Tearing down and building up: Amazon wants Deliveroo, opens 4-Star store

It’s has been a busy past few days for Amazon:

  • Amazon has been in preliminary discussion to buy Deliveroo, which is based in London and sends out cyclists to deliver food. It now serves 200 cities in 12 countries and has a valuation of over $2B. (Reuters)
  • Amazon also opened its first 4-Star Store in SoHo. The store only sells items that are ranked four stars or more on Amazon. (The Verge)
  • The company announced it is raising its minimum wage across the company to $15 an hour. (CNBC)

On the surface, the first two – the potential Deliveroo acquisition and the 4-star store- are services that Amazon would really be able to provide to big cities.

Deliveroo really only works in places like London, which are dense and have a customer base who are willing to pay a premium to have their sushi strapped to the basket of a bike and delivered to their door. For a multitude of reasons, that model doesn’t work in Murfreesboro, Tennessee.

The 4-star store is going to sell (mostly) premium goods in premium real estate. It’s more of a marketing tool than anything for Amazon, a place where the company can point and say “look at all these awesome products we sell!” It’s no wonder they opened in SoHo, just like Google opened a pop-up to demo the Pixel and Dreamview in the neighborhood a few years ago.

But what if I live in Murfreesboro?

Well, last-mile delivery and the 4-star store news doesn’t help you much. You can still get two-day Prime shipping, of course, but there’s a small chance you’ll be getting a 4-star store anytime soon.

And last-mile food delivery requires density. It isn’t difficult to drive to your local restaurant to pick up dinner in car-centric Murfreesboro, so why pay someone else do do it? Papa John’s, for example, is partnering with DoorDash to deliver pizzas to rural customers, but there are questions how this would actually work in practice, and how profitable this might be.

But what Deliveroo and the 4-star store do expose is that there is clearly a gap in some of Amazon’s investments for a huge part of its customer base. And this brings up a question: are all these investments from tech companies that transform our physical space and our cities (in the cité sense – the feeling and livability of a city, rather than the ville sense, or the physical structure of the city)? Is there a chance that creates more political animosity toward Amazon and other tech companies?

I think that’s a big risk for Amazon, especially given our tribalized politics and the fact that Amazon and Jeff Bezos sits squarely in the middle of the partisan shit-tossing.

But I also think that beneath the surface, a lot of these investments could benefit suburban or exurban customers more than urban customers.

If you live in Manhattan, it’s easy to walk out the door and buy anything you want, or to have anything you want delivered to you. But this all costs money – a lot of it.

If you live in Murfreesboro, you can have the same goods that you can buy in specialty boutiques in Brooklyn delivered to your door, for free, in two days. That’s incredible for suburban and rural consumers, because it opens them up to the benefits of specialization that were previously only contained in cities. Even if you live in Midtown Manhattan, the market for Prime is gigantic compared to on-demand delivery, so it really doesn’t matter where you live.

Amazon’s $15 an hour minimum wage obviously helps suburban and rural customers the most. The company’s warehouses are largely in these areas, and would bump up the wages even outside of Amazon in those communities. To pay for this, Amazon would likely increase the cost of Prime, which is a direct shift of wealth into these communities with lots of Amazon distribution and logistics jobs.

The point is, the beneficiaries of tech aren’t all that obvious on the surface.  As Tyler Cowen argued in Bloomberg View in 2016, the technological revolution could favor suburban and rural customers the most. That’s worth considering next time you hear a certain resident of the White House engaging in Amazon/Bezos bashing at rallies in suburban or rural communities.

Could WeWork bring down Manhattan’s commercial real estate market?

Everyone loves WeWork, right? They have well-designed spaces in the best neighborhoods in cities. They’re a sort of physical manifestation of our entrepreneurial desires. Seriously, a bunch of good looking, plaid-shirted people drinking artisanal coffee and building wireframes of apps and whiteboarding video marketing spots? That’s just… cool.

