Monday, 15 September 2014

Another disruptive lunch: @BBYltd @lawpath @gocatch @safesitetech and Soliton Music

Last weeks latest edition of the BBY Disruptive Lunch series had me pondering the following question:

Exactly how radical does a business plan have to be in order to be seen as disruptive?

For some reason investors I've spoken to somehow regard disruptive businesses as being inherently revolutionary, but that's not always the case. Sure, a business can come along with a completely new technology that challenges the way a service or product is delivered, produced, maintained, enhanced or challenged, but more often than not it's a incremental shift in thinking that can be successfully disruptive. In fact it's probably the biggest, most traditional industries that find it hardest to defend themselves in the face of the smallest shifts. The reason for this is often the mindset that says . . .  "its worked like this for many years and is providing a stable and even growing return for our investors. This is something we've seen coming and we feel we can adequately deal with it." The companies that I was lucky enough to see presenting at BBY last Thursday are in my way of thinking representative of small shifts with larger consequences, rather than radical challenges in themselves. For investors that can mean a safer, more easily understood investment case, but also one likely to, if rightly combated by the entrenched leaders more easily repelled if directly challenged while still in their infancy.

Safe Site (http://safesiteapp.com) CEO Peter Grant presented his work site safety app that was easy to understand and immediately accessible to anyone who's ever picked up a smart phone type device. In fact if like me you've used the "Snap, Send, Solve" app to report anything from dumped garbage to fallen trees to your local council you'll immediately understand the simplicity and flexibility of the Safe Site offering.


For those new to this type of workflow manager it works by identifying a problem and automating the reporting process. Take for instance an exposed cable on a building site. On a huge construction site it's obviously not enough to start wrapping electrical tape around it etc., the fault is a) likely to be far more dangerous in an industrial setting, b) perhaps emblematic of a larger fault in systems of construction, supply or manufacture, or c) applicable across multiple worksites in terms of solution. All of this requires a complicated and somewhat time consuming production of documents and reports. Safe Site simply streamlines this process and automatically produces these reports at first contact and ensures their delivery to appropriate managers, services and regulators in a timely, logical and traceable manner. Furthermore it allows for the systemised collation of safety data useable by everyone from practitioners, insurers and I predict investors in a project so as to best provide a safe and minimally disruptive worksite.

Safe Site as a business is at it's core a subscription based service charging on a per user basis, though single tradesmen can use it for free. It currently is already being trialled in Australia and impressively in my view the US where it is already in use in California. My only question given my own use of Snap, Send Solve was just how do they propose to protect their idea from like minded disruptors or current stakeholders (surely a smart Union could do this)? Well Peter is very logical in his defence and clearly emphasises his own engineering background and the experience of members of his advisory board. For mine there's still somewhat of a "land-grab"element inherent in the business plan. The company is taking a softly-softly approach with the construction unions and trying to work both the top-down and bottom-up line. There's no guarantee of success, but I know that with the current Royal Commission into Unions and various investigations into the construction industry in Australia there is at least some fertile ground and first mover advantage for the team. The fine balancing act that Safe Site will have to execute is not simple, but is at least understandable and investors and practitioners alike gravitate to industry wide standards in this field and therefore should keep a close eye on the adoption rate of the app.

I use "App Annie" (http://www.appannie.com) to track app download charts and stats. The site has various tools for estimating metrics associated with an app. It's not free to get the higher end stats, but  it does provide a basis for understanding the iOS and Android marketplace. Note this down.

There was at least one existing investor in GoCatch (http://www.gocatch.com) in the boardroom on Thursday. I had been told about this Taxi booking app a few times over the last 6 months, but hadn't got around to taking a close look at it due to the fact that I rarely catch taxis anymore thanks to my trusty bikes and my proximately to reliable public transport.


