Point A to Point B

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On December 1, 2017, Point A to Point B commented on “America First” Leaves Bombardier Aerospace Scrambling for Help :


This is an excellent article on a fairly subtle issue and highly complex supply chain. Thanks for digging in.

To your second question, regarding the action space and best move by the union leader at Bombardier, I find that there are likely to be two equilibria. The first of these is one that is analogous to the deal of convenience that Bombardier struck with Airbus. In much the same way as Bombardier realized they were in a risky scenario with limited insight into how things were going to shake out, and “blinked” as a result; I would expect there to be a strong argument on the part of the union to also “blink,” and yield to the prevailing labor rates and conditions necessary to ensure the continued production of the CSeries, and in turn the continued employment of the unionized workforce. There is widespread arguments on both sides of the political aisle around how necessary unions actually are to protect the rights of workers. [1] Indeed, some have argued that it is a paradox that unions actually “go on strike” if the mere threat of a strike, by backward induction, should be enough to bring everyone to the negotiation table and a resolution before the strike itself. The inversion of this is that if the company has no profit to go around (“going bankrupt” instead of “going on strike”), it’s not clear why the union would not be willing to come to the negotiation willing to concede on many points.

Additionally, I think the concerns about America First policy having far reaching consequences across the continent and the globe are overblown. I think the value proposition of international trade is widely understood to be positive for the vast majority of market participants (in both labor and financial markets). As such, I would expect a political consensus under a median voter theory of public choice to agree to continue to allow for the proliferation of trade over time.

[1] Derek Thompson, “Are Unions Necessary,” The Atlantic, June 2012, https://www.theatlantic.com/business/archive/2012/06/are-unions-necessary/258356/, accessed November 2017.
[1] David Lee and Alexandre Mas, “Long Run Impacts of Unions on Firms,” Institute for Research on Labor and Employment, January 2009, http://irle.berkeley.edu/files/2009/Long-Run-Impacts-of-Unions-on-Firms.pdf, accessed November 2009.

On December 1, 2017, Point A to Point B commented on Arsenal Football Club: The Accidental Victim? :


Thanks for your tour de force on the English Premier League and Aresenal FC.

I, too, respectfully disagree with the conclusion that Brexit will have long-lasting pernicious effects on the pan-European (and indeed global) nature of the English Premier League. If ever there was a sport that generated outsized returns for the country where it was born, it is soccer. If ever there was a sport that was inextricably linked with the role of a country in the world, it is soccer in England. Among many interesting things about Brexit is the notion that, when polled today (vs. when the actual Brexit referendum took place), a plurality of voters (47%) would not vote in favor of Brexit. [1] This has led to an unstable political consensus, wherein it appears that the UK is angling for a “Brexit in name only,” i.e., a formal Brexit per the will of the voters at the official vote without the wide-ranging consequences of a “full Brexit.” Though a bit incongruous, I think this dynamic political consensus coupled with a “house view” about the value of soccer (and its internationalization) in the UK is likely to result in a much softer impact on the player realities facing Arsenal today.

To your second, more general question, about what export-oriented industries do in a national context that turns inward, I’m afraid that the answer is bleak. It is abundantly clear that market access is quite valuable to companies irrespective of where the markets are and how they are formed. [2] The cost of isolationism comes in three flavors. The first of these is the direct deadweight loss associated with not being able to sell into customers who are willing to pay for the goods and services that the exporting company is willing to sell. The second is the cost associated with not being able to benefit from the flow of ideas and commensurate knowledge acquisition that is inherently associated with trade across national and regional borders. Additionally, the cost to produce for all national firms is likely to go up in an isolationist context, as these firms become starved of potentially lower cost, more efficient suppliers in international markets. The analogues to Arsenal’s predicament in a world where Brexit hurts them are clear: less revenue from international customers as they stop watching, less dynamism in the game itself as players stop interacting with new players, and a suboptimal “supply of labor” as many players become inaccessible. Thankfully, I do not think we will live in this world, and English soccer will live on.

[1] Matthew Weaver, “Labour Flags Up Brexit Poll Suggesting Public Regrets Decision,” October 2017, https://www.theguardian.com/politics/2017/oct/13/labour-flags-up-brexit-poll-which-suggests-public-regret-decision, accessed November 2017.

[2] Stephen Redding and Anthony Venables, “The Economics of Isolationism and Distance,” July 2002, http://www.princeton.edu/~reddings/pubpapers/isodist2002.pdf, accessed November 2017.

