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Chinese progress

Meeker's Internet Trends Tells Us A Chinese Company Could Soon Be The Global Internet Leader

Burgess COMMENTARY
Fascinating read ... and worth looking at the complete slide set as well.

These data raise many more questions. The focus of the 'value' proposition relates to owners' perspective of the respective companies, and I understand this. But where has the money come from to enable the sales revenues that has been giving these companies these valuations.

Henry Ford understood that for people to be able to buy his cars, the people had to have money. When people earn enough money they can buy the cars. So where has the money come from to give these companies the aggregate demand that they need to prosper.

For a long time this money came from the America consumer that had a substantial amount of disposable wealth and good income. Over time income deteriorated and when disposable wealth went to zero, various credit devices were put in play so people could continue to dispose of their money going more and more into debt.

Much of the money went to Korea, China and the emerging economies where wages were low and rising, and manufacturing was becoming the core of their economies. Initially there was little domestic consumer demand, but now this is growing very fast. American demand is growing slowly and is, in my view, very fragile and likely to deteriorate even further.

The Internet makes its money from advertising. Advertisers make their money by getting stuff sold. This stuff has to be made and this process is doing dangerous vicious cycle and doing damage to the environment ... and the risk of this is huge. An amazing amount of money is now in play in the Internet economy. Meanwhile money for investment in the 'fix the environmental issues' economy (which needs to be huge) is paltry.

Money makes the world go round ... but a purely money based economy that encourages Internet driven buying will fry the planet. R&D to move to a no carbon economy has a high return of good, but such return up to now has not been bankable. What is the value of good? Depends on the discount rates being applied to risk ... but maybe risk should not be discounted but compounded as we delay investment in important issues affecting the future.

We are in fascinating times

Peter Burgess

Max Motschwiller ... General Partner at Meritech Capital Partners

Meeker's Internet Trends Tells Us A Chinese Company Could Soon Be The Global Internet Leader

After having been at Kleiner the past two years for “Trends season” as the team calls it, it was amazingly refreshing to read Mary’s Internet Trends report for pure pleasure. As part of Mary’s team at Kleiner Perkins, I can appreciate the incredibly detailed research, intense thought and 100s of hours of time that goes into creating what has become the industry’s go-to state of the Internet (mobile). On the surface, Mary’s analysis is interesting, but it is her ability to provoke thoughts around future implications of our world that is most powerful. With a fresh set of eyes and the liberty of not reading footnotes for typos, I had the patience to do what “The Queen of the Net” intends all of her readers to do, critically think about her analysis and let their minds wonder freely. As she tells us all, you must take a step back and “dream the dream.”

While reading Trends, I became fascinated with the slides summarizing the recent US tendency to China’s “playbook” around messaging platforms.

I began to wonder where else the US internet market might run a Chinese “play,” and what those storylines would imply for global internet brands. I warn, some of the implications are scary and admittedly low probability, but it’s always fun to think about what the future of the global internet could hold. So, let’s play out some of the most interesting scenarios.

Playbook A: Lower Marketplace Take Rate – for the most common Chinese playbooks, look no further than Mary’s China Section (slides 150-158 – thank you Wu + Hillhouse). Slide 158 shows that China’s e-commerce companies have significantly lower take rates, faster growth rates and larger scale when compared to their US counterparts.

The lower Chinese take rate extends beyond e-commerce into mobile marketplaces; Didi/Kuadidi (Uber of China) has a take rate of ~0% vs. Uber & Lyft who have take rates of ~10%. Most marketplace businesses in the U.S. pitch/expect they can reach ~20% take rate over time, including Uber and Lyft. Given the intense battle for market-share (competition), limited access to capital (although it doesn’t feel like that today) and proven success in China it is very possible that we see take-rate compression in the US and long-term unit economics that are significantly lower than many companies are predicting.

This will have tremendous implications on FCF, which Mary points out is a key to ultimate company valuation (slide 176). The math is simple, if Uber’s take rate is 5% vs. 20% their GMV (what riders pay for a ride), must be 4x as big to have equal net revenue. In the extreme case, what if Uber’s take rate was forced to be 0%? Worth noting, this is not outside of the realm of possibility -- western-centric companies OfferUp, Wallapop, VarageSale all have 0% take rate and combine for ~$2B+ of GMV.

