Feb 2021 Update; Weedmaps and Latch

General Update

It's been a while since my last post. What's there to write in a world where every stock chart is up and to the right? 

The past few months have been less about single stock fundamentals, but more just managing portfolio exposure. I try hard to keep my net exposure below 60% (now down to 50-55%) as numbers fly upwards - trim here and there, add a little index hedges...etc. Just trying to keep my risk down. That's a good problem to have!

My genomic basket (slightly under 20% of my portfolio) went absolutely bonkers. This is ILMN/EXAS/GH/NTRA and a rotating cast of more speculative plays. I got into PACB and BNGO relatively early, both multi-baggers. I had small positions in these, and gradually sold on the way up. So these are base hits instead of home runs. But add up a bunch of base hits and all the sudden I'm up 15-20% YTD in my main accounts.

The other thing is - it's easy to find ideas when 8x sales is now considered cheap. Of course, no one knows how long the market will stay crazy, so I have a portfolio of speculative stocks and blow them out at the first sign of market weakness. Then when the market look stable again I get back in. 

A Couple Interesting Ideas

Here are a couple of these speculative ideas in Tweet threads. For now they are in my rotating basket but I may end up with them as long term investments.

These are early stage companies and the industries are still being defined. So I'm focused on how these companies can build their moat and enhance their positions in the value chain.

If I sound somewhat negative about them, that is because they are promising enough to worry about.

1) SSPK (Weedmaps)

1/n

Some takeaways from my DD on Weedmaps $SSPK

- the purchase process was far from smooth

- Weedmaps is like Yelp on consumer side and Square on seller side, but the 2 sides are not necessarily integrated- Consumer experience suffers as a result https://t.co/d6rq8VUIsh

— mspacey (@mspacey4415) January 10, 2021

I want to see Weedmaps integrate further into the customer's value chain - especially in terms of payments and logistics. That would help enhance the customer experience as well as erect further barriers to entry. Regulations need to be loosened up (which is likely in this political environment) and give marijuana related companies access to the banking system. 

Weedmaps currently does not take any cut of their GMV, and that represents a big upside if regulation allows.

2) TSIA (Latch)

1. waiting for more disclosure from $TSIA / Latch but I like this one so far . one of the more promising SPAC targets IMO

— mspacey (@mspacey4415) January 26, 2021

Latch has a chance to not just be a management platform for building owners, but also a consumer platform for every day use. I want to see them extend functionalities to make renter's life more easier and more convenient. This way LatchOS can be central to residents' lives and perhaps a platform to connect with other services (laundry, elevator, vending machines...etc). 

New companies typically some with some niche focus. A small competitive border is easier to defend and dominate than a wide border. This is what LatchOS has done with multi-family apartment buildings. But they are talking about extending that to commercial buildings. I worry that resources might be stretched a little thin here.

Pre-election Portfolio Review

Here's my portfolio going into the election. The main holdings are: 

• GOOGL
• ILMN - talked about oncology upside here 
• FNF - I sold down in Feb as explained here, but bought back a chunk when it dropped to ~$30.
• AMZN
• PGR
• SQ+PYPL
• ASML - a small position from 2018 that doubled and turned into a material position
• TTD - this has tripled. First wrote about it last year, and here
• SHAK - bought in August
• FORM
• GH

Google and Illumina are 6-7% positions, the rest are no more than 4% each. I also have a long tail of smaller positions. 

Roughly, I'm 75% long equities, 25% cash/bonds/preferred's/yield plays. I'm also -15% short index futures, taking net equity exposure down to ~60%.

So it's a defensive posture. But probably less defensive than it looks. I'm running a barbelled portfolio where I have cash & equivalents on one hand, and highly volatile stocks on the other. 

The newer stocks in the portfolio are FORM, GH, and ILMN. For now I'll just do a few bullets points about them.

FORM (avg cost basis slightly < $29/share).

