Much has been written about what makes Google work so well: their ridiculously profitable advertising business model, the technology behind their search engine and data centers, and the amazing pay and perks they offer.
My experiences investing in and working with startups, however, has taught me that building a great company is usually less about a specific technical or business model innovation than about building a culture of continuous improvement and innovation. To try to get some insight into how Google does things, I picked up Google SVP of People Operations Laszlo Bock’s book Work Rules!
Bock describes a Google culture rooted in principles that came from founders Larry Page and Sergey Brin when they started the company: get the best people to work for you, make them want to stay and contribute, and remove barriers to their creativity. What’s great (to those interested in company building) is that Bock goes on to detail the practices Google has put in place to try to live up to these principles even as their headcount has expanded.
The core of Google’s culture boils down to four basic principles and much of the book is focused on how companies should act if they want to live up to them:
Presume trust: Many of Google’s cultural norms stem from a view that people are well-intentioned and trustworthy. While that may not seem so radical, this manifested at Google as a level of transparency with employees and a bias to say yes to employee suggestions that most companies are uncomfortable with. It raises interesting questions about why companies that say their talent is the most important thing treat them in ways that suggest a lack of trust.
Recruit the best: Many an exec pays lip service to this, but what Google has done is institute policies that run counter to standard recruiting practices to try to actually achieve this at scale: templatized interviews / forms (to make the review process more objective and standardized), hiring decisions made by cross-org committees (to insure a consistently high bar is set), and heavy use of data to track the effectiveness of different interviewers and interview tactics. While there’s room to disagree if these are the best policies (I can imagine hating this as a hiring manager trying to staff up a team quickly), what I admired is that they set a goal (to hire the best at scale) and have actually thought through the recruiting practices they need to do so.
Pay fairly [means pay unequally]: While many executives would agree with the notion that superstar employees can be 2-10x more productive, few companies actually compensate their superstars 2-10x more. While its unclear to me how effective Google is at rewarding superstars, the fact that they’ve tried to align their pay policies with their beliefs on how people perform is another great example of deviating from the norm (this time in terms of compensation) to follow through on their desire to pay fairly.
Be data-driven: Another “in vogue” platitude amongst executives, but one that very few companies live up to, is around being data-driven. In reading Bock’s book, I was constantly drawing parallels between the experimentation, data collection, and analyses his People Operations team carried out and the types of experiments, data collection, and analyses you would expect a consumer internet/mobile company to do with their users. Case in point: Bock’s team experimented with different performance review approaches and even cafeteria food offerings in the same way you would expect Facebook to experiment with different news feed algorithms and notification strategies. It underscores the principle that, if you’re truly data-driven, you don’t just selectively apply it to how you conduct business, you apply it everywhere.
Of course, not every company is Google, and not every company should have the same set of guiding principles or will come to same conclusions. Some of the processes that Google practices are impractical (i.e., experimentation is harder to set up / draw conclusions from with much smaller companies, not all professions have such wide variations in output as to drive such wide variations in pay, etc).
What Bock’s book highlights, though, is that companies should be thoughtful about what sort of cultural principles they want to follow and what policies and actions that translates into if they truly believe them. I’d highly recommend the book!
A few weeks ago, I had the chance to attend Google I/O — this time, not just as a fan of the Android platform but representing a developer. Below are some of my key takeaways from the event
Google‘s strategic direction – there were three big themes that were emphasized
Next Billion – a lot of what Google is doing (like making Google Maps / YouTube work without internet) is around making Chrome/Android/Google Search the platforms of choice for the next billion mobile users — many of whom will come from Brazil, India, China, Indonesia, etc. Its important for us to remember that the US/Western Europe is not the totality of the world and that there’s a big chance that future major innovations and platform will come from elsewhere in the world.
Machine Learning – I was blown away (and a little creeped out!) by the machine learning tech they showed: Google Now on Tap (you can hold the home button and Android will figure out what’s on your screen/what you’re listening to and give you relevant info), the incredible photo recognition tech in the new Photos app, as well as innovations Android is making in unlocking your phone when it knows its been in your pocket and not your desk. Every company should be thinking about where machine intelligence can be used to enhance their products.
Everything Connected – it reminded me of Microsoft’s heyday: except instead of Windows everywhere, its now Android/Chrome everywhere: Android Wear, Chromecast, Android TV, Android Auto, Brillo/Weave, Cardboard for VR, Nest/Dropcam for the home, things like Jacquard & Soli enabling new user interfaces, etc.
I sat through a panel on how Google does personalized recommendations / search on Google Play — long story short: keywords + ratings matter
Google will now allow A/B testing of Google Play store listings
Google Play console now directly integrates App Install advertising so you can run campaigns on Google Search, AdMob, and YouTube
Google Play console will also track how users get to Play Store listing by channel and how many convert to install
Android M – a lot of tweaks to the core Android app model for developers to pay attention to
Permissions: Android M moves to a very iOS-like model where app permissions aren’t granted when you install the app but when the app first uses them; they’ve also moved to a model where users can go into settings and manually revoke previously granted permissions; all Android developers will need to eventually think about how their apps will work if certain permissions are denied (see: http://developer.android.com/preview/features/runtime-permissions.html)
Doze and App Standby: Applications will now have two additional modes that the OS may enforce — one called Doze that keeps all apps in sleep mode to reduce power drain and Standby where the OS determines an app is “idle” and cuts off network access, syncs, and jobs — apps in both modes can still receive “high priority notifications” (see: http://developer.android.com/preview/behavior-changes.html under Power-Saving Optimizations)
Auto Backup: Applications will now backup up to 25MB worth of data to the user’s Google Drive (but won’t count against their quota) once every 24 hours; this can be customized (see: http://developer.android.com/preview/backup/index.html)
Fingerprint API, Direct Share, and Voice Interactions: universal fingerprint recognition API, the ability to share specific content with specific favorite users (i.e. send to someone over Facebook Messenger, etc), and a new way to build voice interactions in app (see: http://developer.android.com/preview/api-overview.html, starting from Authentication)
Chrome Custom Tabs: basically lets you embed Chrome in your app with custom styling (rather than having to embed a vanilla webview and do a lot of work styling it), its apparently already out in beta channels for Chrome: https://developer.chrome.com/multidevice/android/customtabs
For free/automatically: pound on every button / interface on your app that they can see after launch for 1 min and see how many crashes they can get on a variety of Android devices (which helps given the sheer number of them that exist)
Paid: run custom Espresso or Robotium tests on specific devices (so you can get test coverage on a broader range of devices doing a specific set of things)
Places API: a lot of talks promoting their new mobile Places APIs (which will let iOS and Android apps have better mapping and place search capability)
Espresso testing framework: this was a ridiculously packed session — but Google has apparently made numerous refinements to the Espresso UI testing framework
They also continued to show progress with Project Ara (modularized mobile phones so you can build one the way you would a gaming PC) and Project Tango (phones that can do 3D scanning / depth tracking)
I was not impressed when I first saw Google’s vague overly-feel-good marketing materials for their new Inbox product. It seemed like a design refresh for email focused on implementing Google’s Material Design aesthetic rather than something that I absolutely needed. But, thanks to an invite from my buddy David, I’ve been able to use Google’s new take on email for about a week and I have to say this is the email product I’ve been waiting for.
What does it do that has gotten me so excited? There are three core pieces of functionality which make Google Inbox a great fit for the productivity-minded Gmail user:
Auto-categorization that actually works: Google has taken Gmail’s smart inbox functionality (which can tell personal emails apart from social updates, promotions, and forum posts) and have taken this to a whole different level with Inbox. The new categorization tech not only automatically groups common email types like trips vs bills vs social network updates, but it can, for many types of email, recognize the implied rules for the labels I already have and preserve those (i.e. messages to/from my wife).
The ability to snooze/dismiss email: One of Inbox’s most compelling features is a clone of the Dropbox-owned Mailbox app’s snoozing email functionality: moving an email out of your inbox until you’re ready to deal with it (i.e. until later tonight, tomorrow morning, later this week, etc). This feature, thankfully, also extends to the smart categories functionality, which, for instance, lets you snooze all of your promotions-related emails or dismiss all your email receipts in one go.
The ability to add todo items/reminders: Inbox also lets you add todo items and reminders directly into the inbox. These todos/reminders are treated as if they were emails — they sit side-by-side with “regular” emails in the interface and, as you probably expected, are also snooze-able (and sync with Google Now’s reminder functionality).
These enhancements let Gmail power users (like myself!) more readily use email as a productivity tool which tracks all the things they need to do (rather than managing a separate email and todo list) across multiple platforms (web, Android, iOS) with functionality built in to make it easier (like auto-bundling related emails and auto-complete as you type out todo items/reminders) as well as being integrated directly into Gmail (so with full support for search and without creating strange new labels/folders the way Mailbox does).
That being said, while the app’s conceptual and usage model are geared for power users, its missing some of the functionality that I (and I’m sure other Gmail power users) have come to depend on such as in-browser push notifications, ability to embed photos in messages, the ability to add things to a bundle/label via keyboard shortcut, support for labs functionality like embedding the calendar widget in the interface or pulling in preview functionality for Yelp/YouTube/Google Maps inline in the email, and the ability to snooze an email/todo (and set the time for the snooze easily) with a keyboard shortcut.
Those small problems aside I’ve taken so much to Inbox that it now pains me to use the regular Gmail interface for my work email account and I can’t wait until Google extends Inbox support for Google Apps accounts. If you have access to an invite, I would 100% recommend giving it a shot for a while.