On December 1, 2017, Point A to Point B commented on Re-inventing NYT: Impact of digitalization on news media :


Thanks for the exposition on The New York Times and its future.

Your second question around what is the appropriate business model for the newspaper going forward is quite interesting to me. As a first step, it might be helpful to visualize what the world will look like decades from now in the context of news consumption. One important difference between this “world of tomorrow” and today’s world is that the value proposition of precisely what makes the NYT valuable today will likely decline significantly. In a sense, the paper is lauded and read for its ability to find information in far away places (both geographic and secretive) and disseminate it in a relatively unbiased way to its readers. As digitalization continues its long march toward complete penetration of our lives, both public and private, I would argue that the service the paper provides (and the service other papers provide) will be less “meaningful” and in turn less valuable to us all. The arguments rests primarily on the notion that technology is increasingly allowing for the near-free flow of information around the world. As an example, the near ubiquity of smartphones in the developed world is creating the conditions of possibility for “everyperson” reporters, who provide live, high-quality access to the events and circumstances around them. One might argue that what makes newspapers valuable is not just the provision of information but also the “unbiasing” of information, i.e., the removal of noise from the signal. Here to, I fear for the NYT, technology once again has the answer in the form of machine learning and algorithmic decision making. Why employ a cohort of college-educated professional journalists, each notably with their own biases and lived experiences, to separate truth from “fake news,” when the algorithms of the future will likely be able to adjudicate truth to a far greater degree of accuracy than any team of human truth-seekers? [1]

In this context, which would imply that the future for the “as-is” NYT is so dire, I would argue that radical change is needed sooner rather than later. I would encourage the paper to invest all of its current free cash flow in algorithmic technologies specific to the news industry. The NYT does have today a large store of news content and a large store of news experts (in the form of journalists) both of which can be used to train machine learning algorithms to get better at discerning the difference between news and opinion, between truth and lie. I think the only hope for an information company whose core product is facing dramatic price compression is to participate in precisely the mechanism that is driving this compression. Existing algorithms are already starting to get the job done, but the Times has an opportunity to do what it did to journalism more than 100 years ago: make it great again. [2]

[1] Carl-Gustav Linden, “Algorithms for Journalism,” Journal of Media Innovations, May 2017, http://www.journals.uio.no/index.php/TJMI/article/view/2420/4150, accessed November 2017.

[2] Kaveh Waddel, “Algorithms Can Help Stomp Out Fake News,” The Atlantic, December 2017, https://www.theatlantic.com/technology/archive/2016/12/how-computers-will-help-fact-check-the-internet/509870/, accessed November 2017.

On December 1, 2017, Point A to Point B commented on Goodbye To The Big Screen, Hello Everything Else – How Much Is Too Much? :


Thanks for the note on Warner and the vicissitudes of the video content industry. I found it quite helpful to see the run down of existing and potential future initiatives that Warner is undertaking to combat the multi-faceted competitive threat that it’s facing from Netflix and the other tech behemoths.

Honing in on the current and future role of the telecom providers, it would be instructive to recall the takeaway from a classic 1964 cartoon, “He who owns the gold, makes the rules!” I would modify this to Warner’s context and argue that those who own the pipes through which content will be delivered are likely to emerge as the long-term sustainable winners of the video ecosystem. The one thing that all of the digital content and digital platforms in the world have in common is that the “last mile delivery” occurs via a wired or wireless Internet connection. Because of economies of scale and network effects (less strong in Internet than in telecom more generally, but important nonetheless), the players who control the delivery of Internet to the home, workplace, and smartphone have traditionally been few in number and large in size. Despite all of the change in digital world, this fundamental fact about industry structure is not changing. In fact, the only changes are ones that reinforce the consolidated nature of the industry, e.g., the recent merger of Time Warner Cable and Charter Communications. On the other hand, the world of content is becoming increasingly fragmented as technology and a fragmentation of demand dynamics push the price of marginal content down to zero. Structurally, there are far more video content creators in a world with YouTube than in the old world dominated by a handful of TV and movie studios. Similarly, the so-called digital platforms, which sit “in the cloud,” i.e., deliver their content via the ISPs pipes, are also encountering fragmentation, as the cost of starting up a platform goes down over time and the “old” content providers, like Warner move into the platform game. The view that emerges (consolidating ISPs, fragmenting content providers, and fragmenting digital platforms) at least suggests that the structural winners will be the ISPs.