GoCatch caught me (pardon the pun) in a about 3 minutes of CEO Ned Moorfield taking the microphone. For international readers of the blog who are early adopters of Uber you'll need to understand that regulators and users of regulated car services in some countries have been less than enthused about the laissez faire nature of Uber. In Paris and Berlin the existing industry has fought back fiercely against the private market place by playing heavily on safety concerns and reliability issues. GoCatch is that safe halfway house for users and drivers in that it challenges not the notion of regulated taxis per see, but rather the entrenched infrastructure associated with them.

The disruptive nature of the company, here in Australia at least is a challenge to the cost structure and service delivered by dominant credit service Cabcharge. Right now drivers pay a commission to cab charge and users of taxis also pay a premium to use the service. Right now the charge is about 11%. Go Catch brings that down to 5% and nets out about 1.5% of the journey charge. They get a commission from drivers as well because they in effect skirt around the existing Co-ops and their booking service which charges drives a regular fee no matter how reliant they are on the service itself. In fact drivers by regulation have had to be associated with such a Co-op, but this is changing and the State of Victoria is introducing legislation that allows drivers to be 100% independent, yet regulated and therefore they can adopt the user pays model that GoCatch essentially is.  So far they've got 4,000 drivers using the service and in August managed 45,000 trips in the months and are on track for 800,000 in their 2014 year. Current average fare per journey is $29. They predict this to ramp up to 2 million in 2015 and 4 million in 2016. This will still only represent 1 to 2% of all journeys in Australia, so they would say they're being very conservative.

Whats in it for passengers? Well first up the system instantly gives you a map with all GoCatch taxis in your vicinity, it even gives you idea on how busy they are. You book by entering your location and I believe a responding driver can see you on their app and accept the business as they see fit. You link your account to a credit card or Paypal and you can add a tip and even rate a driver at the end of your journey. For business users the app allows you to collate your expenses without the usual paper receipts that really are the bane of business travellers . . . I really don't know how many times I've lost a little piece of paper for a $50 cab fare to the airport and have been told by a company accountant "too bad". I asked two taxis drivers on the day of the presentation that I had caught the old fashioned way whether they'd heard of or currently use GoCatch? The first driver said he's heard of it and the owner of his taxi was going to get it. The other driver just said "why would I want that?" I went through the cost structure and got his interest, but I think he thought I was going to try and pay him with Bitcoin or some other exotic method. I told both drivers about the Victorian legislation change and how NSW was likely to adopt the same policy and the fact they weren't going to be locked into a network with its cost. GoCatch was for them a viable alternative and it got them both listening to different degrees. I'm positive that the deregulation of the Co-ops and some further direct marketing to the drivers will pay dividends for GoCatch. The fact that GoCatch is offering benefits to both the drivers and the passengers seem to me a big advantage and investors only then have to assess whether the existing players are determined enough to fight back on both cost and ease of use. Current evidence is that GoCatch may succeed in establish a bridgehead that can at least be fortified and defended in the short term.

Law Path (www.lawpath.com.au) to me was a bit of a cut and paste of US success story Legal Zoom. I'm sorry if that's somewhat dismissive of the effort going into the company, especially given the advisory board has on it a member from the Legal Zoom team. Basically Law Path offers quick and cheap access to standard legal documents that you might require in setting-up and maintaining SME's of various varieties.


Obviously that encompasses the usual partnership agreements and company formations. The key to Law Path is building a supporting network of lawyers who are willing and able to act as the second level support for documentation that needs to be customised to the client.  This also means that they can also act as referral system for what they say is an over-supplied market place. CEO Damien Andreasen is not a lawyer himself and is more like you typical serial entrepreneur. That's not a bad thing if you're trying to disrupt an industry that has a pretty big wall around built around it both in terms of jargon and licensing. He says they have 510 lawyers have already signed up, but because of time I never got a chance to ask him whether that meant 510 individuals or firms?

Law Path is both subscriber (the lawyers) and obviously user (the client pays). I didn't catch the charges for practitioners. The scalability is also something I'm wondering about, as is the size of the Australian market and its entrepreneurial impetus. As an investor I like the story, but wonder if I wouldn't be better placed if I invested in Law Path UK or Law Path Germany. The positives are that the team Law Path has assembled seems to have enough debt and they have some first mover advantages and there's margin and excess capacity. Is that enough? We will see.

