Themes and Dreams

Richard Kramer:  It's really easy to get everyone excited before you realize that there are just gonna be too many mouths to feed from the same meal. And investors never want to get involved in a hunger game scenario where several or many established companies are fighting over a flat or declining market.

Will Page:  Welcome to Bubble Trouble, conversations between the economist and author Will Page, that's myself, and the independent analyst Richard Kramer that lay out some inconvenient truths about how financial markets really work. This time we ask, if it's too good to be true, are we in dreamland? More on that in a moment.

Welcome along to Bubble Trouble where last week's bubble is this week's trouble. And the past two weeks we've discussed sycophants and stenographers, those who praise as opposed appraise. We've also discussed trends that appear too smooth to be true, when the master of arts is in managing how numbers are reported not how they're generated. So, this week we're gonna ask whether we're in dreamland. Richard, welcome along.

Richard Kramer:  Thanks.

Will Page:  So, I got a song in my head with this one. The song is Aerosmith Dream On, and the chorus goes, "Dream on, dream until your dreams come true." And I watched the Theranos documentary on Amazon, and tha- that expression fake it until you make it kind of resonates as we get into this one. 'Cause here we're gonna discuss themes and dreams, the themes and dreams that markets put out there to attract the investor's dollar, I guess. One could also call this episode Cooking the Books. And Richard, you've, you've got a classic story of cooking the books which relates to cooking.

Richard Kramer:  I mean, uh, uh, the, the notion of taking any company to the market has got to be based on the dream that it can fulfill two, three, five years down the road. And indeed when there was a company in 2017 brought to the market called Blue Apron, which assembles meal kits, at the time of their IPO the investment banks that brought the company to market suggested that the total addressable market for the company's services-

Will Page:  That's-

Richard Kramer:  ... the kits it assembled-

Will Page:  ... that's the TAM, right?

Richard Kramer:  ... that's the TAM, was $6 trillion.

Will Page:  [laughs]

Richard Kramer:  Because that accounted for every scrap of food consumed in the US which could theoretically have been put into a meal kit. And of course all of those, uh, banks that were sponsoring the IPO had blessed that notion that there wasn't any part of the food industry that meal kits couldn't address. Unfortunately, 2017 proved to be the peak year for Blue Apron's revenue, and indeed today it's trading at about $150 million cap, just a tiny fraction of the money it raised when it went IPO. And clearly it's had a difficult time tapping into that vast TAM. And that's something that we talked about before in the smoothing. It's very easy to talk about a very large number when you don't have to get into the nitty-gritty details of addressing how you reach that market.

Will Page:  And I, I guess Blue Apron, I mean putting your TAM as the entire produce of food and beverage in the United States of America is a bit extreme. Is th-, is that an exceptional case, or is there others that can join that, that group of blue-sky thinking TAM operators?

Richard Kramer:  No, I think in almost every case, you see a company providing some area of limitless possibility that they could address. It's something that I would call letting your flights of fancy go. The trouble with a TAM is you want to make the opportunities seem limitless but it, it's not always so easy to address that market. And it's much easier to point to the potential of a market than it is to grind out the hard work of reeling it in.

Will Page:  So, when I try and understand this concept of themes and dreams and how that contributes to the bubble trouble, I often think of a, a lesson I learned when I first had to meet people in the advertising world. And as an economist, I'd been insulated from this way of life, the, the, the ad men, the mad men, as you could call it. And I had to address a group of people in the advertising profession, and I asked for advice. And the advice was given to me which is people who work in advertising are like dogs, th- they, they feed off good news. They can't deal with bad news. They had to have good news. They're salivating like Pavlovian dogs to get good news. Is that example of dealing with people from the mad world of ad world applicable here to the themes and dreams?