As your entire essay articulates, the big question is what can Warner do as they stand in the proverbial quicksand. I am a firm believer that the content providers are dying, and the evolution of their public valuations only substantiates this claim. [2] One need only look at the stock price trending of CBS, Viacom, and Discovery Communications to realize that the industry is in deep trouble. Although Warner Bros appears to be taking a try everything and anything approach, I see one viable path for Warner Bros and one path that is bound for failure. The wrong path is likely to involve copying what all the other content providers are trying to do: create a digital platform to compete with the premier digital platforms (the Hulu and Netflix contingency). With the exception of HBO, which has seen some short-term success with its platform, there is little to no evidence that investing a tremendous amount of resources behind creating a subpar digital platform, with a subpar digital viewing experience, is likely to solve the fundamental problem that Warner and its peers are facing today. A more sensible approach, in my view, would be to “cash flow out” the business. A transformation into a digital company will never compete with digital-first alternatives in a world where Warner’s core asset, its content, is facing massive and sustained price compression; the only successful strategy may be an orderly failure.

[1] “The Big Picture: The Technology to Meet the Challenges of Media Fragmentation,” Nielsen, February 2017, http://www.nielsen.com/us/en/insights/reports/2017/the-big-picture-technology-to-meet-the-challenges-of-media-fragmentation.html, accessed November 2017.

[2] “Sample Portfolio: Content Providers,” Buy Upside, http://www.buyupside.com/sample_portfolios/contentproviders.php, accessed November 2017.

On December 1, 2017, Point A to Point B commented on Nio – A Chinese Tesla Disrupting The World’s Supercar Industry :


Thanks for sharing your insights on Nio and the emerging Chinese EV market.

My biggest concern with Nio’s prospects is the competitive landscape in which it is attempting to reach its business objectives. As you mentioned, the Chinese government is devoting substantial resources and regulatory weight behind a push to reduce air pollution and incentivize the development of electric vehicles. This would seem to be an unambiguously positive fact pattern for Nio: the more government subsidies and backing, the better. However, the incentives are so good that they have resulted in the creation of over 200 companies who have publicly stated plans to commercialize new-energy vehicles in Asia. [1] That is an outstanding number of start-ups focused on the same fundamental problem, creating a cost-efficient EV, in an automotive industry where scale has been a primary driver of cost reduction and business success. The Chinese government is aiming for 7 million units to be sold annually in the country by 2025. [2] Although I am confident that the aforementioned incentive structure will help the country achieve this lofty objective, ‘picking winners’ will be a highly uncertain and unpredictable exercise. What is the source of Nio’s sustainable competitive advantage that will turn it into China’s Tesla? What gives us confidence that any of the many other players are not better positioned to achieve this objective? The resounding failure of Chinese conglomorate LeEco to achieve its electric vehicle objectives, despite being viewed by the Chinese government as a preferred national company par-excellence, serves a sobering reminder that the future is uncertain even when we are trending toward something that appears within reach. [3]

To the extent a path to success exists here, I would echo your emphasis on solving the supply chain question first and foremost, but I am cautious around the degree to which throwing additional capital at the problem will actually result in a desirable outcome, e.g., in a cheaper battery technology. As we saw in our sailing case, product development is a science whose success is a function of critical elements that go beyond funding: strategy and execution. On the strategy front, Nio intends to manufacture vehicles via a contract manufacturer. Although this saves them upfront capital expenditures required to build their own cars, it comes at the cost of margin, as the manufacturer extracts some economic value from the system, that could have otherwise been used to continue to push the innovation frontier in a competitively differentiated manner. Similarly, as it relates to batteries, they have made a strategic choice to buy batteries from third parties. The unfortunately reality of this strategy is that those third parties are free to sell their battery technology to the highest bidder or any number of bidders. In this context, battery innovation, to the extent it occurs, is likely to create rents for the battery OEMs, not for Nio. It is not clear how being at the mercy of powerful suppliers, for both technology advancement and production execution, positions Nio to win the race to China EV dominance.

Overall, a company that serves as a design shop that plays in an industry structure with 200 competitors where required innovations will come mostly from suppliers does not smell like a winning bet, no matter how much money Tencent et al put behind it over the near-term.

[1] Emily Feng, “China Puts a Stop to Electric-Car Gold-Rush,” Financial Times, June 2017, https://www.ft.com/content/891d8264-5016-11e7-bfb8-997009366969, accessed November 2017.

[2] Ibid.