Just as an aside wouldn't it be great as an investor if you could see the usage stats for Law Path or in the US, for Legal Zoom. The correlation to economic activity in the economy must be very strong. I know you could just track the financials, but that in itself might tell the whole story.

Finally I got my second chance  to here from the team at Soliton Music (www.soliton-music.com). I was luck enough to have a one on one with them back in June and wrote up a business summary for an investor I thought might be interested. I said at the time I wasn't really "Mr. Entertainment Industry" so needed to take a crash course in their space.

Soliton Music is an Asia Centric business currently centered on music streaming in Hong Kong, they have the rights to 1.7m+ songs currently. These are delivered via partnerships with various HK telcos. They have approximately 20,000 subscribers. The company intends to reposition itself towards live streaming of concert and associated events for which it will charge a variable fee. Delivery is via web / app. The current app will be replaced around the time of the company going public. At this time they will seek to port across their Telco based subscribers to form the core of the new customer base.
The company aims to list on the Australian Stock Exchange in November.

Soliton’s plan is highly dependent on acquiring the rights to concerts and live events. The intention is to do this via the acquisition of individual promoters. They say that typically these promoters have a 12 – 18 month stream of events in their books and can be acquired for USD 1- 2m per promoter. None of the management team to my knowledge have ever executed the buy out of such an agency and as such are by their own acknowledgement dependent on their biggest non-executive shareholder to be mentor in the targeting process of said promoters. After the acquisition of a promoter Soliton will acquire the rights to the concert books and associated live broadcast rights. Promoters usually take 10 – 15% of the gross. Soliton says they can offset between 30 – 60% of an event’s cost by co-producing with record labels. Soliton’s main value-add will be the on-sale of the events via live streaming for up to USD 10 per event. This amount will vary widely depending on the artist involved. It may also vary depending on whether the subscriber decides to accept advertisements during the show, though this feature will not be active during the building of critical mass. It is envisaged that associated events will be added to various concerts such as “meet the artist” broadcasts where the performer will share pre-concert talks and fan “greets” via streaming. These will attract a fee. Other opportunities will include direct merchandising involved with the event.


Any investor will ultimately have to be convinced that the management team is capable of building a larger database of subscribers in a limited time period. It would be comforting to see an example of a recent transaction where a promoter had sold out to a larger entertainment entity in Hong Kong. Perhaps I'm too old and vanilla for this one, but for the hipper, more Asia aware it's probably worth investigating the segment further.

Ciao!





Thursday, 11 September 2014

Scotland, Branding and the unbearable pressure of details

I'm all-in for Scottish independence. I've always thought that Scotland was up for something a little more "socialist" than the UK elections have ever tossed up. Essentially the country wants to go down the road of a massive increase in public sector employment. The problem with this is that unless income increases to support this rebalancing of their economy they'll leave themselves exposed to greater volatility. And thats where I come in. We're already seeing a big increase in the volatility of Sterling which recently fell 5% as the poll numbers became more obvious and looks to be in my view more an opportunity than a trap.


Currency volatility almost inevitably leads to equity market volatility . . .you just can't have the basic pricing unit of your economy "winging around" and not see it flow through into all asset classes. The This is the value trap for investors, because it infects the basic valuation of your investments by virtue of the relationship defined by the sharpe ratio:


The steadiness of the stock market has "bored" investors into believing that they have a better Sharpe ratio than history might otherwise indicate. As such a change in the denominator will come as a shock that should open opportunities.

The UK economy has generally been growing and readers of this blog know that I was a published bull on the economy there as far back as 2012. In fact I had suggested to several Australian investors that they should have taken advantage of the AUD's over-valuation against Sterling in early 2013 to switch into hard assets in the SE of England. In the last six months I've suggested investors should have been switching into Southern European exposures as it was likely that monetary policy in the EU would favour these countries for extended period. Now with Scotland causing consternation amongst UK investors this blog sees further weakness as a buying opportunity. If anything I'd expect London's financial industry to have a field day in the face of asset trading in the any post "Yes" vote and at least a bounce in the face pot a "No" vote.  Whatever the case I'd expect an increase in volatility for all UK assets and trading opportunities beyond what we've seen in the past year. Look for the BoE to delay a rate rise in the face of volatility even though we know from recent minutes of the MPC that some see inflation starting to build.

