In the spring of 2012, I moved to San Francisco to start the US office for Toca Boca. My wife, Miriam, followed shortly thereafter and we sent ten boxes of stuff with UPS. We didn’t know how long we would stay and took one year at a time.
A few weeks ago, I moved back to Sweden. To Malmö, next to Copenhagen, more specifically. A little more than eight years after I left. This time with a freight container full of stuff, and two American daughters. Quite the difference.
I’m going to continue my work as an advisor and independent board member in the same way as before. In fact, due to who I work with regularly, the time zone will be a considerable improvement.
When I had worked in my advisory practice for a year, I summarized what I had actually been doing. It’s been a little over two years in total now, and I think it is time for a brief update.
Here’s a selection of the things I’ve been working with:
I advised an educational WeChat app in China with positioning and marketing.
I presented about Voice tech for a corporate VC and their portfolio companies in Sweden.
I developed an App Store marketing strategy for a London-based EdTech company.
I did a long row of expert network consulting gigs with VCs, family offices, and PE companies from across the world.
I started working with a family messaging service from Canada.
I advised a UK law firm on a specific case.
I did product strategy work for an EdTech app based in Taiwan.
I wrote a report for a Swedish company about the driving forces behind why people pay for online services, and what happens to their expectations once they start doing it.
I helped an Indian EdTech company with overall quality assurance in product development processes.
I made a few minor investments, and started formally advising a few others.
In my new hometown of Malmö I look forward to contributing with my experiences and getting to know the local community. I look forward to freeing up more time for reading and writing. I look forward to having meetings in more convenient parts of the day. I think it is going to be great.
If you have a project in mind or want some help with something – wherever in the world you may be – please feel free to reach out.
Rovio is a company I have followed and admired for many years. They were pioneers in building the first global family brand through mobile. In later years, they have gone through a big transformation to the company you can see today. I’m proud and grateful to have the opportunity to help them on this continued journey.
Since 2008, I have had a mild obsession with a South African media company called Naspers. They are most known for being a very early investor in Tencent. In 2001, they bought a 46.5% stake for $32 million. 18 years later, it was worth $133 billion. It is likely one of the best investments of all time.
But success can be a double edged sword. This remarkable investment led to a meteoric rise of Naspers share price, but it also put them in a very complicated position. You can read all about it in my latest essay.
BBC Discovery – Russell Foster Russell Foster is a professor of circadian neuroscience at Oxford University, and in this (quite old) interview he describes how clocks and light affect your daily life.
“The investment strategy at the time was to find a replacement revenue source for its traditional print media business – which it forecast would decline in the advent of digital media”
That’s a quote from an article describing Naspers, a South African media company, in the 1980s. Koos Bekker – now the Chairman – had suggested that there was potential for a new type of pay TV in South Africa, similar to HBO.
The narrative is immediately familiar. A media company tries to branch out to digital media in order to make up for the shortfall in print. But this is not that kind of story. Instead of cautiously investing a little on the side, Naspers transformed themselves from a legacy media company to one of the most interesting and prominent internet investors in the world.
What makes the story about Naspers even more interesting is that their transformation wasn’t solely driven by clarity of vision. It was – and is – driven by necessity after having hit the investment equivalent of winning the Powerball – their investment in Tencent in 2001. But having an unbelievably successful investment as a listed company is a double edged sword. Naspers’ journey has been both complicated and has led to some extraordinary secondary effects.
Let me explain what I mean. But first, a little background.
Naspers was founded in South Africa 1915 as a newspaper and magazine publisher. They later added book publishing, and in the 1980s also pay-TV through M-Net. Their original name was De Nasionale Pers Beperkt, and as the name implies they were nationalists – Afrikaner nationalists more specifically.
In the 1990s, the company changed its name to Naspers and listed itself on the Johannesburg Stock Exchange. By then, the TV operations contained a spinout from M-Net, now called Multichoice – a subsaharan provider of pay-TV and sports programming. But still, all in all, very much a traditional media company with newspapers, books, magazines and television.
This is where it starts to get interesting. Naspers had started to diversify, which among other things meant some investing in China and other foreign markets. However, the crash in 2001 forced the company to make a lot of write-offs – among the Chinese activities in particular. They lost hundreds of millions of dollars in total, and about $100 million in China alone. But the CEO at the time – Koos Bekker – still managed to leave the market with one, valuable asset.