[3] Qian Chen, “China’s LeEco Set Out to Change the World. Its Failure Has Changed China,” CNBC, November 2017, https://www.cnbc.com/2017/11/13/a-chinese-company-wanted-to-beat-netflix-tesla-and-apple–its-turned-into-a-multibillion-dollar-mess.html, accessed November 2017.

On December 1, 2017, Point A to Point B commented on LEGO: Building a more sustainable future—brick by brick :


Thanks for your thoughtful exposition of LEGO’s sustainability efforts.

I would first like to call attention to your suggestion that LEGO should consider extending its Engage-to-Reduce arm into a fully fledged not-for-profit consulting practice that could potentially help other companies in their carbon reduction efforts. This initiative, though creative and thought-provoking, is a step to far in the context of LEGO’s core competencies and historical areas of focus. Though it is clear that LEGO has developed expertise in managing its carbon footprint and, to a lesser extent, those of its suppliers, I am not convinced that they have significant know-how in doing this beyond the realm of their specific production processes and value chain. I would argue that the very reason their existing sustainability initiatives have been so successful to date is precisely because they have been focused on a business they know very well: their own. They have intimate knowledge of their own cost structure, their own customers, and the particulars of their own vision of the future of the company. Notably, they would be starting from scratch as it relates to other businesses. Moreover, they are a business that is accustomed to thinking about delivering value in the context of a consumer-oriented business model; it is quite difficult for B2C companies to morph or diversify into B2B business models and doing so would create significant execution risk. Most importantly, although LEGO remains a family-owned private company today, meaning it need not respond to the demands of the market at-large, its basic organizing principle is still one of profit maximization. As the saying goes, mixing business with pleasure can make for unsavory outcomes, and I suspect mixing a profitable play materials business with a carbon-footprint consulting non-profit would likely lead to similarly unwanted results, causing distraction, reallocating focus away from delivering on the core customer promise, and orienting the company in an area where it is by no means globally expert. We have to recognize that there are a variety of approaches to achieving sustainability objectives, with many corporates experimenting with a range of initiatives resulting in a wide distribution of outcomes: caution is warranted in thinking about the next leg of the LEGO sustainability program. [1]

I think one helpful framing for your question around whether carbon elimination would pay dividends for LEGO on the customer side, be it through customer willingness-to-pay or loyalty to the brand, is to think about the potential differences between short- and long-term effects. In particular, it is possible to imagine a world with an end state in which consumers of LEGO products (both parents, with purchasing power, and children with toy preferences) become more informed about climate change and, in turn, become hyper conscious of the carbon content of the products they consume. To the extent that this (enlightened) state of the world is sufficiently close, then I would agree that these initiatives serve as rightful investments that will generate economic value in the form of incremental top-line over the next few decades. There is good evidence from public opinion surveys that, in fact, consumer views are moving in this direction. For example, in 2017, 58% of Americans believed that global warming is caused by human activity, which compares to only 47% who believed this in 2011. [2] Nonetheless, this education process, even if helped along by LEGO itself, will take time and result in an uncertain impact on the top-line. I would argue that in the short-term, the more important benefit of conducting these sustainability exercises is the potential for material innovation to transform the global landscape of plastics globally. LEGO has innovation in its DNA — bringing new and cutting-edge products to keep up with consumer expectations year-after-year — and it has an opportunity to leverage this culture and know-how of innovation to make breakthroughs in material science that could then be the new inputs for companies around the world. Of course, this breakthrough is by no means guaranteed, but it represents a significant upside to the initiative and given that LEGO is an inventive first-mover in the space, I would not dismiss the possibility of success. Of course, like the non-profit idea, this too would require them to shift customer bases, but it would still be a for-profit endeavor focused on their industry and part of the value chain, materials manufacturing, which better positions them for success.

The ambitions of Rick Cohen’s Symbotic, which aims to provide best-in-class warehouse automation technology to other warehouses, strike me as interesting analogue to the embedded potential of this sustainability initiative. In Cohen’s case, the technology development started as a mechanism for improving his own warehousing business and eventually resulted in a realization that selling the technology more widely could give Symbotic access to a much larger profit pool.

[1] Tim Smedley, “Every Little Helps,” The Guardian, May 2014, https://www.theguardian.com/sustainable-business/every-little-helps-distraction-making-sustainable-business, accessed November 2017.

[2] “Half of Americans Think Global Warming Mostly Human Caused,” Yale Program on Climate Change Communication, http://climatecommunication.yale.edu/visualizations-data/half-americans-think-global-warming-mostly-human-caused/, accessed November 2017.