Tuesday, 26 August 2014

BBY Disruptive Lunch . . . Get cash back, watch your business and hurt some people

Three companies presented at the latest of BBY's Disruptive Lunch series last Thursday. Aa a bonus we also got to hear from Jennifer McFarlane, a long time adviser to new technology start-ups (natural resources, pharma) who provided a nice narrative of her latest project.

Arriving early as usual I got to meet David Pysden the CEO of start-up Chiron, which is the holding company for the latest entry into the booming combat sports arena (think UFC, boxing, etc.) Unified Weapons Masters (UWM). It's kind of hard to describe, essentially it's a synthesis of some traditional weapons based martial arts, such as Japanese Kendo and medieval armour. The armour in this case is currently a 27kg suit studded with 59 sensors allowing the combatants to avoid significant injuries. The suit seems to be a cross between a Star Wars Imperial Storm Trooper and one of those weird cyborgs with the single LED scoping eye of Battle Star Gallatica. Here's a promotional video of what I'm talking about:

As male investor the first thing you have to do when presented with something like this is try and contain your testosterone. It's all too easy to get into the video game like nature of what you're seeing. That's a trap, so firstly let's look at the technology.

The suit's 59 sensors measure more than just body strikes, they also purport to measure the force of the blow and even though we didn't get into it there seems to be some algorithmic analysis of the likely injury caused by these blows. The suits currently are a polycarbonate type material and David tells me that the production version should shed about 9kgs bringing them down to 18kgs thanks to some help from carbon fibre boffins in the UK who specialise in Formula One car building. Overlaid on this will be various web and app based portals that allow a simulcast of data directly to your chosen device such that you're able to see the effect, status and likely location for the next "killing blow". Additionally you don't have to be Warren Buffett to see the possibilities for spin-off products such as video games . . .

If they could ever produce a suit for $300 that was safe you can imagine where this could go in the mass market, but at this stage the suits are not intended to be sold to the general public, rather UWM, like UFC, WWE and boxing before them is trying to create a closed system that allows them to match professionals against each other in sanctioned bouts. Right now the plan is to produce 24 such suits and rollout tournament style events in carefully chosen geographies. There seems to be a preference for version 1.0 to start in Asia where weapons based fighting has very deep roots in the sporting psyche.

As a business model you can track the growth in the sector by looking at WWE stock price and reports from UFC's privately held owner Zuffa LLC. Both leaders in the space, as well as boxing are very media-centric and have been keenly pursued by various content hungry media conglomerates. As I said to David before his presentation, if the L.A. Clippers are worth $2bn to Steve Ballmer without even owning their own stadium and then baseball teams are earning $200m plus a year from their own TV channels, then I can fully understand the market they're aiming for. News Corp. is reportedly already paying UFC at least $100 million per year for UFC programming.

Chiron / UWM will need to raise more money soon in order to build 24 production suits. I liked the fact that management had a very detailed plan helped by previous management and board experience.  The questions that I still have are:

  1. How viewer friendly is it? Are bouts like fencing at the Olympics short and sharp over multiple rounds?
  2. What liability does the company have for injuries? We know from the NFL that a helmet alone doesn't stop participants being concussed.
  3. In UFC fighters salaries are fast becoming an issue. What do you think you'll have to pay participants to attract the right types to the "sport"?
  4. How durable are the suits? 
The question for investors in this sector is are the viewers as likely to respond to a sport with limited visuals when it comes to the actual blows as they are in (say) UFC where literally real blood is flowing from the octagon? Then again would a Roman gladiator fan have liked watching medieval tournaments? I guess they probably would? And if enthusiasm is worth anything then following David Pysden and his team of happy martial arts enthusiasts is likely to be a rewarding trip. 

I guess for me it was much easier to understand and have some connection with the other two presentations of the day. Even though both Local Measure and Starthere go over some old ground both offer some new disruptive qualities that should appeal to investors are users alike. 

While listening to Jonathan Barouch the CEO of Local Measure I couldn't help thinking of it as part Digivizer, part crowd control software being used by various police forces around the world. Essentially Local Measure is a venue management system come instant customer feedback system rolled into one. Here's how it works. A company asks local measure to monitor social media output associated with a particular venue. The first example given was an airline lounge. The management of the lounge wants feedback on everything from the overall experience to whether a customer thought the choice of cereals  or wines was up to the standard they expect. Algorithms filter some of the noise and focus on ranking the feedback and even associating it with particular high value customers. Think about it this way, if there's a very important frequent flyer in a lounge making a point positive or negative about the venue staff are able to respond to that promptly rather than waiting for the delayed feedback. 

