An Interview with Brent Beshore

Two Truths and a Take, Bonus Episode: Season 1, Episode 26b

In this month’s interview special, I’m really grateful to have Brent Beshore come on the newsletter and share his life’s work and mission at

Brent’s business is Being a Good Owner. He and his firm discover, buy, and own (for the long run) SMBs who do something really well, and whose founder / CEOs are looking to put the business in good hands when they turn to the next phase in their life. 

I got acquainted with Brent initially through Twitter, and over the past couple months I’ve been lucky to have his point of view cutting through my feed. Most people in my professional bubble have been busy spilling ink over WeWork and direct listings and other existential fretting about what is the correct pace at which billion dollar platform businesses should be operating at a loss. Meanwhile, I really think that everyone on Tech Twitter should follow Brent and others like him, because:

  • Most businesses aren’t all-or-nothing bets that the world will be radically different in a few years

  • Most businesses actually earn money, and do so from the very beginning of their life

  • Most businesses stick to doing one or two things really well

People sometimes say that VCs are the ultimate optimists, but I believe people like Brent and the business that he runs actually represent a deeper and more fulfilling kind of optimism. I think you’ll agree after hearing from him today. 

To begin, let’s talk about family businesses. Your company,, focuses on investing, recapitalizing and acquiring American family businesses that earn, say, $5 to $10 million a year. For some people in tech or on the coasts who might not appreciate this - how many of these businesses are there out there, and how important are they to the country?

With over 30 million strong and employing almost 60 million people, small-to-medium sized businesses (SMBs) are the backbone of the United States. On the small end of the spectrum, businesses with net incomes below $1M, are the restauranteurs, dry cleaners, landscapers, and insurance brokers who make the economy function. (Here are some stats put out by the Small Business Administration.)

The businesses we work with are bigger, but still considered small. We’ll look at organization that have greater than $3M of net income, but our sweet spot is $3M-$8M in earnings. These owners have done extraordinarily well, but usually have capped out in growth and most don’t have an exit strategy.

When you survey who owns these larger small businesses, it’s dominated by Baby Boomers who are aging out of their work. After I bought the first business almost ten years ago, I thought I had missed the retirement wave. But due to the Great Recession and trends in longevity, the tidal wave of Baby Boomer exits was delayed about ten years. I guess it’s better to be lucky than good.

What are your favourite characteristics in a family business that you look for, beyond the usual good signs of a healthy company? Are there any particular sectors or features that just really get you excited? Anything that doesn't really have a rational explanation, but you just love to see?

Different investors look for different things differently. That’s what makes pricing so dynamic.

For us, we like steady, boring, useful, and faithful companies. These are organizations that have been built brick-by-brick over a long period of time, serve a necessary function in the economy, and care about their clients, employees, and communities. These businesses are change-resistant and people-driven.

This style naturally leads us to business services, manufacturing, distribution, and construction. If you look at our current portfolio we’ve got a little bit of everything — the U.S.’s largest pool construction company, a military recruitment firm, a specialized glazier, the world’s highest-end matchmaking firm, a handful of manufacturers, and most recently a couple aerospace distribution firms. It’s eclectic, but the unifying themes are all there.

Beyond the obvious, we like to see fairly-to-generously compensated employees, high levels of repeat business, pricing power, and an executive team that shares mutually deserved trust. We won’t buy from a seller who’s not already wealthy, because if they didn’t become wealthy doing it, neither will we. And we like to see the seller genuinely care for others, which is unfortunately rare.

My grandfather, Léon Danco, dedicated his life’s work to helping owner/managers of family businesses with the challenge of handing off the organization: either to the next generation of the family, or alternatively to someone else who could continue its success.

One of the recurring themes of his books and lessons was the idea that family business CEOs, who often single handedly built their businesses, often seem inseparable from the company. If you take them away from their desk for longer than a weekend, things start to fall apart fast. Their weekly tasks and responsibilities aren’t comprehensively written down anywhere, or formalized into anything that can be handed off - the CEO just takes care of them.

When you look at a family business like this, how do you go about assessing the ease with which a business can be successfully handed off by its founder? Any lessons you’ve learned the hard way?

Your grandfather nailed it. This is, by far, the single biggest challenge facing smaller companies. It goes by a lot of names. We call it owner-moat and refer to these businesses as hustles at scale. Everything hinges on the owner. There is little, if any redundancy. Relationships, processes, expertise, and decision-making can be hit by a bus.

The only way to transition these businesses is by coming alongside the owner over a long period of time and building the knowledge, processes, and redundancy. That’s not something we feel comfortable doing, so we pass on these opportunities. For a buyer-operator, there’s big opportunities if you’re willing to take this risk and invest the time.
We counsel sellers to take these steps themselves. This often looks like hiring a second layer of leadership and promoting someone else to the CEO role. Over time, processes get hardcoded into software and documented. Decision-making is delegated. Relationships get diversified.

The difference in valuation is dramatic. People often confuse size and scale. We have seen hustles as big as $15M of earnings and occasionally will come across a highly conservative owner with a real business at $1M of earnings. The reason why bigger businesses often get valued far higher on a multiple-basis is not because they’re big, but because they’re durable and ready for future growth. Conversely, smaller companies seem cheap because they can’t be grown reliably and could go to zero with one accident.

At you have a scout network that helps you find great businesses; I suspect there might be a few Snippets readers who’d make great scouts. Who are the kinds of people you’re looking for, what is it that Scouts get up to, and what’s your pitch for joining?

The Scout Network is a group of people from all walks of business life who get to know and refer opportunities as they arise. We have quite a few of who you’d expect — lawyers, CPAs, financial advisors, and bankers — people who know and frequently interact with business owners. But we also have non-competitive private equity people, government officials, MBA students, entrepreneurs, and even a monk.

The pitch is simple: All businesses need to be transitioned and when the time is right, the greatest gift you can give a business owner is a warm introduction to an acquirer who will treat them well. In exchange, we share some of the economics of the deal by giving the Scout a $100,000 check, plus a $25,000 adventure of a lifetime vacation.
If someone is interested, they can find out more by visiting or by reaching out.

Let’s shift gears for a minute and talk about startups. A funny thing that’s been happening in the past few years, as the overabundance of capital in the VC ecosystem has trickled down into costs like customer acquisition, is that startup managers are all of a sudden learning all these lessons about business that “regular companies” live and breathe every day. I’ve remarked before that the startup version of Cost of Capital / ROIC is CAC / LTV; now entrepreneurs are having to learn that even though money’s cheap, a high CAC means you need to start caring about things like payback period. Who knew! So my question for you is: what do you think is going to be the next big business theme that startups will “discover”, but which comes as second nature to people who run small businesses?

To answer your question directly — profits and profitability. I hope this doesn’t make me sound too out of touch, but sooner or later, all businesses must make money to survive, let alone thrive. The funny thing is that no one disagrees in theory, but VC trends have allowed the focus to shift because we hit a period of development where the classic J-curve worked exceedingly well. Losing money temporarily in order to make gobs of money later is smart, as long as the underlying economics are sound. Hence you get companies like Google and Facebook. But, this also allows bad businesses to masquerade as intentionally unprofitable.

I’ve angel invested, which usually equates to for-loss philanthropy. The handful of highly successful early-stage companies I’ve invested in all shared a seemingly odd focus on profitability from the very beginning. In fact, some of their biggest struggles have been with VCs who want them to burn more cash and take on more capital. That’s an odd dynamic.

