Mar 10, 2019

Axios Capital

By Felix Salmon
Felix Salmon

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1 big thing: The precarious rental economy

Illustration: Sarah Grillo/Axios

Everything is a service, these days. Here's investor Mikal Khoso:

Today you can rent living space flexibly based on your needs (AirBNB, Stoop), commute from that space without ever buying a car (Wheels, Uber, Lyft), rent clothes to fill your closet (Le Tote), rent specific appliances based on your needs (Joymode) and rent the furniture you fill your apartment with (Fernish).

Why it matters: There's a lot to be worried about in this brave new world where our entire lives are dominated by rentiers, even if investors like Khoso have managed to persuade themselves that everybody wins.

  • Companies in the rental business are worth untold billions, whether they're renting out software (Oracle, Salesforce, SAP, Slack) or goods and services (IBM, Uber, Lyft, Airbnb). The people who rent out the information-economy pipes (Comcast, Verizon, AT&T) are big enough to eat any media company for breakfast (NBC Universal, Yahoo, Time Warner). When Netflix pivoted from DVDs-by-mail to streaming, the one thing that stayed sacrosanct was its subscription-based business model.
  • The move to a rental economy has been good for consumers — so far. According to research by Austan Goolsbee and Peter Klenow, inflation in the digital world is much lower than inflation in the economy as a whole, with a difference of more than 1 percentage point per year.

What's next? Price hikes are certain in a digital economy where many companies are burning cash at an unsustainable rate.

  • Lyft alone lost $911 million in 2018; Uber lost twice as much.
  • The entire minotaur business model is based on buying a dominant position in a market and then exploiting that position. Once they have stopped growing and their markets mature, for instance, companies like Salesforce and Slack have astonishing latitude to raise their prices before their clients even think about switching.

Ownership is a hedge against rental price increases. That's true in the housing market, as economists Todd Sinai and Nicholas Souleles have shown. But it's true in other rental markets, too. Owning a car is a hedge against price hikes at Uber; owning your own computer server is a hedge against price hikes at AWS, and so forth. Renting might be cheaper, but it's also more uncertain.

  • Inflation isn't monolithic; it hits different people differently. (In 2014, apparently, it was hitting Republican billionaires quite hard.) In a world where prices on Amazon fluctuate by the second, the cognitive cost of inflation — the amount of time we spend thinking about how much things cost — can be substantial even when inflation itself is low.

The bottom line: A world of continuously variable price is unstable and uncertain, even when overall inflation is low.

Bonus: Lyft's growing slice of the pie
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Data: Company filing; Chart: Chris Canipe/Axios

This chart comes from Lyft's IPO filing, and it shows how much money Lyft takes out of every dollar spent on its platform. It's not a perfect proxy for the amount siphoned from each fare before the driver gets paid, but it's close. As platforms like Lyft become bigger, they invariably take an increasing cut of total revenues.

  • The losers, in this chart, are Lyft's drivers. Workers in the gig economy know full well how uncertain their incomes are and how they can be changed at whim. At Contently, for instance, all freelancers saw their pay cut by 4.75% at the end of February, only for the pay to be reinstated last week after a backlash from the freelancers "who contribute to Contently's success."
2. The nexus of money, power, and fame

Illustration: Lazaro Gamio/Axios

Fame is a powerful and dangerous drug. It's probably easier to turn power into money than it is to turn money into power. But it turns out that many people want fame more than either.

Here's billionaire Bill Gross, having an introspective lunch with Robin Wigglesworth:

Gross attributes his drive to a deep-seated need for recognition. At Pimco he would ask potential hires what they would choose if they could only have one thing: money, power or fame. “I knew for me it was to be famous,” he says.

Gross was never really famous. At best he ended up becoming Nerd Famous, which is a far, far cry from Hollywood Famous. (According to Charles Duhigg's excellent profile, the switch from being Nerd Famous to being Hollywood Famous was exactly the point at which another billionaire, Elon Musk, became impossible to work for.)

Kylie Jenner is Hollywood Famous, and, at least according to Forbes, she's also the youngest self-made billionaire of all time. Even if she's not really self-made, and even if she's not really a billionaire, she is certainly better at turning fame into money than Gross was at turning money into fame.

My thought bubble: Billionaires tend to have somewhat awkward fame. It's probably preferable to be famous for being famous than it is to be famous for being rich.

3. Room for expansion

Illustration: Lazaro Gamio/Axios

Elizabeth Warren, as possibly befits a former Harvard professor, is carving out a niche for herself as the policy wonk of the race for the 2020 Democratic presidential nomination. This week she proposed breaking up the tech giants, complaining that Big Tech companies are buying up competitors.

  • What she's saying: "Weak antitrust enforcement has led to a dramatic reduction in competition and innovation in the tech sector."
  • Flashback: Facebook bought Instagram and WhatsApp; Amazon bought and Zappos; Google bought Waze, YouTube and DoubleClick. All of these acquisitions helped the giants remove a direct competitor or expand into an adjacent space.