• #1 player in probe cards for semiconductor testing. Here's a nice little explanation of where probe cards fit in.
• Every new chip design needs its own probe card. This is really a consumable business so I regard it as steady revenue (at least compared to equipment makers) in a structural growth market.
• Their largest customer is Intel. Intel's troubles contributed to FORM's stock weakness this year. But FORM is gaining share at TSMC and particularly at the most advanced product lines.
• Management has a good track record of achieving its goals. The company's 2023 target calls for about $160mm FCF. Assume some interim cash flows and 17-20x EV/FCF, stock is worth close to $50 in 2-3 years.

ILMN and GH (avg cost basis ~$283/share and $97/share, respectively)

I actually had a starter position in ILMN since mid-2019, added during the downturn in February and March, and made it my biggest position in September when ILMN announced the acquisition of Grail, and stock got crushed below $270. (ILMN lost way more in market cap than what they will be paying for Grail!)

I was initially negative on Grail too, but quickly came around to it. 

Grail does pan-cancer liquid biopsy screening. The advantage of liquid biopsy is obvious. 

A few years ago, my mom did a checkup and found nodules in her lungs. It was suspected to be lung cancer. But the doctor couldn't confirm until my mom undergoes a biopsy - basically surgery to cut out a piece of her lung tissue for examination. 

My mom's fine now. But she sure would have preferred a simple blood draw! As for ongoing monitoring, blood draws will be infinitely preferable to repeated surgery.

But why Grail? Isn't there a ton of these liquid biopsy companies? 

• Yes, there's a ton of liquid biopsy companies, but only a few are 1) pan-cancer, and 2) for screening. 
• For example, I also own Guardant Health, which is one of the few companies that does pan-cancer liquid biopsy, but for cancer therapy selection instead of early screening.
• I posted a long thread here. Quick summary thesis: The pan-cancer screening market will be a natural oligopoly, where the first successful product will gain economy of scale and customer stickiness - overtime that combination will make Grail's lead insurmountable.  
• The whole field is very early innings, so I have an entire basket of these. ILMN and GH are the largest ones, but also PACB/EXAS/NTRA/NVTA.

More on Pan-Cancer Screening

Take a step back for a second. Forget the theories and just think about it. Pan-cancer screening just makes sense! Society NEEDS this.

Does it makes sense that people should have 50 screening tests for specific cancers such as colon cancer, lung cancer, breast cancer...etc? And then have insurance cover them one by one?

In practice, having these separate screenings means we don't get screened until some doctors suspect we have one of these diseases - and that's most likely AFTER we start showing symptoms. Stage 1 cancer is about 90% curable, while stage 4 cancer is only about 10% survival. Not getting screened until you're showing some symptoms is a huge disadvantage.

Pan-cancer screening solves that. You get it early, before you have any reasons to suspect you have cancer. You get it on some routine annual check up. One blood draw, 50 screens. Millions of cancer deaths prevented.

That's the holy grail of cancer screening. Someone has to drive that forward. Used to be Grail, now it's Illumina. 

The technology is here. It would be a sin of our healthcare system to not make it happen.

A (Flawed?) Ethereum Thesis

Here's a theory I cooked up earlier this month:

Ethereum as collateral means reflexive credit cycle.

just as higher home price = more lending = higher home prices;

higher ETH -> more Defi -> higher ETH. #Ethereum #DeFi

can someone punch holes into this thesis?

— mspacey (@mspacey4415) September 3, 2020

 

Quick glossary for above:

• ETH = Ethereum
• Defi = Decentralized Finance
• "reflexive credit cycle". A positive feedback loop between home prices and lending. Banks typically lend based on some loan-to-value ratio. Higher home values means banks are more willing to lend. More lending means more buying power, which increase housing prices, which then enables more lending, and the loop goes on.

For more information on reflexivity and credit cycles, Soros has a whole chapter on these dynamics in his "Alchemy of Finance". 

Anyways, when I heard that there's now a way to lend and borrow Ethereum (ETH), I immediately came up with the analogy. Ethereum prices can keep going up and up, because of this feedback loop!

Unfortunately there's 2 flaws to this thesis:

1) Can the Ethereum blockchain really scale?  The ethereum system is prone to congestion and result in high transaction fees. This is a well known critique of the ethereum ecosystem, with several solutions being worked on. But implementation risks remain.