In general, I’m a pretty optimistic person, and I’m especially optimistic about how the internet and modern tech is empowering a new generation of entrepreneurs and business owners to go build. What do you think are some under-appreciated ways in which software and the internet have democratized something essential for small business owners? And what do you think have been the under-appreciated consequences of that availability?

Immediacy and fluidity of communication has to be the biggest enabler of small business success, as well as quality of life. People like to bag on email, but it’s incredible. Write a letter, hit send, and it’s instantly delivered. The asynchronicity of it is delightful. Layer in text and Slack, and communication friction is reduced to the messiness of merely being human. The result is an acceleration of accomplishment without overhead and much great location independence.

SaaS and small-scale targeted advertising both come in a close second. SaaS allows small businesses to have access to latest technology without capital intensity, while targeted advertising enables small businesses to find niche customers previously obscured by the expensive blunt hammer of mass advertising. With AWS, some basic light SaaS applications, and a Google Adwords account, small businesses can now compete.

Finally, I feel like a lot of people who read Two Truths and a Take are based out of a handful of regions: the east and west coast, maybe a few other superstar cities in North America and around the world. You’ve found an incredible home for in Missouri; how did that come to be, and what’s your pitch for coastal people to spend more time in the middle of the country?

I understand why people live in big cities — physical density of the interest graph has a meaningful impact on serendipity and access to infrastructure, quality of distraction, and broad variety is beneficial. Rural America is built on family, the outdoors, and community. It’s just a fundamentally different lens to view the game of life.

With that said, there are many “Goldilocks” towns in the U.S. and my hometown of Columbia, MO is one of them. We frequently host visitors from the coasts and virtually all of them remark about how they “get it.” We’re a college town with about 130,000 residents without students and roughly 40,000 students in the area. We blend the quality of food, music, sports, and art of a bigger city with a toned down pace and focus on community. There’s no traffic. It’s cheap. People are friendly and welcoming. We have a vibrant downtown, beautiful outdoors, and host some of the top film, music, and book festivals in the country. We put together short slide deck about it here:

My pitch is that there’s far, far more going on than wherever you physically find yourself in the world. That area of the country you fly over looks barren, but it’s not. For instance, two of Y-Combinator’s most valuable companies originated in Columbia in the past 8 years (Zapier and Equipment Share). CNBC ranked Columbia as the second best place in the U.S. for women with careers. Forbes ranked Columbia as the 10th best place in the country for business. Plus, the internet cord stretches all the way out here and there are jet planes that can take you anywhere you want to go.
You should come check it out. I’d be happy to show you around.

Thank you again so much to Brent for taking the time to share this with us. If you want to learn more, head to to get started. Or, better yet, take Brent up on his offer and head down to Missouri.

The Audio Revolution, Part One

Two Truths and a Take, Season 1 Episode 26

If I told you about a piece of consumer electronics technology that:

  • A billion+ people own and use every day

  • Has changed those people and their world in some pretty radical and consequential ways

  • Gets more important every year, but not much attention - and the little attention we give it is mostly a sideshow that misses the real story in plain sight:

I’d be talking about these.


In the next two weeks of Two Truths and a Take, we’re going to talk about how headphones, and the audio they hiss into our ears, changed everything. Our social values and instincts have changed because of headphones. Populism and politics have changed because of headphones. I think there’s even a case to be made that Donald Trump is president because of headphones. The audio revolution happened while everyone looked elsewhere.

This is a big topic, and we’re splitting it over two weeks in order to give it justice. The punchline is next week, and today is the setup. And we’ll need a lot of setup for this one. 

The Basics of Information

To really understand the impact of audio, we need to go back to basics and understand how audio works as a medium, independent of its content. What does audio have to say? What does it do to us, in plain sight, that's gone unnoticed? We need to go deep into some Marshall McLuhan territory, and appreciate what he meant by his famous line The Medium Is the Message. 

McLuhan is one of two 20th century figures - the other is Claude Shannon - to truly grasp how and why information technology works. Claude Shannon laid the groundwork for McLuhan by discovering Information Theory, and defining information in a counterintuitive but powerful way: as resolution of uncertainty

Compare these two sentences: “Let’s meet tonight at my house at 7:30” versus “Let’s do tonight, maybe.” Which one contains more information? The first one. It resolves uncertainty to a higher degree, which is why we say it’s "higher resolution". 

If you’re told “Let’s meet tonight at my house at 7:30”, you’ve received a pretty complete, high-resolution dose of information. On the other hand, “Let’s do tonight maybe” is lower-resolution, with some gaps you’ll need to go fill yourself. It could mean yes, it could mean no. Eventually you’ll figure it out, but it requires active work on your part to interpret your friend’s communication style and understand the message correctly.

We live in a world of information, and we often think of information in terms of sensory input coming at us. But that’s not really information. Information isn’t what we’re told; it’s what we understand. 

Hot and Cool Media

Now let’s add McLuhan to the picture. McLuhan’s first insight here is that different forms of media create different kinds of spaces and stages for information and understanding, regardless of whatever the content might be. You can arrange them on a spectrum, from high-resolution to low-resolution. McLuhan labeled this spectrum “Hot” to “Cool”. 

Some forms of media and communication inherently transmit information in high definition, where what’s being communicated is right in your face. Uncertainty is resolved immediately and thoroughly. The media yells at you, like a newspaper or an action movie: it doesn’t hold back. There’s no guesswork or participation required on your part. McLuhan calls this “Hot” media. 

Other forms of media and communication transmit information in lower definition. The participants have to do work to integrate several different pieces or senses, including gaps in information that must be filled in or genre conventions that must be followed, in order to complete the picture. A typical telephone conversation is lower resolution media, because a large part of the message being communicated is obscured or unsaid: it isn’t in the words, but in the gaps we must fill in. This is “Cool” media. 

The concept of Hot and Cool media took me a long time to really understand. But when it suddenly clicked, it clicked all at once. I think some people have a hard time figuring it out because McLuhan’s illustrative examples in Understanding Media are from another era. “The Waltz is a Hot dance, because it’s unambiguous mechanical mashing, whereas the Twist is a Cool dance, because you have to integrate information and fill in gaps in real time” was a great example then, but less so now. People also get thrown off by his description of TV as a "cool, tactile medium”. Remember, back then, TV was a glowing fuzz of white dots and muffled audio you had to piece together - a totally different medium than film (hot back then, and now) or TV today (which has heated up a lot since McLuhan’s day). 

 So here’s an explanation in terms of media we know today: texting, Twitter, Instagram, Facebook and YouTube.

Texting: ice cold. The entire point of texting, particularly for young people, is that it’s a way to communicate that reveals very little information. Uncertainty and ambiguity is the point. Texting, especially a group chat, is often like a game of “what’s said versus unsaid”, where gaps must be filled in. It demands active participation on your part to complete the picture of what’s being communicated. (The dreaded “…” in iMessage, which says so little but draws us in, is Cool Media.) 

Twitter: cool. Similarly, Twitter is a low-resolution, character-limited format where the majority of what’s being communicated is actually just offscreen, out of the picture. The greatest tweets and the funniest jokes on Twitter are incomplete information: they’re pure punchline. The setup goes unsaid; you have to already know it, or go figure it out. It takes a lot of work to use Twitter successfully and you have to fluently understand its genre conventions in order for it to make sense. Twitter, when used optimally, is classic Cool Media.