Let’s assume this is true, marketplace take rates trend toward 0%. Could Uber, Postmates, Handy and Zirx still exist? There are certainly other business models that can exist on top of these platforms that could allow them to make profit. Uber could show ads (they already are) to their users and have ad supported rides. Other marketplaces (mostly content) have this as their primary business model (e.g. Youtube). Another option is Uber implements a subscription business model where to use the app you have to pay $100 per month (+ pass on cost of ride to drivers). Instacart (on-demand groceries) has the potential to make $ off of CPG relationships (Postmates and Doordash are similar).

Playbook B: Local Market Consolidation (M&A) – As summarized in Slide 157, China’s Internet has seen accelerating consolidation through M&A, the most notable being the recent merger of Didi/Kuaidi.

It seems inevitable that US marketplaces will follow suit overtime as the intense competition is leading to lower take rates, higher customer acquisition costs and excessive cash burn. We are already hearing rumors of this M&A playbook being run in the US with rumors that Handy is acquiring its rival Homejoy. Are Postmates and Doordash next, dare I say Uber and Lyft?

Playbook A & B are closely related. If competition increases (or remains high), take-rates will fall, resulting in a higher likelihood of M&A (which could then decrease competition and lead to a higher take rate). It has been shown that in cities where marketplace businesses have more direct competition their take rate is less as compared to markets where they operate without competition.

Playbook C: Large U.S. Companies try to Invest in Emerging Chinese Leaders: We are seeing the Chinese mega-internet companies aggressively investing in industry leading private US companies. Alibaba has put $100s of millions into Snapchat & Lyft (and Didi/Kuaidi), and invested in Quixey, Ouya, Peel, Kabam and Jet among others. Tencent has invested $10s of millions into Snapchat and is also an investor in Pocketgems, Whisper, Weebly, Scanadu, Riot Games etc. Baidu invested in Uber’s Series E. Could we see mega-internet companies in the US follow suit? Facebook and Google trying to invest in Didi/Kuaidi or Mogujie or Meilishuo?

Potential Chinese Playbook D: Cross Border Acquisitions (US tries to Follow): The interesting part about playbook C is that the next logical step for Chinese companies is to start aggressively making acquisitions of US based internet brands. It is unlikely that Tencent or Alibaba will displace Facebook (WA, Insta, Messenger) or Amazon with their core offerings today. However, what would a world look like where Alibaba or Tencent acquired Snapchat (again they are already investors)? The implications of a Chinese company having control over a communication and media platform with ubiquitous scale and engagement in the US would be unique. Even bolder, what happens if Didi/Kuaidi purchase Lyft (they do have overlapping investors with Tencent and Coatue, or maybe Tencent buys Didi/Kuaidi and Lyft!) and there is a battle of even more epic proportions between the aggressively acquiring Chinese powerhouse of Tencent/Didi/Kuaidi/Lyft (and anyone else they purchase) vs. Uber (Credit @tjnahigian). Not to say any of this happens, Uber could buy Lyft, or purchase Didi/Kuaidi or everyone remains independent (favors Uber given lowest cost of capital). As China gets aggressive, perhaps we see large U.S. companies respond and attack through acquisitions in China.

Playbook E: US restricts Chinese Internet Operations (or acquisitions) in the US: The Chinese government has been stifling US internet company penetration for years and the strategy has enabled Chinese Internet companies to flourish (e.g. censoring of Google has led to rise of Baidu). I have experienced firsthand the un-announced firewall shutdowns, Hong Kong re-routing and government provider licenses nightmare while working with a US internet company trying to operate in China. Beyond the cultural challenges, the Chinese government is making it next to impossible for our brands (Facebook, Google, Twitter, LinkedIn) to exist in China. As China’s threat toward US internet penetration grows, perhaps the US government adopts a similarly restrictive stance (it has not done so today, but Chinese internet companies are not yet a threat to US based companies). All this said, if DJI is any early indicator (the most innovative and formidable Chinese brand in the US), the US might continue sit back and let a Chinese branded consumer platform dominate our market.

Potential Chinese Playbook F: China has the first Trillion $ Internet Company, the US follows (I am not counting Apple as an internet company, but that is a discussion for a different day): It is likely the first trillion dollar internet company owns both China and the US (2 largest smartphone subscriber bases in world). Given Chinese government censorship of US internet companies and the US openness toward Chinese internet investments / operations , it would seems as though there is a higher probability that a Chinese company wins in the US as compared to a US company winning in China.

In reality, China's messaging playbook is all about consolidation and bundling, the opposite of what we have observed in the US (Facebook de-bundling, on-demand services de-bundling, financial services de-bundling). If China extends its consolidation playbook into making acquisitions (as foreshadowed by Chinese M&A and US Investments) the US as the global internet leader might be a tale of the past.