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USERANDSUBSCRIBERECONOMICS:VALUEDYNAMICS
Allaboutusers?
TheSetUp
Baseyear Years1-5 Years6-10 Afteryear10TotalMarket $200,000 Grow1.5%ayearGrossMarketShare 10.00% 40%RevenueShare 20.00% 15.00%OperatingMargin -43.08% 20.00%Reinvestment NA Reinvestmentrate=7.5%Costofcapital NA 10.00% 10%->8.00% 8.00%Riskoffailure
TotalMarket MarketShare Revenues(15%ofGross) EBIT(1-t) Reinvestment FCFF1 220,780$ 13.00% 8,826$ (2,105)$ 775$ (2,880)$2 243,719$ 16.00% 11,309$ (1,983)$ 828$ (2,811)$3 269,041$ 19.00% 13,930$ (1,564)$ 874$ (2,438)$4 296,995$ 22.00% 16,661$ (820)$ 911$ (1,731)$5 327,853$ 25.00% 19,466$ 270$ 935$ (665)$6 361,917$ 28.00% 22,294$ 1,715$ 943$ 772$7 399,520$ 31.00% 25,080$ 3,511$ 929$ 2,583$8 441,030$ 34.00% 27,741$ 3,884$ 887$ 2,997$9 486,853$ 37.00% 30,173$ 4,224$ 811$ 3,414$10 537,437$ 40.00% 32,246$ 4,514$ 691$ 3,823$
Terminalyear 548,723$ 40.00% 32,923$ 4,609$ 484$ 4,125$
69,920$ 28,479$ (2,103)$ 26,376$
5%-$
25,057$ 5,000$6,000$
36,057$
Uber,TheGlobalLogisticsCompanywithabehaviorproblem(June2017)TheStory
Uberisalogisticscompany,doublingthemarketsizebydrawinginnewusers.Itwillenjoyweakglobalnetworkingbenefitswhileseeingitssliceofrevenuesslip(85/15),highercosts(withdriversaspartialemployees)andlowcapitalintensity.Theextracurricularproblemsatthecompany,withitlegaltanglewithGoogle'sWaymodivisionandaccusationsofcondoningofsexualharassmentwillslowthecompanydownintheneartermbut
notdamageitenoughtoalteritsstorysignificantly.TheAssumptions
StorylinkGrow10.39%ayear Delivery&Moving+Ridesharing
10%>40% Bigplayer20%->15% Lowerrevenueshare
-43.08%->20% CostpressurescontinueSalestocapitalratioof3.00 Morecapitalinvestmentmodel
At75thpercentileofUSfirms5%chanceoffailure,ifpricingmeltdownleadstocapitalbeingcutoff Cashonhand+Capitalaccess
TheCashFlows
TheValueTerminal valuePV(Terminal value)PV (CF over next 10 years)Value of operating assets =Probability of failureValue in case of failureAdjusted Value for operating assets
Mostrecentpricingputthepriceatgreaterthan$70billion
+Cashonhand+CrossholdingsValueofallassets
4
PushbackonUberValuation
¨ Inputdisagreement:LotsofinputsandassumptionsandIcouldbewrongonanyorallofthem..
¨ Modeldebate:DCFwasdesignedforoldeconomycompaniesandnotsuitedtoneweconomyfirmsthataremorefocusedonaccumulatingusers&subscribers,makingthemstickwiththefirmandsellthemproducts&servicesoverlongperiods.
¨ DCFisflexible:DCFmodelsaremuchmoreflexiblethanmostpeoplegivethemcreditfor,andthattheycanbemodifiedtoreflectotherframeworks.IfyouhaveaproblemwithaDCFvalue,itshouldnotbewiththemodelbutwiththepersonusingthatmodel.
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DCF:AggregatedversusDisaggregatedValuation¨ DCFFirstPrinciple:Thevalueofabusinessisthepresentvalueoftheexpectedcashflowsfromthatbusiness,withthediscountrateadjustedforrisk.Thatistrueforanybusiness,manufacturingorservice,smallorlarge,oldeconomyorneweconomy.
¨ AggregatedversusDisaggregatedValuation:Inaggregatedvaluation,youvaluetheentirecompany,consolidatingitsrevenues,earningsandcashflows.Youcouldvalueacompanyonadisaggregatedbusinessbasedupon¤ TheDifferentBusinessesitisin(SumofthePartsValuation)¤ TheDifferentGeographiesitoperatesin¤ TheUnitsthatitgeneratesrevenuesfrom(Subscribers,Users)
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Whydisaggregatedvaluation?
¨ Incorporatekeydifferences:Inaggregatedvaluation,youmisskeydifferencesacrossdisaggregatedunits(business,geographies,products,users)aswellasthemissingofcompetitiveadvantagesthatapplyonlytosomeunitsofthebusinessandnottoothers. Withdisaggregatedvaluation,youcanbringthesein.
