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On December 14, 2015, Cozean commented on Redbox – “Disruptor” Finally Disrupted :

Thanks for the reply, Tyler.

I think the reason investors were able to look past the declining physical DVD rental space for so long is that the company still generates a significant amount of cash flow – even on a per kiosk basis – that makes the company an interesting opportunity to get good value if you believe that they will continue to buyback shares, accruing that cash flow to equity holders. If you think back to the Kerr-McGee case, there’s a lot of value to believing that the company will not use that cash to try to invest in other, riskier businesses (e.g., its ecoATM business described in the post) and/or will not try to plug the revenue gap by investing in additional kiosks. With a misaligned business / operating model, they would be “lighting money on fire” as I like to say – the recent revenue revisions probably made investors think twice about how sustainable that cash flow will be.

On December 14, 2015, Cozean commented on Redbox – “Disruptor” Finally Disrupted :

We are 100% in agreement – if we were writing this TOM Challenge in 2007, I could make a very compelling argument that Redbox was actually a fantastic success story. To me, the lack of foresight to attempt some transition toward online content and to repair damaged studio relationships (per Adam’s comment above) was the beginning of a slow erosion of the core business that has just recently started to come to a head. Also, I don’t totally blame them – if I’m looking at great kiosk return on investment and white space for miles, not sure I would have been able to shift either.

On December 13, 2015, Cozean commented on Redbox – “Disruptor” Finally Disrupted :

Thanks for the reply, Adam.

Revenue contribution for those two sources is not easily broken out but I would contend neither are “solutions” to the fundamental operating model issue.

Late fees are not a recurring source of revenue and may accelerate customer departure away from the physical DVD rental model – similar to what happened with Blockbuster, et al. I did not talk much about it in the post but the one advantage they had for awhile was renting new releases “on-demand” just down the street. However, given rise of true “on-demand” services (e.g., Comcast, Apple, Amazon) that rent new releases with greater convenience than before, I fear that Redbox will continue to shed volume until it gets down to its absolute core customer (i.e., the person that is actually only concerned with paying $1 versus $5 regardless of hassle, convenience).

Game rentals were a natural extension given the physical infrastructure was already in place. I can’t confess to knowing that much here but seems like services like GameFly are the natural Netflix in this industry. Additionally, given the higher price point per unit and likely more unpredictable rental period, I would think that all the issues I described regarding DVDs would just be exacerbated here. That being said, it does stave off the declining volumes if you can add new revenue to the same fixed asset base; so maybe I’m not giving them enough credit.

I think you are spot on regarding the relationship with the content owners and could have put an entire other paragraph in regarding the contrasting choices made toward channel partners that Redbox and Netflix made. I do still think they could have gotten there if they had made the move earlier, as content providers probably wanted to diversify away from a Netflix streaming monopoly even if it meant Redbox. However, after new entrants had already emerged, there was no reason in 2012 to give Redbox the light of day. Purely conjecture – they may have never been able to get there.

On December 12, 2015, Cozean commented on Netflix: Revolutionizing Content Creation and Distribution :

Since I posted about current Redbox struggles, feels like I have to ask: do you think Netflix is reaching the point where it might shed its physical DVD distribution business? Looking at the revenue breakdown graph, looks like physical DVDs make up an increasingly small portion of the overall business and I would assume drops though at a lower margin given distribution facilities, shipping, DVD procurement, etc. Can see an argument to keep if “return on DVD” metric is high and the company does not expect to increase fixed cost expenditures, or if the company believes that there are significant retention synergies with the streaming business. Otherwise, seems like focusing growth capital expenditures on building international businesses and developing original content would offer the company a better long-term return. Just seems like they are running two different businesses now with different economic and operational idiosyncrasies.

On December 12, 2015, Cozean commented on SunEdison: Solar-As-A-Service & The YieldCo Model :

Great post, Jeff – had not fully understood their previous level of vertical integration; impressive how much value that symbiotic structure was able to create.

We were pitched on all sorts of solar development companies over the last two years and toward the end of my time, it really started to feel like a mini-version of the housing crisis. Folks were talking purely in terms of origination volume for residential and small-complex contracts and emphasizing that the next logical step was securitization of “subprime residential agreements”. Through the actions you described, it sounds like SunEdison might be setting itself up to be a power broker in that market – drawing parallels to the New Century Financial case, you have to wonder if it is trying to access growth in a way that may end up with runaway negative externalities; either way will be really interesting to see how it plays out.