Instagram: warm. Instagram is higher-resolution than Twitter. The main content being communicated is all visual, and you don’t need to understand genre conventions as much. Instagram in its early photo filter days was fairly hot media, but it cooled down when it became the de facto social status app. Now there's interplay between what’s posted and how many likes it gets, and from whom, and other social dynamics like private versus public posting. There is still some ambiguity, but as a medium it’s more information-complete than Twitter or texting. 

Facebook: hot. Unlike Twitter, which is a muttering mass of inside jokes, or Instagram, which is warmer but still has some cool elements to it, Facebook is more like a newspaper. It’s not holding anything back. It’s a patchwork mosaic of yelling: Acknowledge this! Be angry at this! Celebrate this! There’s not a lot of mystery on Facebook, and it doesn’t take much fluency to use it correctly. The information being communicated is all right there, blasted at you. Facebook may have started out cooler, back when it was college kids navigating social status (as Instagram is used now). But it’s heated up steadily since then.

YouTube: scorching hot. We’re going to talk about YouTube later. 

Now, remember: when we say Hot and Cold media, we’re not talking about the content. We’re talking about the medium itself. The Medium Is the Message means is that the choice of media creates a stage for what follows. Hot media creates space for hot communication; cool media creates space for cool communication. Hot media heats things up; cool media cools things down.

Think about the difference between communicating by texting (cool) versus email (hot). Typographically, there’s no difference between the two. But email is understood to be a single-shot method of communication, which is hot and high-resolution, whereas texting is understood to be a dialogue: it’s a cool, chatty medium by nature, where little information is actually exchanged. Communicating by email, regardless of the content, will generally heat things up and force directness. Communicating by text will generally cool things down and invite ambiguity. 

Meanwhile, the physical properties of the medium you choose will also influence the temperature of what’s being communicated. A photograph is hotter than a pencil: they both make pictures, but one makes low-resolution sketches and the other high-definition images.

What’s hottest? You might think that the highest-resolution format of all could be visual, typographic or video. But it’s not. It’s audio. 

Audio: the hottest format of all

Audio, especially verbal speech, is tremendously high in information content. Most people are unaware of this. We mistakenly think of information as sensory input being thrown at us, usually with a bias towards our visual senses. But information isn’t what we’re told; it’s what we understand. Audio and speech resolve uncertainty and communicate meaning more powerfully than any other format. 

Audible speech burns hot with information. Intonation, accents, innuendo, vocal phrasing, emphasis, pauses, all communicate far more than a transcript can. Audio is the format for “You all know exactly what I’m talking about, because of the way I’m saying it.” Audio is how you communicate what you really mean, straight into ears, headphones and car radios, intimately and directly. Music is good at this, but speech is even better. 

Here's an exercise you can do: speaking out loud, say the word “tonight” twenty different ways, where each way is communicating something distinct. You can say “tonight” in a way that’s intrigued, satisfied, tired, horny, dejected, anxious, suspicious, hesitant, desperate, or any number of ways - and the person you’re talking to will know exactly what you mean. You can’t do that easily with image or text. A transcript of the word tonight just says tonight: flat, ambiguous. Our eyes treat it neutrally. But our ears don’t. Our ears are hyper-discriminatory. 

Whatever it is that’s being communicated, audio will heat it up. Imagine you’re in a confrontation with your landlord, and you can communicate either over text messaging or by phone (cooler, back-and-forth dialog) or by email or voice mail (hot, one-shot blasts). Text keeps things chill, whereas audio forces the issue.

When you present information in an audio-first format, or especially in an audio-only format, it heats up what’s being communicated, and saturates its information content. What may have seemed ambiguous or flat when presented in text or mixed media format won’t be interpreted ambiguously by your ears. Your ears understand what’s really being said, and they seek hot content. 

There’s a famous story about the Nixon-Kennedy debates that I misunderstood for a long time. Following a presidential debate between Richard Nixon and JFK, those who had listened over the radio overwhelmingly felt that Nixon had won, whereas those who watched on TV felt that JFK won. I remember originally hearing this story and thinking that the point was somehow that TV was more “superficial” than radio, and that JFK’s handsome face or easy on-screen charm somehow overruled the debate’s substance on TV but not on the radio. 

I’ve now come to understand that this wasn’t the point at all. The lesson has nothing to do with the content of what either of them were saying. The content doesn’t matter. What matters is that Nixon was a Hot candidate: sharp, saturated with information, abrasive, and in your face. But JFK was a Cool candidate: relaxed, speaking easy, in slogans that invited multiple interpretations, creating plenty of gaps for the audience to fill in themselves. 

Hot, high-resolution media like radio created space for a hot style and messenger like Nixon really well. But cool, low-resolution media like 1960s TV rejected him. Nixon sounded powerful and alive on the radio, but abrasive and mismatched on TV. Meanwhile, Kennedy seemed slow, empty and lethargic on a hot medium like radio, but fit smoothly and confidently on TV. It couldn’t matter less what they said: our cool and neutral eyes liked Kennedy; our hot and discriminatory ears liked Nixon. 

Hot media seeks and creates hot content and hot messengers. A voice like Howard Stern, coming straight into our hyper-discriminating ears, is a powerful thing and when we hear it, we want more of it. Put headphones on, turn off the lights, and put Howard’s voice in your ears - audio only, in the dark - and you’ll experience heat. Cool messages and messengers won’t cut it anymore - not on hot media; not on headphones. They feel flat and dead. 

On other forms of media, cool messengers and cool messages and cool values and cool society do well, because there’s a cool environment for them that fits right. Barack Obama was a successful Cool candidate. Yes We Can was a perfectly cool message: it doesn’t really say anything, but helpfully leaves a gap for us to fill in however we’d like. That message fit perfectly on the cool format of mid-2000s mixed internet media, with Yes We Can as a cool, blank canvas. It’s an entirely different temperature from Make America Great Again. There’s no ambiguity there. We know exactly what Make America Great Again means. If you’re not sure, go listen to it spoken out loud, on talk radio. 

A good match between message and medium goes a long way; a bad match usually fizzles out fast. That’s why The Medium Is the Message - dominant cool media mean popular cool messages, which in the long run - averaged out over all their content - just means a cool temperature. Hot media mean hot messages, hot temperature, and hot consequences. It’s relatively rare for mismatches to thrive. 

There’s a possible exception here worth noting, which is Donald Trump’s Twitter account. It’s quite ironic, actually, that people think of Trump - a supernaturally hot entity who rides a hot political wave and a hot tide of resentment - as somehow this great master of Twitter, one of the coldest forms of mass media today. 

Here’s the thing: he’s not actually a good fit for Twitter. His tweets are a jarring spectacle, clashing badly with the way the medium normally works. Trump’s tweets only really work because he’s already president, and because the clash is part of the show. And even then, Twitter is not how Trump actually talks to his base or flexes populist power. He did not rise to the presidency because of Twitter. 

You want to know where he sounds positively presidential? On the radio. 

Trump sounds incredible on the radio. 

Come back next week for part 2: when you put headphones on everybody, and put a hot, private channel in everyone’s pocket all day, should we be surprised that things seem to be heating up?

In other news and notes this week, in Scarcity in the Software Century we got to a nice recap point where we can look at how everything fits together in context so far: 

Over the rest of the book, we’ll be using this template an awful lot, as we fill in what’s been happening with software, the internet, and the modern innovation economy. If you haven’t already, you can sign up at for weekly-ish chapters and discussion forums. 