¨ Connectstoriestovalue:Ifthestorybeingtoldbyabusinesspersonorentrepreneurisaunit-basedstory(users,subscribers),buildingavaluationthatisrelatedtothoseunitsisbetter.
¨ Connecttobetterbusinessdecisions:Totheextentthatinsiderscanobtaintheinformationtovalueabusinessonadisaggregatedbasis,youcanusethatinformationtoimprovethewaythecompanyisrunandtoincreaseitsvalue.
UserBasedValuation- Structure
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UserBasedValuation
¨ Tovalueacompany,basedonitsusers,youhavetovalueanindividualuserfirstandthenestimatethecostofacquiringnewusers.
Valueofuser-basedcompany’soperations=Valueofexistingusers+Valueaddedbynewusers- Valuedragfromcorporateexpenses
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ValuingExistingUsers
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ValuingNewUsers
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ValuingCorporateExpenses
AUser-basedValuationofUber
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Uber:DeconstructingtheFinancials
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Uber’sExistingUserValue
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Uber’sNewUserValue
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UberCorporateExpenseValue(Drag)
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UberValuation
UserValue Assetvalue CompanyValue EquityValue
ExistingUsers $16,412.49
NewUsers $20,190.70
UserValue $36,603.19 $36,603.19
- CorporateExpenseDrag $(10,369.28)
UberOperatingAssets $26,233.91 $26,233.91
+Cash $5,000.00
+Didi CrossHolding $6,000.00
UberFirmValue $37,233.91 $37,233.91
- Debt $-
ValueofEquity $37,233.91
User-basedValueDynamics
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I.UserCostPropositions
• Profitsarebetterthanlosses:Ifyouareaninvestorinabusiness,youwouldratherthatthebusinessmakemoneythanlosemoney.
• Youngcompanieslosemoney:Ifyouhaveayoungcompany,youshouldexpectthecompanytomakelosses,evenifitisavaluablebusiness.
• Notalllossesarecreatedequal:Foryounggrowthcompanies,dependentuponusersorsubscribers,therearegoodwaystolosemoneyandbadwaystolosemoney.
• Investorbeware:Toinvestinthesecompanies,youneedtoknowwhytheylostmoney,notjusthowmuch.
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a.ExistingUserversusNewUserCosts
UserValueProposition1:Amoney-losingcompanythatislosingmoneyprovidingservicetoexistingusers/customersisworthlessthanacompanywithequivalentlosses,wheretheprimaryexpensesarecomingfromcustomeracquisitions.
21
b.FixedversusVariableCosts
¨ UserValueProposition2:Acompanywhoseexpensesareprimarilyfixed(willnotgrowwithrevenues)willbeworthmorethananotherwiseidenticalcompanywhoseexpensesarevariable(trackrevenues).
22
II.UserGrowthPropositions
• Foryoungcompanies,wegenerallyviewgrowthasgoodandrewardcompanieswithhighergrowthrateswithhighervalue.
• Notallgrowthiscreatedequal.Somegrowthstrategiescreatemorevaluethanothersandsomemayevendestroyvalue.
• Inauserorsubscriberbasedmodel,therearetwowaysyoucangrowyourrevenues.Oneistogetexistinguserstobuymoreoryourproductorserviceorperhapsotherproductsandservicesthatyoucomeupwith.Theotherisbytryingtoacquirenewusers.
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a.GrowthfromExistingUsers
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b.GrowthfromNewUsers
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GrowthandValue
¨ UserValueProposition3:Acompanythatisgrowingrevenuesbyincreasingrevenues/userisworthmorethananotherwisesimilargrowthcompanythatisderivinggrowthfromincreasingthenumberofusers/customers.¤ Youngcompaniesfacetradeoffsandthequestionofwhethertoallocateresourcestogetnewusersortrytosellmoretoexistingusersisoneofthose.
¤ AtleastinthecaseofUber,thenumbersseemtoindicatethatifyouhavetoputpriorities,itshouldbeongettingexistinguserstousetheservicemorethantokeeplookingfornewusers.
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III.UserBusinessPropositions
¨ Lookingatacompanyasauserorsubscriberbasedcompanycanbeusefulindecipheringhowandwhytheymakethestrategicandbusinesschoicesthattheydo.¤ FromBuzzwordstovalue:Auser-focuscanhelpusmakesenseofthefocuson“bigdata”and“networkingbenefits”thatmanyofthesecompanieshaveandlinkthemmoredirectlytovalue.
¤ RevenueModels:Auserfocuscanhelpdeterminewhattypeofrevenuemodel(subscription,advertisingortransaction)willoptimizevalueforacompany.
¤ RealOptions:Doesacompanywithalargeandloyalcustomeruserbasehaveoptionality(leadingtoapremiumbeingaddedtoitsvalue)?Whilerealoptionsarenotoriouslydifficulttovalue,inthiscontext,auserfocuscangiveusdirection.
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a.TheGreat,theGood,theBadandtheUgly!