So cool, that the Wall Street Journal just reported this week that WeWork now occupies more office space than anybody in Manhattan, just passing JPMorgan Chase. You know, the biggest bank in the country, with $2.5 trillion with a T in assets.

It’s really a testament to how much people love WeWork.

But its also sort of a problem. Or at least could easily become a problem.

The article noted,

WeWork is one of the biggest and fastest-growing of the “flex space” office providers, a group that also includes Knotel Inc., Industrious Office and IWG PLC. These companies rent office space from building owners, then sublease it for as short as a month or up to three years. They offer tenants greater flexibility than do traditional landlords, which typically lock in renters for a decade or longer.

In finance, this would be called a duration mismatch. If you’re managing a pension portfolio, and the average person in your plan is 20 years from retirement, you’d want all the assets in your plan to have a duration of 20 years – that is, to make sure any changes in the value of the liability (how much you must pay pensioners) are offset by changes in the value of that pile of assets (how much you’re investing now to pay them in the future). And note, it isn’t exactly linked to “years” in practice, but for simplification sake, we’ll run with it. This gets mathy because the change in the value of a 1-year Treasury note acts differently than the change for a 30-year Treasury bond when interest rates move.

All this is to say that this duration mismatch makes WeWork’s strategy incredibly risky. If they enter into a 30-year lease on some commercial real estate space, and sub-lease it for 6-months, 1-year, or 3-years to companies, they are banking that they’ll be able to replace those tenants with other tenants who can pay the same amount in a few years.

But what happens in an economic downturn? There will be less demand for that real estate space, so WeWork will either have trouble filling its space, or will cut prices to draw in customers. But at the same time, they have the same lease payment to make for their own lease on the space.

Anyone who has lost a job or has taken a pay cut when they have a mortgage knows how stressful this is. And when there’s a much bigger recession things can get ugly. Just think back to 2008 and 2009, when the entire US housing market fell into tatters because of an economic downturn.

That’s sort of the kind risk WeWork poses to the New York commercial real estate market. What if an economic slowdown puts pressure on smaller companies and entrepreneurs to cut costs? What then happens to all that commercial real estate space WeWork is leasing in New York? What kind of effect could that have on the bigger real estate market in the US?

JPMorgan is able to withstand a recession. They have a ton of money, and can raise capital quite easily. WeWork, on the other hand, is a private company that relies on private equity funding, but has also tapped into the bond markets for financing.

The results have been less than stellar. The WSJ wrote a story right after the first bond issue in April titled, WeWork Bonds Fall As Debt Investors Question Startup Stories. The bonds have recovered since then, but are still trading below par.

And oh yeah, the economy is humming along right now. WeWork’s story might get a lot more interesting when things get choppy.

Adobe is killing it; Thank you, creators

Adobe’s quarterly earnings yesterday showed a continuation of a longer-running trend: the Creative Cloud is an unstoppable force.

A few quick highlights from the report and some analyst reactions:

  • The transition to the Creative Suite was a huge question mark, but that story is over – now the company has been adding users like gangbusters. Stock analysts talked up Creative Cloud’s growth, which was up 28% over the past year. That’s a lot more people taking up photography, videography, and web design. Hell yeah.
  • The subscription model really works! That was a huge question over the past few years, but Adobe gets it. It’s also why Apple is pushing app developers to sell on a subscription basis – that works well for consumers who want to test products, and works great for the companies, who have to continuously update their software and make it better for the consumer.

This is all fantastic stuff. Hopefully it’s a good signal that there are just more people out there creating fantastic art.

Product review-less review of the Apple September 2018 launch

I watched the entire Apple product event yesterday (big hat tip to Sam Sheffer and his live stream on Twitch. Well done.), and while of course I’d like to upgrade right away to the XS Max and the new Apple Watch, I… might not. They’re just expensive, and I think I might be able to hold out with my 6+ for one more cycle.

And while I won’t get into a review of each of the products – there are already plenty of good ones out there – here are my thoughts on the event, from a bit of a different perspective. Where does the product and timing of the iPhone Xr, iPhone XS, and iPhone XS Max stand in the upgrade cycle? Will all those iPhone 6 and 7 holdouts finally make the leap with this new line of iPhones?

