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.
- It's our job 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 its 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 a simple page; nothing fancy.
People forget, but they didn't pivot to mobile unitl right before their 2012 IPO.
As Vox correctly notes. 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, its mobile app sucked. The majority of their effort was geared towards making a great desktop experience.
But in early 2012, Zuckerberg switched their entire strategy from desktop to mobile. Everything Facebook did going forward was mobile first.
And although they had a mobile app at the time of their IPO, they derived zero revenue from it.
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.
Did you catch the last sentence?☝ They believed, back in 2012, that people would increasingly access Facebook on mobile devices, instead of desktops.
So let’s follow the breadcrumbs… Advertisers follow eyeballs👉 Eyeballs are moving from desktop to mobile👉 Currently, all of Facebook’s revenue is from desktop ads👉 If Facebook believes in the shift to mobile, they’re probably going to build an ad product for mobile, right?
So, if you were a potential investor in Facebook and read their S-1, you could say two things.
- At the time of its IPO, its biggest product (revenue wise) was desktop ads.
- They believe mobile will increasingly steal eyeballs from its desktop product.
Knowing these two things, some sensible follow-up questions could be:
- If they improve their mobile app, would consumers prefer it, over the desktop?
- Could mobile potentially drive larger ad revenues than desktop?
- Could it be their NEW Apex Mountain?
Now, it’s easy to say: “It was right there, how could anyone not see the shift to mobile?”
After all, there were no numbers that proved the shift to mobile would work. Those came later.
But the clues were there…
Will crypto be Facebook's third apex?
We can say this about Facebook:
- Its 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? Its new Apex Mountain; the burst they need to break $1 trillion in market cap? Or a complete bust?
We don't have the numbers to say one way or the other. But what's their ceiling if crypto turns out to be bigger than mobile?
Just something to chew on...
The "Why Now" Question and Netflix's First Apex
"Why now" is a question VCs ask startups about why the company they are trying to build makes NOW.
In other words, what trends in the macro environment will provide a tailwind to what you are building?
A good example is Netflix ($NFLX). Netflix did away with late-fees, and solved other frustrations customers had with traditional video stores. But they also started during an 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. But in three short years, that figure jumped to 65%.
The DVD was the fastest growing consumer technology in history. And 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 streaming, 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.
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 at 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 its 2005 annual report, they noted two hurdles preventing mass adoption of streaming video over the internet.
- The technical challenge of delivering video 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. Its 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 today.
- This company says they are doing this. How realistic are its intentions?
- What is the macro environment they are operating in?
- What are the barriers 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?
If you like history and technology, I encourage you to grab a copy.