On December 11, 2015, Cozean commented on Solazyme: Poised to revolutionize oil markets? :

Wow! Awesome technology – crazy what single-celled organisms can do with a bit of technological innovation.

I initially had similar concerns as Gaurie’s post (i.e., how long-lived is the IP, how defensible is business model without IP protection) but think the significant decrease in oil price may end up being a blessing in disguise long-term. While we don’t know the cash flow situation from the post, the video highlighted a significant number of supply agreements with high-quality off-takers. Assuming these were longer-term in nature, Solazyme may be able to ride out the demand response that its customers will have toward a lower-priced oil input.

If this is the case, there is a near-term opportunity to focus on process innovation, potentially buy up similar-type companies with sub-optimal capacity, and work on some of the longer-term R&D, all without the threat of significant new competition. Purely conjecture but will be interesting to see whether they put the accelerator down with the expectation they can ride out the downturn or if they turn toward a more “safe” cash conservation approach that won’t necessarily hinder but wouldn’t advance current market position.

Really interesting talent / transparency strategy – I wonder whether this business is the highest and greatest usage of such an internally / externally aligned organization?

Maybe I’m missing something about the business model but it feels like the automation of coordinated social networking communications could eventually either be a.) automated through a simple operating tool or b.) work better as one piece of functionality in a broader offering from a company servicing social media needs (e.g., SEM, consulants) that they could “toss in for free”.

Specifically on the transparency point: while this could be beneficial early on to develop trust, does it potentially hurt the ability to convert freem-ium users in the future (e.g., need to disclose targeted offers, volume discounts)? Maybe everyone having access to that will incent more loyal usage but could be complicated to manage as complexity / heterogeneity of customer base increases.

Which all leads me to the fundamental question: if you took this model – with 100% outsourced but high talent work force, along with “radical transparency” – what other issues could you go solve?

Sign me up!

As I sat back and thought through the network effects of how this business should scale, it seems pretty incredible. To the points already raised in the responses above, it doesn’t seem like rocket science (in terms of ability to duplicate) and really focused on individuals earlier in their investing time-frame (“set it and forget it”) at this point. However, in my mind both of these issues are mitigated through scale (which at >$2B AUM seems like you’re getting there). I could imagine a world where:

– Scale allows the *option* to purse asset classes not traditionally available to typical consumers (e.g., PE, VC) – probably truly sets you apart from any type of competitor at this point
– Fee structure here clearly changes but sheer impact of having as an option significantly increases AUM and likely starts to expand upward into “Gen X”-type demographic
– More diversified user set allows company to explore other options – more fixed income, insurance derivatives, etc. that continue to appeal to an older crowd

I’m sure there are myriad legal hurdles to overcome there and a huge mental hurdle as well – David mentioned above but to his final point I think “we could be witnessing disruptive innovation right in front of our eyes”.

On December 10, 2015, Cozean commented on Tesla Motors: A Battery Charged Model of Effectiveness :

Really interesting post about a clear innovator!

Reading through, I would agree that Tesla built a “symbiotic business [] and operating model” but was also struck by how quickly this could unravel as better-capitalized, more-diversified auto firms enter with similar offerings (e.g., the BMW i8). For instance, if the marginal advantages erode:

– Government or private funding creates neutral third-party “supercharger” stations, reducing barriers to entry for any individual electric car manufacturer
– Legal pressure regarding captured dealer network (i.e., it violates state laws requiring channel separation) reduces ability to “own” the upfront customer experience and capture economics usually reserved for dealerships

Seems like this could be accomplished through a concentrated lobbying effort (and some $$$) from traditional manufacturers, as they look to enter the sphere. These aren’t necessarily game-changers as Tesla still has the powertrain IP; idiosyncratic talent; and advanced progress up the experience curve, but it wouldn’t help.

The question for me then becomes: how far ahead is Tesla? If BMW or Mercedes (or Ferrari, Porsche, etc.) decide to make the bet and invest significant R&D resources (and potentially hire away Tesla talent), how much reaction time does Tesla have before someone can provide a similar (or better) car at a lower price and/or with an international brand behind it?

Given a decent amount of short interest in the stock, seems like others may have a similar (albeit likely more articulate, nuanced) thesis on this point but it also strikes me that the auto industry isn’t exactly known to be nimble, so Tesla likely has more breathing room than I’m giving it credit for.