Demand: I think Apple is clearly trying to position itself across a massive swath of the market. Just look at this chart, tweeted by Horace Deidu this morning

Apple is making a serious move to cut across a lot of price points here – from entry-level users who just (probably) want to be on iMessage, all the way up to the price insensitive buyers who are using the XS Max with 512 GB of storage for basically anything under the sun you can imagine a phone doing.

However, I think that if we were to compare this with the past upgrade cycles, this would be huge step up. But I just don’t think that is going to happen this time. First, it’s just a S-level upgrade, so all those iPhone X buyers are probably fine waiting for the next upgrade cycle. Second, those of us with iPhone 7s or 6s are just waiting longer to upgrade.  As I wrote a few weeks ago in Samsung Note 9 vs Apple iPhone X vs You’re probably not going to upgrade anyway

These kids, who are doing summer internships at Morgan Stanley and are thus likely well-remunerated (I’ll hold off from any family wealth assumptions), are using their current devices for longer and longer. The most popular phones were the iPhone 7/7+, then the 6, then the 8, then the X.

On a device payment plans? See fewer promotions? Just opting to replace your battery? Or just riding a phone until the wheel completely fall off? You’re not the only one, and that is weighing on upgrade rates.

And while the XS Max has the biggest display ever, I can’t see it generating the same kind of buzz we saw with the iPhone 6+. It’s bigger and better, but is if fundamentally different?

The “cheap” iPhone Xr: I think the Xr is going to be the biggest hit of the cycle. Apple’s in-house estimates (in-house, so take with a boulder of salt) show 50% of iPhone users, which is around 700M to 825M customers, could look to upgrade to the Xr in the next year and a half to two years. Even if just a fraction of those users do that, that’s big for Apple – at least in units moved. That lower price is a big selling point for consumers – at least relative to the high-end iPhone models. That $750 price tag is more than the highest end models just a few cycles ago. For all the talk about ASPs, Apple has done a great job making people think $749 is cheap for a phone.

Usage: The biggest step forward seemed to be with the new Watch, with the focus on health and fitness. Fall detection and ECG? How many people are going to be getting these for their aging parents? I can see these being a bigger hit than past models, and a lot of people who had been on the fence about the Watch might finally see some real-world uses that might finally push them over the edge. 

The new iPhones though? They are fantastic – just look at the chip upgrades, the camera and camera software. But I just don’t think there’s that much new with them. Some of the biggest improvements that people might use day-to-day – the portrait mode with adjustable bokeh comes first to mind – are software upgrades, not hardware upgrades. You can buy an iPhone 8 that is going to do 99% of what the Xr will do for $150 less (though I don’t doubt people would pay that kind of premium to have a salmon-colored iPhone).

If anything, this fact hammers home the fact that services – and not devices – are the future of Apple’s future revenue growth.

So that’s my quick product review-less review of the Apple launch.

9/11, the 10th anniversary of the Financial Crisis, and Downtown Manhattan: A lesson in resiliency

With this week including both September 11th and the 10th anniversary of the Financial Crisis, it has been a great week to reflect on Lower Manhattan.

I have been reading a lot about the history of New York lately, and that little bit of land at the very southern tip of the island of course has a long and interesting history. It was where New York was founded, was as much a part of the founding of the United States as anywhere, and grew to become the center of the financial – and later cultural – universe.

But that all didn’t happen seamlessly. I’ll list just a few things that has happened that centered on the (rough back-of-the-envelope calculation…) four square miles below Canal.

And every single time, it has shifted its form, becoming something else entirely.

We’ll start when the Dutch took Manhattan from the Lenape. The Dutch weren’t great neighbors. But they wanted money and power, they filled the shallows in (go look how the pavement slopes on Pearl Street), and startedto build up its commercial port.

Then the British took over, reclaimed more land from the sea, and started building up the wharves and seawall.

