This article does a lot of looking back. And it's easy to say all of this was obvious in hindsight.
- In every annual report, companies state their future intentions (i.e. their future business plans).
- It's our job as investors to assign a likelihood to those intentions. And figure out, one, if they are realistic. And two, if they are realistic, why this company — and not their competitors — is in the best position to execute on those intentions.
💡The Light Bulb Moment
I first heard the term "Apex Mountain" from the Rewatchables; a Ringer podcast. The podcast does deep dives on movies they deem "rewatchable."
You know, those movies that suck you in when you're flipping through channels.
They break up the podcast into diferrent categories. Like most rewatchable scene, what's aged the best, and is this an actor or director's Apex Mountain? Meaning, is this their best work, the peak of their powers?
For example: Is Vince Vaughn's Apex Mountain Old School or Wedding Crashers? I lean Wedding Crashers, but many would say Old School, or even Swingers.
It got me thinking...
How could we apply the Apex Mountain frameworking to investing?
Most companies, whether young or mature, probably had one product that got them to where they are today. But will that same product lead their next leg up in market cap? Will it remain their Apex Mountain?
Facebook's Near Miss
Facebook's first product was desktop based. It was just a simple page; nothing fancy.
People forget, but they didn't pivot to mobile unitl right before their 2012 IPO.
As Vox correctly note. They almost missed it.
From the article:
Facebook had mobile apps for the iPhones and Android phones, but they were built using the technology known as HTML5 — a relatively new software language good for building web pages but not for building apps native to IOS and Android devices.
Facebook had universalized it's code, using the same technology for all of its services instead of building apps specifically designed for each operating system. As a result, the apps were buggy, slow, and prone to crashes.
In other words, their mobile app sucked. The majority of their effort was geared towards making a great desktop experience.
But in early 2012 (the IPO'd in May 2012), Zuckerberg switched their entire strategy from desktop to mobile. Everything Facebook did going forward was mobile first.
Although they had mobile apps at the time of their IPO, they derived zero revenue from them.
From their 2012 S-1 (p.46). Emphasis mine:
We do not currently display ads to users who access Facebook via mobile apps and our mobile websites. To the extent that increasing usage of Facebook through mobile apps or our mobile website substitutes for the use of Facebook through personal computers where we do show ads, the number of ads we deliver to users and our revenue may be negatively affected unless and until we include ads or sponsored stories on our mobile apps and mobile website.
We believe that people around the world will continue to increase their use of Facebook from mobile devices, and that some of this mobile usage has been and will continue to be a substitute for use of Facebook through personal computers.
Will crypto be Facebook's third Apex?
We can say this about Facebook:
- Their desktop product brought them from a college dorm room through their IPO.
- And their pivot to mobile provided the fuel that made them a top ten company.
What will their experiment with crypto turn out to be? Their new Apex Mountain; the burst they need to break $1 trillion in market cap? Or a complete bust?
We don't have the numbers to say one way fr the other. But what's their ceiling if crypto turns out to be bigger than mobile?
Just something to chew on...
The "Why Now" Question and Netflix's First Apex
"Why now" is a common question VCs ask young upstarts about the company they are trying to build makes NOW.
In other words, what trends in the macro environment will provide a tailwind to what you are trying to do?
A good example is Netflix ($NFLX). We know that Netflix did away with late-fees, and solved other frustrations customers had with traditional video stores.
But they also started during a very opportune time — the secular shift from VHS to DVD. In other words, they had a strong tailwind behind them.
Netflix launched in April, 1998. At launch, Netflix only had 500 titles to choose from. Why? That was nearly all the DVDs in existence at the time.
In 1999, only 5% of households owned a DVD player. In three short years, that figure jumped to 65%.
The DVD was the fastest growing consumer technology in history. During that time, Netflix exploded.
The shift from DVDs, and the incumbents unwillingness to embrace online video rentals, helped Netflix get far enough that they IPO'd in 2002.
However, it's what happened next that pushed them over the top.
The pivot to streaming: Netflix's second apex
From 1996 to 2001, telecom companies raised $1.6 trillion from Wall Street and proceeded to jam 80 million miles of fiber optic cable throughout the United States.*
It was this cable that laid the groundwork, for not only Netflix's shift to streraming, but the modern internet we know today.
Netflix's first breakout hit was House of Cards in 2013. But they were thinking about the shift from DVDs to streaming back in 2004.
From their 2004 annual report:
In addition, we plan to launch Internet delivery of movies in 2005. Our long-term strategy has always been to seize leadership of that new market by building a large subscriber base and offering those subscribers the choice of mail or Internet delivery.
In every annual report onward, Netflix became more aggressive when describing their future plans for streaming.
FYI: From when they first mentioned streaming in their 2004 annual report, up until February 2010, you could buy their stock for under $10 bucks.
Like we said from the beginning. Everything is obvious in hindsight😉
For six years in a row, Netflix mentioned that consumers preferred getting movies and T.V. shows instantly. In fact, in their 2005 annual report, Netflix noted two hurdles that needed to clear before mass adoption of internet streaming would be realistic.
- The technical challenge of delivering movies over the internet.
- The need for more engaging content.
- What's their ceiling if both problems get solved?
- Does streaming have a chance to become their new Apex Mountain?
The answer wasn't obvious at the time. But eventually, both problems were solved.
First, bandwidth increased. Which allowed for videos to be streamed over the internet at ever increasing speeds.
In addition, traditional cable and satellite T.V. companies were caught flat-footed by the shift to OTT (over-the-top). And in the coming decade, lost millions of subscribers.
In fact, the shift in consumer behavior was so drastic, that a new term was coined — "cord cutting."
Second, Netflix pushed into original content. Their first hit was House of Cards; which premiered in February 2013. One month prior, their stock broke above $20 dollars per share and never looked back. Today it sits at $340 per share.
Both of Netflix's products — first their DVD business, then their streaming business — coincided with technological breakthroughs and shifts in consumer behavior.
Some would say their timing was lucky...
Maybe so, but we would say they were aggressive. And took risks incumbents weren't willing to take. Because incumbents weren't willing to cannibalize their current cash cow (DVDs) in order to pursue a new, but risky, future (streaming).
Asking Better Questions
The point in re-visiting history is to help us form better questions that we can apply to today's potential investments.
- This company says they are doing this. How realistic are their intentions?
- What is the macro environment they are currently operating in, and might it change in a decade?
- What are the barriers to preventing change? What is the likelihood they are overcome?
- If they are overcome, who will benefit and capture the value that was previously locked?
- What is the "job-to-be-done" this company is solving for? What other companies are trying to solve this problem?
- If the new environment comes to pass, will this company be uniquely positioned to be a market leader and create a hard to replicate product or service? Whether through proprietary technology, network effects, economies of scale, branding, or some combination?
Thanks for reading, and have a great day!
If you like history and technology, I encourage you to grab a copy.