Customer acquisition is oftentimes the key cost for a startup, and hence one of the most important capabilities for a startup to build and a key skillset for a startup to hire for. One reason for that is that Google, while a great tool in many ways for helping companies with customer acquisition, can really make customer acquisition hard to do.
Why? Well, the importance of Google to the internet means its algorithm and policy changes have HUGE impacts on customer acquisition costs and strategies.
Just a few months ago, Google again shook the customer acquisition world by introducing a new tabbed interface in their Gmail web email client. While tabbed interfaces have been around forever, what made Gmail’s special was that these tabs also served to filter email messages so that Facebook/Twitter updates, forum posts, and – drumroll – promotional emails/coupons – weren’t the first thing a user sees when they open up their mail. The result? All those brilliant subject lines and email marketing campaigns that you’ve come up with? There’s a really big chance they got shunted to a tab that the user is predisposed to ignore with impunity. The result? Companies who rely on email as a customer acquisition channel have to find ways to counteract this — getting users to (1) open up their “Promotions” tab and (2) designate to Gmail that they want those particular promotions to hit the main inbox – or shift to a new way of getting customers to act.
This type of thing is typical in the customer acquisition world: to succeed, you need to not only get really good at today’s modalities of acquiring customers, you also have to be adaptable – and roll with the sudden changes that Google or Facebook or one of any sudden shifts in the digital world can do.
Update at 11AM PST, 8 Oct 2013: As if on cue for my blog post, I received an email from eCommerce jewelry vendor Blue Nile today about moving their promotions into my main email tab 🙂
Last week, Google unveiled its long-rumored Google Drive product with great fanfare. While the gaggle of tech journalists/bloggers issued predictable comparisons of Google’s new service with online storage/syncing services like Dropbox, I couldn’t help but think that most of the coverage missed the point on why Google Drive was interesting. Yes, its another consumer-facing cloud storage service – but the really interesting aspect of it is not whether or not it’ll “kill Dropbox/Box.net/iCloud/[insert your favorite consumer cloud service here]”, but the fact that this could be the beginning of a true web “file system”.
I’ve blogged before about the strengths of the web as a software development platform and the extent to which web apps are now practically the same thing as the apps that we run on our computers and phones. But, frankly, one of the biggest things holding back the vision of the web as a full-fledged “operating system” is the lack of a web-centric “file system”. I use the quotes because I’m not referring to the underlying NTFS/ExtX/HFS/etc technology that most people think of when they hear “file system”: I’m referring to basic functionalities that we expect in our operating systems and file systems:
a place to reliably create, read, and edit data
the ability to search through stored information based on metadata
a way to associate data with specific applications and services that can operate on them (i.e. opening Photoshop files in Adobe Photoshop, MP3s in iTunes, etc)
a way to let any application with the right permissions and capabilities to act on that data
Now, a skeptic might point out that the HTML5 specification actually has a lot of local storage/file handling capabilities and that services like Dropbox already provide some of this functionality in the form of APIs that third party apps and services can use – but in both cases, the emphasis is first and foremost on local storage – putting stuff onto or syncing with the storage on your physical machine. As long as that’s true, the web won’t be a fully functioning operating system. Web services will routinely have to rely on local storage (which, by the way, reduces the portability of these apps between different machines), and applications will have to be more silo’d as they each need to manage their own storage (whether its stored on their servers or stored locally on a physical device).
What a vision of the web as operating system needs is a cloud-first storage service (where files are meant to reside on the cloud and where local storage is secondary) which is searchable, editable, and supports file type associations and allows web apps and services to have direct access to that data without having to go through a local client device like a computer or a phone/tablet. And, I think we are beginning to see that with Google Drive.
The local interface is pretty kludgy: the folder is really just a bunch of bookmark links, emphasizing that this is a web-centric product first and foremost
It offers many useful operating system-like functionality (like search and revision history) directly on the web where the files are resident
Google Drive greatly emphasizes how files stored on it have associated viewers and can be accessed by a wide range of apps, including some by Google (i.e. attachments on Gmail, opening/editing on Google Docs, and sharing with Google+) and some by third parties like HelloFax, WeVideo, and LucidChart
Whether or not Google succeeds longer-term at turning Google Drive into a true cloud “file system” will depend greatly on their ability to continue to develop the product and manage the potential conflicts involved with providing storage to web application competitors, but suffice to say, I think we’re at what could be the dawn of the transition from web as a software platform to web as an operating system. This is why I feel the companies that should pay more close attention to this development aren’t necessarily the storage/sync providers like Dropbox and Box.net – at least not for now – but companies like Microsoft and Apple which have a very different vision of how the future of computing should look (much more local software/hardware-centric) and who might not be in as good a position if the web-centric view that Google embodies takes off (as I think and hope it will).
If it hasn’t been clear from posts on this blog or from my huge shared posts activity feed, I am a huge fan of Google Reader. My reliance/use of the RSS reader tool from Google is second only to my use of Gmail. Its my main primary source of information and analysis on the world and, because a group of my close friends are actively sharing and commenting on the service, it is my most important social network.
Yes, that’s right. I’d give up Facebook and Twitter before I’d give up Google Reader.
I’ve always been disappointed by Google’s lack of attention to the product, so you would think that after announcing that they would find a way to better integrate the product with Google+ that I would be jumping for joy.
[A]fter reading Sarah Perez and Austin Frakt and after thinking about just how much I use Google Reader every day, I’m beginning to revise my initial forecast. Stay calm is quickly shifting toward full-bore Panic Mode.
(bolding and underlining from me)
Now, for the record, I can definitely see the value of integrating Google+ with Google Reader well. I think the key to doing that is finding a way to replace the not-really-used-at-all Sparks feature (which seems to have been replaced by a saved searches feature) in Google+ with Google Reader to make it easier to share high quality blog posts/content. So why am I so anxious? Well, looking at the existing products, there are two big things:
Google+ is not designed to share posts/content – its designed to share snippets. Yes, there are quite a few folks (i.e. Steve Yegge who made the now-famous-accidentally-public rant about Google’s approach to platforms vs Amazon/Facebook/Apple’s on products) who make very long posts on Google+ using it almost as a mini-blog platform. And, yes, one can share videos and photos on the site. However, what the platform has not proven to be able to share (and is, fundamentally, one of the best uses/features for Google Reader) is a rich site with embedded video, photos, rich text, and links. This blog post that you’re reading for instance? I can’t share this on Google+. All I can share is a text excerpt and an image – that reduces the utility of the service as a reading/sharing/posting platform.
Google Reader is not just “another circle” for Google+, it’s a different type of online social behavior. I gave Google props earlier this year for thinking through online social behavior when building their Circles and Hangouts features, but it slipped my mind then that my use of Google Reader was yet another way to do online social interaction that Google+ did not capture. What do I mean by that? Well, when you put friends in a circle, it means you have grouped that set of friends into one category and think of them as similar enough to want to receive their updates/shared items together and to send them updates/shared items, together. Now, this feels more natural to me than the original Facebook concept (where every friend is equal) and Twitter concept (where the idea is to just broadcast everything to everybody), but it misses one dynamic: followers may have different levels of interest in different types of sharing. When I share an article on Google Reader, I want to do it publicly (hence the public share page), but only to people who are interested in what I am reading/thinking. If I wanted to share it with all of my friends, I would’ve long ago integrated Google Reader shares into Facebook and Twitter. On the flip side, whether or not I feel socially close to the people I follow on Google Reader is irrelevant: I follow them on Google Reader because I’m interested in their shares/comments. With Google+, this sort of “public, but only for folks who are interested” sharing and reading mode is not present at all – and it strikes me as worrisome because the idea behind the Google Reader change is to replace its social dynamics with Google+
Now, of course, Google could address these concerns by implementing additional features – and if that were the case, that would be great. But, putting my realist hat on and looking at the tone of the Google Reader blog post and the way that Google+ has been developed, I am skeptical. Or, to sum it up, in the words of Austin Frakt at the Incidental Economist (again bolding/underlining is by me)
I will be entering next week with some trepidation. I’m a big fan of Google and its products, in general. (Love the Droid. Love the Gmail. Etc.) However, today, I’ve never been more frightened of the company. I sure hope they don’t blow this one!
Many of my good friends are big fans of Apple and its products. But not me. This good-natured difference in opinion leads us into never-ending mini-debates over Twitter or in real life over the relative merits of Apple’s products and those of its competitors.
I suspect many of them (respectfully) think I’m crazy. “Why would you want an inferior product?” “Why do you back a company that has all this information about you and follows you everywhere on the internet?”
I figured that one of these days, I should actually respond to them (fears of flamers/attacks on my judgment be damned!).
First thing’s first. I’ll concede that, at least for now, Apple tends to build better products. Apple has remarkable design and UI sense which I have yet to see matched by another company. Their hardware is of exceptionally high quality, and, as I mentioned before, they are masters at integrating their high-end hardware with their custom-built software to create a very solid user experience. They are also often pioneers in new hardware innovations (e.g., accelerometer, multitouch, “retina display”, etc.).