Local Measure also has a policing function. It's amazing what people say and record on social media. Local Measure recently won a contract to monitor a particular casino, apparently during a presentation to the management board someone actually put up on social media that they'd stolen a security guard's walkie-talkie. Obviously the meeting was interrupted, but the bigger point was that the software effectively filtered the "noise" and prioritised the message, without this you'd be hoping for someone to hashtag their activity and for one of your staff to manually pick that up. And just laughs Jonathan showed us that stealing communications equipment is not the end of such stupidity . . . surface to say, don't take illegal drugs and post pictures of it from even the most expensive of hotel venues. 

As far as business model for Local Measure it's the usual subscription service based on size and number of potential sources. Jonathan didn't get into the numbers, but his clientele seems to be fairly tier 1 at the moment and I'm going to guess that if they're not already cash-flow positive they can't be too far away. I'd like to see them look into some more predictive algorithms as per the police work I mentioned earlier as I don't believe their first mover advantage is sufficient enough to be a wall around their revenue sources. 

Perhaps take Local Measure the next step?
I like Local Measure just a little bit less than Digivizer, though they're not exactly in the same place they certainly are closely related. And thats the problem, because if Emma Lo Russo and the team at Digivizer leveraged their customer base and offered something similar it may hurt Jonathan Barouch's progress to the next step. Investors need to start pocketing-up information on this sector and watch it closely. There will be a winner, but also a fair amount of carnage along the way, making this not as big a "gimme" as I'm sure many at the lunch thought at they mulled over who may be watching their own tweets, postings and feedback in the darker corners of the data mining cosmos.

I'm not sure any of the esteemed investors or bankers in the boardroom last Tuesday have ever given much thought to the various low-level rewards schemes offered by retailers aside from that most aspirational incentive of all, frequent flyer points.

It takes a second or two to adjust the radar and come down out of the clouds to where Chris Barton CEO of Starthere (under the guidance of Chairman Adir Shiffman - see my blog on Catapult Sports) is starting to get traction by offering shoppers cash back instead of nebulous points and alike. Yes thats CASH . . . in fact it's about $5 in every $100 for the shopper and $5 safely into the coffers of Starthere. There's a tool bar overlay for your chosen desk top browsers that automatically detects you shopping on an accredited site and quickly scoops up the rebate ready for your periodic payout. All very simple and even if Chris was a bit nervous during the presentation he still came across as positive and likeable.

Here's the value proposition for the shopper. Currently for every $100 you spend with your frequent flyer accredited card etc. you earn basically $1.80 worth of points. If you're getting back $5 from Starthere you're ahead of the game. And just to top it off you still get the frequent flyer points because you used the same card you always have. Thats the good news. The not so good news is it's not everywhere yet, but it's starting to be in places where at least this blogger is likely to make a purchase  a couple of times a year.

What I have trouble with in respect of businesses such as Starthere is where is the value for the actual retailer? Someone I asked said to me: "Mike, what do you think they're already doing in Australia with docket shopping? Whether they do it through a product discount, a coupon, frequent flyer miles or cash back they don't care." Thats a good point, in which case it just comes down to their ability to administer the scheme and drive new shoppers towards participating companies. Personally I think the barrier to entry is Starthere's ability to "land grab" enough that their critical mass makes it uneconomical for another player(s) to jump into the space.

The rain continues here in Sydney and the low skies and wet conditions are keeping me off the bike and pushing me into the gym. I wanted to mention that I snapped a shifter cable on Saturday while on a rare ride and will have to rely on the Cheeky Monkey team to get it back on the road. It was strange, on Saturday I was riding along and it started to rain. One thing I've learnt is that a lot of things work differently when the wet stuff comes down, so the resistance I was getting from the rear derailleur didn't surprise me. It was especially difficult to get a positive click into my lowest gears and though maybe a bit of cable stretch and the water were the culprits? Luckily I made it home and as usually while wiping my bike down I cleaned off the chin with a cleanish rag and lubed it with my usual oil. When I tested the shifting the derailleur stopped moving. I lifted the shifter covers and noticed that the cable was connect with 2 or three strands only and a couple of more shifts broke it entirely. I pulled the cable through and contemplated fixing it myself but probably luckily for me didn't have the specific cabling kit I needed, which in my case Campagnolo specific.