Richard Kramer:  Uh, absolutely. And indeed it's, it's always wonderful to dream that in a limitless market of a trillion dollars or multiple billions of dollars, why not have a goal to just take your market share from just 1% to 2%? And, uh, isn't that exciting the, the idea that after you got to 2 or 3 or 5 or 10%, there would still be so much further to go? Now, the reality is, for the advertising industry, that the rubber is meeting the road in realizing that, you know what? Maybe everybody doesn't want to have a relationship with your brand. Maybe that notion that just because you put a product in front of someone doesn't mean that the only reason they're buying it isn't convenience or habit. Forget about brand love or brand loyalty. Or maybe they're just happy with mild satisfaction. And that's not the kind of thing that inspires either advertisers or investors. Because you want to imagine that brand is gonna last, uh, for generations.

Will Page:  Let's turn to that classic component in any startup story which is the investor deck, which in my opinion should be no more than five slides. Quite often it's 50 slides long. When we think about how themes and dreams are illustrated in that investor deck, what sort of illustrations you would be looking out for?

Richard Kramer:  So, one of the things we talked about in a previous episode was the hockey stick growth curve. You know, the one where it typically follows the kind of Fibonacci sequence where each number gets exponentially larger by adding the two numbers prior. And what you really want to see is that growth s-, maybe it starts off slow and it's difficult in the first couple years, but then it just rockets up the steep part of the S curve before it matures and tops out. What is rarely put into investor decks, especially in a world where the overall global economy is only growing a few percent a year, is what is falling off on the other side, what's being lost to make up for what this particular company or that particular company is gaining. So, rarely does the investor deck talk about the competitors who are supposed to effectively roll out the red carpet and surrender their market share to hand over to this new company that's come along with the clever new mouse trap.

Will Page:  And that reminds me of a great expression from the University of Chicago which is, "There's never been a competitor vat without a victim." A good example is your treasury function in a firm. If your treasury function in the firm says, "We made, let's say $50 million last year," does anybody ask that function, "Who lost $50 dollars?" Or did money just appear through thin air?

Richard Kramer:  Indeed. Uh, and one of the problems with these vastly overstated totally addressable markets is that it always gives you the sense that there's another large market around the corner in case this one doesn't work out. If the global transport market is $4 billion or trillion, if you can't address it in one particular country, there's always another country around the corner to enter into. And it doesn't really come to grips with the fact that addressing those individual markets, each comes with their own costs. Now, one of the other things you have in these prospectuses and investor decks is very large presentations of all the potential risk factors. And that's usually written by a bunch of lawyers who want to make sure they are covering their backsides for every potential eventuality. And typically in a prospectus for any fairly large company, this will run to dozens of pages covering everything from acts of nature would could disrupt supply chains to competitive pressures to the company's ability just to hire good staff and continue to be able to grow. So, there's a lot that's stuffed in there to cover potential future liabilities and not really to enlighten investors.

Will Page:  When you look at these investor decks, there's this assumption that the, th-, that there is gonna be a competitive vat and there is gonna be a victim, that that victim doesn't fight back. And that's something that I've always had a, a bo-, a bee in my bonnet about which is the idea that there's a pie chart. You've seen those pie charts, Richard?

Richard Kramer:  Too many of them, Will.

Will Page:  Okay, too many pies. Explains your figure. Still, when you see those pie charts, and the idea is that you can grab a slice of that pie, and it's a stationary view of the world, that this pie is worth $100 billion and we're gonna get 30% of that $100 billions after three years. And what I don't understand about that is how the pie is seen as a stationary object, the fact that the pie is just gonna release that slice without any form of competition, any form of throwing up barriers or building moats to protect what they've already built. And equally, the slice that you extract from that pie retains its value, like nothing changes. The cost structure doesn't change so they revenues don't change. And I, I see this most in the ad world, when we talk about ad markets. So, I know that's a specialty of yours. I'm not sure, can you relate to that in terms of how that slice of the pie analogy works in advertising?

Richard Kramer:  I think the simplest example of that is coming from a decade or more ago when I used to spend a lot of time looking at the mobile phone market. And you would ask all of the vendors what their market share was. And funnily enough, it would add up to 120 or 130%. Because everyone was defining the market in a slightly different way. Many smaller companies has self-reported numbers so you didn't actually know their shipments. Other larger companies would bury their detailed numbers inside other divisions so you wouldn't get the direct disclosure you were looking for. And there was a lot of adding up the total size of the pie based on a range of ingredients, apples and pears and cherries and whatever you might put into your pies. So, you don't always have a consistent outline of what you're measuring. And certainly, in the global advertising industry, it's extremely difficult from a top-down point of view to come up with what the total size of the pie is. Because there's so many different forms of advertising and so many of the measurement techniques used by the different industry analysts or by groups within the agencies to come up with a top-down overall figure are assembled in slightly different ways.