As they were leaving Beijing, Bekker was approached by two young men who had started an internet operation called Tencent, which was already signing up users at a remarkable pace. Against the decision to withdraw, Bekker took a gamble on 49% (sic*) of their company.
This was the turning point – when the South African media company started to become a global internet company.
Tencent President, Martin Lau, chairman & CEO Pony Ma, and CFO John Lo. Photo: Asia Times.
The Tencent investment
Bekker bought 46.5% of Tencent for just $32 million in 2001. 18 years later, in 2019, their stake – after IPO dilution – had grown to $133 billion. An almost unbelievable return, and likely one of the best investments of all time. In 2018 they sold 2% of their Tencent stake, and netted $9.8 billion.
But while the shareholders were happy with the return of their Chinese investment, their trust in what else Naspers was doing seemed to erode. In 2012, 80% of Naspers stock price was based on their stake in Tencent and another 10% on their holding in Mail.ru. That meant that all other activity in the company was valued at only 10% of the total stock price. It also meant that the dependency on Tencent was immense. And with it, a perceived high volatility. Investors were asking themselves: what will happen to Naspers, if Tencent falls?
Being lucky with an individual investment can be a blessing and a curse. In this case, the outlier investment in Tencent forced the management team to start differentiating even further, and much more aggressively. Naspers started to invest a lot into other internet companies – predominantly in emerging markets. Remember – they had already done this once and lost hundreds of millions of dollars about ten years earlier. So this move took some courage. But this time it was a defensive move rather than an offensive one. If the media assets that they owned weren’t going to rebalance the stock volatility – something else had to it. And the bet was that one or several of these new internet companies might do the trick.
The investment era begins
From around 2007 and still to this day, there has been an immense activity in investment and M&A from the South African giant.
Here’s a selection of the e-commerce transactions that they’ve been part of:
These are big deals. There aren’t that many companies in the world that are involved at these levels. And what’s more – note that this was just five of their transactions, in one single category (e-commerce). The complete list is too long to list, but Crunchbase has a longer version for those of you that are especially curious. And below is a little bonus reading about each respective deal mentioned above.
– Is this an internet investment company, like IAC?
– Is this a holding vehicle for Tencent shares, like Altaba was to Alibaba?
The answer to all these questions is basically “yes“. But that’s not very helpful in terms of analysis of course. Naspers acknowledged this.
On top of this confusion, Naspers also had – and still has – a structural disadvantage in that they primarily trade on the JSE – the Johannesburg Stock Exchange. This is troublesome for several reasons, but partly because the South African currency, the Rand, is among the most volatile currencies in the world. The currency risk alone is enough to put many investors off. Also, Naspers size compared to the JSE at large was a becoming an issue. And then you have the complexity to analyze and understand the company overall too.
The solution to this was to restructure the business entirely. It was done in 2019, and this is where Prosus first enters the terminology. The process started by spinning out Multichoice, the entire TV- and cable business, to it’s own listing on the JSE. This made the actual media part of this former media company very small. In fact, it represented just 1.7% of revenues in 2019.
Next was to separate Takealot – probably because it is a South African marketplace which makes sense to have listed together with Naspers in their home market.
And then finally – the creation of Prosus, a new company which listed on Euronext Amsterdam in September of 2019. Prosus consists of all of their internet investments, including the 31.1% stake in Tencent. Naspers holds around 73% of Prosus shares, while 27% are floated.
I made a graphic to explain what the relationship looks like, as of February 19, 2020:
As you can see, the Tencent stake represents more than 100% of EBITDA. It’s fair to say that the dependency on this one holding is still very substantial.
Naspers strategy in 2020
Naspers today focuses on the following eight areas:
Let’s look at each of them briefly:
Classifieds – relatively well consolidated and an established business. Now profitable as a whole too. My prediction that they will acquire Adevinta still stands.
E-Commerce – largely a local South African play, and not an area for further expansion given that they have divested Flipkart and Souq.
Food Delivery – has similar market dynamics to classifieds in that it is also a marketplace, but a more underdeveloped one. This one will be costly and require more consolidation before it shows a profit.