Ethereum is the first smart-contract blockchain. It has overwhelming first mover advantage, and the vast majority of DeFi apps are built on top of Ethereum. 

Think of it like the Microsoft Windows operating system, on top of which you can have unlimited number of applications. There were other challenger operating systems that might be faster, more efficient, more secure than MS Windows, but having all the best apps / developers gave MS Windows an insurmountable network effect that outweighed its flaws.

Whenever Ethereum has scalability/congestion issues, newer blockchains will try to take apps and developers away from its ecosystem - perhaps through compatibility tactics. For example, Binance is launching BSC, "an Ethereum Virtual Machine-compatible blockchain ".

So there's a strategic chess game going on in crypto, much like there is among big tech platforms like Google and Apple. Ethereum has to solve its scalability issues to ensure its dominance.

 

2) DeFi lending is not real lending as argued here. 

and this thread below (sorry I keep linking to myself but as far as I know, no one else is talking about these things.)

i dont completely agree but hugely important article

a loan without a maturity date.. is that still a loan? https://t.co/etKO0U0Hbh

— mspacey (@mspacey4415) September 4, 2020

It get's very technical if you dig deeper. The short story is that there's no unsecured borrowing and there's no maturity date. The latter means you cannot develop a yield curve that serves as a critical reference point for pricing assets.

In short, I believe the way DeFi operations are currently set up encourages speculation and scams instead of the development of a real credit market. If I'm right, then the current "lending" in crypto is not a sustainable.

If DeFi is not sustainable, then it cannot be the necessary part of the positive feedback loop that drives ETH prices higher. 

All is not lost. Innovation and progress require several waves of boom and bust. People are driven and entrepreneurial - I'm seeing new coins and new crypto systems comes up every week.

So I'm pretty sure someone will get it right one day, and crypto will have a real credit market. The feedback loop then completes itself.

Crypto 2.0:  Crypto as Collateral

And let's not overlook how big a step forward DeFi already is. 

Here's what I posted in Reddit's r/MakerDAO forum (lightly edited to provide context here):

What attracted me to Maker is its game changing paradigm of using ethereum as collateral and issue US dollar pegged money. In doing so it accomplish 2 things:

1. ethereum replaces reserves at the Fed as monetary base. That money base is now out of government control!

2. Maker moved us from crypto 1.0 ( unrealistic dream of crypto being used as money in every day transactions) to crypto 2.0 (crypto as collateral that anchors a credit system much like Fed reserves or US Treasury bonds currently do).

This is a big step up for crypto! Serving as collateral is a more feasible and more central role than money (currently there's a multitude of fiat currencies but one ultimate collateral - US treasury bonds. It also means crypto is now a cash flow generating asset - providing theoretical foundation for valuation frameworks.

Just to elaborate. Crypto 1.0 (my own terminology for the era that ended in 2017-2018 boom/bust) envisions a crypto asset such as Bitcoin or Ethereum as money - as in when you go buy a Coke at 7-Eleven, you're supposed to pay in Bitcoin instead of US dollars. That turns out to be bunk, as crypto turns out to be too slow and too volatile for transactions. 

So Crypto 2.0 evolved to have stablecoins such as USDT, DAI, USDC...etc. All these are pegged to the USD and thus can easier be adopted as money for transactions. The original crypto assets such as Bitcoin and Ethereum then can serve as collateral that generate those stablecoins. 

This is a big step forward and in fact better mirrors the real world monetary system. (footnote 1)

Does DeFi become the new eurodollar system?

Here's another question that drew me to Ethereum:  does crypto lending/borrowing create money supply, and become the "new eurodollar"? 

In the 60/70's, foreign banks began lending in US dollars and that created USD denominated deposits ("eurodollars"). Since those banks are not subject to the same regulation as US banks, the eurodollar system inadvertently created huge new supplies of USD, and that lifted all asset markets. 

The Soros "Alchemy of Finance" book I mentioned above also discussed the impact of the eurodollar market.

DeFi, with its USD pegged stablecoins, has that same potential. 

