. Which is why you see lots of big tech co's investing massively there.

To borrow author's words, I believe for the next round, profitable tech companies will be Cloud providers (along with a Mall too), which will justify rich premiums.

One could argue cloud services is just a mall for computers (VMs), computing services (managed databases), or computing time (serverless offerings).

I agree that tech companies depending on attention will devalue. However the value of companies is also based on expected future value and the FANG companies are well positioned to profit from advances in AI, new energy technologies, life extension tech, etc., etc. I think there is a lot of profit to be made in emerging tech.

Yep, the article is dead on.

Malthus was wrong! Spectacularly so. Is the title a joke?

> If technology is everywhere, the tech sector no longer exists

Funny, because tech is everywhere and the tech sector is the biggest it has been in history.

Strange title. The connection to Malthus is tenuous at best.

Seems pretty straightforward to me. The premise is that tech businessses have exhausted the extant food supply for opportunities and growth and are becoming constrained by hard natural limits. Seems like a spot on metaphor to Malthus.

Sounds more like plain old market saturation to me, if you describe it that way.

I suppose I object to complicated social and political thinkers being reduced to bowlderized metaphors for clickbait headlines.

The author makes it clear that he does not think that there are 'hard natural limits' to the tech sector.

I was expecting him to say that attention-based company valuations demand a high exponential growth rate, and there's only so much attention to go around.

The original title was ‘is the age of tech over?’. It seemed too much even to the editors.

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