Also, don’t miss today’s bonus issue: a very special interview with Brent Beshore, coming to your inbox just a few minutes after this one. You can find a perma-link to the interview here:

An interview with Brent Beshore | 

Here’s an interesting head-scratcher:

Combining probability forecasts: 60% + 60% = 60%, but "Likely" + "Likely" = "Very Likely" | Mislavsky & Gaertig

What's going on here is simple but interesting. When we give a probability forecast for something (e.g. "How likely is it that Trump will get reelected?"), we usually see answers fall into one of two categories: either numeric / quantitative ("60%") or verbal / qualitative ("Likely”). A lot of the time, we have to rely on more than one probability forecast - we make up our mind by integrating several different sources of information and then deciding for ourselves what to conclude. 

This paper asked something simple but important: do we combine probability forecasts differently if they're presented numerically versus verbally? Their answer was yes, in an interesting way:

When we hear multiple numeric predictions, we take a numeric average: if you hear "60%" and then next hear "65%", we integrate that into a combined probability assessment of ~63% or something. Makes sense.

But when we hear multiple verbal predictions, we do something else: we combine them in a way that's more additive. So if you hear "Likely" and then next hear "Likely", we mentally integrate that into a probability assessment of "Very Likely". (On the low end it works the same way: Unlikely + Unlikely = Very Unlikely.)

If you know anything about statistics, something very interesting has happened here. When we're presented with numerical forecasts, our brains default to a Fisher-ian worldview. It's a worldview that basically says, "I acknowledge that data is noisy, but that at least we're asking the right question." To a Fisherian, repeated confirmations of "60%" tell you: "Yeah, 60% is probably correct."

Whereas when we're given verbal forecasts, our brains become more Bayesian. Bayesians have a lot more faith in observational data, but less faith that the question being asked was correct in the first place. To a Bayesian, repeated confirmations of "Likely" tell you, "This is probably the right track. I'm becoming more confident in our understanding of the situation. Likely is upgraded to Very Likely."

An interesting side note about this is that it flies right in the face of celebrity statisticians like Nate Silver who are on these two quests to 1) get us to think more numerically, and 2) get us to think more like Bayesians. The two goals seem to be in opposition, it appears. 

Other reading from around the internet:

How America lost dinner | Amanda Mull, The Atlantic (A great piece hitting the same notes as mine a few months ago on Cooking as a Service)

Exec 101: first thirty days | Sriram Krishnan

The Ticket: One man’s descent into the underworld of sports ticket scalping | Travis Pilling, SB Nation

Fear and loathing on the blockchain: Liebowitz et al. versus iFinex (or: the Tether Trial) | Preston Byrne, The Block

Three Big Things: the most important forces shaping the world | Morgan Housel

Startup options are much better than they look (because you can leave) | Ben Kuhn

Have a great week,


Five Writing Tips

Two Truths and a Take, Bonus Episode: Season 1 Episode 25b

Hello everyone,

We have a bonus newsletter issue this week, by popular demand. I get asked pretty frequently for writing tips, and usually I don’t have anything useful to say except for the Pottery Teacher story (see tip #5). But not anymore: here’s a set of five writing tips you can put to work right now. Everyone writes differently, but hopefully these are useful for you. Enjoy!

Writing routines and beating publishing anxiety:

I don’t think you need to write every day. Some days your writing brain is off and that’s fine. But you need to ship something every week. Email newsletters are good for this because they’ll also help you build your own distribution, and services like Substack make it trivially easy to set up and manage. 

If you’re nervous about sending fresh writing in an email newsletter to an audience whose opinion you care about, here’s a trick I use. Every week, I write the essay that becomes the main section of my email newsletter and then the first place I publish it is on my own website. Hardly anyone ever goes to directly just to browse around; that’s not how distribution works. (You can write the essay of the decade, but if all you do is post it on your own blog, no one’s gonna read it.) 

You can use this to your advantage, though. When you post it to your blog, it becomes public to you. So you can cheat the initial feeling of being anxious that the writing isn’t good enough: post it, just to somewhere it won’t be read much. Then sleep on it, go back the next day and maybe you feel like editing it or proofing it again or something, and then copy paste it into your newsletter and then send it to your distribution. The cheating comes from breaking up the anxiety step into two parts that each feel a lot less significant on their own. 

Meanwhile, get a sense of what your writing's brand is. A brand is a promise, and a good brand is a promise kept. What does your audience, even if they are tiny, feel they’ve been promised from you? As you get a better understanding of what that brand is, you’ll get a quicker sense for when to hit publish and when to keep working. 

How to beat writer’s block:

Never start with a blank page. Start with anything. It could be an outline, it could be starting with quotes or excerpts from what other people have said about your topic or even an adjacent one. It could be “I want to make this point, and here’s why.” It could be “here are three people who I hope get something out of this, and why.” It doesn’t even have to be text: one trick I use pretty often is grabbing screenshots of tweets and throwing them into my Evernote doc. You can get rid of all of this later, although you may realize you want to keep it.

Why do this? Because it’s easier to write sentences 2, 3 and 4 of a paragraph you’ve already started than the opening sentence. And it’s easier to write pages 2, 3 and 4 of an essay when you’ve already written the first page. You use a different part of your brain when you’re in the middle of making a point versus when you’re trying to start one. 

By throwing in external stuff, like other people’s quotes or tweets, you can short circuit this to your advantage. Start with something, write the middle, then go back and delete that prompt if you feel you need to, and write your own. 

A related hint: if you find yourself stuck and you can’t find a way to move forward, try rearranging what you’ve already written. It’ll reset that point you were in the middle of making, and give you a fresh start at trying to re-complete your thought, but with different lead-in material. Sometimes that’s all it takes. Just copy the section you’re working on into a new page, rearrange a bunch of the sentences, maybe delete some of the useless ones (there’s always some). And before you know it, you’re back writing fluidly again. 

The magic word you should use more:

Want to learn one magic word that will immediately make year writing better? Meanwhile. Why? Most people, when they string thoughts and ideas together, rely on joining words like “so”, “then”, “therefore”, “however”, or “except”. There’s nothing wrong with them, but what they do is establish a chain of thinking that goes, “A, then B, then C, then D.” It’s linear. Even counterfactual joining words like “however”, “but”, “nevertheless”, even though they establish opposition, are still doing so in a one-track fashion.

Meanwhile does something else. It establishes parallel tracks of thought. A, therefore B. Meanwhile, C, yet D is a more powerful way to communicate complex ideas than one-track linear writing. When the punchline eventually comes, and those lines of thought collide into something interesting, you can make a better point than if you only had one track to work with. 

How to write faster and more authentically: 

Read your own writing. Read it all the time. Not just reading your outlines or drafts; that doesn’t count. I mean reading your finished writing product, not in order to edit but to absorb it. I spend at least an hour a week reading my own writing.

Why? If you want to write well, you need to read a lot, so that you can get fluent how good writing sounds and feels. So reading long-form writing from people who know what they’re doing is a must. You’ll absorb their logical and rhetorical tools, and their lyrical style; eventually, and probably without realizing it, you’ll incorporate it into your own writing. 

But why read yours? Because the most important writing style to master is your own. An hour spent reading your own writing will make every next thing you write maybe half a percent easier and half a percent faster. It won't feel like much at first, but it pays compound interest. Phrases and constructions will come more easily to you because you’ve read them before, in your own work. You don’t need to concentrate or critically analyze your old stuff. Let your subconscious do the work, it’ll do a better job anyway. 