Will Page:  And that's where I think also that role of costs which, when you're discussing themes and dreams, very few people want to actually discuss cost structures. But the costs of generating that pie dictate to a large part the size of that pie. And when you take a slice of that pie and compete for it with a different cost structure, the size of that slice has to adjust to the cost as well. So, costs are a function of what makes the pie the size that it is. But it's rarely discussed in the themes and dreams.

Richard Kramer:  When you look at any particular market represented in a pie chart, you then want to think about how fast is that overall pie growing. And then as you rightly point out, how much is the cost of addressing the incremental growth that lies ahead? So, if the $100 billion market can be addressed where all the players collectively can generate $10 billion of profits, that's terrific. But if doubling the size of that market is something where it's only going to leave an extra $5 billion of profit or indeed, as we see with very many similar services, where the marketing costs that are differentiating your product mean that there's very little profit left to go after that extra bit of the pie, then it may actually make less sense to constantly be trying to grow that pie as opposed to looking to an adjacent market or shifting the business into new areas.

Will Page:  So, if you have that market stealing effect versus market growing effect. Perhaps a little bit too nuanced for themes and dreams but an absolutely fundamental part of business strategy.

Richard Kramer:  Yeah. And I think there is a lazy presumption when you're sitting in front of an enthusiastic founder or youngish management team that thinks the world is their oyster to think that, "Well, sure, the global finance market may be trillions of dollars, and if we're this little fintech startup competing against these entrenched banks, we can sail our pirate ships into the cove and steal all the treasure without any hassle." And it's very rare that that works out without a lot of painful execution over a very long period of time.

Will Page:  Let me just join the dots here for our listeners as we go to the break. So, we, we discussed letting your flight of fancy go, that the supply side is just to think of a number, put three zeros on the end of it, and go with those hopes and aspirations, those themes and dreams. And why not? You know, y- you're writing fiction not fact at this stage in your startup so you might as well aim as high as you possibly can. Then what we discussed was, on the demand side, the feeding frenzy, the fact they're like dogs out there in the market just desperate for good news, desperate for a story that they can pump as the company approaches IPO or approaches a new quarterly earnings figure as well. So, you've got to kind of supply and demand equilibrium. Supply side, aim as high as you possibly can and let your flights of fancy go. On the demand side, the feeding frenzy which needs good news. That's that 24-hour new cycle we discussed in an earlier episode as well. And the product of that is you get these tools, these antiquated tools like pie charts which just allow you to accentuate the problem, which allows you to fail to think about the causes of bubble trouble and think that we're a zero-sum world where somebody's gain is not somebody else's pain, that these achievements can be, uh, you know, reached without any implication to cost.

We're gonna take a break now. And then we'll come back and do what we've always done on Bubble Trouble which is give our listeners some smoke signals to spot so we don't get caught out again. Or as The Who would say, "You won't get fooled again."

For Richard Kramer, I'm Will Page, and you're with Bubble Trouble.

We're back again with Bubble Trouble where this week's bubble is next week's trouble. And we're trying to help you not get fooled again, to quote The Who, uh, with these recurring causes and consequences of why markets get themselves into these bubbles and cause so much trouble. Um, we're seeing that in the market today. We'll touch on that in a minute, Richard, in terms of what your spotting in the market. What I want to do in the second part is give our listeners some smoke signals. How can we give our listeners smoke signals to spot these bubble troubles at play so they don't get fooled again? What are those smoke signals that we can explore today that makes us less prone to bubble trouble tomorrow? So, we've been discussing how these themes and dreams take place, why on the supply side the startup or the company wants to let their flights of fancy go, why on the demand side there's this feeding frenzy for good news like dogs salivating like, uh, over next quarter's numbers or next week's IPO, and how that's [inaudible 00:16:06] in illustrations and investor decks that quickly, you know, ignore some basic fundamentals of how markets work. So, Richard, what's the first smoke signal our listeners can look out for to avoid this form of bubble trouble?

