ACV Auctions, AMZN vs Temu, CoreWeave vs Hyperscalers, SPOT, Sunbelt, TTD, Vistry, TDG

Content Published Last Week

1. IP COMPANY PROFILE: ACV Auctions & US Wholesale Auto Market

2. Amazon vs Temu: Business Model & Logistics

3. CoreWeave, Lambda & GPU-Specific Providers vs Hyperscalers

4. Burford Capital & the Risk of Insurance Products: Law Firm Angle

5. Investor Dialogue: Spotify, Podcasting & Competition

6. The Trade Desk: Publisher Programmatic Strategies

7. Ashtead, Herc, & United Rentals: Equipment Rental Market Growth Prospects

8. Vistry Group: Organizational Structure, Scale Advantages & Housing Associations

9. TransDigm Group Podcast (Spotify / Apple)

IP PROFILE: ACV Auctions & US Wholesale Auto Auctions

ACV Auctions bridges two areas of research we’ve been studying for a decade: auctions / marketplaces and the auto retail and wholesale market. The inefficiency in the physical auto wholesale process led us to focus our research on understanding how ACV’s auction compares to traditional wholesale auctions.

In 1970, George Akerlof published ‘The Market for Lemons: Quality Uncertainty and the Market Mechanism’. He listed a few core attributes of a ‘lemon market’:

1. Asymmetry of information between buyers and sellers

2. Incentives for sellers to misrepresent low-quality for high quality products

3. A wide range of sellers across different levels of quality

4. Difficulty for sellers to signal quality

6. Lack of regulation, guarantees, or warranties

All of these factors are present in traditional physical wholesale auto auctions.

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When buying vehicles wholesale, there are many quality grades of used car sellers but limited tools for buyers to judge the quality of prospective purchases. When such asymmetry of information exists, ‘lemons’ can drive out good products and distort the functioning of the market.

ACV Auctions aims to improve the wholesale vehicle buying process by providing transparency and assurance for potential buyers. The company runs the most rigorous vehicle inspections to understand the quality of each vehicle. It also stands by over 90% of vehicles with its Go Green assurance product.

This has led ACV's sales conversion to be 70% vs below 50% at physical auctions. The buyer and seller fees are also lower.

For sellers, our main pitch is that we come out to the dealership when they want and do a full inspection on the vehicle. We take 50 pictures and perform a 60-point inspection, then launch it in a 20-minute live auction to a thousand nationwide dealers. All the seller has to do is give the keys and price floors to the inspector. They have control of the auctions and can run them at any time. It is at no cost to them until they sell the vehicle, unlike typical online auctions where you let vehicles sit. - Former Regional Manager at ACV Auctions

This IP Company Learning Journey curates our historical research on ACV and the auto wholesale market. We break down the market structure and auction processes across traditional physical and new digital auctions. We also cover CVNA and its positioning with ADESA in both retail and wholesale. We plan to cover ACV and the wholesale market in more detail next year.

Amazon vs Temu: Business Model & Logistics

This interview is worth reading for anyone studying AMZN or retail in general. A Former Senior Manager at Amazon Logistics walks through the differences in how a unit flows from China to a customer in the US on Temu and AMZN. How Temu and SHEIN avoid the import duty is explored in detail:

"If you have an ocean container of widgets coming into the US, you're going to pay 25% in duties or taxes to the US Government for importing them. However, if you ship one or six widgets, and their total value is less than $800, which is typically the case when you're shipping directly to a consumer, you're not paying that 20% or 25%. So, if you bring it in an ocean container, you pay a 25% tax. If you ship it to a consumer, you pay a 0% tax. This is one structural advantage. - Former Senior Manager at Amazon Logistics

The interview also walks through the unit economics of shipping a t-shirt and an air fryer across the two competitors:

Let's do the T-shirt example. It's a half a pound, so it's eight ounces. If it's a $15 T-shirt, the air freight cost for Temu for a T-shirt is going to be about one fourth of that $3.50. This is because it's a half a pound, which is a quarter of a kilogram. So, the air freight for a T-shirt is likely eighty cents to the US. If you can do some sort of customs clearance in the US, in the Temu model, so section 321 clearance, and if it's something that's less than a pound, they're going to use the US Post Office. For last mile, if it's less than a pound, the best value is USPS. If you're shipping something, or Temu is shipping something, or Amazon is shipping something, if it's less than a pound, the post office is the way to go 100% of the time. You're looking at about $4 for that parcel. - Former Senior Manager at Amazon Logistics

CoreWeave, Lambda & GPU-Specific Providers vs Hyperscalers

In this interview, a Data Center Product Architect and Senior Director at Nvidia sheds light on the potential threat GPU-specific cloud providers like CoreWeave and Lambda present to hyperscalers.

