Amazon Ads, ADPma & PMA Parts, Teams vs Slack, Office 365, YouTube, Serial Acquirers, & IP Primary Research Centre

Content Published Last Week

1. Enterprise: Amazon Advertising: Decoupling from GMV

2. IP ANALYSIS: Serial Acquirers

3. ADPma: Manufacturing & Selling PMA Aerospace Parts

4. Microsoft Teams: Product Evolution, Strategy & Competition

5. YouTube, Twitch, & Live-Video Monetisation

6. Microsoft 365, Google Workspace & Selling through the Channel

7. IP Primary Resource Centre: Approaches to Expert Interviews: Extraction vs Dialogue

Two New Free Content Formats

Last week, we launched two new series available for free on inpractise.com and all podcast players:

IP Analysis Podcast

Each week, we plan to explore our learnings from the previous week’s internal primary research. We will typically focus on one idea or company. The first podcast shares some lessons from our recent trip to Stockholm meeting CEO's and attending the Serial Acquirer event. We share more about this podcast below.

All episodes are available to listen for free on our app or your podcast player. Add our feed to Spotify or Apple Podcasts and other players here.

Primary Resource Centre

We're not only in the business of providing primary research services to investors, but we conduct primary research ourselves. We spend a lot of time each week discussing and thinking about how to conduct the highest-quality interviews. How do we manage our biases? How should we approach difficult executives? Or tricky subjects? We've created a Primary Research Resource section on our platform where we will publish content on our primary research process in the quest to conduct the highest-quality research globally. Our first article is on two fundamentally different approaches to executive interviews. As always, please give us feedback.

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Sponsor

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Visible Alpha built a platform to analyze consensus data for financial and operating metrics on over 6,400 publicly traded companies. Rather than digging through models one by one, Visible Alpha creates consensus data for every line item included in sell-side models so institutional investors can better understand expectations on metrics beyond just revenue and earnings. Try Visible Alpha for free here.

New IP Analysis: Serial Acquirers

Last month, we visited Stockholm for Redeye's Serial Acquirer event. We met CEOs from Bergman and Beving, Lagercrantz, Röko, and many other Swedish companies that use accretive M&A as their core value driver. This podcast explores what we've learned after a few years studying 'serial acquirer' companies. We discuss:

1. Different ways of categorising acquirers; from Berkshire to CSU.TO

2. Lessons from the most successful acquirers

3. When it works and when it seems to fail

4. Key ingredients for the serial acquirer model

We discuss companies such as Lifco, Danaher, Berkshire, CSI and Diploma.

We’ve also been working our way through all of Berkshire’s AGM recordings from 1997-2022. One Buffett comment in 2004 particularly stood out:

“Not all businesses are supposed to grow” - Warren Buffett, 2004 AGM

This is a brutal reality for most companies. Yet public company CEO’s rarely say this. The desire to grow typically leads to capital misallocation.

This comment highlights why the holding company model works so well when led by a great capital allocator: cash generated from operating companies who can’t deploy the capital is redistributed into new companies which deserve the capital. It's a simple idea but hard to execute. Berkshire is extreme in centralizing decision-making because it has the best capital allocator of all time at the helm. BRK is arguably the purest form of the model.

It also highlights the attractiveness of being sector-agnostic. The more end markets you can invest in, the more opportunity, and the longer your redeployment runway. WEB has been at this for nearly 60 years because he has the capabilities to deploy capital anywhere he likes.

Every other company doesn’t have WEB so they tend to focus on a sector or type of company like CSI in VMS or Judges in scientific instrumentation. Widening the opportunity set is crucial to fuel the machine but must be offset with the incremental risk of buying assets one doesn't understand.

If CSI is indeed seeing more VMS competition, maybe we will see what ML can do in non-VMS markets? Röko is a model that lends itself closer to BRK than other Nordic acquirers that we will explore next week.

We’re constantly on the lookout for the best capital allocators globally who understand the power of the model and, more importantly, stipulate rigorous rules on how and when opcos can redeploy capital. We are currently producing research on HEI, Diploma, Röko, and Bergman & Beving.

Amazon Advertising: Decoupling from GMV (Enterprise)

Historically, advertising revenue generated by online marketplaces typically plateaus at ~5% of GMV. AMZN's current ad revenue / GMV is ~6%.

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This analysis (Enterprise only) explains the mechanics of Amazon’s endemic vs non-endemic advertising business, AMZN's positioning in a cookieless world, why ad revenue will increasingly decouple from GMV, and the potential size of the business in 2030.

ADPma & Aerospace PMA’s

This interview is with the senior management of ADPma, a private company that designs, certifies, and produces limited source, proprietary aerospace products. The company has hundreds of FAA-PMA approvals and has delivered thousands of approved parts to airlines globally. This is the first interview of a two-part series that shares their history, strategy, and more insight into the PMA industry.