Footnote:

1. What we know as "money" are really bank deposits ("Citibank owes you $xx, you can draw that anytime"), and is separate from the "base money" that Federal Reserve creates (which is liabilities on Fed's balance sheet, but assets on Citibank/JPM..etc's balance sheets; this "base money" is in effect collateral that backs bank deposits that you and I call "money").

On Shake Shack

I tweeted about Shake Shack (SHAK) a few weeks ago:

just bought some Shake Shack $SHAK . biggest driver of value is a) eventual store count, b) revenue per store.

they have about 300 stores now, I think that can easily double to 600.

— mspacey (@mspacey4415) August 5, 2020

Here's the gist of the thesis. Shake Shack can eventually reach 1,000 stores. At 600 stores (achievable within 3-5 years), and assume lower revenue per store for the new stores, I get to $89 a share using 20x EBITDA. That would be roughly a double in 3-5 years from my purchase price of $50.

The 20x EBITDA assumes growth runway beyond the 600 stores modeled here. That multiple may seem high but keep in mind currently it's at >25x.  In any case, it's all about growth runway and if Shake Shack can maintain its competitive position in the future (which in turn will allow them to uphold profitability).

Now, margin assumptions. As I mentioned in my tweet, Shake Shack is currently suffering from dis-economy of scale given its growth strategy. They are going after the big cities and claiming a foothold there. So if you have one store in Salt Lake City, you're setting up an entire supply chain to service that one store. 

That is obviously not optimal for margins. But things get better as you densify. The second store in the area might lead to some cannibalization, but will also allow them to leverage fixed costs. The 3rd and 4th stores will further enhance relative market positioning, as well as economy of scale... and so on. 

So as Shake Shack further penetrates the geographic areas they are already in, I expect margins to benefit.

To put things in perspective, in the affluent Bay Area (North California), Shake Shack only has 4 stores!  (San Francisco, Mateo, Palo Alto, and San Jose).

I go to the Palo Alto store, and even in the Covid-19 era there's usually a line of people waiting outside for online orders. 

Think about this for a second, Shake Shack invaded In-N-Out country - and have done pretty well!

To wrap up this section. I believe Shake Shack can easily get to 600 stores just by penetrating existing areas of operation. As they densify their operations, they can get leverage on existing infrastructure and improve margins.

A Telling Misconception

One push back I have gotten multiple times is "why would anyone buy a $10 fast food burger!?"

The answer is they don't. Shake Shack burgers are $6-7 dollars, not much more than than buying a Big Mac at McDonald's. Shake Shack burgers are made of 4 ounce patties, while Big Mac is made of two 1.6 oz patties. Then you factor in quality differences, I would say SHAK is an outright bargain.

But it's telling that people assumes Shake Shack sells $10 burgers. People hear about SHAK through friends and social media, see its nice stores (and lines out the doors), and assume it's some kind of snobby "premium" burger. 

They would be right about the premium part. Shake Shack is not your regular fast food burger, and can't be compared to such. It occupies an unique "premium fast food" position that few fast food operators can claim. 

It's the cheap glamour burger. The Michelin of fast food burgers. Founded by industry celebrity Danny Meyer.

Some people will have ideological aversion to this kind of categorization, but buzz matters. There's just some extra magic to Shake Shack beyond a quality burger at the right price. 

I was in Manhanttan through the 2000's when there's only the Madison Square Park location. I saw the buzz it generated. People regularly wait in line for an hour just for $5 burger. Even in early 2010's after they opened shacks throughout the city, the Madison Square location still has lines around the park.

As Shack Shack invades international big cities, they take that buzz with them. Below is a view of the newly opened Beijing store. I'm pretty sure people don't wait hours for Hardee's opening!

I thought one hour was long... First customer at @shakeshack in Beijing said she’s been waiting for five hours to get the hot dog 🌭.😳 $SHAK pic.twitter.com/1jNUV6b2Yn

— Eunice Yoon (@onlyyoontv) August 12, 2020

Other Puts and Takes

• Shack Shack patties have a distinct texture versus competitors such as In-N-Out or Five Guys. This is due to their proprietary blend from Pat LaFrieda and a smash-and-scrape technique.