Scotland has a few brands going for it that if fostered correctly should remain the core of their economy for years to come. I know whiskey and smoke salmon seem somewhat at odds with the high-tech 21st century, but as we've seen luxury can be leveraged. Australia on the other hand doesn't really have a lot of iconic brands. France, Italy are the leaders in luxury, but even the US has their own versions. Whatever the reason the brands that do have significant profile here as being Australian classics (think Qantas or R.M.Williams) have all at times been through the proverbial wringer of neglect and mismanagement. When local conglomerate Pacific Brands announced it's intention to sell local "workwear" staples King Gee and  Hard Yakka it got me thinking about the nature of branding and the value or lack there of that this notion brings to the value of a company.

The trend in recent years has been to revive, streaming and build brands. The chief proponents in rebranding have been as diverse as LVHM, Richemont, IBM and Apple. Even a mining giant like BHP is doing it after it announced that it was refocusing away from minerals and into energy. It would seem to this blogger that the most successful companies in executing this type of restructuring usually have the following characteristics:

Strong visionary leadership:

Bernard Arnault and Steve Jobs superficially at least would seem to have little in common when it comes to running businesses, but look a little deeper and you'll see similarities. In my mind the most common of these is having an eye for design and an understanding of how this one concept produces value for the consumer and the producer of a product.

When Arnault bought the bankrupt owner of fashion house Christian Dior in the mid-80's he started a chain of events that would lead to formation of uber-luxury group LVMH. The pattern was simple; strip out the low end value eroding product lines and limit expenses on the "highest-end", but media attention grabbing area of haut couture. Then focus on cash generating products that leveraged the core values and name of the company without denigrating the ultimately aspirational and margin enhancing aspect that is the concept of "luxury". He launched the perfume Poison, which although it smelt like bug repellent to me somehow was modern and different enough in itself to relaunch the Dior brand as something for the modern consumer and not just the maker of dresses for an older set of clientele. Arnault, like Gucci bought the brand back under control and stopped licensing out its name for cheap and nasty low end products. When he gained control of Louis Vuitton he adopted a similar strategy only this time recognising that the strength of the signature monogram canvas was being eroded by counterfeiting. Since that time LVHM has been a leading litigant in the war against knock-offs and brand protection.

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An understanding of the core strengths of it's brands

IBM seems to be a strange company to associate with luxury, but it was indeed the epitome of tech luxury from the first golf ball type typewriter right through to room filling main frames. If you had the IBM badge on your business machine, you had the best. What happened though was that IBM, like a fashion house licensed out it's name for clone PC's during the 80's and diluted its brand value. Unlike Gucci, IBM never bought back the real estate it sold and ended up exiting consumer products (with help from Lenovo). Management chose to focus on what IBM had been best at for years and that was business systems. IBM became a consulting powerhouse by keeping only the highest end businesses and with that bought back the margin and management focus that ad almost slipped out of it's grasp.

Steve Jobs understood branding in the same way as IBM. For Jobs, the omnipresent control-freak the Apple brand had lost its cache under John Scully who had begun to investigate licensing out the core operating system to clone manufacturers. When Jobs got back in charge of Apple he killed off the clones and introduced a design "ethic" that has survived his death. That first iMac with the ""bondi blue" translucent case may not have been the fastest computer on the market, but it was the best looking and it was something you didn't have to hide in a nook.