Richard Kramer:  One thing you should definitely take note of is the notion of double counting. It's really easy to get everyone excited before you realize that there are just gonna be too many mouths to feed from the same meal. And investors never want to get involved in a hunger game scenario where several or many established companies are fighting over a flat or declining market. This is why companies are constantly appealing to the future, to the tremendous potential, to the limitless upside of their total addressable market. They don't want any investors to see that it's a dog fight to get every point of market share or a-, open any new territory in those markets. They'd rather think that the world was beating a path to their door.

Will Page:  And to go back to your Blue Apron example, which I just love, what double counting existed there?

Richard Kramer:  I think in any vast market, which you'd define as food or transport or retail sales, there's going to be tremendous fuzziness in terms of the barriers of where certain services begin and end. That's why when you see companies coming to the market that do food delivery, they say they are 21 opportunities a week to deliver food, it's breakfast, lunch and dinner. And yet the notion that you're going to wake up in the morning and order breakfast delivered to you from one of the food delivery apps is something v-, I think very few people in the world would contemplate. But again, it's much easier to think about 21 opportunities to deliver food, and our customers are doing it less than one of those times on average every week. So, it's, again, easier to appeal to something that feels limitless than to constrain your market or say, "Our existing business is just in this narrow field that you can carefully measure."

Will Page:  Uh, yeah, and let's stay in that kitchen for a second because there's other startups just now, I, I believe the founder of Uber is behind one of them which is the assumption that kitchens are over, like in the future nobody will cook for themselves and therefore it's a home-delivery mechanism, buying up city center car parks so that the, the v-, the cars can get meals out to houses even more efficiently than currently present. And wh- when, when you hear that logic, 'cause it's a theme and a dream that nobody's gonna cook and everybody wants to order, yeah, you can paint that picture if you want, but the kitchen industry isn't thinking like that and neither is the consumer. What causes somebody to buy into the story that nobody's gonna bother cooking food anymore when there's so many more data points, so much more evidence, so much more cultural considerations to suggest that perhaps cooking's gonna be more popular than ever?

Richard Kramer:  Well, look, it's clear that on one level there is a logic to centralization. And there are giant food service companies that support delivering meals to schools or to universities or to corporates that have to deliver mass volumes of meals for large numbers of people on a daily basis. But at the same time, people don't want to think when they walk into a Pret a Manger that there's a giant warehouse in Croydon or somewhere which is cutting up their sandwiches every morning.

Will Page:  [laughs]

Richard Kramer:  They want to think that the McDonald's that they just ordered comes from the local McDonald's on the corner just down the block which they would've got up and walked to if they hadn't ordered on their app. So, the notion of dark kitchens is simply a, a reflection of the desire to consolidate the delivery of food an- and, and the services around delivering food. But what's missed here is the fact that very few people would want to know that they're consuming a meal which was cooked in a car park.

Will Page:  I want to, I want to noodle on this just for a quick second here because maybe the idea of the startup mentality is that they've identified that cooking has a cost, and there's gonna be value if you can relinquish that cost and have somebody do it for you like a division of labor argument if you go back to Adam Smith. But then perhaps what's not appreciated is a more culturally nuanced point which is cooking has a benefit. Maybe people enjoy it. Pe-, maybe if more people participated in cooking, more people would enjoy it which goes counter to the themes and dreams of the startup is putting out there in the market.

Richard Kramer:  An- and it's notable that food delivery has had varying levels of penetration depending on the markets that it's in.

Will Page:  Wow.

Richard Kramer:  Uh, there are some markets where culturally it just hasn't been adopted in the same way and by the same demographic as it has been in other markets. And equally, its distribution is very uneven across the economic spectrum. So, there's some groups that clearly, maybe under lockdown they have no choice because restaurants aren't open. But when given the opportunity, we'll see how many people would choose to have a gourmet d-, meal delivered to their house or enjoy, for all the other reasons, the theater of having it delivered to them at their table in a restaurant.