They are currently focusing on ease of use. When you come to us, you can get up and running immediately. However, they face a challenge as they don't provide an end-to-end solution. They offer a competitive price point and simplicity, which is why they are gradually pivoting towards providing specialized solutions. - Senior Director at NVDIA

The scale and knowledge of hyperscalers may be too hard to overcome:

Before we even discuss the infrastructure, their advantage lies in their knowledge. To build a data center and use it with an efficiency of 70% to 80% to make it profitable is akin to an airplane; when it's sitting at an airport, it's not generating revenue. So, you need to have it running. They already possess that level of expertise. They have encountered scale problems. A scale problem arises when you're deploying Xeon servers, say 10,000 in an enterprise. If one or two servers fail, you can walk to it and replace it, it's not a significant issue. However, when you start deploying at a scale of 100,000 to 200,000, that's a scale problem. These individuals are very familiar with such problems. They have the expertise and work very closely with memory vendors to lower their costs. They can negotiate with silicon providers like Intel, AMD, and Nvidia, as well as memory vendors like Micron. They have excellent procurement, a robust supply chain, and the know-how to get things up and running. They are well-versed in dealing with reliability issues and so on. - Senior Director at NVDIA

Burford Capital & the Risk of Insurance Products: Law Firm Angle

Last week, in our survey of law firms on litigation finance, the biggest risk mentioned from multiple firms was the impact of insurance on litigation finance pricing. This interview explores just how such new insurance products work.

What we've seen, and this is rapidly evolving in just the last quarter, is that credit funds are becoming available. If you have a case that's insured, they're offering financing on deal terms that might be more competitive than traditional litigation funding, based on the collateralization of that insurance policy from the start. I'll reserve my comment as to what that means at this point because it's all too new. But it's just something that I've seen recently. - Current Partner at US Law Firm

Insurers are underwriting policies on portfolio cases up to a certain loss amount. Plaintiffs then collateralise the policy and receive cheaper financing from credit funds to pay the insurance premium and legal fees to run the case:

We're now seeing insurers who want to insure litigations. The risk profile is different, but the analysis is not all that dissimilar from working with a litigation funder. They're going to look at the merits of the case, the strengths, the weaknesses. They're going to look at the defendants. They're going to look at the damages profile, and if they like the case, they're going to write a policy for it. What we've seen, and this is rapidly evolving in just the last quarter, is that credit funds are becoming available. If you have a case that's insured, they're offering financing on deal terms that might be more competitive than traditional litigation funding, based on the collateralization of that insurance policy from the start. I'll reserve my comment as to what that means at this point because it's all too new. But it's just something that I've seen recently. - Current Partner at US Law Firm

But the underlying litigation risk doesn’t disappear; it's shared between an insurer and new capital provider. The insurer is underwriting litigation risk on the portfolio of cases up to a certain amount and credit funds are offering capital at 15-20% IRR's to finance the portfolio. This has limited downside for the capital provider as long as the insurers are highly rated. This type of new financing could potentially take a portion of funding opportunities away from funders as the insurance-backed product is cheaper than pricing offered by funders. We’re still working to understand just how such products are structured and will release research on this asap.

The Trade Desk: Publisher Programmatic Strategies

In this interview, a Former Sales EVP with experience at Hulu and Warner Bros Discovery explores UID 2.0 and CTV publishers' approach to programmatic advertising.

"Large publishers like Max, Discovery+, Netflix, Hulu, and Disney+ will still have a significant amount of direct business due to new releases like House of Dragon or a new food show or a Hulu original. Advertisers will want to spend money to be part of these shows. However, the long tail of all the other content on their platforms won't require direct purchasing, especially for reruns of popular shows. - Former EVP at Warner Bros Discovery

Less desirable publishers might feel threatened by UID 2.0 as it might move more dollars over to premium content providers.