So, given this, why on earth would I call myself a Google Fanboi (and not an Apple one)? There are a couple of reasons for it, but most of them boil down basically to the nature of Google’s business model which is focused around monetizing use rather than selling a particular piece of content/software/hardware. Google’s dominant source of profit is internet advertising – and they are able to better serve ads (get higher revenue per ad) and able to serve more ads (higher number of ads) by getting more people to use the internet and to use it more. Contrast this with Apple who’s business model is (for the most part) around selling a particular piece of software or hardware – to them, increased use is the justification or rationale for creating (and charging more for) better products. The consequence of this is that the companies focus on different things:
Cheap(er) cost of access – Although Apple technology and design is quite complicated, Apple’s product philosophy is very simple: build the best product “solution” and sell it at a premium. This makes sense given Apple’s business model focus on selling the highest-quality products. But it does not make sense for Google which just wants to see more internet usage. To achieve this, Google does two main things. First, Google offers many services and development platforms for little or no cost. Gmail, Google Reader, Google Docs, and Google Search: all free, to name a few. Second, Google actively attacks pockets of control or profitability in the technology space which could impede internet use. Bad browsers reducing the willingness of people to use the internet? Release the very fast Google Chrome browser. Lack of smartphones? Release the now-very-popular Android operating system. Not enough internet-connected TV solutions? Release Google TV. Not enough people on high-speed broadband? Consider building a pilot high-speed fiber optic network for a lucky community. All of these efforts encourage greater Web usage in two ways: (a) they give people more of a reason to use the Web more by providing high-value web services and “complements” to the web (like browsers and OS’s) at no or low cost and (b) forcing other businesses to lower their own prices and/or offer better services. Granted, these moves oftentimes serve other purposes (weakening competitive threats on the horizon and/or providing new sources of revenue) and aren’t always successes (think OpenSocial or Google Buzz), but I think the Google MO (make the web cheaper and better) is better for all end-users than Apple’s.
Choice at the expense of quality – Given Apple’s interest in building the best product and charging for it, they’ve tended to make tradeoffs in their design philosophy to improve performance and usability. This has proven to be very effective for them, but it has its drawbacks. If you have followed recent mobile tech news, you’ll know Apple’s policies on mobile application submissions and restrictions on device functionality have not met with universal applause. This isn’t to say that Apple doesn’t have the right to do this (clearly they do) or that the tradeoffs they’ve made are bad ones (the number of iPhone/iPad/iPod Touch purchases clearly shows that many people are willing to “live with it”), but it is a philosophical choice. But, this has implications for the ecosystem around Apple versus Google (which favors a different tradeoff). Apple’s philosophy provides great “out of the box” performance, but at the expense of being slower or less able to adopt potential innovations or content due to their own restrictions. Case in point: a startup called Swype has built a fascinating new way to use soft keyboards on touchscreens, but due to Apple’s App Store not allowing an application that makes such a low-level change, the software is only available on Android phones. Now, this doesn’t preclude Swype from being on the iPhone eventually, but it’s an example where Apple’s approach may impede innovation and consumer choice – something which a recent panel of major mobile game developers expressed concern about — and its my two cents worth that the Google way of doing things is better in the long run.
Platforms vs solutions – Apple’s hallmark is the vertically integrated model, going so far as to have their own semiconductor solution and content store (iTunes). This not only lets them maximize the amount of cash they can pull in from a customer (I don’t just sell you a device, I get a cut of the applications and music you use on it), it also lets them build tightly integrated, high quality product “solution”. Google, however, is not in the business of selling devices and has no interest in one tightly integrated solution: they’d rather get as many people on the internet as possible. So, instead of pursuing the “Jesus phone” approach, they pursue the platform approach, releasing “horizontal” software and services platforms to encourage more companies and more innovators to work with it. With Apple, you only have one supplier and a few product variants. With Google, you enable many suppliers (Samsung, HTC, and Motorola for starters in the high-end Android device world, Sony and Logitech in Google TV) to compete with one another and offer their own variations on hardware, software, services, and silicon. This allows companies like Cisco to create a tablet focused on enterprise needs like the Cius using Android, something which the more restrictive nature of Apple’s development platform makes impossible (unless Apple creates its own), or researchers at the MIT Media lab to create an interesting telemedicine optometry solution. A fair response to this would be that this can lead to platform fragmentation, but whether or not there is a destructive amount of it is an open question. Given Apple’s track record the last time it went solo versus platform (something even Steve Jobs admits they didn’t do so well at), I feel this is a major strength for Google’s model in the long-run.
(More) open source/standards – Google is unique in the tech space for the extent of its support for open source and open standards. Now, how they’ve handled it isn’tperfect, but if you take a quick glance at their Google Code page, you can see an impressive number of code snippets and projects which they’ve open sourced and contributed to the community. They’ve even gone so far as to provide free project hosting for open source projects. But, even beyond just giving developers access to useful source code, Google has gone further than most companies in supporting open standards going so far as to provide open access to its WebM video codec which it purchased the rights to for ~$100M to provide a open HTML5 video standard and to make it easy to access your data from a Google service however you choose (i.e., IMAP access to Gmail, open API access to Google Calendar and Google Docs, etc.). This is in keeping with Google’s desire to enable more web development and web use, and is a direct consequence of it not relying on selling individual products. Contrast this with an Apple-like model – the services and software are designed to fuel additional sales. As a result, they are well-designed, high-performance, and neatly integrated with the rest of the package, but are much less likely to be open sourced (with a few notable exceptions) or support easy mobility to other devices/platforms. This doesn’t mean Apple’s business model is wrong, but it leads to a different conclusion, one which I don’t think is as good for the end-user in the long run.
These are, of course, broad sweeping generalizations (and don’t capture all the significant differences or the subtle ones between the two companies). Apple, for instance, is at the forefront of contributors to the open source Webkit project which powers many of the internet’s web browsers and is a pioneer behind the multicore processing standard OpenCL. On the flip side, Google’s openness and privacy policies are definitely far from perfect. But, I think those are exceptions to the “broad strokes” I laid out.
In this case, I believe that, while short-term design strength and solution quality may be the strengths of Apple’s current model, I believe in the long run, Google’s model is better for the end-customer because their model is centered around more usage.
First, I think the community overreacted. There is a lot to not like about Google’s stance, but I think there are a few things to keep in mind:
There are political limits to what strict net neutrality promoters can achieve. Its a fact of life that the telco providers have deep pockets (part of their having government-granted monopoly status) and stand to gain or lose a great deal from the outcome of net neutrality legislation and thus wield enormous influence over broadband legislation. Its also a fact of life that the path towards net neutrality is more easily served by finding common ground which preserves the most important aspects of net neutrality than it is to fight the telco providers kicking and screaming the whole way. What I mean to say is: we should not criticize Google for dealing with a telco or with making compromises on net neutrality. That’s an unreasonable stance typically held by people who don’t have to actually make policy. With that said, we should criticize Google for making the wrong compromises.
I don’t think Android was the issue here. Many people may disagree with me here, but I don’t believe Android has much direct impact to Google’s bottom line. From my perspective, Google’s commitment to Android is about two things: (a) preventing Apple from dominating the smartphone market (and potentially the mobile ad market) by empowering a bunch of phone manufacturers to provide devices of comparable (or better) quality and (b) forcing all mobile phone platforms to have decent-enough web surfing/app-running capability (by providing a free alternative which did) so that Google can provide its services effectively on those platforms and serve more ads. If anything, Google’s incentives here are better aligned with net neutrality than most companies: it benefits the most if there are more people using the web, and the best way to push that is to encourage greater content diversity. While Google TV may change Android into a true profit center, it wouldn’t be for several years, and so I think it’d be a stretch to say it is a big enough deal to significantly impact Google’s political policy moves. I can buy the argument that Google pushed a deal with Verizon because they have a closer relationship via Android, but I think suggesting that Google subverted net neutrality as a concession to Verizon on Android is taking it too far.
I think Google did a good job of emphasizing transparency. The proposal emphasizes that telcos need to be held to higher standards of transparency, something which is sorely lacking today, and something which we definitely want to and need to see in the future.
With that said, though, there are definitely things to criticize Google’s agreement on:
Wireless: I can sympathize with the argument that wireless is different from wired networks and could require more aggressive traffic management. I even went so far as to call that out the last time I talked about this. But, given the importance of wireless broadband in the future, it doesn’t make any sense to exclude explicit protections around neutrality for wireless. The arguments around competition and early development strike me as naive at best and Verizon PR at worst – whatever provisions exist to protect neutrality for wired networks should be applied in the wireless space. Competition and the development of more open gardens make it possible to compromise, but not necessarily throw caution to the wind.
Wording weirdness: I’m concerned that the proposal contains phrasings which seem to give avenues for telcos to back out of neutrality like “prioritization of Internet traffic would be presumed inconsistent with the non-discrimination standard, but the presumption could be rebutted” without clearly explaining what are reasonable grounds for rebuttal. Even parts of the compromise which I accept as valid (i.e., letting telcos do basic network quality of service management, prioritize government/emergency traffic, fight off malware/piracy, etc.) were framed in terms of what telco’s were permitted to do, but not without clearly laid out restrictions (i.e., network service quality management must be subject to FCC review). For a document meant to safeguard neutrality, it sure seems to go out of its way to stipulate workarounds…
“Additional online services”: I understand (and agree with) the intent – carriers may want to provide special services which they want to treat differently to meet their partners’/customers’ needs like a special gaming service or secure money transfer. The language, however, is strange and not imminently clear to me that there aren’t “back doors” for the telcos to use to circumvent neutrality restrictions.
Truthfully, I think most of the document rings true as a practical compromise between the interests and needs of telcos (who would bear the brunt of the costs and should be incentivized to improve network quality and provide meaningful services and integration) and the interests of the public. But, I would ask Google or whatever legislator/FCC member who has a voice on this to do two things:
Not compromise on content neutrality on any medium. The value of the internet as a medium and as a platform of innovation comes from the ability of people to access all sorts of applications and content without that access being discriminated against by the network operator. Not sticking to that is risking slower innovation and choking off a valuable source of commentary/opinions, especially in a setup where large local players hold enormous market power because of their government-granted monopoly status.