• Declining same store sales. SHAK has a different sales pattern compared to most. Since the company enters a market with so much buzz, the stores typically start with high revenue per store, then drop off in the second year. Sales eventually stabilize, and I think will improve as they add options such as drive through and curb side pick up.

• This idea that Shake Shack might be hurt by higher mix of delivery orders (assuming those have lower margins). 
• SHAK can pick sole delivery partner as leverage (I guess that's what they do with GrubHub). 
• SHAK also has an excellent mobile app (better than McDonald's in my opinion, and I'm a big fan of MCD!). This means they won't depend on delivery partners to drive traffic.

• The real risk is if the company expand too quick and loses its quality and reputation. Other than that, I think it's a sure thing. 

• My average cost basis is slightly below $50/share. The plan was to average down and really load up if the stock ever go down to 30's. Instead, it's seen a quick run up. I will likely add a little when it reaches $60. 

PayPal's Move Into Offline Retail: Balance of Power Means Cooperation, Not Competition

I've been wondering about the payment value chain. Specifically how PayPal (and to some extent, Square) moving toward offline retail will shape the industry. Specifically, can its P2P apps aggregate consumer attention and lead to less industry power for Visa and Mastercard.

Today's consumer transaction landscape is as follows:

• Peer to peer (P2P). PayPal and Square (with PayPal app, Venmo, and Cash App). Note that P2P transactions do not have to go through Visa and Mastercard's networks.
• Business to consumer (B2C) online. 
• Visa and Mastercard  - consumers puts in their credit card info online.
• PayPal buttons.
• Business to consumer (B2C) offline
• Visa and Mastercard.
• Apple Pay and Google Pay. These wallets mostly just wraps around credit/debit cards. 
• PayPal and Square both have debit cards that consumers can put into Apple/Google Pay.

Note that PayPal already dominate P2P and have solid presence in B2C online, but weak in B2C offline.  

That's why I'm really interested in PayPal's initiatives to use QR codes. Here's a tweet back in February when I was thinking out loud:

Why aren't more physical stores letting people pay with QR codes? (Like Starbucks app). Bypass $V and $MA right? And why wouldn't $pypl and $SQ push this method to extend their reach in offline transaction?
— mspacey (@mspacey4415) February 26, 2020
 

My original thought process was something like this: 

• The P2P apps (PayPal, Venmo, Cash app) already have ability to transfer money without going through V/MA. Brick and mortar retail is the missing piece before theses apps could be used anywhere.   
• You can also store money in these PayPal/Venmo/Cash App. So these apps can technically replace banks and credit cards. 
• The more transactions go through these apps, the more leverage they have. For example, if consumers rely on Venmo for all their transactions, including at retail stores, then Venmo can threaten to steer consumers away from V/MA's networks, and extract fee concessions. 

I've since updated my thinking. Why? Because if the above hypothesis is true, Google Pay and Apple Pay will be circumvented and rendered irrelevant. 

Is that realistic? Probably not. The payment space is so big that Apple and Google are unlikely to step aside without some competitive response.

how does Apple Pay / Google Pay respond to Paypal $PYPL's ambition in brick & mortar payments? it can bypass apple / google Pay with QR codes

— mspacey (@mspacey4415) June 4, 2020

The responses could come in 2 ways - co-op and retaliation. Google Pay and Apple Pay can easily co-opt the QR code movement by adding that features as well. The wallets can also retaliate by pushing into P2P space. In fact Google Pay already has P2P features but doesn't advertise it much. It's not very smooth now, but it works.

The payment sectors has a balance of power that prevents any one player from dominating. 

So what does PayPal really get out of this QR code move? I think it mostly furthers that balance of power - as if to say "hey Google/Apple/Visa/Mastercard, if you try to cut us out of the payment profit pool, we have the means to strike back."

It's building a bunch of nuclear warheads pointing at each other. Threat of mutual destruction upholds industry economics.

In the meantime, PayPal is broadcasting that they are open to cooperation, and not looking to cut any one out.

I now think the multi-player landscape will hold and no one sub-sector or company will dominate. PayPal, Square, Apple, Google, Visa and Mastercard are frenemies that will cooperate instead of compete. They will collectively gain leverage over the banks.