Media – a shrinking business that is going to be difficult to divest due to the lack of buyers. I wouldn’t be surprised if these assets were placed in an independent trust instead of run through the operations.
Payments & Fintech – largely a supplemental business to the marketplaces. Having access to massive consumer groups is a great way to launch new payments brands, as well as the additional margin on each purchase.
Social & Internet Platforms – this consists of the holdings in Tencent and Mail.ru.
Travel – a merger created an ownership stake in a listed Indian travel company called MakeMyTrip. No other activity in the space.
Ventures – seems largely opportunistic and a way of identifying new growth areas in the market.
Cursed by success
If the main point of Naspers’ additional investments and acquisition was to diversify from Tencent, how has that worked out? Well, it turns out it is hard to catch up with success. This is how the Tencent stock has performed since it’s IPO:
Tencent’s share price since IPO ($0700.HK)
As of February 17, 2020, Tencent’s market cap is $510.358 billion. The 31.1% ownership that Prosus owns should subsequently be worth ≈ $158.7 billion. However, the total market cap of Prosus is currently at $126.7 billion. The value of the Tencent stake still eclipses the value of the entire company.
This puts Naspers in a familiar position. On the one hand, the performance of Tencent has been incredibly successful – more so then anyone could have imagine. On the other hand, all their other investments and acquisitions still haven’t convinced the stock market that they are worth while. It must be slightly ungrateful to be one of the largest internet investors in the world, and still see your entire portfolio be considered a rounding error in overall valuation of the company. The volatility of the stock remains, and the dependency on Tencent too.
So, why doesn’t the market value Naspers and Prosus higher then? It’s always hard to explain why the market does what it does. In general, investment companies often trade at less than their net asset value, but Naspers discount has been unusually high. Some have raised concerns about the tax liability that selling the Tencent stock could induce, and others have referenced the political instability – including currency risk – that Naspers has in South Africa. These factors could play in, but the market is often not as rational as it is made out to be.
All in all, the fundamental question is: can Naspers do it again? If they have anything in their current portfolio that has close to the development that their one lucky break in China has had, then the tables could quickly turn and the market could start looking at them differently.
Naspers has spent the past 20 years trying to diversify themselves. But no one knows the double edged sword of success like they do. The very success that put them where they are today, is the very thing that is holding them back. The world’s most interesting – and underrated – internet investor in the world, that almost no one has heard of.
Disclaimer: This should not be considered investment advice, and at time of writing I do not hold any stock positions in Naspers, Prosus, or Tencent.
As a celebration of Joan Ganz Cooney’s first report on kids and media (re-issued here), I wrote a post for their blog. It is about finding a spark of inspiration in times where things might seem a little bleak. A bit like the kids app market today.
Here’s my attempt to remember the big picture and the great opportunities that are ahead:
At times like this, it is important to remember the big picture. We have a generation of kids across the globe growing up with access to smartphones and devices. The collective knowledge of the world is at their fingertips. Communication between friends, family, classmates is free, simple, and immediate. Entertainment is endless and available anytime, anywhere. Families have the infrastructure in place, the time to spend, and the interest in finding new, great ways to help their kids develop, learn, and have fun.
Similarly to last year, I will not be writing a summary of 2019. Sharing less over the year has been surprisingly liberating. For me, it has forced more deliberate attention to a few selected things instead. My writing, for instance.
That being said, I do often get asked what I do all day. I tend to answer “surprisingly little” which is somewhat correct but mostly an unexpected way of answering an expected question.
A more serious answer would be that I’m an independent advisor and analyst. Throughout 2019, I’ve worked with companies in Canada, China, Denmark, England, Germany, Singapore, Sweden, Taiwan, and the United States. I’m very grateful for having the opportunity to have such a varied day to day life.
I have also written a little more often – and longer – than before. Here’s a summary of the articles I wrote this year:
I’d like to thank you for reading this newly launched newsletter. I hope you’ve found a few things of interest, and the odd unexpected delight too. I also want to send over some holiday recommendations since this is a time to relax and catch up on things.
Thank you for coming with me this far.
Happy Holidays,
Björn
Things I’ve written in 2019
Some of this may be a repeat, but here are the best articles that I wrote in 2019.