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NetworkBenefitsandBigData:Keystobeingexceptional¨ UserValueProposition4: Theexceptionalfirmwillbetheonethatisabletofindapathwaytohighvalueperuserandalowcosttoaddinganewuserinamarketwhereitscompetitorsstrugglewitheitherlowvalueperuserorhighcostsofacquiringusers.
¨ Thekeystobeinganexceptionaluser-basedcompanylieinutilizing:¤ NetworkBenefits,toreduceyourcostpernewuser,asyougetbigger.
¤ BigData thatyouhaveaccumulatedonyourusersto(a)customizeexistingproducts/servicestomeetuserpreferences,(b)createnewproductsorservicesthatmeetperceiveduserneedsor(c)fordifferentialpricing
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b.RevenueModels
Subscription Transaction Advertising
UserStickiness(Userlife&RenewalProbability)
High(Highlife&renewalprobability)
Intermediate(Intermediatelife&renewalprobability)
Low(Lowlife&renewalprobability)
RevenueperUserPredictability(Discountrate)
High(LowDiscountRate)
LowPredictability(HighDiscountRate)
Intermediate(AverageDiscountRate)
RevenueperUserGrowth(AnnualGrowthRate)
Low(Lowgrowthrateinrevenues/user)
Low(Highgrowthrateinrevenues/user)
Intermediate(Intermediategrowthrateinrevenues/user)
Growthrateinusers(CAGRin#Users)
Low(LowCAGRin#users)
Intermediate(IntermediateCAGRin
#users)
High(HighCAGRin#users)
Costofaddingnewusers(Cost/NewUser)
High(HighCost/NewUser)
Intermediate(MiddlingCost/New
User)
Low(LowCost/NewUser)
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The“best”revenuemodel
¨ UserValueProposition5: The"optimal"revenuemodelwillvaryacrossfirmsdependingupon wheretheyareinthelifecycle,theproductorserviceofferingandwhethertheyarefocusedonusergrowth,revenuegrowthorrevenuesustainability.
¨ Anadvertising-basedmodelwillallowformuchmorerapidgrowthinafirm'searlyyears,asubscription-basedmodelwillgeneratemoresustainablegrowthandatransaction-basedmodelhasthegreatestpotentialforrevenuegrowthfromexistingusers.
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c.RealOptions
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TheValueofOptionality
¨ UserValueProposition6:Thevalueofoptionalityfromauserbasewillbegreatestatfirmswithlotsofsticky,intenseusers inbusinesseswherethe futureisunpredictable becauseofchangesinproduct/servicetechnologyandcustomertastes.
¨ Thevalueofarealoptioncomesfromexclusivity,andtotheextentthatyouhavesticky,intenseusers,youhaveabasethatyoucanusetoexperimentwithotherproductsandservices,withthevaluescalingupwiththenumberofuses.
Uncertainty:AFeature,notaBug!
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1.EstimationversusEconomicUncertainty
¨ Estimationuncertaintycomesfromincomplete,missingormisleadinginformationprovidedbythecompanythatyouarevaluing.
¨ Economicuncertaintyisdrivenbyforthcomingchangesinthebusinessthatthecompanyoperatesin,aswellasmacroeconomicfactors.
¨ Thefirstcanbereducedbyobtainingbetterandmorecompleteinformationbutthelatterwillremain,nomatterhowtimeyouputinanddataanalysisthatyoudo.
¨ WithUber,itiseconomicuncertaintythatisthedominantsource.So,gettingbetterinformationfromUber(eitherasaninvestororwhenitgoespublic)isgoingtodolittletoreduceuncertainty.
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2.Uncertaintyisafactoflife(andbusiness)
¨ Uncertaintyispartandparcelofdoingbusinessandyoucannotwishit,prayitoranalyzeitaway.
¨ Youhavetwochoiceswhenitcomestouncertainty.¤ Youcandealwithitfrontallybymakingexplicitassumptions.Youwillbewrong100%ofthetime,butyouwillbeabletoseewhereyouarewrongandadjustyourvaluation.
¤ Youcangointo"denial"modelandmakeimplicitassumptionsaboutvariables.Whenpricingbylookingatwhatothersarepayingforusersinsimilarcompanies,youaremakingassumptionsaboutallofthevariablesaswell,butthoseassumptionsareimplicit.
36
3.Uncertaintycanbevisualized
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BottomLine
¨ ThemostdirectapplicationsofauserorsubscriberbasedmodelisinthevaluationofcompanieslikeUber,FacebookandNetflix.
¨ Thatsaid,moreandmorecompaniesareseeingbenefitsinshiftingfromtheirtraditionalbusinessmodelstouser-basedones.Apple’sbillioniPhoneusers,Amazon’sseventymillionPrimemembersandMicrosoft’shundredmillion365usersareallgivingthesecompaniestheirversionsofuser-basedmodels.
¨ Understandingusereconomicsiskeytoinvestinginthesecompanies(valuingorpricing)andinmanagingthem.