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I thought this was a very interesting read, Ninad, and generally really enjoy the Stratechery blog. I think one area that Ben Thompson may have gotten it wrong, though, is that distributors are struggling to recoup their upfront capital — cable companies are earning record profits with +HSD% growth due to advantage on higher margin broadband. With broadband revenue growing so much, the cost of distribution is not really going to zero but rather being re-allocated. I agree that the cost of distribution for media companies themselves is going to zero, but I don’t agree that this is an advantage for companies like Disney.

My prediction is that Disney’s shift to direct-to-consumer will not be non-dilutive. Due to the historically oligopolistic nature of Pay-TV market, distributors, and therefore consumers, have always been forced to push high-priced content (e.g., ESPN) to all consumers regardless of whether they watch it. Consumers had no choice but to eat that in their bill because there was no other way to get video content; however, now they can watch Netflix, Amazon, Hulu etc. For Disney, there is no way that any recapture of distribution costs from ISPs will ever make up for subscription losses in a fragmenting world. They have simply been over-earning from over-distribution today in the legacy bundle.

Should Monsanto develop innovative talent inside the organization or participate in M&A? I see many parallels between the pharma/medical device industry to the increasingly IP-centric agricultural industry. Pharma/medical device companies are constantly faced with buy vs. build decisions. Similar to these companies, Monsanto should develop both capabilities and make decisions on an IP-level bases. In instances where IP is available to buy in foreign countries and it is cheaper than building it themselves, they should acquire, capitalize on the IP in the foreign jurisdiction, and bring the technology back to the U.S. for other use cases. If the IP does not end up having monetizable use cases in the U.S., acquiring this IP still acts as a defensive move against other large agriculture companies. This is important in the increasingly competitive and consolidating market that Patrick alludes to.

On November 30, 2017, Erin commented on Digital Content Delivery – Can AMC Theatres survive? :

One thing this post made me question is if this attempt by studios to shift to PVOD really a function of box office attendance trends? Or are they suddenly being forced into this because their other businesses (e.g., Turner for WB, NBC for Universal) are facing accelerating headwinds? If so, does this negate any perceived leverage on the exhibitors’ side? AMC does not have an inherent advantage over cable, Apply, Netflix, etc. as a PVOD distribution hub; however, they are currently taking 50% of the box office in the legacy distribution model. It is hard to see them sustaining this level of take-rate in modern digital distribution when they have no competitive advantage.

I question if the anti-collusion laws have as much teeth to protect AMC as they think? All of these discussions between the studios and distributors (e.g., Apple, Comcast) are so advanced that it will be very easy for other studios to be fast followers on same terms once they are established. To complicate the problem for AMC, the trend toward original content is accelerating — Netflix is doubling its original films to 80 next year from 40 this year. This will cut out the studios and the exhibitors from the distribution model completely — unless AMC adapts.

For these reasons, AMC should focus on its core value proposition around experience and the social aspect of movie-going. HJ’s idea to work directly with digital content providers creating original content (i.e., Netflix) is very interesting to me. Will people pay to see new Netflix releases in a movie theater with friends?

On November 30, 2017, Erin commented on Foxconn: Out-Foxing Protectionism :

You asked: “Is it a mistake to allocate capital for the long-term to address what could be a passing protectionist movement?” I think the answer to this question is yes and would pose the question back, “Are there any benefits from a government relations perspective of shifting production into developed economies?” Protectionism is simply bad economics, assuming proper social safety nets and educational transition programs are in place. So given the natural trajectory of global progress (absent hiccups like current US leadership), I think I would want to bet on a tilt back towards globalization.

If Foxconn did bet on protectionism being here to stay, given the natural cost disadvantage of manufacturing in developed economies, the transition to robotic production will only be hastened. If Foxconn builds plants in the U.S., these should be robotics first factories. In turn, will cause Foxconn to be castigated as now the evil Chinese company who is leading the charge on automating all global productions?

As Patrick said, I think Foxconn is in a extremely tricky spot; however, investing to keep pace with bad policy is likely bad policy itself and one with likely unintended consequences. No matter what Foxconn, or similar companies do, they will always be a soundbite as long as there are unscrupulous politicians looking for scapegoats.

As a lover of New Orleans, reading this post made me sad! In trying to decide how much Louisiana’s tax payers would be willing to pay for the capex outlined in the original post and Graham’s response, I wondered how much of Louisiana’s economy is actually tied to the port. From the Port of New Orleans website: “The Port of New Orleans is committed to continuing its role as Louisiana’s Economic Engine. Maritime activity associated with the Port of New Orleans accounts for 160,500 jobs in Louisiana and is responsible for $8 billion in earnings.” There is also a significant portion of business generated by the cruise industry: “The Ports’ Cruise industry accounts for $399 million in direct spending in Louisiana and 7,548 jobs. In addition, 60 percent of all cruise passengers spend an average of two nights in New Orleans, which accounts for an additional $28 million in spending locally.”

This signals to me that the port is extremely important to the state of Louisiana and drives the economy by more than just income earned directly related to shipping. The taxpayers of the state of Louisiana should have a strong incentive to protect the port and invest in the capex needed to do so. However, to Peter and Hans’ points, I am very concerned that climate change factors outside the port’s control (that make it more dangerous or difficult to pass through the Gulf of Mexico), will make it more cost effective for goods to enter / exit through other ports in the West or Northeast and travel by land within the U.S. This may be more cost effective for the players involved, although poses serious questions to the future health of the economy in Louisiana.

Thanks for the interesting read, Consuelo! Similar to Alona, I immediately thought about our IKEA discussion when reading this case. Not only does fast fashion inherently imply that customers are more likely to only use the clothing for a limited amount of time (and thus increase textile waste), but also that Zara aims to sell lower priced clothing at a higher volume — increasing waste through higher transportation costs and increased packaging. Can Zara’s business model of selling a high volume of cheap, fast fashion clothing possibly be reconciled with promoting sustainability? Similar to IKEA, I think Zara can do as much as it can to leave the smallest environmental footprint within the constraints of its business model.

I agree with others that Zara should not reposition its brand to be longer lasting clothing (e.g., Patagonia) as its main value proposition to customers is on-trend clothing; however, I disagree that Zara’s customers do not care about their sustainability efforts. Zara’s customer base is millennials who increasingly care about these issues and are voting on companies with their dollars. There are lot of fast fashion companies in the market and this could be part of Zara’s competitive edge. Albeit, I agree, this should not be their main focus.

Zara should not switch to a subscription clothing business as it would fundamentally change its business model, requiring a very different logistic and customer service process. In addition, the quality of the clothing would need to be significantly higher given handling by several clients and there would be as much (or more) wasted transportation costs. Finally, subscription based offerings do not aim to provide the same customer promise for on-trend clothing but rather designer items or “classics” — if they did, they would produce the same amount of waste through continual replacement of inventory.