In time, you’ll find that you’re writing faster, with less effort, and in a way that feels more authentic.

Just write more:

A pottery teacher has two students. On Monday he tells the first student: “Your job this week is to try to create one perfect pot. Spend as much time as you need. Make it perfect.” Then he tells the second student: “Your job this week is to make as many pots as possible. I don’t care if they’re nice. Crank ‘em out.” Then on Friday, he comes back. What does he find?

Not only has the second student produced hundreds more pots than the first student (who’s laboured over his one shot at glory); every single one of her pots is better. The way you learn how to make a perfect pot is by making a lot of pots. Period. 

Go make some pots. 

Permalink to this post is here: Five writing tips |

Disruption Theory is Real, but Wrong

Two Truths and a Take, Season 1 Episode 25

Dr. Clay Christensen, author of The Innovator’s Dilemma and inventor of Disruption Theory, is one of the rare people to be revered as a Business Prophet by both tech leaders and management consultants. The Innovator’s Dilemma is required reading in both camps. And an awful lot of smart people, who’ve really walked the walk, swear by his writings as foundational text for how the tech industry works. 

But there’s a problem. Christensen’s public predictions about tech companies, to be honest, have been real stinkers. He famously predicted that the iPhone would fail; everyone’s heard that one. But there’s also Uber, and MOOCs, and if we go back far enough, most of the companies in his own book. Perhaps most frustratingly, his most actionable advice – Job to be Done theory – has found better adoption in hired gun management consulting than it has in actual product development, or in actually disruptive businesses.

There’s something that needs be reconciled here. Disruption Theory describes something real, but it’s generating bad advice. 

It feels to me like there’s something interesting behind this, and no one has really articulated why. I took a stab several years ago about how Apple repeatedly escapes disruption, and Ben Thompson wrote a good piece on that subject a few years later. I believe what we wrote happens to be correct (“continually push expectations upwards, and never let customers become overserved”), but it’s a bit of an obvious platitude. I don’t think either of us cracked open the real mystery. 

Ben’s most well-known piece in this area, What Clayton Christensen Got Wrong, never inspired me all that much. “Consumers aren’t rational and they like nice things” doesn’t scratch the itch; to me it sort of cheapens the insight of the theory (which, I believe, ought to logically hold true everywhere, not just only for enterprise as opposed to consumer) and for a while I really struggled with how to untangle this.

After thinking about it for a long time, I have an idea of what’s happened.

 In today’s tech industry, Disruption Theory gets the process right, but it gets the resolution level wrong. It brilliantly describes a set of forces and incentives that really exist, which is why it resonates so much with people who’ve walked the walk.

But today, those forces are playing out on a level that’s different from how Christensen initially understood them. Today’s disruption isn’t a story of individual businesses disrupting incumbents, but rather of business ecosystems disrupting incumbents. The result is a framework that feels more relevant than ever, but that generates reliably incorrect advice. 

Let’s figure out how this happened. First of all, to really understand the Christensen, Inc mindset, we need to look at how disruption theory fits into what is really a three-part worldview:

The first Christensen Idea is Modularity Theory. Modularity theory starts with a familiar categorization of how all of the different components of a product or service interact with each other: predictable and independent (modular) versus proprietary and interdependent (integrated). Modularity theory predicts that as competitive environments mature, the initial performance and predictability advantage of integrated systems eventually lose ground to the cost and compatibility advantage of modular systems. 

The second one, which is the famous one and came first chronologically, is Disruption Theory. Disruption Theory explains a process through which incumbents who do “all the right things” get unseated by upstarts anyway. Incumbent businesses (who often sell integrated products that command high profit margins, and prioritize “sustaining innovations” that increase performance) periodically come under competitive pressure from new entrants at the lower end of the market. These new competitors often use cheaper, modular, good-enough technology that can pick off undemanding customers who are overserved by the high performance and high cost of incumbents. 

The Innovator’s Dilemma goes through three case studies of disruption: steel mills, construction equipment, and disk drives. In each case, a certain critical mass of customers inevitably become “overserved” by the high-end performance that incumbent solutions offer. The first important part of the theory is understanding these customers, for whom the delta in performance between a high-end integrated solution and a lower-end modular solution is unnecessary. They become good prospective customers for new entrants.

The second important part of the theory is its explanation for how incumbents respond to this kind of threat. Christensen explains how the rational business decision for incumbents is to retreat upmarket rather than compete head-on against these disruptors, because entering into a low-end competition undermines their own business model. This could be for a variety of reasons. Management could feel that their integrated product, and the high quality, brand, and high margins it bestows, is too important to compromise. It could also be that the business’s cost structure or debt structure does not allow them to compete on price. Either way, the hallmark of disruption is seeing incumbents have “allergic reactions” to this new form of competition. 

The third idea, which is the one that offers the most actual advice, is Jobs-to-be-Done Theory. JTBD theory is really a mindset exercise for how to step into your customer’s shoes and understand what elements of performance they actually care about in a product, versus which elements they don’t. 

The classic story that gets told here is the Milkshake Story. Christensen’s group was hired by a fast food chain who wanted to sell more milkshakes, and wanted to better understand their competitive standing compared to other desserts like ice cream. When they were surprised to learn how many milkshakes were sold between 7 and 9 AM, the group realized that customers were hiring milkshakes for a different job than they’d previously believed: the job wasn’t “reward me at the end of a hard day”, like a dessert, but rather “keep me fed and happy during my boring morning commute.” 

The moral of the milkshake story, which is broad but correct, is basically “know your customers”: they may care about your product and its features for a different reason than you assumed. In this case, the most underrated product features of morning commute milkshakes had been their portability and thick texture, since they were being consumed in cars over long drives. In the Christensen worldview, the key lies in understanding the JTBD of overserved and restless customers: people currently buying a product they can’t take full advantage of, and who are both less demanding but also more willing to switch to a new entrant. 

At the intersection of the three theories, you find the core of the Christensen worldview, which is a theory of customer choice. It basically goes:
“Consumers know what jobs they want done, and they’re going to hire products that get that job done as cheaply and effectively as possible. High-end incumbents with integrated products often fail to recognize or are unable to respond to the threat posed by lower-end, modular competitors who can solve users’ needs. 

The solution is to step into your customers’ shoes, and understand their JTBD as your guiding lighthouse for navigating your product’s purpose amongst the competition. If you are a disruptive business, then you compete on cost and modularity, and you win by replicating the JTBD of overserved customers. If you are a sustaining business that competes on performance, then the incumbent wins.”

How applicable is all of this? Clearly, disruption – as more or less originally described by Christensen – is happening in the big picture. Technological eras and big disruption narratives are defined, in big terms, by overserved and opportunistic customers shifting to new platforms and offerings while incumbents are paralyzed from responding by their own business models:

  • Expensive, integrated IBM mainframe computing systems were disrupted by modular PCs running inexpensive microprocessors (Although IBM famously built their own PC in a completely separate location, a notable validation of The Innovator’s Dilemma)

  • Expensive, integrated IBM mainframe servers were disrupted by Unix on Sun boxes, and then Linux on x86 racks

  • Expensive on-premise IT departments are getting disrupted by cloud computing and web-based software-as-a-service

  • Expensive PC fleets in controlled environments are getting disrupted by bring-your-own mobile devices and App stores

  • Expensive publishers, distributors and gatekeepers are getting disrupted by aggregators and plug-and-play direct-to-consumer platforms

  • Expensive, integrated car ownership is (one day, probably) getting disrupted by modular transportation-as-a-service

These are big shifts, and they are genuinely disruptive: incumbents are paralyzed from responding by their own business model, which requires them to sell customers something they no longer (or perhaps never) needed. The incumbents look like classic disruptees. The problem is that fewer and fewer of the newcomers look like classic disruptors. Upstarts are competing on performance and going after high-end customers, which isn’t at all what disruptors are supposed to be doing. 