Create clear (but flexible enough to be future-proof) guidelines for acceptable behavior with clear adjudication and clear punishments. No squirrely word weirdness. No “back door” language. You don’t need to browbeat the telco’s, but you don’t need to coddle them either.
Today, a partner at the firm I work at wanted to call me, not realizing I was on a plane
He leaves me a voice message on my phone which includes a cell phone number for me to reach him at
Thankfully, I’m on a flight with WiFi
Also, I have Google Voice which not only gives me an online control panel to access all my voicemail, but also transcribes the message, and forwards it to my email (technology #2)
Because I have Google Voice, I can also read and send text messages as long as I have an internet connection, so I shoot his cell number a text message telling him when I land
I added his cell phone number to my list of Google contacts
When I land, Google Sync adds the partner’s new contact information to my Blackberry contacts
I used the Google Voice app on my Blackberry to shoot my partner a call
So I get to help the partner out without breaking a sweat :-).
I’ve mentioned on morethanone occasion my love for Google Reader. And here’s another reason to throw into the mix: analytics. While this is a feature I don’t use very often, it’s nevertheless very interesting to look at (translation: I spent an hour looking at it, and feel like if I don’t blog about it, then it was a waste of an hour). You can access it by clicking on the “Trends” link in the Google Reader navigation box, or by typing “g” and then “[shift] t”.
The trends feature gives you a snapshot of two things: (1) your Google Reader browsing habits and (2) details on the blogs and RSS feeds that you subscribe to.
There is a block dedicated to showing how many items you read on a daily basis (I apparently read most of my posts around noon-time with an odd spike around 3-4 PM, and the number of posts I read on a typical weekend is less than half that I would read on a typical weekday):
The analytics also gives me an analysis of which feeds I read the most (I had no idea I read that much VentureBeat):
As well as an analysis of how often certain feeds update, as well as which of my feeds are the most “obscure” (as measured by how few Google Reader subscribers each feed has):
So, who cares? Good question. In terms of how I’ve used the feature, I’ve used it to cull subscriptions from my list — by singling out feeds which updated too frequently but which didn’t have consistently high quality content or by singling out feeds which I never read — and also to encourage me to post encouragements to the more “obscure” blogs that I follow, so as to encourage them to keep posting.
Google has recently overhauled the two applications I use on my Blackberry the most (Gmail and Google Maps) and introduced a new useful one (Google Mobile Updater) as well as made a few interface changes to the Blackberry Google Talk applet.
The new Gmail upgrade is the least polished of the overhauls. It feels a little more sluggish, although, thankfully, they’ve now included new bandwidth status messages to at least give you a hint of what’s going on. It also adds new features such as:
new keyboard shortcuts
contacts interface which allows you to search through your Gmail contacts, call those you have listed phone numbers for
secure connection — you now have the option to use a secure connection for all your Gmail interactions
drafts are something that I always thought were a no-brainer; unfortunately, these drafts don’t show up in your Gmail draft folder and you can only have one at a time
notifications are something which make the Gmail update much more useful; before, when new messages were received there was no way for me to know when or how many. New mail messages in my work inbox would result in my Blackberry’s LED flashing, a vibration or tone (depending on what mode I set the device at), and a change in the inbox icon revealing that there were new messages. Gmail’s new applet has finally fixed this allowing one to customize exactly how Gmail will notify your Blackberry that new messages have arrived– by icon, by LED, by tone/vibration, etc.
Much more useful is the Google Maps upgrade which now includes a new feature called “My Location” for those of us too poor to pay for GPS service and a built-in GPS device in our phone (and who can’t stand to re-charge our mobile phone devices super-often as the GPS service drains your battery like crazy). My Location is a feature which allows Google Maps to estimate your location to within ~2000 ft radius (highlighted by a light blue circle surrounding the blue dot in the interface) by locating the cell phone tower that you are closest to. While this doesn’t let you pinpoint your precise location, it makes the app much more useful. Case in point: on my way to our office’s Community Impact Day, I got lost, and instead of having to find some clunky means to estimate my location in Google Map’s interface, I simply used the My Location feature to give me an estimate of where I was so that I could quickly see the local streets. The video below summarizes:
Not particularly useful, but visually more interesting is the Blackberry Google Talk application updating to allow for Google Talk icons to show up, and a restructuring of the menu to be a little more usable. Alas, neither the rarely-updated Google Talk desktop application or the Blackberry Google Talk application seem to be able to interface with AIM the way the Gmail client does.
Google also very recently introduced the Google Mobile Updater which now provides one central location from which to install and update Google software (except for the Google Talk applet which appears to be maintained by RIM/Blackberry rather than by Google). This is currently only for Blackberry devices and, taking a page from the new Gmail applet’s icon, also informs the device user of updates and new products by change of icon.
It can now count to 1000. Back before this Google Reader update (during the wild, young days of the internet), on days when I couldn’t check Google Reader, the unread post count would build up rather quickly. However, instead of being told precisely how many blog posts I had, Google would only tell me that I had “100+” unread posts. Not particularly informative for a company that prides itself on being the organizer of the world’s information. Today, it can go to 1000. I have yet to reach the point where I have that many posts unread, but at this rate, I think in another year or two, Google may update the reader so that it can count to 10,000. But right now, our technology just can’t handle numbers that big 🙂
You can use “back” and “forward”. Given that Google Reader is on a webpage, you might expect that the back and forward arrows on your toolbar should work like they do on a regular webpage. But, Google Reader is no ordinary webpage: it’s an AJAX application, which means that movement from page to page is not so clear cut. Implementing “forward” and “back” has actually been a challenge for a lot of online Web developers who create AJAX applications, so it’s very nice (and quite a feat for some hapless programmer who probably had to do a lot of unappreciated behind-the-scene work) that they were able to implement this.
Search. Why a company renowned for search expertise create a product without search is beyond me, but its great that Google has finally gotten around to implementing it in Google Reader, allowing me to dig through every post I’ve ever read.
I use a lot of Google products/services.Not all of them are equally worthwhile, to be frank. But, there are several that I use regularly. One which many of you are already aware of is my Blogger account, which, yes, is now owned by Google (what better way to search people’s blogs than to start a blog service?).
One that I’ve been particularly impressed with is Google Reader. It, like all other google services, requires a google account (but lets face it, how many of you DON’T have one?). Up until recently, I’ve been using Sage, the RSS reader extension for Firefox to aggregate my RSS feeds. One of the reasons that I really liked Sage was that it used my Firefox browser history to point out which feed items I’ve already read (ie if I visited Jane’s LJ, Sage would know, and it wouldn’t tell me that Jane had a new post that I hadn’t seen before). The problem with that, of course, is that if I visit Jane’s LJ while I was waiting for my next class at the computer lab and I read her latest post about wine glasses, then my Sage extension at home wouldn’t know, because — well, its at home.
Enter Google Reader. It is, like Sage, a RSS feed aggregator. It is also, like my.yahoo and livejournal friends page, completely online. But, it has a few distinguishing features. Not only does it aggregate feeds for me, so that I can read the latest posts on Jane’s LJ and Greg Mankiw’s blog, but unlike my.yahoo and Sage, it does not separate them into separate lists or groups of articles, but groups them all together in one big list for me to read. Moreover, it also notes which posts I’ve already read and since its online, it means that the stuff I read when away from my laptop is still marked as read!
You can also attach tags/labels to different feeds and even different posts. For instance, I put the Sinfest, Dilbert, and PhD Comics feeds under a label called “humor” and, if all I want to do is look at humorous stuff, I use Google Reader to show me only all feeds tagged “humor”.
Google Reader also lets you publicize your feeds. If anyone’s interested, I can give the feed URLs for some of my tags so that, if you wanted, you could be reading the same stuff I’m reading when I’m on break. On the sidebar of this site, for example, is a list of articles that I’ve found and clipped as “noteworthy”.
The thing I like the most about Google Reader’s interface, however, is the keyboard shortcuts. I’m not really a big mouse guy — blame my old HP laptop for having mouse buttons which didn’t work properly, so its good to be able to navigate the interface without having to use the mouse (even though I’m now a proud owner of a VAIO with functioning mousepad). On any article that I find to be interesting, I hit “L” and I can label it as “noteworthy”. If I want to read a specific feed, I hit “g” and then “u” and it takes me to a menu of the feeds that I subscribe to, and I can then choose it. If I want to read a specific label, I hit “g” and then “l” and then I get to a menu of labels that I’ve defined. On the main interface, I can move forward and backwards through any list I’m reading by hitting “j” or “k”, and if I want view the original website where the article came from, I only have to hit “v”. And, the interface is pretty mouse-intuitive as well (scrolling on your mousewheel does what you would expect it to), for those of you who are more into the mouse thing.
About the only complaint I have is that there is no way (at least not yet) to search all the feeds that I have read for stuff. I can only search for new feeds.
Anyways, if you started getting into the whole blogosphere/feed thing, I’d definitely recommend Google Reader as a way to keep track of things. And, if someone from Google is reading this, I’d like to get paid commission :-).
The word “startup” is usually associated with innovation and speed. But, from a financial perspective, the thing that most distinguishes a startup from other types of businesses is that startups are dependent on investors for cash to fund growth.