A statue of King George III went up in Bowling Green, but that was pulled to the ground by American revolutionaries, then, as the New York Times noted,

“His statue here has been pulled down to make musket ball of, so that his troops will probably have melted Majesty fired at them,” Ebenezer Hazard, the New York postmaster, wrote to Gen. Horatio Gates.

The population boomed in the 1800s, as the American’s created even more land. As Adam Davidson noted in his fantastic book Magnetic City,

Huge loads of ash, offal, manure, dead horses, and household garbage were carted to the water’s edge and loaded onto floating “dumping boards” and into the shallows and slips, where they gradually alchemized into real estate. The slow process haloed the city in stink, but in the long run it proved to be the most profitable form of recycling.

A 1835 fire burned down almost everything in Lower Manhattan, including the Merchants’ Exchange and the Tontine Coffee House, the birthplace of the American-style market economy.

From the ashes, though came the Woolworth Building, opened in 1913 as the tallest building in the world Its architect, Cass Gilbert, said it had “a measure of beauty, and that architectural beauty, judged even from an economic standpoint, has an income-bearing value.” It was a physical symbol of technology (the skyscraper), beauty (just look at its turrets and green copper top), and America’s capitalist might (Gilbert said it was just a machine that makes land pay).

Not everyone was so enthused, including a terrorist who bombed JP Morgan and Co. in 1920. You can go there (23 Wall Street) and still see the marks on the building from the blast.

New York’s shipping industry collapsed in the mid-20th century. But out of that, a group of artists moved into the Coenties Slip, into the industrial lofts abandoned by shippers. Some of those artists? Robert Rauschenberg, Jasper Johns, Ellsworth Kelly, Agnes Martin, Robert Indiana.

Then New York almost went bankrupt in the 1970s. Some fantastic books were written about how New York at that time (most notably Ken Auletta’s The Streets Were Paved With Gold).

But the city recovered in the 1980s and became the “Master of the Universe” global center of wealth and culture, and all the good and bad that came with it.

Then 9/11 happened. A total aside: I was a senior in high school at the time. That entire day still sticks out vividly in my mind. I was watching MTV, who was playing music videos from New York banks through the night after. I recall watching Malcolm McLaren’s Buffalo Girls:

But guess what? New York recovered. 

The disasters that followed in the 2000s and 2010s – the Finacial Crisis and Hurricane Sandy – were also devistating to Lower Manhattan – though certainly in different ways than 9/11.

Yes, Wall Street is there, but in an increasingly decentralized financial universe, there is less of a need for a footprint around the exchange. But the neighborhood itself is far different than it was in the mid-2000s. People actually want live there.

Now, some of those monuments to the past are being converted to totally new, different uses. Look at 70 Pine Street, which was the headquarters of AIG, the insurer that blew up and almost brought down the entire US economy in 2008. Now, it was converted to residential. Here’s your typical 1BR apratment, for just $4,550 a month.

Or the top of the Woolworth Building, which was gutted of its elevator and mechanical equipment and converted into a $110M home.

Photo via Curbed/Williams New York

Or the JP Morgan & Co. building on Wall Street. Davidson wrote,

“In its new incarnation, the roof of Morgan’s folly has become a poolside arbor in which to lounge with a cocktail and admire the muscular marble figures laboring in the pediment of the Stock Exchange across the street. The roof garden, Starck enthused, is “like an Italian villa on a lake. You’re in the middle of a sculpture, in a garden in the middle of the world. It’s an ecstasy trip.”

Affordable housing is without a doubt the biggest problem in New York. These transformations are all creations for the absolute wealthiest, and do nothing to address the most pressing need of the city. So some of the most recent changes in Lower Manhattan are indeed an evolution, but an evolution to what end?

But the point still stands that Lower Manhattan will adjust, shift, iterate, mold itself into something new. You can throw whatever you want at it, but it’s about the most dynamic place on the face of the earth.
Lower Manhattan has lived a hundred lives. It still has a couple thousand more to go.