Fiscal targeting 

All the design in the world can't help you unless you have some kind of fiscal target. In luxury that usually means margin. Margin is what protects a business and gives it flexibility in bad times. It requires a careful balancing of manufacturing, logistics and supply. Ferrari famously limits production in the knowledge that you might pay more for a "thing" if you know you're not going to see 100 others pass you by on your commute to work. Apple has Tim Cook, logistics genius, because it knows that in consumer electronics the race to the bottom can kill you. As far manufacturing goes, the audacious raid by LVMH on Hermes at the height of the global economic meltdown was as much about acquiring the skilled craftsmen of houses leather works as it was about brand ownership in itself.

Coca-Cola my have been the most egalitarian brand the world had ever seen, but that didn't stop them trying to reinvent themselves with the disaster that became "New Coke".  Younger readers may not remember the decision from the Atlanta based behemoth to almost overnight throw out a product that was a brand leader without any real long term fiscal goals. One could understand the move if the company had credible future plans beyond what become little more than the equivalent of a crazy use car salesmen blowing up cars in his lot in an effort to create new "buzz" about his business.

Significant "edge" or "leadership" in at least one area of design or skill

Coke tells us once you have leadership you need to wall it off and protect it, much like LVMH protect Louis Vuitton and it's other brands by prosecuting counterfeiters everywhere. If you can't protect your product you need to make it very expensive for others to jump on into your market. This is where I return to Australia and in particular the current CEO and board of Qantas.

The one thing the world knows about Qantas is that its aircraft didn't used to have malfunctions. That seen in the Tom Cruise, Dustin Hoffman film "Rainman" where Hoffman's charter refuses to fly on anything other than a Qantas plane said it all. The problem of course was that expansion means you can't control the product in the same way. Take Starbucks . . . the quality suffered as the product expanded. New machines replaced the old espresso machines because they were quicker, rather than better. That was expensive and those "auto" cappuccino generators eventually got tossed away when the company started to look shaky. Qantas had a virtual "Coke-like" monopoly of the Australian domestic market after its main rival collapsed. Internationally the airline was being challenged by Asian flag carriers who offered newer fleets and a better service ethos . . . but Qantas had safety and in reality was small enough even in the 90's to nimbly move to upgrade and expand it's fleet to at least match the Asian carriers; so what changed? Well the Qantas domestic margins were too much of a draw to other carriers and logistics businesses. The choice was easy, protect the income line (market share) or the bottom line (Margin). The CEO and the board decided it was better to maintain market share domestically as they belied that this would protect their under siege international operations. The line in the sand of 60-odd% domestically became a race to the bottom. Insanely (to some) to cover up the race Qantas started Jet Star in an effort to have its cake and eat it too. The theory was that Qantas would be the premium business airline and Jet Star would, like a souther hemisphere Ryanair hoover up the tourist dollars. The problem was that the competition was equal to the task and margins became so thin that the profit line became almost like punting jet fuel futures. It didn't help that the cost cutting that the company put in place saw the fleet age and encounter several embarrassing mishaps that undercut the long cultivated record for reliability.



Qantas is the anti-LVHM or Apple currently. I'm not sure the competition is worth the risk for investors unless you see a Bernard Arnault or Steve Jobs waiting in the wings. Returning to the Sharpe Ratio, in the case of Qantas the volatility is too high to justify the returns without a significant restructuring of the current failing business plan.

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Last week I heard about the death of another design genius Giovanni 'Nanni" Pinarello. Readers of this blog will know my fond memories of rediscovering bike riding after being presented with my Pinarello Dogma 60.1 at the Pinarello family HQ in Treviso Italy.


Nanni was 88 at the time, but his daughter told me he still came to the retail outlet inside the walls of the city everyday. He liked to supervise his staff and especially liked to assist in fitting the bikes. I'm not sure what the dimunitive Nanni thought of my 95kg's perched on top of the carbon fibre racing frame, but he smiled and seemed happy and engaged even if the mechanic doing most of the work begged him to leave it to him. The attention to detail that day in Treviso still impresses me and makes me understand the dedication needed to run a brand successfully. Nanni was 92 when he passed away and I'll bet a Qantas flight to Melbourne he still would have been shuffling into the shop and lecturing the staff on the presentation of the products right up until the day he died.

Ciao!