A common misconception here is that startups need investors because they are unprofitable. While many startups are indeed unprofitable (in many cases, rationally so), profitability does not shield a business from the need to invest capital (to build a factory, to build up inventory, to order raw materials for production in advance of sales, etc.) to grow. In the case of a rapidly growing, cash strapped startup, this problem is particularly acute as there are no certain past or future cash flows with which to finance growth and so startups have to turn to pitching investors.
By that definition, electric vehicle maker Tesla is a startup operating on an unprecedented scale. While it may have a valuation (over $40 billion market cap as of this writing) and revenues (over $20 billion in 2018) that look like a “grown up” company, as with virtually all startups, it is completely dependent on investors to finance its growth. Since Tesla went public in 2010, the company has raised over $15 billion of debt and equity (net of paying out dividends and repaying loans), over 2/3 of which has gone into funding the extensive capital expenditures (CAPEX: investments in tooling, equipment, factories, land, etc) they’ve needed to grow.
Note: the numbers / figures presented in this post are based on publicly available data provided by Tesla on its deliveries and financials. As Tesla has a penchant for revising old figures, some of these may be based on slightly outdated figures, but I have tried to use the most recent versions I could find. Tesla does not break out much detail by segment or, for automotive, by car model, and as a result most of the figures here are aggregate level. For revenues and gross profitability, I’ve used GAAP numbers from their automotive segment (inclusive of leasing) but for capital expenditures, operating expenditures, depreciation, and cash flows I’m using the entire entity. This is done both because Tesla does not provide breakouts by segment but also because burdening these costs on Tesla’s automotive business is likely both realistic (due to the fact that Tesla’s automotive segment is responsible for the vast majority of revenue and expenditure both today and in the past) and presents a more favorable view of the business (due to Tesla’s automotive segment consistently being more profitable than the others). Refer to this Google Sheetfor additional information.
This has fueled an astonishing 76.4% compounded annual growth in revenue from 2009-2018, which is especially impressive considering that Tesla vehicles sell at a premium relative to the rest of the market.
However, because the company continues to require injections of investor cash (having raised $1.5B in the first two quarters of 2019, after burning $323M of cash in that same time), the key question for any current or prospective investor into Tesla is will all of this cash burn ever pay off?
This is a question that VCs are used to asking with the startups they pour money into, but it’s one that is a lot trickier for Tesla shareholders to answer. A small software startup looking for $10M in venture capital can find many patient sources of capital who are willing to bet that the company either turns profitable (because most of the cost lies in initial development and sales) or gets sold at an attractive valuation.
But, Tesla, with a valuation in the $10’s of billions (pricing out most buyers) and needing to raise $100’s of millions (if not more) each year from investors demanding near-term results (i.e. public market investors, large corporate debt holders and their rating agencies), will likely have to prove that it can generate real profits.
But, that isn’t happening today. While Tesla proudly boasts about record deliveries as a sign of healthy demand, the numbers show this is a direct result of Tesla’s choice to shift away from selling more profitable Model S/X vehicles to selling lower price, less profitable Model 3s. This has exacerbated a multi-year trend of declining per vehicle profitability:
Lower gross profits per vehicle are not the end of the world, provided that Tesla can sell enough Model 3s to make up for the lower unit profit and start covering their other costs. But that also isn’t happening. At a fundamental level, Tesla is just not getting any real operating leverage. While booming sales volumes have boosted Tesla’s gross profits, the company’s operating expenditures (OPEX; or spending on sales, administrative overhead, and research & development) have more than kept pace. Rational watchers can choose to interpret this as either an inability to maintain growth without spending huge amounts on R&D and SG&A or as smart, long-term bets on future technologies, but the data is clear that Tesla has a long way to go before proving it can fund its own growth just by selling more cars.
The chart below shows another way of looking at this — it graphs the number of vehicles Tesla needed to deliver to cover its OPEX in a given year against the number of vehicles Tesla actually delivered that year. What is astonishing is that the number of vehicles needed to cover OPEX has gone up dramatically each year. Only in one year since 2014 did Tesla close that gap — 2018 after two amazing quarters — and from the available data for the first half of 2019, it looks like, barring a dramatic shift in pricing or profitability, Tesla will need to hit its guidance of 360,000-400,000 cars to just breakeven.
*Multiplied 2019 H1 vehicles deliveries & deliveries to break-even by 2 to compare directly with data from past years
If Tesla is not clearly demonstrating improving profitability, then for the startup investment story to work, it needs to at least demonstrate improved capital efficiency (how effectively it spends investor cash on production). While one can point to Tesla’s more moderate CAPEX spend since 2017 as evidence for this, it is more relevant to understand how Tesla is progressing in its ability to turn CAPEX investments into profit.
While its difficult to calculate precise figures around capital efficiency in the absence of specific data on the cost to build a factory and how the factories are utilized, a ratio of Tesla’s annual automotive gross profits (adjusted to remove depreciation) to its annual depreciation (a way of measuring how current and past capital expenditures are utilized in a given year, albeit one which also factors in CAPEX from Tesla’s non-automotive businesses because Tesla does not break those out separately) can be instructive. The chart below shows that, where Tesla once generated nearly $5 in profit per $1 of depreciation in 2015, it generated only $2.69 in the first half of 2019 (over 40% less). In other words, if Tesla is improving its capital efficiency and utilization as it ramps production and learns from its past mistakes, its not apparent in the numbers.
Adj. Automotive Gross Profits are GAAP Automotive Gross Profits, Less Total TSLA Depreciation
All of this is not to say that Tesla is doomed — the company’s sales, despite missteps (happy one year anniversary of “funding secured”), continues to grow, and the company has clearly captured the American public’s imagination and mind-share as it pertains to electric vehicles, and equity/debt investors continue to extend Tesla more capital even at its current valuation and debt load.
But, in terms of capital requirements, Tesla is running the largest startup experiment of all time. Earlier this year, Bird raised $300M to invest in (what are currently) money-losing electric scooters. In a sense, Tesla is doing the same thing with the Model 3 but at a far greater scale, all the while trying to develop autonomous driving technology and financing the massive liabilities of its SolarCity business. As a result, Tesla needs to continue to sell the dream both to the public and to investors, and to continue to maintain the vision of future profitability and capital efficiency as a misstep here could cause things to rapidly unravel.
Special thanks Andrew Garvin and Derek Yang for reading an earlier version of this and sharing helpful comments!
While it’s impossible to quantify all the intangibles of a college education, the tools of finance offers a practical, quantitative way to look at the tangible costs and benefits which can shed light on (1) whether to go to college / which college to go to, (2) whether taking on debt to pay for college is a wise choice, and (3) how best to design policies around student debt.
The below briefly walks through how finance would view the value of a college education and the soundness of taking on debt to pay for it and how it can help guide students / families thinking about applying and paying for colleges and, surprisingly, how there might actually be too little college debt and where policy should focus to address some of the issues around the burden of student debt.
The Finance View: College as an Investment
Through the lens of finance, the choice to go to college looks like an investment decision and can be evaluated in the same way that a company might evaluate investing in a new factory. Whereas a factory turns an upfront investment of construction and equipment into profits on production from the factory, the choice to go to college turns an upfront investment of cash tuition and missed salary while attending college into higher after-tax wages.
Finance has come up with different ways to measure returns for an investment, but one that is well-suited here is the internal rate of return (IRR). The IRR boils down all the aspects of an investment (i.e., timing and amount of costs vs. profits) into a single percentage that can be compared with the rates of return on another investment or with the interest rate on a loan. If an investment’s IRR is higher than the interest rate on a loan, then it makes sense to use the loan to finance the investment (i.e., borrowing at 5% to make 8%), as it suggests that, even if the debt payments are relatively onerous in the beginning, the gains from the investment will more than compensate for it.
To give an example: if Sally Student can get a starting salary after college in line with the average salary of an 18-24 year old Bachelor’s degree-only holder ($47,551), would have earned the average salary of an 18-24 year old high school diploma-only holder had she not gone to college ($30,696), and expects wage growth similar to what age-matched cohorts saw from 1997-2017, then the IRR of a 4-year degree at a non-profit private school if Sally pays the average net (meaning after subtracting grants and tax credits) tuition, fees, room & board ($26,740/yr in 2017, or a 4-year cost of ~$106,960), the IRR of that investment in college would be 8.1%.
Playing out different scenarios shows which factors are important in determining returns. An obvious factor is the cost of college:
T&F: Tuition & Fees; TFR&B: Tuition, Fees, Room & Board List: Average List Price; Net: Average List Price Less Grants and Tax Benefits Blue: In-State Public; Green: Private Non-Profit; Red: Harvard
As evident from the chart, there is huge difference between the rate of return Sally would get if she landed the same job but instead attended an in-state public school, did not have to pay for room & board, and got a typical level of financial aid (a stock-market-beating IRR of 11.1%) versus the world where she had to pay full list price at Harvard (IRR of 5.3%). In one case, attending college is a fantastic investment and Sally borrowing money to pay for it makes great sense (investors everywhere would love to borrow at ~5% and get ~11%). In the other, the decision to attend college is less straightforward (financially), and it would be very risky for Sally to borrow money at anything near subsidized rates to pay for it.
Some other trends jump out from the chart. Attending an in-state public university improves returns for the average college wage-earner by 1-2% compared with attending private universities (comparing the blue and green bars). Getting an average amount of financial aid (paying net vs list) also seems to improve returns by 0.7-1% for public schools and 2% for private.