Will Page:  You know something, you're just making me think aloud there in terms of all the investor decks I've seen with hockey stick growth curves and slices coming out of pie charts, you never see anything dealing with cultural characteristics of the market in place. You never see that. It, it's completely missing. And if you're discussing it in this example, how can you ignore something so fundamental? I guess because it limits the themes and caps the dreams.

Richard Kramer:  Simply put, one of the approaches I've always sought to take as an analyst is to act as a sort of ethnographer or cultural anthropologist looking at the companies I'm covering. Because you really have to understand the baseline culture of the company to understand what it's possible for them to address in the same way as you need to understand the context in which the company operates to understand what might be possible. And whether that's true of a Japanese gaming company like Nintendo, it's famously very insular in its culture or a Finnish company like Nokia or a quintessentially American company, you really have to understand the context around the company to understand how it's likely to behave or operate in the marketplace.

Will Page:  Let's go to our second smoke signal. I mean we've talked about double counting and how that can conflate the figures. What else have we got that our listeners can learn from?

Richard Kramer:  Well, another thing is sort of duplicative reasoning. And by that I mean it's very easy for one company to copy the pitch of another company, especially when that company's been successful.

Will Page:  I call this coat-tailing. Is that a fair expression?

Richard Kramer:  Yeah. I mean, i-, so Eric Nuzum who is producing this podcast had a wonderful bit this morning about how there was one company in the States that has been announcing for the past years that it's number one in podcasts. But here was a medium where you've gone from basically not a lot of people doing it to two million people providing podcasts in the past five years. And what does number one mean? What is the measure of being number one in a market which is mushrooming and, in many respects, still commercially challenged? But why does market leadership or being number one matter-

Will Page:  [laughs]

Richard Kramer:  ... other than to say, "We're number one."?

Will Page:  Because we've got egos to satisfy surely.

Richard Kramer:  Absolutely. I think one of the phenomena we're seeing is that when one company, for whatever reason, is accorded a very high valuation for addressing a particularly interesting emerging area of the market, dozens of other companies say, "Hey, we can do that too." Whether it's in a subsegment of the advertising market or an area like social commerce, everybody will very quickly anoint themselves with the similar buzzwords to try to bask in the reflected glory of that company that got a premium valuation. And very often when you look to alternative sources that you can find to see what's going on inside a company, whether it's reviews by people interviewing for jobs or blogs around the company, you'll realize that inside the company there's nothing to it. This was just a PR exercise to say, "Hey, we can do this too," by the management which really didn't have the team and the investment behind it, which typically takes years.

And I think in a previous episode we talked about how quarterly earnings are really a sham because no company is really able to accomplish very much in 90 days. And when they say they've had a great quarter, i- it doesn't really mean much because strategy in companies, especially large companies, tends to unfold over multiple years. They're dealing with product cycles that will stretch out three, five years into the future and investment cycles that take dozens of years to unfold. So, it's simply a nonsense to say, "Oh, well we can do that too," because someone else got accorded a big valuation for saying that they are a world leader in doing this particular function.

Will Page:  Now really feeling it. So, we can really learn something here and we can join a lot of dots in, in a simple body blow to, to, to the bubble trouble issue that we're always trying to tackle on this show. Le- let's just work through it for a second. You were talking about duplicative reasoning. It would be fair to say you could also have duplicative stenographers and sycophants which we discussed in the first episode. You could have one social media platform being backed by one cheerleader investment back and another one backed by a different cheerleader investment bank, and because you've got duplication in stenographers and sycophants you can double the story, you can double the size in the market because they're both discussing their own lanes without thinking about how they complete or across either side.

And then back to two smooth to be true, these trends can be duplicative as well. Because again, because you've only got your own separate cheerleaders backing your company, you can back your own separate trends. There'd be no downward pressure on price from your competition because we'd be treating both in isolation. And again, we can cook the books even further there. And, uh, i- is the way of thinking through what duplicative reasoning means? Because we've all got our own church with our parish of cheerleaders, we can invent our own story and ignore the threats around us which might take the, the shine off those themes and dreams?