With expensive growth stocks, the key is TAM and strategy. If the TAM is vast, as long as the strategy works, companies can grow into it. I think that describes both PayPal and Square. They are both long term buys.

Natera's NIPT Upside

Back in late 2017, I wrote about Natera here. I bought it but got shaken out with very little gain. The stock then almost quadrupled and I've been kicking myself from the sidelines. All I can do now is do the work and be ready when a better buying opportunity presents itself.

Natera (NTRA) is a genetic testing / diagnostic company. Current revenues mostly come from its reproductive health business which includes NIPT (Non-Invasive Prenatal Testing) as well as carrier screening. Two other promising areas where NTRA has pipelines are oncology, and organ transplants.

I will focus on reproductive health business here. 

Upside from Additional Reimbursement and Penetration

Like some other diagnostic companies, Natera's NIPT business performs a bunch of tests they don't get paid for. This is some low hanging fruit upside, as getting insurance coverage on those tests would be revenue that falls straight to the bottom line. 

NIPT patients can be segmented into high risk and average risk. The former is mostly reimbursed, while the latter that is mostly unreimbursed, and thus also suffer from low penetration. (Quick note: "high risk" and "average risk" here refers to risk of Down Syndrome and other abnormalities. So a woman above age 35 might be considered "high risk", and below that is "average risk".)

Back in 3Q19, the company estimate that it can have additional $60mm in revenue if their average risk NIPT patients get reimbursed. This is essentially another $60mm in EBIT because they already incur the costs. 

But that's not counting additional penetration in the average risk segment, which is likely to happen with reimbursement. So I went about estimating that number. 

As luck would have it, NTRA gave a virtual presentation at an UBS conference in May, and they gave out some numbers that made this estimation much easier.

Here are the relevant paragraphs from the presentation:

"...it's about 60-40 mix between average risk and high risk. And so then drilling down a little bit more into that average risk bucket, we're getting paid -- right now, we're getting paid about 35% of the time."

"Right now, that's the case for high-risk women, it's about 65% penetrated among high-risk women. It's only like 20%, 25% penetrated among average risk women."

"So contracted rates right now are in the, call it, $700 to $900 range as a general rule. And those have been very stable for the last 4-plus years since we went in network with most of the payers. In return for a huge growth in volume, I wouldn't be surprised if contracted rates eroded and then kind of got to kind of that more kind of slow single-digit heavy erosion you just alluded to"

"when I'm calculating that $60 million number, I'm actually just taking the units and I'm multiplying it by $450. Now like I said, contractor rates are much higher than that, and I actually think that -- there's no reason for them to come down all that rapidly, but I feel like that's a good, conservative long-term ASP number, presuming kind of broad reimbursement for average risk NIPT."

 

I found a couple things when I tried to tie out the numbers. First, it seems that it's actually 60/40 between high risk/average risk, not the other way around as they stated. Second, management said (shown above) that contracted rate is $700-$900 but they assumed $450 to be conservative. My calculations show that Natera is already getting paid $460 for each reimbursed test right now. 

With ASP in hand, we can work out the upside. I'm assuming volume for high risk patients remain the same while average risk volume scales up from 25% penetration to 65%. Then I assume 85% of average risk tests get reimbursed.

As seen above, Natera can get $40mm of additional revenue per quarter - from average risk NIPT tests getting more reimbursement and more penetration. 

Keep in mind I'm not assuming any upside from NTRA's microdeletion products getting reimbursed - I've seen sell side estimates that those could be worth another $50mm per year.

The $77mm quarterly revenue (bottom right of table above) annualizes to $310mm a year. 

Here's a sensitivity table I did for NTRA's reproductive health business, assuming $200 unit cost and $180mm opex (which is referenced in one of the transcripts).

 

I ran these sensitivities because management said the current contracted rate is much higher than their $450 assumption. This is contrary to my own calculations - which show they're actually already being paid at $460 rate. So the higher priced scenarios are unrealistic in my opinion. With volume growth and competition, I would expect the rate to go down, not up. 