As with college costs, the returns also understandably vary by starting salary:
There is a night and day difference between the returns Sally would see making $40K per year (~$10K more than an average high school diploma holder) versus if she made what the average Caltech graduate does post-graduation (4.6% vs 17.9%), let alone if she were to start with a six-figure salary (IRR of over 21%). If Sally is making six figures, she would be making better returns than the vast majority of venture capital firms, but if she were starting at $40K/yr, her rate of return would be lower than the interest rate on subsidized student loans, making borrowing for school financially unsound.
Time spent in college also has a big impact on returns:
Graduating sooner not only reduces the amount of foregone wages, it also means earning higher wages sooner and for more years. As a result, if Sally graduates in two years while still paying for four years worth of education costs, she would experience a higher return (12.6%) than if she were to graduate in three years and save one year worth of costs (11.1%)! Similarly, if Sally were to finish school in five years instead of four, this would lower her returns (6.3% if still only paying for four years, 5.8% if adding an extra year’s worth of costs). The result is that an extra / less year spent in college is a ~2% hit / boost to returns!
Finally, how quickly a college graduate’s wages growrelative to a high school diploma holder’s also has a significant impact on the returns to a college education:
Census/BLS data suggests that, between 1997 and 2017, wages of bachelor’s degree holders grew faster on an annualized basis by ~0.7% per year than for those with only a high school diploma (6.7% vs 5.8% until age 35, 4.0% vs 3.3% for ages 35-55, both sets of wage growth appear to taper off after 55).
The numbers show that if Sally’s future wages grew at the same rate as the wages of those with only a high school diploma, her rate of return drops to 5.3% (just barely above the subsidized loan rate). On the other hand, if Sally’s wages end up growing 1% faster until age 55 than they did for similar aged cohorts from 1997-2017, her rate of return jumps to a stock-market-beating 10.3%.
Lessons for Students / Families
What do all the charts and formulas tell a student / family considering college and the options for paying for it?
First, college can be an amazing investment, well worth taking on student debt and the effort to earn grants and scholarships. While there is well-founded concern about the impact that debt load and debt payments can have on new graduates, in many cases, the financial decision to borrow is a good one. Below is a sensitivity table laying out the rates of return across a wide range of starting salaries (the rows in the table) and costs of college (the columns in the table) and color codes how the resulting rates of return compare with the cost of borrowing and with returns in the stock market (red: risky to borrow at subsidized rates; white: does make sense to borrow at subsidized rates but it’s sensible to be mindful of the amount of debt / rates; green: returns are better than the stock market).
Except for graduates with well below average starting salaries (less than or equal to $40,000/yr), most of the cells are white or green. At the average starting salary, except for those without financial aid attending a private school, the returns are generally better than subsidized student loan rates. For those attending public schools with financial aid, the returns are better than what you’d expect from the stock market.
Secondly, there are ways to push returns to a college education higher. They involve effort and sometimes painful tradeoffs but, financially, they are well worth considering. Students / families choosing where to apply or where to go should keep in mind costs, average starting salaries, quality of career services, and availability of financial aid / scholarships / grants, as all of these factors will have a sizable impact on returns. After enrollment, student choices / actions can also have a meaningful impact: graduating in fewer semesters/quarters, taking advantage of career resources to research and network into higher starting salary jobs, applying for scholarships and grants, and, where possible, going for a 4th/5th year masters degree can all help students earn higher returns to help pay off any debt they take on.
Lastly, use the spreadsheet*! The figures and charts above are for a very specific set of scenarios and don’t factor in any particular individual’s circumstances or career trajectory, nor is it very intelligent about selecting what the most likely alternative to a college degree would be. These are all factors that are important to consider and may dramatically change the answer.
*To use the Google Sheet, you must be logged into a Google account; use the “Make a Copy” command in the File menu to save a version to your Google Drive and edit the tan cells with red numbers in them to whatever best matches your situation and see the impact on the yellow highlighted cells for IRR and the age when investment pays off
Implications for Policy on Student Debt
Given the growing concerns around student debt and rising tuitions, I went into this exercise expecting to find that the rates of return across the board would be mediocre for all but the highest earners. I was (pleasantly) surprised to discover that a college graduate earning an average starting salary would be able to achieve a rate of return well above federal loan rates even at a private (non-profit) university.
While the rate of return is not a perfect indicator of loan affordability (as it doesn’t account for how onerous the payments are compared to early salaries), the fact that the rates of return are so high is a sign that, contrary to popular opinion, there may actually be too little student debt rather than too much, and that the right policy goal may actually be to find ways to encourage the public and private sector to make more loans to more prospective students.
As for concerns around affordability, while proposals to cancel all student debt plays well to younger voters, the fact that many graduates are enjoying very high returns suggests that such a blanket policy is likely unnecessary, anti-progressive (after all, why should the government zero out the costs on high-return investments for the soon-to-be upper and upper-middle-classes), and fails to address the root cause of the issue (mainly that there shouldn’t be institutions granting degrees that fail to be good financial investments). Instead, a more effective approach might be:
Require all institutions to publish basic statistics (i.e. on costs, availability of scholarships/grants, starting salaries by degree/major, time to graduation, etc.) to help students better understand their own financial equation
Hold educational institutions accountable when too many students graduate with unaffordable loan burdens/payments (i.e. as a fraction of salary they earn and/or fraction of students who default on loans) and require them to make improvements to continue to qualify for federally subsidized loans
Making it easier for students to discharge student debt upon bankruptcy and increasing government oversight of collectors / borrower rights to prevent abuse
Government-supported loan modifications (deferrals, term changes, rate modifications, etc.) where short-term affordability is an issue (but long-term returns story looks good); loan cancellation in cases where debt load is unsustainable in the long-term (where long-term returns are not keeping up) or where debt was used for an institution that is now being denied new loans due to unaffordability
Making the path to public service loan forgiveness (where graduates who spend 10 years working for non-profits and who have never missed an interest payment get their student loans forgiven) clearer and addressing some of the issues which have led to 99% of applications to date being rejected
Special thanks Sophia Wang, Kathy Chen, and Dennis Coyle for reading an earlier version of this and sharing helpful comments!
You can learn a great deal from reading and comparing the financial filings of two close competitors. Tech-finance nerd that I am, you can imagine how excited I was to see Lyft’s and Uber’s respective S-1’s become public within mere weeks of each other.
For two-sided regional marketplaces like Lyft and Uber, an investor should understand the full economic picture for (1) the users/riders, (2) the drivers, and (3) the regional markets. Sadly, their S-1’s don’t make it easy to get much on (2) or (3) — probably because the companies consider the pertinent data to be highly sensitive information. They did, however, provide a fair amount of information on users/riders and rides and, after doing some simple calculations, a couple of interesting things emerged
Uber’s Users Spend More, Despite Cheaper Rides
As someone who first knew of Uber as the UberCab “black-car” service, and who first heard of Lyft as the Zimride ridesharing platform, I was surprised to discover that Lyft’s average ride price is significantly more expensive than Uber’s and the gap is growing! In Q1 2017, Lyft’s average bookings per ride was $11.74 and Uber’s was $8.41, a difference of $3.33. But, in Q4 2018, Lyft’s average bookings per ride had gone up to $13.09 while Uber’s had declined to $7.69, increasing the gap to $5.40.
Note: the numbers presented above for Uber are for Uber ridesharing bookings divided by total Uber rides, which includes rides for Uber Eats — this was done because we don’t have great data on rides for Uber Eats and because I suspected that Uber Eats trips represent a small minority of trips — something borne out by the fact that the trend / numbers I arrived at roughly matches the Ridesharing Gross Bookings per Trip chart in the Uber S-1
This is especially striking considering the different definitions that Lyft and Uber have for “bookings” — Lyft excludes “pass-through amounts paid to drivers and regulatory agencies, including sales tax and other fees such as airport and city fees, as well as tips, tolls, cancellation, and additional fees” whereas Uber’s includes “applicable taxes, tolls, and fees“. This gap is likely also due to Uber’s heavier international presence (where they now generate 52% of their bookings). It would be interesting to see this data on a country-by-country basis (or, more importantly, a market-by-market one as well).
Interestingly, an average Uber rider appears to also take ~2.3 more rides per month than an average Lyft rider, a gap which has persisted fairly stably over the past 3 years even as both platforms have boosted the number of rides an average rider takes. While its hard to say for sure, this suggests Uber is either having more luck in markets that favor frequent use (like dense cities), with its lower priced Pool product vs Lyft’s Line product (where multiple users can share a ride), or its general pricing is encouraging greater use.
Note: the “~monthly” that you’ll see used throughout the charts in this post are because the aggregate data — rides, bookings, revenue, etc — given in the regulatory filings is quarterly, but the rider/user count provided is monthly. As a result, the figures here are approximations based on available data, i.e. by dividing quarterly data by 3
What does that translate to in terms of how much an average rider is spending on each platform? Perhaps not surprisingly, Lyft’s average rider spend has been growing and has almost caught up to Uber’s which is slightly down.
However, Uber’s new businesses like UberEats are meaningfully growing its share of wallet with users (and nearly perfectly dollar for dollar re-opens the gap on spend per user that Lyft narrowed over the past few years). In 2018 Q4, the gap between the yellow line (total bookings per user, including new businesses) and the red line (total bookings per user just for rides) is almost $10 / user / month! Its no wonder that in its filings, Lyft calls its users “riders”, but Uber calls them “Active Platform Consumers”.