Instead, we’re seeing ecosystems of many different products and businesses, many of which in isolation look like integrated businesses or a sustaining innovations and compete on high-end, quality user experience. But as they do so, they create an ecosystem of technology that undermines and eventually disrupts the integrated, single-purpose legacy systems that preceded them. 

Let’s look at one example of an industry that’s been disrupted by the smartphone ecosystem: the consumer electronics industry. Digital cameras, video recorders, and other kinds of multimedia equipment were fairly integrated, relatively costly, and competed largely on performance. (Remember the megapixel wars?) 

Now consider how they’ve been upended by the combination of mobile phones with cameras on them, and apps like Instagram that do something with the camera. Neither the iPhone nor Instagram are pursuing disruptive product strategies. They obsess over user experience, and started with the most demanding customers in their markets. 

Nor do they do the same kinds of jobs to be done as the handheld electronics they replace. The smartphone’s job is “An interface on the whole world, in your pocket” and Instagram’s job is “Find out what your friends are up to, share and signal status”; neither of those compete directly in a JTBD sense with the integrated electronics that came before them. If they had, Apple would look like Sony, Instagram would look like Flickr, and neither would be worth hundreds of billions of dollars. 

But the combination of the two was hugely disruptive. They compete with a technological and cost advantage that gives traditional electronics vendors no way to respond other than by retreating to the high end, like DSLR and 4K cameras (which still sell). The combination of the two is also quite modular: iPhones can be swapped out for Android phones, Instagram can be swapped out for Youtube, Vine, Snapchat, or TikTok, and they all work together predictably. The outcome is disruption, even though no individual participant’s playbook is. 

Here’s another example: the taxi, limo and rental car industries, who for many years competed with one another in a relatively stable arrangement. But then we started to see some apps, most notably UberCab, who started as what I’m sure anyone would call a sustaining innovation: a way to hail black cars faster. On its own, that’s not disruptive. 

But when you pair it with mobile connectivity via smartphones and democratized navigation superpowers via Google Maps (also, not really a disruptive product in isolation), you create space for this new, modular ride-hailing ecosystem (swap out Uber for Lyft, iPhones for Androids, one driver and car for another) that created something actually disruptive: UberX, a labor platform against which incumbents can only really compete via regulatory appeal or by retreating upmarket. The taxi business won’t compete in the broader labor market for willing drivers, and rental companies don’t want to compete against cars people already own; the incumbents have all the right allergic reactions you expect. Disruptive outcome, but made out of high-performance, “sustaining” parts. 

Compared to the legacy systems that preceded them, this is modular competition! The tech community is continually reshuffling itself, finding new combinations of apps, endpoints and real-world assets that serve users in new, creative ways to remove friction and bypass incumbent cost structures. The whole mobile ecosystem, starting with the most demanding customers, is clearing space for new business models and product offerings in a way that incumbents have a hard time responding to. It’s disruption, except the disruptors don’t look like disruptors. 

That’s key to the mystery: the ecosystem as a whole may be disruptive, but any given piece of this ecosystem does not really want to compete on price or plug-and-play modularity at the low end. They want to deliver the best experience possible, not compete on cost! They want the best users, not the lousy ones! 

This may be part of the riddle as to why sometimes disruption seems to “spread from above”: because the conditions for disruption appear when some critical mass of new tech companies get adopted by early users, and most of the time, those are going to be the rich power users who make for great customers. But once you have a critical mass of mobile ecosystem, there’s enough capacity to do actual in there for customers to start abandoning legacy solutions. 

Christensen devotees might at this point protest, and argue that these companies represent “New Market Disruption”. In retrospect that’s what they were, but in practice that’s not what they looked like. They looked like sustaining innovations! The iPhone was famously lambasted by Christensen as a sustaining innovation on the cell phone. Uber was criticized as a sustaining innovation on livery cars. Almost everything starts out as a derivative of something else that already exists, addressing a market that already exists in some form. If Disruption Theory can only recognize New Market Disruption in retrospect, then it’s not that useful.

The thing is, just to repeat this again, Disruption Theory is doing a great job of explaining the forces and incentives that exist at the level of the ecosystem. So it rings true, as it should. The issue is that it’s explaining a kind of gameplay that’s carried out at one level of abstraction higher than what the product and growth people at disruptive tech companies actually care about, or what early-stage investors can measure and finance. So the advice that it spits out feels as though it should be true, but ends up being paradoxically backwards. Now we can understand why.

By the way, the Innovator’s Dilemma isn’t the only example of a well-loved tech theory that gets a process right, but the abstraction level wrong. The Lean Startup is another one. The Lean Startup described a worldview about innovation that preached, “We don’t know what works, we have to try everything, so run lots of little experiments and iterate on your position rapidly in order to figure out how we ought to build the future.” That feels right, and it is right, except it’s right on the level of the startup community as a whole; not on the level of any given company. 

The innovation economy works because it’s full of startups, each of which represents a low-cost experiment seeking validation. However, if you are one of those experiments, your best shot at succeeding isn’t to surf around and do a lot of low-commitment experiments and try to iterate towards an idea that works – it’s to obsessively pursue a vision of the future, use every possible tool available to you to build it, and not quit until you’ve changed the world or your business has died trying. The ecosystem collectively benefits by being lean, but any given participant shouldn’t strive to be. 

It’s a similar story going on with Disruption Theory, I think. Disruption is happening, and the tech industry is having a dynamic and revolutionary impact on industries around the world for precisely the reasons that Christensen articulates in his work. But the units of resolution aren’t right; maybe not everywhere, but that certainly feels to be the case in today’s tech world. 

Here’s something interesting everyone freaked out about this week: this slide, supposedly (I’m taking this tweet at its word here) an official diagram of how the Softbank Vision Fund structure works. 

As a reminder, the gargantuan (for tech, anyway) Softbank Vision Fund now looks like it’s in real trouble now that WeWork could go to zero, Uber is underwater, and a lot of its other investments aren’t performing all that well. (There’s also an interesting side complication in that some of Softbank’s companies own shares in each other: Didi Chuxing, the Chinese ride hailing company, owns a lot of shares of Uber.)

The issue for the fund is that 40% of the money is debt, and it pays a 7% coupon every year. So SVF has gotta come up with a good chunk of change, around $28 million dollars a year I think, to pay its debt in cash each year. If things had gone well, that leverage would’ve been great for their returns. But now that things are going bad, there’s a real question as to how SVF is going to pay those coupons. Are they going to be forced sellers of stock in their companies, at a really bad moment in the market for that?

But the question seems to be answered by that footnote highlighted in yellow: Softbank can pay its debt by simply calling more capital from the fund, paying investors back their own money as interest payments. At first glance, this seems Ponzi-like; at best, it’s going to be grim for fund performance, since it sets the clock ticking on the internal rate of return that this capital, now summoned from its masters, must go earn out in the world. Except the return on this capital is guaranteed to be zero (it got spent on interest payments), putting more pressure on the rest of the fund to somehow pull off a miracle. 