At over $45/share, NTRA now has market cap and enterprise value of ~$3.6bn and $3.3bn, respectively. Conservatively speaking, the valuation can no longer be justified with reproductive health business alone. Not unless you want to assume a higher price than the company does, and add in another $50mm EBIT in the case microdeletion gets reimbursed. I'm not going to do that. 

At this valuation NTRA has to be successful in its oncology and transplant business. I'm quite positive on the former as Signatera looks like a potential home run.

Themes From Roku and Trade Desk Earnings

Roku and Trade Desk ("TTD") both reported earnings last week. 1Q results were strong but 2Q does not sound that great, especially for TTD which mentioned that during the last 10 days of April, "total spend improved to a negative high teens year-over-year decline."

But this post is not about near term puts and takes. I want to outline the big picture themes that stood out to me.


TV Upfronts

Both TTD and Roku talked about how failure of traditional TV "upfront" season can accelerate movement toward connected TV ("CTV").

Here's Roku in its 1Q20 call:



Here's TTD:

"Often, the majority of TV ads are sold in the upfront process. The upfronts are usually done in late April and early May, and those events are largely suspended this year."

"For advertisers, this can be liberating. I hear it from brands and agencies every day. For them, the upfronts are a bit of a burden. They're asked to commit billions of dollars to content they don't know that much about and chasing audiences that they can't measure quite as well as anywhere else. Now they have the freedom to be more deliberate, agile and data-driven in their TV ad investments."

That's an interesting point about advertisers not liking the upfront format. It reminds me of Bruce Greenwald's views of upfronts - as a scheme for media to collaborate against advertisers. 

"Behind the glitz is a highly successful, closely coordinated system to ensure the highest prices possible for advertising with the least incentive among networks to undercut one another."

"The up-front season occurs in the context of a general industry agreement on capacity developed under the guise of a public interest code of conduct to 'protect' viewers from too many advertisements...With the limited number of minutes available for sale preagreed, the tight time frames of the season make it relatively difficult for advertisers to successfully pit the networks against one another on price."

      - from "Curse of the Mogul" by Seave, Greenwald, and Knee


So traditional media is already declining, and now its implicitly anti-competitive/collaboration scheme is being exposed.

The question is what replaces the upfronts? Will there be another process that protects the bargaining power of publishers? Or does the leverage shift to ad buyers from now on?


CTV Now Exceeds Linear TV in Reach


I find it hard to believe but this is what TTD is saying. Jeff Green actually goes further and compares TTD alone to traditional TV!

"As I said, according to eMarketer, our total U.S. households with cable would fall below 82.9 million this year. Our research suggests it could be below 80 million. This year, we expect to reach well over 80 million households via CTV in the United States."

"This is an important point. The Trade Desk is the largest aggregator of CTV ad impressions across every major content provider, and that massive scale is a great leading indicator of future spend on our platform. All of this means that in 2020, The Trade Desk will likely surpass traditional TV in reach capabilities for the first time in our history. We're already seeing this shift as brands strategize on our platform."

Of course, larger reach does not mean larger monetization, but things are certainly looking bright for CTV. 

I don't like how TTD use the word "aggregator" to describe itself. It may be technically true, but broadcasting your ambition this way will likely make your clients wary and try to reign in your dominant position.

Strategic Role of Roku Channel, and CTV Fragmentation

In its quarterly letter, Roku mentioned that in the UK, the Roku Channel works on NOW TV (Sky) and Sky Q Devices.

Sky is part of Comcast which has Peacock. Peacock works on Roku. The Roku Channel works on certain Comcast devices. 

Are we going into a world where every channel works on every device, and the market for smart TV devices/software/platform gets commoditized? We now have Apple TV, Amazon Fire, Roku, Android TV (and its variants), Comcast Flex, Samsung smart TV, and it looks like XBox is getting into the game too. 

So where's the strategic point in the value chain? If CTV platforms like Roku and Apple TV become commodities, then the next point of aggregation are aggregate channels like Roku Channel, Peacock, Netflix, Hulu…etc. 

For Roku, there's a possible scenario where its importance in the value chain (and its profit potential) comes not from Roku the platform, but from Roku the Channel.