Despite Pocketing More per Ride, Lyft Loses More per User
Long-term unit profitability is more than just how much an average user is spending, its also how much of that spend hits a company’s bottom line. Perhaps not surprisingly, because they have more expensive rides, a larger percent of Lyft bookings ends up as gross profit (revenue less direct costs to serve it, like insurance costs) — ~13% in Q4 2018 compared with ~9% for Uber. While Uber’s has bounced up and down, Lyft’s has steadily increased (up nearly 2x from Q1 2017). I would hazard a guess that Uber’s has also increased in its more established markets but that their expansion efforts into new markets (here and abroad) and new service categories (UberEats, etc) has kept the overall level lower.
Note: the gross margin I’m using for Uber adds back a depreciation and amortization line which were separated to keep the Lyft and Uber numbers more directly comparable. There may be other variations in definitions at work here, including the fact that Uber includes taxes, tolls, and fees in bookings that Lyft does not. In its filings, Lyft also calls out an analogous “Contribution Margin” which is useful but I chose to use this gross margin definition to try to make the numbers more directly comparable.
The main driver of this seems to be higher take rate (% of bookings that a company keeps as revenue) — nearly 30% in the case of Lyft in Q4 2018 but only 20% for Uber (and under 10% for UberEats)
Note: Uber uses a different definition of take rate in their filings based on a separate cut of “Core Platform Revenue” which excludes certain items around referral fees and driver incentives. I’ve chosen to use the full revenue to be more directly comparable
The higher take rate and higher bookings per user has translated into an impressive increase in gross profit per user. Whereas Lyft once lagged Uber by almost 50% on gross profit per user at the beginning of 2017, Lyft has now surpassed Uber even after adding UberEats and other new business revenue to the mix.
All of this data begs the question, given Lyft’s growth and lead on gross profit per user, can it grow its way into greater profitability than Uber? Or, to put it more precisely, are Lyft’s other costs per user declining as it grows? Sadly, the data does not seem to pan out that way
While Uber had significantly higher OPEX (expenditures on sales & marketing, engineering, overhead, and operations) per user at the start of 2017, the two companies have since reversed positions, with Uber making significant changes in 2018 which lowered its OPEX per user spend to under $9 whereas Lyft’s has been above $10 for the past two quarters. The result is Uber has lost less money per user than Lyft since the end of 2017
The story is similar for profit per ride. Uber has consistently been more profitable since 2017, and they’ve only increased that lead since. This is despite the fact that I’ve included the costs of Uber’s other businesses in their cost per ride.
One possible interpretation of Lyft’s higher OPEX spend per user is that Lyft is simply investing in operations and sales and engineering to open up new markets and create new products for growth. To see if this strategy has paid off, I took a look at the Lyft and Uber’s respective user growth during this period of time.
The data shows that Lyft’s compounded quarterly growth rate (CQGR) from Q1 2016 to Q4 2018 of 16.4% is only barely higher than Uber’s at 15.3% which makes it hard to justify spending nearly $2 more per user on OPEX in the last two quarters.
Interestingly, despite all the press and commentary about #deleteUber, it doesn’st seem to have really made a difference in their overall user growth (its actually pretty hard to tell from the chart above that the whole thing happened around mid-Q1 2017).
How are Drivers Doing?
While there is much less data available on driver economics in the filings, this is a vital piece of the unit economics story for a two-sided marketplace. Luckily, Uber and Lyft both provide some information in their S-1’s on the number of drivers on each platform in Q4 2018 which are illuminating.
Q4 2018
Lyft
Uber
Comparison
Drivers
1.1 million
3.9 million
Rides / Driver
162.18
382.82
Uber is higher by 136%
Rides Bookings $ / Driver
$2,123
$2,943
Uber higher by 39% because Uber bookings per ride lower by 41%
Total Bookings $ / Driver
$2,123
$3,633
19% of Uber bookings are non-ride
Take Home $ / Driver
$1,514
$2,982 (total) $2,350 (rides)
Uber higher by 97% because drivers take home 15% more per $ If only rides, Uber higher by 55%
The average Uber driver on the platform in Q4 2018 took home nearly double what the average Lyft driver did! They were also more likely to be “utilized” given that they handled 136% more rides than the average Lyft driver and, despite Uber’s lower price per ride, saw more total bookings.
It should be said that this is only a point in time comparison (and its hard to know if Q4 2018 was an odd quarter or if there is odd seasonality here) and it papers over many other important factors (what taxes / fees / tolls are reflected, none of these numbers reflect tips, are some drivers doing shorter shifts, what does this look like specifically in US/Canada vs elsewhere, are all Uber drivers benefiting from doing both UberEats and Uber rideshare, etc). But the comparison is striking and should be alarming for Lyft.
Closing Thoughts
I’d encourage investors thinking about investing in either to do their own deeper research (especially as the competitive dynamic is not over one large market but over many regional ones that each have their own attributes). That being said, there are some interesting takeaways from this initial analysis
Lyft has made impressive progress at increasing the value of rides on its platform and increasing the share of transactions it gets. One would guess that, Uber, within established markets in the US has probably made similar progress.
Despite the fact that Uber is rapidly expanding overseas into markets that face more price constraints than in the US, it continues to generate significantly better user economics and driver economics (if Q4 2018 is any indication) than Lyft.
Something happened at Uber at the end of 2017/start of 2018 (which looks like it coincides nicely with Dara Khosrowshahi’s assumption of CEO role) which led to better spending discipline and, as a result, better unit economics despite falling gross profits per user
Uber’s new businesses (in particular UberEats) have had a significant impact on Uber’s share of wallet.
Lyft will need to find more cost-effective ways of growing its business and servicing its existing users & drivers if it wishes to achieve long-term sustainability as its current spend is hard to justify relative to its user growth.
Special thanks to Eric Suh for reading and editing an earlier version!
There’s been a fair amount of talk lately about proactively regulating — and maybe even breaking up — the “Big Tech” companies.
Full disclosure: this post discusses regulating large tech companies. I own shares in several of these both directly (in the case of Facebook and Microsoft) and indirectly (through ETFs that own stakes in large companies)
Like many, I have become increasingly uneasy over the fact that a small handful of companies, with few credible competitors, have amassed so much power over our personal data and what information we see. As a startup investor and former product executive at a social media startup, I can especially sympathize with concerns that these large tech companies have created an unfair playing field for smaller companies.
At the same time, though, I’m mindful of all the benefits that the tech industry — including the “tech giants” — have brought: amazing products and services, broader and cheaper access to markets and information, and a tremendous wave of job and wealth creation vital to may local economies. For that reason, despite my concerns of “big tech”‘s growing power, I am wary of reaching for “quick fixes” that might change that.
Another factor which complicates tech policy is that the traditional “big is bad” mentality ignores the benefits to having large platforms. While Amazon’s growth has hurt many brick & mortar retailers and eCommerce competitors, its extensive reach and infrastructure enabled businesses like Anker and Instant Pot to get to market in a way which would’ve been virtually impossible before. While the dominance of Google’s Android platform in smartphones raised concerns from European regulators, its hard to argue that the companies which built millions of mobile apps and tens of thousands of different types of devices running on Android would have found it much more difficult to build their businesses without such a unified software platform. Policy aimed at “Big Tech” should be wary of dismantling the platforms that so many current and future businesses rely on.
Its also important to remember that poorly crafted regulation in tech can be self-defeating. The most effective way to deal with the excesses of “Big Tech”, historically, has been creating opportunities for new market entrants. After all, many tech companies previously thought to be dominant (like Nokia, IBM, and Microsoft) lost their positions, not because of regulation or antitrust, but because new technology paradigms (i.e. smartphones, cloud), business models (i.e. subscription software, ad-sponsored), and market entrants (i.e. Google, Amazon) had the opportunity to flourish. Because rules (i.e. Article 13/GDPR) aimed at big tech companies generally fall hardest on small companies (who are least able to afford the infrastructure / people to manage it), its important to keep in mind how solutions for “Big Tech” problems affect smaller companies and new concepts as well.
To be 100% clear, I’m not saying that the tech industry and big platforms should be given a pass on rules and regulation. If anything, I believe that laws and regulation play a vital role in creating flourishing markets.
But, instead of treating “Big Tech” as just a problem to kill, I think we’d be better served by laws / regulations that recognize the limits of regulation on tech and, instead, focus on making sure emerging companies / technologies can compete with the tech giants on a level playing field. To that end, I hope to see more ideas that embrace the following four pillars:
I. Tiering regulation based on size of the company
Regulations on tech companies should be tiered based on size with the most stringent rules falling on the largest companies. Size should include traditional metrics like revenue but also, in this age of marketplace platforms and freemium/ad-sponsored business models, account for the number of users (i.e. Monthly Active Users) and third party partners.
In this way, the companies with the greatest potential for harm and the greatest ability to bear the costs face the brunt of regulation, leaving smaller companies & startups with greater flexibility to innovate and iterate.
II. Championing data portability
One of the reasons it’s so difficult for competitors to challenge the tech giants is the user lock-in that comes from their massive data advantage. After all, how does a rival social network compete when a user’s photos and contacts are locked away inside Facebook?
While Facebook (and, to their credit, some of the other tech giants) does offer ways to export user data and to delete user data from their systems, these tend to be unwieldy, manual processes that make it difficult for a user to bring their data to a competing service. Requiring the largest tech platforms to make this functionality easier to use (i.e., letting others import your contact list and photos with the ease in which you can login to many apps today using Facebook) would give users the ability to hold tech companies accountable for bad behavior or not innovating (by being able to walk away) and fosters competition by letting new companies compete not on data lock-in but on features and business model.