Julie Lindahl, on The Portal with Eric Weinstein This is something so unusual as a deep, thoughtful, and respectful conversation about a highly complicated and emotionally loaded topic. Julie Lindahl explores her family history reveals a dark, yet open, secret. This is a must listen.
Coffee – In our Time, BBC Radio 4 Apart from Melvyn Bragg being delightfully British, this conversation around coffee and its history is fascinating. Full of great anecdotes and cultural context.
Today, Disney+ launches in the US. It’s the latest entrant to the streaming wars, but hardly the last one. The video streaming market is also changing as new alliances form between media companies and telcos. Huge acquisitions and partnerships have been announced.
This is a familiar story. In my latest analysis piece, I make the case that it is in fact a loop that most telcos are stuck in. I hope you like it.
Björn
Things I’ve written
The Telco Identity Loop: What Disney+ does for Verizon A long piece of analysis where I go through why telecom companies keep buying content, and then end up selling it when it doesn’t work out. It also includes predictions of US and Nordic telco’s next strategic moves.
Two podcast episodes to enjoy
Wendell Pierce, on Desert Island Discs An unusually thoughtful episode. The actor Wendell Piece has a voice made for radio, and the life experiences to match.
Julie Thibault, on Prehype Podcast Julie works as an innovation lead for Chanel, but shares insights into the modern consumer that are applicable for everyone.
Two ways to learn about Costco(!)
Retail Dive: At Costco ‘everything resonates with the consumer’ I love Costco – both as a consumer and as a business case. I think it is both underreported and misunderstood too. There’s more than meets the eye, and this article is a good starting point.
Mine Safety Disclosures: Costco This is a slide deck from 2018, but it is definitely still worth going through. Among other things, it explains the strategy behind their membership model and how they handle threats from companies like Amazon.
Originally sent as a newsletter on November 13th, 2019. Read the original.
May 2015. Tim Armstrong, the CEO of AOL, is on CNBC. He is wearing a navy blazer, no tie, blue shirt. He’s talking fast, and in bursts of excited management speak. He has a lot to be excited about. It has just been announced that Verizon is going to buy AOL for $4.4 billion.
This is of course good news for Mr Armstrong. CNBC anchor, Andrew Ross Sorkin, asks him the key question for the whole telco industry:
– “Why [does] the pipe business need to own content now?”
Telcos – the owners and operators of the infrastructural pipes that the internet and other communications run on – regularly go through this exercise. They ask themselves:
Can we be more than just the backbone for others?
Should we own more of the value chain ourselves?
Can we bundle our existing offering with new, value-added services (VAS)?
The short answer to all of these questions tends to be yes. This is then followed by big acquisitions in the content and media space.
After a few years, it then changes back to no. The telco writes down a massive dollar value and tries to divest the media assets. And so the perpetual identity crisis of telecom companies continues.
This is the Telco Identity Loop. Let’s break it down.
The Telco Identity Loop
Stage 1: “We have to be more than just pipes”
One would think that being the infrastructure for the internet would be a pretty good business. Everyone loves the internet, right?
Turns out, it is in fact a good business. Telcos often have gross margins of over 80%, and profits at around 20%. Not bad, for being pipes.
But since consumers don’t really care which pipes are being used – as long as their services work well – this puts telcos in a situation where competition can get fierce. And fierce competition is expensive, generally speaking.
So, how does one differentiate these uninteresting pipes? Let’s add something to them! Some services, or rather some VAS – value-added services. A favorite acronym in telco world.
VAS are often content bundles, in some shape or form. They serve the purpose of helping with initial customer acquisition, or retaining existing customers longer.
Verizon’s campaign for Disney+
A current example is Disney+ that launches today. Their tie-up with Verizon was what made me write this blog post in the first place. If you are a certain type of Verizon customer, you get a full year of Disney+ for free. List price: $69.99. T-Mobile has a similar deal with Netflix. If you have two phone lines with them, you get Netflix for free too.
Note that neither of these companies have ownership of each other. They are just partnerships, which is indicative of Stage 1. We don’t really want to commit, but we do need something. It also speaks to their competitors’ tie-ups, that have moved on to Stage 2.
Stage 2: “Let’s buy content!”