In this interview we explore how you commercialise and sell a PMA post-approval and the relationship with OEM’s and customers.

It's about that value proposition and prime piece. They know if the OEM changes the individual component acquisition price by any percentage, if the reliability is half of ours and they have to go into a shop twice a year versus once with ours, the OEM can no longer respond with a price war. We haven't seen any OEMs respond technically to us because most aircraft you fly on were designed 30 to 50 years ago and the manufacturing technology is no longer the same. A realistic example would be a housing used in a landing gear actuator module. In the past, that housing had to come from a casting house and sometimes go through multiple processes and vendors, and there is a legacy cost to keeping that supply chain around. Rick gets parts machined from a billet plate with a 5 axis machining company, and those machines didn't exist back then. The OEM cannot overcome that differential unless they are willing to redesign. - President at ADPMa

Microsoft Teams: Product Evolution, Strategy & Competition

This former Microsoft Office Product Manager discusses how MSFT has responded to Slack’s growth:

Once Slack was seen as a competitor, Teams was funded with seven people to create and compete. They were given a lot of leeway and could define the product and evolve it rapidly. They also had a lot of sway in that if they asked for something from the rest of Office, they would get approvals for that and be given first preference. The idea was that Microsoft had a legacy deck they could leverage, so design was not always necessary. IC3 is a team inside the communication layer that would takes years to build from scratch, but Microsoft already had it. The idea was to leverage what they already had to help them move fast. In 2015/16/17 Teams looked more like Skype, then it quickly changed into what it is today. That process did inherit tech debt from the rest of Microsoft, which didn't make for a great experience because it was simply sending API calls to an old layer Microsoft was using. - Former Product Management Director, Teams at Microsoft

Other tools like Notion and Monday.com may offer better products but it's difficult to compete with MSFT's enterprise sales machine:

Both Notion and Monday are taking huge strides there. They probably offer better products with regards to solving specific use cases, but Microsoft has a hold on the distribution and will go to war with any small company. Their GTM machine is so strong that winning deals for these companies is difficult. Microsoft also throw in Azure credits which their end customers need. That is a harder nut to crack than building real product value. Notion has broken the boundaries of Word, Excel and PowerPoint which is why Microsoft introduced a new me-too product called Microsoft Loop. - Former Product Management Director, Teams at Microsoft

Microsoft 365, Google Workspace & Selling through the Channel

A veteran Microsoft Office Director explores the history of selling Office 365 and compares the go-to-market strategy to Google Workspace:

The question sent to me was what I thought of Workspace as a competitor, and my answer to that was we didn't. Google made a fundamental flaw which they are still battling with today. They first launched Workspace to the SMB market in particular. The SMB channel has 25,000 VARs in the US and many more in other countries. Most of those SMBs are owned by founders who loved what they did and didn't start their business to deal with technology. When I did this research four years ago, we found that 50 PCs was the stage when most founders opted to hire an IT professional to manage it for them. Prior to that, they used a local Microsoft VAR to manage their PCs, and those VARs held incredible sway over 25 million US small businesses. They don't make technology decisions without consulting a VAR, so the idea of selling technology directly to SMBs was very tough. - Former Product Marketing Director at Microsoft

YouTube, Twitch, & Live-Video Monetisation

A Former Product Manager at YouTube who ran the Live Video offerings at YT and other social platforms explores why Live Video hasn't been as lucrative as expected:

I think Twitch started out using the creator-first mantra as a very pointy spear, as a wedge into the system, which is supremely smart. If you look at all of these platforms as a content marketplace, the way that Twitch got kick started was to subsidize the supplier side of the market. It was saying, we’ve got to get this ecosystem kick started and so we’re going to make it super easy and super beneficial and lucrative to one side of the market. They got creators and that strategy worked because the creators got followings and they could bring people to the platform. At some point, I think they got between a rock and a hard place, with trying to make things work for creators and for the business, which is now beholden to the Amazon corporation...I actually think the creator-first thing couldn’t quite last because the money-making machine wasn’t as lucrative as everyone had hoped, at Twitch. - Former Product Manager at YouTube

Approaches to Expert Interviews: Extraction vs Dialogue

Over the last 10 years, we have personally conducted over 2,600 expert interviews and witnessed 100s of investment funds interview senior executives. After our fair share of mistakes, we’ve seen some patterns emerge that contribute to a greater likelihood of surfacing insight into a company’s long-term earning power through primary research interviews. There appear to us to be two fundamentally different approaches to interviewing.

The first, which is dominant in the industry, is what we would call “extractive”. The second approach is what we would describe as “dialogue”.

We explore both of these methods and mistakes we as analysts often make when following the 'extraction' method. This is the first article in our Primary Research Centre.