I believe that is an overreaction. Platform owners offering attractive products and services (i.e., Google offering turn-by-turn navigation on Android phones) can be a great thing for users (after all, most prominent platforms started by providing compelling first-party offerings) and for 3rd party participants if these offerings improve the attractiveness of the platform overall.
What is hard to justify is when platform owners stack the deck in their favor using anti-competitive moves such as banning or reducing the visibility of competitors,crippling third party offerings, making excessive demands on 3rd parties, etc. Its these sorts of actions by the largest tech platforms that pose a risk to consumer choice and competition and should face regulatory scrutiny. Not just the fact that a large platform exists or that the platform owner chooses to participate in it.
IV. Modernizing how anti-trust thinks about defensive acquisitions
The rise of the tech giants has led to many calls to unwind some of the pivotal mergers and acquisitions in the space. As much as I believe that anti-trust regulators made the wrong calls on some of these transactions, I am not convinced, beyond just wanting to punish “Big Tech” for being big, that the Pandora’s Box of legal and financial issues (for the participants, employees, users, and for the tech industry more broadly) that would be opened would be worthwhile relative to pursuing other paths to regulate bad behavior directly.
That being said, its become clear that anti-trust needs to move beyond narrow revenue share and pricing-based definitions of anti-competitiveness (which do not always apply to freemium/ad-sponsored business models). Anti-trust prosecutors and regulators need to become much more thoughtful and assertive around how some acquisitions are done simply to avoid competition (i.e., Google’s acquisition of Waze and Facebook’s acquisition of WhatsApp are two examples of landmark acquisitions which probably should have been evaluated more closely).
This is hardly a complete set of rules and policies needed to approach growing concerns about “Big Tech”. Even within this framework, there are many details (i.e., who the specific regulators are, what specific auditing powers they have, the details of their mandate, the specific thresholds and number of tiers to be set, whether pre-installing an app counts as unfair, etc.) that need to be defined which could make or break the effort. But, I believe this is a good set of principles that balances both the need to foster a tech industry that will continue to grow and drive innovation as well as the need to respond to growing concerns about “Big Tech”.
Special thanks to Derek Yang and Anthony Phan for reading earlier versions and giving me helpful feedback!
For anyone who is also interested in migrating an existing WordPress deployment on another host to AWS Lightsail and turning on HTTPS/SSL, here are the steps I followed (gleamed from some online research and a bit of trial & error). Its not as straightforward as some other setups, but its very do-able if you are willing to do a little bit of work in the AWS console:
Follow the (fairly straightforward) instructions in the AWS Lightsail tutorial around setting up a clean WordPress deployment. I would skip sub-step 3 of step 6 (directing your DNS records to point to the Lightsail nameservers) until later (when you’re sure the transfer has worked so your domain continues to point to a functioning WordPress deployment).
Unless you are currently not hosting any custom content (no images, no videos, no Javascript files, etc) on your WordPress deployment, I would ignore the WordPress migration tutorial at the AWS Lightsail website (which won’t show you how to transfer this custom content over) in favor of this Bitnami how-to-guide (Bitnami provides the WordPress server image that Lightsail uses for its WordPress instance) which takes advantage of the fact that the Bitnami WordPress includes the All-in-One WP Migration plugin which, for free, can do single file backups of your WordPress site up to 512 MB (larger sites will need to pay for the premium version of the plugin).
Note: if, like me, you are using Jetpack’s site accelerator to cache your images/static file assets, don’t worry if upon visiting your site some of the images appear broken. Jetpack relies on the URL of the asset to load correctly. This should get resolved once you point your DNS records accordingly (literally the next step) and any other issues should go away after you mop up any remaining references to the wrong URLs in your database (see the bullet below where I reference the Better Search Replace plugin).
If you followed my advice above, now would be the time to change your DNS records to point to the Lightsail nameservers (sub-step 3 of step 6 of the AWS Lightsail WordPress tutorial) — wait a few hours to make sure the DNS settings have propagated and then test out your domain and make sure it points to a page with the Bitnami banner in the lower right (sign that you’re using the Bitnami server image, see below)
The Bitnami banner in the lower-right corner of the page you should see if your DNS propagated correctly and your Lightsail instance is up and running
To remove that ugly banner, follow the instructions in this tutorial (use the AWS Lightsail panel to get to the SSH server console for your instance and, assuming you followed the above instructions, follow the instructions for Apache)
Assuming your webpage and domain all work (preferably without any weird uptime or downtime issues), you can proceed with this tutorial to provision a Let’s Encrypt SSL certificate for your instance. It can be a bit tricky as it entails spending a lot of time in the SSH server console (which you can get to from the AWS Lightsail panel) and tweaking settings in the AWS Lightsail DNS Zone manager, but the tutorial does a good job of walking you through all of it.
I would strongly encourage you to wait to make sure all the DNS settings have propagated and that your instance is not having any strange downtime (as mine did when I first tried this) as if you have trouble connecting to your page, it won’t be immediately clear what is to blame and you won’t be able to take reactive measures.
I used the plugin Better Search Replace to replace all references to intermediate domains (i.e. the IP addresses for your Lightsail instance that may have stuck around after the initial step in Step 1) or the non-HTTPS domains (i.e. http://yourdomain.com or http://www.yourdomain.com) with your new HTTPS domain in the MySQL databases that power your WordPress deployment (if in doubt, just select the wp_posts table). You can also take this opportunity to direct all your yourdomain.com traffic to www.yourdomain.com (or vice versa). You can also do this directly in MySQL but the plugin allows you to do this across multiple tables very easily and allows you to do a “dry run” first where it finds and counts all the times it will make a change before you actually execute it.
If you want to redirect all the traffic to www.yourdomain.com to yourdomain.com, you have two options. If your domain registrar is forward thinking and does simple redirects for you like Namecheap does, that is probably the easiest path. That is sadly not the path I took because I transferred my domain over to AWS’s Route 53 which is not so enlightened. If you also did the same thing / have a domain registrar that is not so forward thinking, you can tweak the Apache server settings to achieve the same effect. To do this, go into the SSH server console for your Lightsail instance and:
Run cd ~/apps/wordpress/conf
To make a backup which you can restore (if you screw things up) run mv httpd-app.conf httpd-app.conf.old
I’m going to use the Nano editor because its the easiest for a beginner (but feel free to use vi or emacs if you prefer), but run nano httpd-app.conf
Use your cursor and find the line that says RewriteEngine On that is just above the line that says #RewriteBase /wordpress/
Enter the following lines
# begin www to non-www
RewriteCond %{HTTP_HOST} ^www\.(.*)$ [NC]
RewriteRule ^(.*)$ https://%1/$1 [R=permanent,L]
# end www to non-www
The first and last line are just comments so that you can go back and remind yourself of what you did and where. The middle two lines are where the server recognizes incoming URL requests and redirects them accordingly
With any luck, your file will look like the image below — hit ctrl+X to exit, and hit ‘Y’ when prompted (“to save modified buffer”) to save your work
Run sudo /opt/bitnami/ctlscript.sh restart to restart your server and test out the domain in a browser to make sure everything works
If things go bad, run mv httpd-app.conf.old httpd-app.conf and then restart everything by running sudo /opt/bitnami/ctlscript.sh restart
What httpd-app.conf should look like in your Lightsail instance SSH console after the edits
I’ve only been using AWS Lightsail for a few days, but my server already feels much more responsive. It’s also nice to go to my website and not see “not secure” in my browser address bar (its also apparently an SEO bump for most search engines). Its also great to know that Lightsail is integrated deeply into AWS which makes the additional features and capabilities that have made AWS the industry leader (i.e. load balancers, CloudFront as CDN, scaling up instance resources, using S3 as a datastore, or even ultimately upgrading to full-fledged EC2 instances) are readily available.
This weekend, I paid a visit to The Henry Ford. Its a combination of multiple venues — a museum, an outdoor “innovation village”, a Ford Motors factory tour — which collectively celebrate America’s rich history of innovation and manufacturing and, in particular, the legacy of Henry Ford and the Ford Motors company he built.
While ambitious super-CEOs like Larry Page (Google), Elon Musk (Tesla), and Jeff Bezos (Amazon) with their tentacles in everything sometimes seem like a modern phenomena, The Henry Ford shows that they are just a modern-day reincarnations of the super-CEOs of yesteryear. Except, instead of pioneering software at scale, electric vehicles, and AI assistants, Ford was instrumental in the creation of assembly line mass production, the automotive industry (Ford developed the first car that the middle class could actually afford), the aerospace industry (Ford helped develop some of America’s first successful passenger planes), the forty hour workweek, and even the charcoal briquet (part of a drive to figure out what to do with the lumber waste that came from procuring the wood needed to build Model T’s).
In the same way that the tech giants of today pursue “moonshots” like drone delivery and self-driving cars, Ford pushed the frontier with its own moonshots: creating cars out of bioplastic, developing biofuels, and even an early collaboration with Thomas Edison to build an electric car.
It was a striking parallel, and also an instructional one for any company that believes they can stay on top forever: despite the moonshots and the technology advantages, new technologies, market forces, and global shifts come one after the other and yesterday’s Ford (eventually) gets supplanted by tomorrow’s Tesla.
My experiences investing in and working with startups, however, has taught me that building a great company is usually less about a specific technical or business model innovation than about building a culture of continuous improvement and innovation. To try to get some insight into how Google does things, I picked up Google SVP of People Operations Laszlo Bock’s book Work Rules!