Richard Kramer:  Each company is, as we talked about before, competing for investor attention.

Will Page:  Right.

Richard Kramer:  And so they will be putting out their own, whether it's fantasy or not, view of reality that says, "We have the special sauce. We have the magic formula. We are the ones who can take a trend that we all can observe, we think is logical and, and reasonable, and be the ones to capitalize on it." And you think about that in the context of advertising, advertisers have dozens of places they can go to show off their wares, to let people know about a new product, to nudge you down the conversion funnel to make sure you buy that product. They have dozens of opportunities. So, how do they select from everything from TV and radio to newspapers and, and print to billboards and out of home to all sorts of digital media, from social media to search-based advertising to product listing ads? It's extremely difficult and confusing. And every one of the potential advertising venues is saying, "Choose me. We're the most effective." And-

Will Page:  We are gonna be the winner that takes all, essentially.

Richard Kramer:  Well, I don't think in that case they would be ones that would take all. They would simply be ones that would be in the consideration set. And that's the key point. You want to be in that consideration set among those advertisers.

Will Page:  So, we've given our listeners two smoke signals that they can look out for, essentially the double counting where two plus two equals 40 as opposed to four, I guess, and duplicative reasons where the logic of the reasoning of that investor desk, it just doesn't quite add up. Now, I want us to turn to undercurrents. Richard, on undercurrents we look for those imperfections that are always gonna exist no matter how good we get at spotting bubbles, in terms of no matter how insulated we are from the trouble that they can cause. What are those imperfections, those undercurrents that are gonna exist when it comes to dealing with these themes and dreams that we're trying to tackle in this week's episode?

Richard Kramer:  So, uh, one that springs to mind right away and that we all have experience with is software. How often are you buying something that's supposed to transform itself over a very long period time? And very rarely do you buy a piece of software and say, "Right, that's all I want it to do forever."? It's classic. You pay now and then you have a sunk cost, you're committed to it, and you're gonna be paying maintenance for updates and, and new versions which are supposed to fix all the problems that the product you just bought was supposed to take care of. So, you really have to be on the lookout for promiseware or the notion that what you're buying-

Will Page:  Promiseware.

Richard Kramer:  ... is a roadmap.

Will Page:  Will I find that word promiseware in terms and conditions?

Richard Kramer:  Probably not. But you do have the right to constant updates and upgrades. The question is whether you'll have to pay again and again and again to get them.

Will Page:  So, that's our first undercurrent. What's our second one that our listeners can hold on to and try and avoid those bubble troubles from the themes and dreams that they're being presented with?

Richard Kramer:  Yeah, the second one I would call the El Dorado figure, the number that if you make it to the peak of that wonderful S curve into the mature market where it's always sunny, the weather's wonderful, the food's great and you've got not a care in the world, there's always some shining city of gold just over the next mountain. And that's because companies, when, especially young companies, they'll be selling futures, potential, opportunity, optionality. Could be snake oil, but there are countless examples of tech companies over-promising and then either under-delivering or just failing to deliver at all. Part of this could be what you have to do to get attention in a crowded world of people trying to raise money.

Will Page:  Well, we bring this podcast, themes and dreams, to a conclusion. And perhaps the first thing that comes to mind is, is the Larry David comedy Curb Your Enthusiasm. Y- you're always gonna be presented with these grandized themes and dreams, uh, but you just have to learn and become, uh, street smart and curb your enthusiasm from the k-, those hockey stick trajectories, looking at that slice coming out of the pie chart, apply some of these smoke signals and be aware of some of these undercurrents which are never gonna go away. Thank you Richard Kramer. This has been Bubble Trouble. This week's bubble is next week's trouble. We'll be back again. Stay tuned, I'm Will Page.

Bubble Trouble is produced by Eric Nuzum and Jesse Baker at Magnificent Noise. You can learn more at bubbletroublepodcast.com. See you next time.