But here’s the thing. Would you rather they not have this option? Yes, the optics are bad: no one really wants in-kind interest payments when you’re in the gutter, and to force LPs to this contractual obligation (when I’m sure this isn’t how they imagined the fund going) seems a bit destructive. But surely, I must grudgingly admit, it beats the alternative for everybody involved to at least have this option available. I dunno if they have to call it, but it probably gives them a bit more maneuverability to navigate through this mess, and at the end of the day that’s good for their LPs. 

Logic, Fast and Slow: the persistent difficulty of the Monty Hall problem | Jay Kosegarten & Gary Kose

Mark Zuckerberg misunderstands why TikTok is such a threat | Josh Constine, TechCrunch

A while back in this newsletter I wrote about how the Lightning Network being developed on top of Bitcoin was really neat; turns out it’s also a really vulnerable attack service! I may have to go back and write a mea culpa over this one:

Hijacking routes in payment channel networks: a predictability tradeoff | Saar Tochner & Aviv Zohar

On the other hand, I’ve been pretty vocal for a while that Ethereum and DAI are overambitious security disasters-in-waiting and, well, yeah:

MakerDAO bug could’ve let hackers steal Ethereum powering its DAI stable coin | David Canellis, The Next Web

If you haven’t read the full transcript of the leaked Facebook all-hands, it’s pretty neat, and honestly comes across as making Facebook look… okay? Like, if you’ve already made up your mind that Facebook is bad and they should be broken up, then this isn’t going to change your mind, it’s probably going to make you more mad. But I think for everybody else this is a pretty reasonable thing to come out and it honestly makes me wonder a little bit if it was a planted leak. 

Read the full transcript of Mark Zuckerberg’s leaked internal Facebook meetings | Casey Newton, The Verge

And finally, just for fun:

What do guys keep in their backpacks? | Kelly Conaboy, The Cut

Have a great week,


Netflix, Positional Scarcity and the Red Queen's Race

Two Truths and a Take, Episode 24

My weekly newsletter, formerly known as Snippets, has a new name! For news on the name-change, the newsletter brand, and a few other important items, head here if you haven’t seen it already.

If Netflix is a genius aggregator with all the subscribers, the best data, and the most focus on long-term compounding… then what’s the deal with this ransom payment they just made?

Today we’re going to talk about why even Netflix, a poster child of doing things right in the new internet economy, can’t escape positional scarcity and its cruel cousin, the Red Queen’s Race. 

I’ve written about the phenomenon of abundance a bunch recently, including recent posts on gaming and cooking-as-a-service, because it’s one of my favourite topics that’s central to everything we do in tech and yet gets oddly little direct attention. 

Most of the time when we talk about abundance, it’s assumed we’re talking about abundance of supply: some resource, product or service going from scarce to plentiful. But I’ve always believed that you get more insight out of treating abundance as a demand-side phenomenon: something that comes first, and foremost, from consumer behaviour

What really gets abundance flywheels going is when consumer demand – specifically demand for more variety than can be produced by traditional producers – pulls production into getting “platformized”. When we look back at how technological abundance progresses, we often get really fixated on the emergence as new production platforms while forgetting why we wanted them in the first place – not demand for quantity or performance, but really demand for more variety.

The signature behaviour that spurs on abundance is browsing. Consumers flipping through a Sears Roebuck catalog in the late 1800s, or surfing Netscape Navigator or the App Store a century later, are all engaging in the same thing: demanding a kind of specificity, variety, and low-commitment shopping that fuel demand for general-purpose production and distribution platforms. As platforms grow, they make this kind of frictionless consumption easier, spinning the abundance flywheel more. Variety, not volume, is what really fuels the abundance cycle. 

The recent rise of Streaming Video On Demand (Netflix, Hulu, Disney+, Prime Video; generally “SVOD”) as the latest form factor for mass video consumption illustrates a few of these principles. When the internet ushered in this new friction-free way to consume video, the change in our behaviour wasn’t striking in that we consumed more video (we were already watching plenty of TV) but rather the increased ease through which we could watch a variety of video, and find exactly what we want, whenever we want it. 

One of the big questions for SVOD, accordingly, is how content producers and owners are going to adapt to this new era of low friction and easy access to variety. You can imagine a basic abundance cycle for streaming video looking something like this:

This brings us to Netflix. All of their hard work and execution to date has put Netflix in an enviable position: a frontrunner in the race to remake TV and movies. Netflix’s early success, both in mail-order DVDs and then in streaming video, came by putting a new distribution model on existing content that it rented on the cheap from legacy media companies who didn’t yet understand the new playing field. As a temporary business model it worked great, but now the free ride is over. Goodbye cents-on-the-dollar deals for hit shows; hello having to bid for content against deep-pocketed SVOD challengers, many of whom own huge back catalogs that they now understand how to use. 

But even without these sweetheart content deals, Netflix still has a path to long-term dominance. They have three valuable things: 1) a lot of subscribers, 2) the ability to access lots of capital, and 3) a lot of “ground truth” viewing data for how to put that capital to work.

Netflix’s opportunity is to ride the abundance flywheel before everyone else, building a moat out of variety along the way. That means a mountain of original content and smart acquisitions that it can lock up for the long run, cultivating a long tail of everything-under-the-sun that no one else can match.  The high fixed costs of producing original content pay off as zero-marginal cost streaming goods that Netflix can offer forever. And now that Netflix has successfully aggregated all of us as viewers, it ought to know how to spend that money in a way that handily out-earns their cost of capital in the long run.

But the folks at Netflix have run the numbers and concluded that it’s more important for them to rent Seinfeld for five years – after which they’ll be left with nothing – than to develop 600 million dollars worth of new shows and movies that they get to own forever. 


Remember when we talked the other day about how in environments of abundance, your relative position in line becomes increasingly important? That’s exactly what’s happening here. Netflix has likely read the room and concluded that most consumers are probably going to pay for 2 or 3 streaming services and no more. So Netflix’s place in line in customer preference relative to Disney+, Hulu, HBO Max, Prime Video, Apple TV+, Peacock, etc is the most important thing for them to secure right now.

Unfortunately for Netflix, the breadth and variety that used to define Netflix’s signature value proposition as the “abundant streaming service” isn’t a differentiator anymore. It’s turned into table stakes in the battle for eyeballs; everybody has a mountain of content to bring to the table.

So Netflix has to find something that is a differentiator: one of the few superstar TV shows with enough brand power to headline Netflix’s roster, and attract and retain subscriptions on its muscle alone. Friends is one of those TV shows. The Office is one of those TV shows. Netflix had them, but it lost them both. So they had no choice but to go find a new one. 

Netflix coughing up $120 million a year for Seinfeld is a great example of something called Wholesale Transfer Pricing Power. Normally, we expect that whoever owns the customer relationship is going to have pricing power over those who don’t. But there’s an important exception, which is when the producer has a strong enough brand or a scarce enough product to overpower the distributor and set their own price. Publishers have leverage over most of the authors they carry, but not over J.K. Rowling. She can set any price she wants. 

Wholesale Transfer Pricing Power becomes especially important in environments of abundance and emerging positional scarcity. If many different aggregator consumer companies are all racing each other for make-or-break market share, and if you need an ace in your hand today, you’ll have to pay for it at the expense of your ability to develop and own future hit shows. But an ace in the hand beats four in the deck, so you go get Seinfeld. 