When partnering isn’t enough, you go to acquisition instead. Let’s build an integrated offering for the consumer! One big bundle of telecommunications and entertainment services on a single monthly bill.
Entering Stage 2 is expensive, because you need to acquire something substantial enough for it to make a difference. Telcos are large companies, after all.
If we stay with AT&T, last week’s announcement of HBO MAX is the latest example of what this type of consolidation looks like in practice. HBO MAX will consist of both HBO content and a long row of additional content from the WarnerMedia ecosystem. And more importantly in this context – it will be free for viewers who already subscribe to HBO via AT&T. One can imagine some great introductory offers for new AT&T customers, once the service launches too.
This all sounds good, until it doesn’t. This is when it starts becoming obvious that the synergies have failed to appear, and that the corporate cultures of a telco and a media company don’t always jive. That’s when you enter Stage 3.
Stage 3: “Why do we own content again?”
Stage 3 often comes along with a broader management shift. It can be a generational change, or simply sluggish figures for too long. A new CEO is brought in, and they understandably want to pave a new path forward.
Hans Vestberg, CEO of Verizon. Photo: Verizon.
In August of 2018, the Swede Hans Vestberg stepped up from CTO to CEO of Verizon. Vestberg was previously at Ericsson – a large provider of telecom services with 5G as their big main bet. Tim Armstrong, who now was running the content division of Verizon (rebranded as Oath), saw the writing on the wall. He left.
As new CEO, Vestberg set out to find out what was really going on inside the company. The process was described like this:
“Vestberg is currently interviewing hundreds of Verizon’s top managers in an effort to refresh the company’s leadership and unify its offerings.”
From Fierce Wireless, by Mike Dano, October 10, 2018
A classic strategic review. It had started earlier in 2018, and had led to shutting down Go90 already. But more things were about to change. Time for Stage 4.
Stage 4: “Back to Basics”
In November of 2018, the new future for Verizon was starting to show.
Oath was written down by $4.6 billion. For context, that’s about half of what they had acquired the two companies for about 2,5 years earlier (Yahoo was $4.5 and AOL was $4.4 billion). Verizon stated that they “didn’t see the synergies it had expected from the combination of Yahoo and AOL” and that 44,000 of their staff had been offered voluntary buyouts.
Fast forward a few months, and Verizon divested Tumblr to Automattic. While Yahoo originally acquired Tumblr for $1.1 billion dollars, the sale was less than $3 million. A pretty impressive value destruction in about six years time.
If not content, then what? In Verizon’s case, it’s 5G. Core telco services – infrastructure. Pipes, but slightly wider pipes than before.
This gets us to August of 2019. Hans Vestberg is now on CNBC – also talking to Andrew Ross Sorkin – and predicting that 50% of Americans will use 5G phones by 2024. That’s where Verizon should be too. Back to basics.
Stuck in the loop
Most telcos are somewhere in this loop. The Disney+ deal is a clear example of how Verizon are leaving Stage 4 and are halfway in Stage 1 again (if you want to learn more about Disney+ and what they are getting out of this, then Matthew Ball is the authority). They still have Verizon Media Group (the new name for Oath) but in Q1 2019, their revenue was only $1.8 billion out of a total of $32.1 billion. These 5.6% of revenues aren’t going to hold back a change of strategy.
“We think that we are best equipped to leverage the best network and continue to partner with [media companies] rather than us managing it”
From Barrons, by Nicholas Jasinski, September 19, 2019.
The CEO and Chairman of AT&T, Randall Stephenson, is clearly deep into Stage 2. They have had to defend that position from activist funds like Elliott Management too. And if margins don’t improve the coming quarters, these concerns will surely come right back again. And then it’s on to Stage 3 again.
Running an undifferentiated business is very difficult, and it’s hard to fault wanting to expand further into the value chain. But these content acquisitions, more often than not, don’t seem to really change the mothership. They’re just bolting on another side business. The culture, what’s considered core business, the way of thinking – it’s all the same as before. And as such, content becomes a secondary priority. Or perhaps a loss leader and marketing expenditure in order to keep the core business going.
The fact that this loop is so recurring also poses the question where a new, innovative vision is going to come from in the telco space. Softbank – that has their core business as a Japanese telco – has certainly tried on a group level. Although you could definitely argue that this vision – including the now infamous Vision Fund – may not be one to emulate for others.