One interesting question I have for the guys is whether I should just re-cable the whole bike? Given I'll have to pay for the cabling kit ($60), surely you just change everything? I'll find out on Thursday. Another thing . . . since coming back from Switzerland I've realised the number of what I'll call Campagnolo component selling shops is limited. You have to order most things Campagnolo, even brake pads are not always in stock when you want them. I think it comes down to the fact that Australia is at the end of a long supply chain and traditionally people here usually buy standard spec bikes, meaning that Shimanois their "go-to" component companies. It's a first world problem I guess, though I had to laugh recently when a better and more experienced rider than me was helping me change a flat on a steep hill didn't know that Campgnolo uses triggers to shift down the cassette or from the big ring to the small at the front. Not his fault, it's just that Campagnolo is rare here.


Wednesday, 20 August 2014

When the tide goes out make are you still have your swimwear on . . .

Sometimes being an investment banker cyclist there's a little moment of schadenfreude that gets me through the day. Today it was the results from US sporting goods retailer Dick's Sporting Goods (Ticker: DKS).

I never did get golf. I tried hard, but I  never did understand the culture. To be frank I was also hopeless and didn't have the patience to spend the hours necessary to progress my game. By the time I moved to Singapore in 2006 I also needed to get fit and so without even knowing it at the time I had played my last game of golf. I noticed a nice piece on Market Watch today looking at the results from Dicks Sporting Goods. Highlighted in the piece was the company’s Golf Galaxy stores which suffered a 9.3% decrease in same store sales. Now some call this the "Tiger effect", but retailers would do well to understand that the baby-boomer bubble is fast peaking and the tide has already gone out with generation X. Lets look at an example. Here's a chart of the Giant Manufacturing Company of Taiwan (9921.TW) v. Callaway Golf (ELY):

I took Callaway because it's a pure golf company, others like TaylorMade are owned by bigger companies (in that case Adidas). Giant is one of the biggest bicycle manufacturers in the world. The outperformance of cycling is obvious, it's clearly been a better investment choice. Now that doesn't mean that bicycle growth will continue because at some stage the market will become saturated. Think about it this way; the limits of golf participation started to become obvious as clubs jacked up membership fees to basically exclude people from participation. In other words it became an "exclusive" sport in a world that is embracing "inclusivity". Gen X onward no longer sees golf as an aspirational sport in the way that the baby boomers have. The world changed. We no longer see smoking as a relaxing indulgence, nor drinking alcohol at work (think Mad Men) as acceptable. There's a whole world now seeing health costs spiral and they want to mitigate that in a way that golf just can't. Golf is still going  to be a sport people play, it's just that it won't grow at the same rate and as an investment banker I call this a mature industry. Golf as a sport or investment now will pay dividends like a bond pays coupons, but it won't provide capital growth that it has in the past. As an investor you need to recognise these moments and embrace them for what they are, not what they were. 

This brings me to some disturbing news from the gambling industry. The trend of casino closures in Atlantic City New Jersey continues with doors shutting at the Show Boat. Atlantic City was once the venue of choice for the north east US gambler, the casinos have tried to transform to resorts, but the weather, the falling cost of air travel and a surge in competition especially at the lower end started to eat away at the business model. Four of Atlantic City's 12 casinos have closed, meanwhile the State of New Jersey looks likely to approve more competition in the form of a new venue at the Meadowlands, a complex which is a limo drive from Manhattan. 

Atlantic City isn't the only place where the Casino industry is showing signs of weakness. Macau’s casino revenue fell 3.6% in July, following a 3.7% decline in June. Interestingly VIP play was estimated down by about 20% as in June, while mass market play continued to expand around 30%, and July produced similar results. 

Macau gambling . . . the best behind us?
That to me is indicating that the high rollers go where they get the newest toys and the mass market goes where they can. That's dangerous for a location, because in terms of the lower end it means other localities can change the paradigm quickly because of nothing more than geography. I know my HK broker friends will tell me that China isn't about to open multiple resorts on the mainland anytime soon and that's true enough. Right now Macau has the location advantage, but as with what happened with Atlantic City, so to can the same thing happen to Macau. If cycling is the new golf, and Meadowlands is the new Atlantic City, then just fill in the blanks for the next Casino mecca in Asia. Investors in casinos should note that the sky is not falling, but the growth is slowing. 

I'll be at another BBY Disruptive Lunch tomorrow and I'm looking forward to it. I've really enjoyed looking at some of these new businesses over the last few months and am somewhat buoyed by the extent of the enterprise I'm seeing in Australia. There's still a solid core of "mining is the only game in town" investment banking here, but you get the sense that the tide has gone out on that sector for the moment. BHP's de-merger plan this week could be the last great party of the decade for the mining teams of the big banks. If you're at a bank that misses out on a mandate associated with this you better be looking for a new arrow in your quiver.