The cruel thing about an environment of abundance is that the more cards there are in the deck, the more the aces matter. In the old days of scarce linear TV programming, it mattered who had the hit shows. As Netflix introduced a new form of abundant on-demand consumption, they found a new element of performance where they could excel: their variety was what counted in attracting consumer eyeballs. “Browse our massive selection, any time” was a great value proposition for starting the abundance flywheel and growing the market. 

But now that on-demand variety is table stakes, the hit TV shows matter again, even more than they did before. The fate of these streaming services is going to come down to whether they’re able to grab a coveted spot in the top 2-3 positions. It used to be that a marquee show like Seinfeld had to carry a network through a prime time spot; now the success of the entire catalog is resting on how many families are going to go with the streaming service with Seinfeld versus the one with Marvel. 

Unfortunately for Netflix, raiding their original content budget in order to rent Seinfeld for five years is a bit like a University starving their academic faculty in order to buy the football team a few more wins. In terms of jacking up your relative ranking in the present, it does work. But mortgaging your long-term capability to create future hits (that you actually own) means leaving yourself dependent on paying ransom for each year’s big free agent show – eventually, it becomes the only working lever you have. 

It gets worse when you remember that the switching costs between one SVOD service and another aren’t that high. Netflix has good customer retention so far, but it hasn’t really been challenged yet. When enough customers get into a “what have you done for me lately” mindset, SVOD providers will find they have to continually re-acquire their own customers in order to keep their heads above water. That means landing the rights to whatever marquee show is available in free agency, at whatever the price – because so much is riding on having a good name as your headliner. 

What’s happening is a kind of Red Queen’s Race: a cruel form of competition where the harder you try to outrun your competitors, the faster the treadmill adjusts underneath you. Over time no one accumulates any advantage, but everyone accumulates cost. Warren Buffett once described the phenomenon as like spectators watching a parade. When one person stands on their toes, they temporarily gain an advantage. But then other people copy them, and soon everyone is stuck standing on their toes. Every spectator is now worse off than if no one had ever made the first move; but someone always will. 

There are examples of the Red Queen’s Race everywhere you look in tech. Some of them are explicitly positional scarcity: when you need to line up to access your customers, and you have to pay tax to whoever runs the line. That’s like Google and Facebook making a killing off of the boom in startup VC funding: they can simply force all the startups to bid against each other for ads, and sell more and more of their equity in order for their paid acquisition to work. 

The kind of positional scarcity we see in SVOD is a little subtler, but it’s still the same thing. The “standing-on-your-toes” cost that gets higher every year isn’t paying rent to one gatekeeper, like it is for Google, but something more like free agency in sports. In any given pro sports league, the higher the level of average competition and the tighter the difference in skill and execution becomes between teams, the higher a ransom payment you’re going to have to make for those select few people who can generate a few extra wins on their own star power.

Contracts like Bryce Harper’s $300 million deal with Philadelphia are like the Seinfeld deal: the return on your investment almost surely gets worse on average as you pursue elite free agents, but you don’t have a choice. What matters is: can you make it into the postseason? If you can clear that threshold, the economic calculus completely resets; you probably make your money back. If not, you probably don’t.

At the end of the day the number one thing that matters for Netflix and Disney+ and all the other SVOD services is making it to the playoffs: the top 2-3 slots in consumer preference ranking for SVOD. Are you in, or are you out?

Competing on variety and homegrown content, like Netflix has done so successfully in their ascendance, was a great thing for kickstarting the abundance ecosystem and growing the whole market: every dollar spent actually meant better product and happier customers. But your place in line, at the end of the day, is a zero-sum competition. And in zero-sum competitions, the way you win is by getting zero-sum items.

Would the Phillies be in better shape as an organization long-term if they’d spend that $300 million (or even a quarter of that!) on their scouting and minor-league programs, homegrown talent development, coaching and analytics? Look, I’m not a baseball GM, but probably. Does that get you into the playoffs this year, though? Nope. Does it sell tickets this year? Nope. So you sign him.

Similarly, this treadmill of escalating headliner payments makes SVOD offerings a worse product for consumers than they could be. That $600 million could have gone into making more smash hits like Stranger Things and niche gems like Russian Doll that viewers love and Netflix can own forever. More importantly, that $600 million would have gone into an even bigger fight where everyone in SVOD stands to lose: the battle for overall time and attention that they’re losing to YouTube, Instagram and Fortnite. 

But instead, it’s going to these guys:

Now, all of this sounds as if it’s a bearish sign for Netflix. But here’s the thing: this kind of Red Queen’s Race punishes everybody in SVOD. And seeing as Netflix is in the pole position, it may not mind having to sweat it out.

The funny thing about the position where Netflix is in is: since it’s currently in the SVOD lead, they paradoxically want as many competitors and as hard a competition in SVOD as possible. The Red Queen punishes everybody. The worst thing for Netflix right now would be two or three really fearsome competitors and no one else. But instead, they’re going to face off with like, eight to ten different services, all of whom are going to have to bid each other up on kingmaker content in order to get their feet in the door.

The more intense the competition for premium content heats up, and the higher the ransom payments get for renting Seinfeld or Friends for a few years, the more punishing the curve will get between winning and losing in SVOD. It helps resolve winners, but it also comes at the expense of creating anything new with that money. $600 million dollars could’ve funded a lot of great new stuff, sadly.

Competition is weird sometimes. We’re usually supposed to assume that more competition is better for the consumer in general; I mean, what could go wrong with companies having to compete against each other over who can offer the best product? But in this particular Red Queen’s Race situation, and in others like it, we have a funny outcome: more competition in SVOD means Netflix becomes a worse product than it could be, but builds a stronger moat and a better business than perhaps it deserves. Sometimes abundance flips things around like that.

For any sports fans, investors, or anyone trying to gain an edge under uncertain conditions, this is a great piece:

Daryl Morey and Jeff Luhnow, the renegade executives of Houston who shook up sports management | Ben Cohen & Jared Diamond, WSJ

I especially enjoyed this bit, where Morey articulates a pretty obvious but often ignored distinction: between trying to build a data edge that’s relative to your competitors, versus pursuing more data in an absolute sense, period. We often think we’re doing the first one but actually doing the second. 

You may have heard that Google’s quantum computing team supposedly reached something called “Quantum Supremacy” recently. It’s a scary-sounding name, and to be honest it’s a bit of a scary topic: does that mean that “no code is uncrackable now”, as Andrew Yang tweeted out? Or is it a giant nothing burger? Here’s a very helpful FAQ from one of the few people who truly knows what they’re talking about here, Scott Aaronson, that I found valuable:

Scott’s Supreme Quantum Supremacy FAQ | Scott Aaronson

Here’s a good thread on Blue Apron’s unit economics not working out:

What happened to Blue Apron and what can we learn? | Adam Keesling

Did you know: the critically acclaimed genius show Fleabag and its creator Phoebe Waller-Bridge recently took home a bunch of Emmys the other day, before announcing a new huge deal between her and Amazon’s film studio. Here’s something I didn’t know: Fleabag started as a Kickstarter! It raised around $5000 to help start Waller-Bridge’s one-woman show in Edinburgh. 

Oh and finally, a huge thank you and high five to everyone who emailed me tweets and articles and other hilarious examples of people in tech working overtime to make sure we all understand that WeWork isn’t a Silicon Valley company, okay? They’re From New York! We have nothing to do with this and we’ve always thought this was a scam, actually! You’re all the greatest. 

Have a great start to fall, 


Loading more posts…