Predictions
With this loop in mind, where will these telcos go next?
Making predictions is a fools errand really, but it’s fun to both read and write. They also have an asymmetrical upside (you’ll probably only remember if I got it right). So here goes nothing:
Current position: Stage 2 (Content Acquisition). Comment: They overspent and fought to push the deal through. Now they have make to make it work, but performance will likely suffer. It is a huge behemoth full of cultural differences and conflicting interests. The likes of Elliot Management will come knocking again, and this will force change.
Prediction: Write-downs and lay-offs starting in 2020. I think at least 25% of the $85 billion acquisition price.
Current position: Coming out of Stage 4 (Write-offs & Divestments), heading into Stage 1 (Content Partnerships). Comment: 5G is their big bet, but it is still quite far away. I think we can expect several partnerships to the marketing going in the meantime. And once 5G is here, they’ll realize that they need to acquire content companies that can make use of this new technology.
Prediction: Major content M&A starting in 2021 (they’ve already bought VR assets from Disney). Could be a company like Magic Leap (if they’ve survived until then).
Current position: Stage 1 (Content Partnerships). Comment: Merger. The FCC just approved the deal and while there are individual states that are still protesting, this is effectively a done deal. The merger has likely taken – and will continue to take – all management attention for the foreseeable future. I can’t see them moving out of Stage 1 any time soon, even if they would have wanted to.
Prediction: Complete strategic standstill for 12+ months. No major M&A.
Current position: Stage 2 (Content Acquisition) Comment: Telia have been trying to acquire Bonnier Broadcasting since the summer of 2018. Things are finally looking up, and the deal is likely to go through just went through. But there have been a lot of stir-ups while they waited. They now have both a new CEO and a new Chairman of Telia. That being said, it would be strange if they immediately divested the very asset they’ve been trying to get hold of – even if it was a different management team doing it.
Prediction: The deal officially passes before Christmas, and the integration begins (Update: The deal went through today!). Once the deal goes through, I predict that they immediately acquire SF Studios from Bonnier too.
Current position: Stage 2 (Content Acquisition). Comment: This Nordic telco have gone in and out of both content and markets the last few years. But it’s hard to look at Telenor without understanding Telia above. Telenor’s entry to Finland is directly aimed at them. Most recently, Telenor merged their cable-tv Canal Digital with NENT Group (formerly half of MTG).
I think they’d like to keep expanding in content, but there isn’t that much to buy in the Nordics. Egmont got TV2 Norway and probably won’t sell. TV2 Denmark has been rumored to sell forever, but never does. TV4 Sweden and MTV Media in Finland just went to Telia. Maybe Discovery would consider selling their Nordic markets?
Prediction: If I had to make a bet, I think Telenor will make a big offer for 51% of TV2 Norway and Egmont will, somewhat reluctantly, accept it. Staying in Stage 2 for a while, in other words.
And finally a long shot, from the other direction:
Current position: N/A Comment: Now this is an outsider since Amazon isn’t a telco. But they are one of few players that could come at this from the opposite direction. Prime Video is a strong video offering and they have plenty of other content offerings too (Audible, Kindle, etc).
Prediction: Amazon takes Prime and becomes a US MVNO within 24 months. I don’t see them building any 5G towers any time soon, but they could easily operate in someone else’s network. They could have bought Boost Mobile in front of Dish, but they might be persuasive enough to find another way out there. That would at least stir things up in an otherwise predictable telco market.
I was recently in Copenhagen to speak at Techfestival. I was invited to present my thoughts on kids and screens – a topic which seems ever present.
Those who know me, know I like a good rant. But this cause required something different – nuance and context. So I wrote a proper speech, for the first time in my life. I hope you like it.
#KidTech A podcast interview with your truly. About the insights from Toca Boca, and the mistakes we made with Toca TV in particular.
Two other newsletters to read
Why Is This Interesting? Eclectic topics from Colin Nagy and Noah Brier. Delivered daily, they find an interesting angle on everything from pop culture to politics.
NYT Parenting I tend to find most parenting media quite tedious and repetitive. This recently launched newsletter from the New York Times is a great exception. Balanced, timely, and interesting.
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