"Some of the tertiary long-tail CTV players might be a bit apprehensive about UID 2.0. If UID 2.0 is trying to reach a viewer who is watching the 100th fastest channel on Pluto TV and also the latest HBO original on HBO Max, the advertiser will likely want to reach them on HBO Max, not on channel 3000 on Pluto TV. I believe that in a UID world, ubiquitous content becomes less valuable, but the best content becomes even more powerful and valuable due to the scale it can deliver. - Former EVP at Warner Bros Discovery

On the other hand, it could also allow them to monetize their audiences better.

"If you believe in your audience and you have the scale, then the advertiser is going to pay for it. UID 2.0 is no different than any other data, pixel, or appended data, it just becomes more valuable. If an advertiser is reaching, for example, primary grocery shoppers on all different platforms, and then they discover that on the Pluto TV platform, there are a lot more people utilizing the same ID, they may pay a 20% to 30% premium for those audiences to round out their media plan, which will have an impact on sales. - Former EVP at Warner Bros Discovery

The interview further explores how Hulu launched programmatic advertising, what Disney and Netflix have learned from this playbook and how direct & programmatic buying will evolve.

Ashtead, Herc, & United Rentals: Equipment Rental Market Growth Prospects

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The US equipment rental market is slowly consolidating but remains highly fragmented. One reason is because it is much more profitable for the big players to cater to long-term/larger clients, instead of serving short-term / smaller clients. This naturally carves out a niche in which smaller equipment rental companies continue to operate.

They primarily operate through outside sales representatives who are usually heavily commissioned. If I have to choose between renting out a skid steer for a weekend or for a three-month contract to a contractor on a job site, even at a much lower rate, I would consider which one impacts my paycheck more. Which one contributes more to the store's bottom line? Which one helps us achieve our goals? It's difficult to cater to short-term, smaller rentals, and smaller contract values when there are attractive large job sites and big customers. You'd prefer to cater to the large job site, rather than the weekend warrior or the landscape contractor who only does $5,000 a year with you and is sometimes slow to pay because they handle their own billing. You'd rather have the plumber who does $250,000 a year with you. So, it's not that they don't want to serve smaller customers, it's just that they're a secondary priority to a broker company like that. - Former CEO of Equipment Rental Firm, sold to AHT

In this interview, the former CEO of smaller equipment rental firm that was acquired by Sunbelt, sheds light on the market dynamics in US equipment rental and the process of selling to a major player.

Investor Dialogue: Spotify, Podcasting & Competition

This IP Investor Dialogue with multiple SPOT shareholders explores the opportunity and risks in the Spotify investment thesis from here:

However, I'm still trying to figure out to what extent Spotify is limited by Apple in implementing some of these monetization plans and if they've been handicapped by in-app purchases. We saw with audiobooks that the rollout was less than ideal. From what I understand, they're continuing with audiobooks, but Apple has made it challenging to make this a truly high growth, high profit segment of the business. So, it's more of a question for the group than I have answers. I'm just considering other forms of monetization beyond advertising and to what extent Spotify can execute those plans or if they're going to be limited by Apple. - Analyst 1

Vistry Group: Organizational Structure, Scale Advantages & Housing Associations

Over the past few weeks, we published a series of interviews on Vistry Group, its merger with Countryside and the partnerships business model in the UK. In this interview with a former Partnerships Director for Countryside, the flexibility and risk profile of the partnerships model are discussed in further detail

"You’re referring to the downturn in the private market? Typically, when the sales market declines, there's growth in the partnerships market as housing associations step up. I would expect an increase in the partnerships business or affordable housing provision. Some developers, unable to sell homes, might consider selling to housing associations. This is happening to some extent currently, where larger house builders are looking to dispose of stock if it's not selling. Generally, a market downturn leads to an increase in partnerships business. This is one of the strengths of Countryside's model, as it can adapt and flex. - Former Partnerships Director at Countryside

TransDigm Group Podcast

In this episode (Spotify / Apple), we explore our recent research on TransDigm's bargaining power vs Boeing. We discuss:

1. How traditional OEM's approach OE and aftermarket pricing vs TDG

2. How TDG's aftermarket philosophy is unique

3. How airframers could combat TDG bargaining power

4. How we approached our research to understand TDG pricing power