Driving the news: Even private companies now feel the need to beef up via acquisition. Airbnb just spent $400 million buying HotelTonight, which brokers hotel rooms in much the same way that Airbnb brokers private homes.

  • Half of the acquisition price is being paid in stock. In a winner-takes-all world, HotelTonight's shareholders get to move over to something adjacent and larger. In the world of tech, that counts as a win, especially since there's no chance that this deal will elicit anti-trust scrutiny.
4. Who cares about the national debt?
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Data: The Harris Poll; Poll conducted Feb. 21–25 among 2,035 adults; Chart: Axios Visuals

What are America's biggest problems that a 2020 president should focus on solving? A new Harris Poll given exclusively to Axios asked 2,035 American adults that question, and 451 of them, or 22%, said that the national debt was one of the three most important issues.

  • By the numbers: The older you are, the more likely you are to worry about the national debt. In fact, Americans over the age of 55 are more than twice as likely to cite the national debt as a top problem than Americans under the age of 39.

Context: Economists who worry about the national debt generally frame it as an issue of intergenerational equity. An individual borrowing money is essentially borrowing from her future self: future-you becomes a bit poorer so that present-you can be richer. On a national level, countries that borrow money are effectively borrowing from future generations.

  • Economically speaking, older Americans should be happier about the debt (it means the government is spending more money on them today), and younger Americans should be more worried about it (since they're the ones who are going to have to pay it back out of their future income). But that's not what we see in reality.

Why it matters: Younger Americans seem to be on board with the new economic consensus that the national debt is not a pressing issue. Their voice should be heard on this, since they're the ones who have the most skin in the game.

5. The state of the art market
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Data: Artnet; Chart: Andrew Witherspoon/Axios

Artnet's second Intelligence Report is out, examining global art sales at auction.

  • Street art is having a moment: KAWS, the most successful of the current generation of street artists, saw his work gross more than $30m at auction in 2018.
  • The broader auction market is flat, with $14.7 billion of sales overall.
  • The top-10 list of the most expensive artworks sold last year by artists born after 1945 is dominated by African-Americans. The top 3 spots (and 6 of the top 10) go to Jean-Michel Basquiat. Kerry James Marshall's "Past Times," which sold to Diddy for $21 million, comes in at number 5 on the list, beating everybody except for Basquiat and Jeff Koons.
  • Overall, Basquiat sold $254 million of art at auction in 2018 — beating out Andy Warhol, on $244 million. Picasso trounced them both, however, with an auction total of $747 million. The top-grossing woman was Yayoi Kusama, on $109 million. The top-grossing living artist was David Hockney, on $206 million.

By the numbers: A recent paper from Marshall Ma, Charles N. Noussair and Luc Renneboog looked at the prices fetched at auction by paintings of different colors. The average hammer price was $504,349, but if a painting had a 1 standard deviation increase in the percentage of blue hue on the canvas, the price went up by 10.6%.

6. Tweet of the week
Via @IvanTheK/Twitter

The Fed's beige book came out on Wednesday, confusing everybody — but it turned out to be nothing compared to the jobs report on Friday.

  • The good: U-6, the broadest measure of underemployment, plunged in January to just 7.3%, down from 8.1% in December.
  • The bad: Only 20,000 new jobs were created in January, compared to expectations of more like 150,000.

Markets had no idea what to think, with stocks in the end closing flat on the day.

7. Bad disguise of the week
Photo: JIJI Press/AFP/Getty Images

Former Nissan chairman and Renault CEO Carlos Ghosn wore blue overalls, a worker's baseball cap and a surgical mask as he was escorted out of the Tokyo Detention House following his release on bail on Wednesday. One of his lawyers later apologized for the disguise, which fooled no one.

8. Sorry

Illustration: Lazaro Gamio/Axios

Many thanks to all the Canadians who informed me, upon receiving last week's newsletter, that Lyft isn't just in the U.S. — it's in Canada, too. You're right; I was wrong.

  • I also screwed up the previous week, when I said that Stripe was a minotaur. It isn't — while it has raised more than $1 billion in capital, it has only raised about $800 million in equity capital, which is what matters.
9. This week: Three key Brexit votes

Illustration: Rebecca Zisser/Axios

It’s a huge week for Brexit, writes Axios' Courtenay Brown, but that won't necessarily mean more clarity on whether and how the U.K. will exit the EU.

  • There will be a vote on the Brexit deal Theresa May negotiated with the EU on Tuesday. The new deal will be almost identical to the one rejected back in January, which led May to the biggest Parliamentary defeat in more than a century.
  • Assuming that gets voted down, there will be a second vote on Wednesday where a no-deal Brexit will almost certainly be roundly rejected.
  • Therefore, expect a third vote on Thursday — this time to determine if Brexit should be delayed for two or three months. Any extension would have to be approved by the European Council, but the ask won't even be made unless and until Parliament votes for it.
  • That's the most likely scenario, but given how febrile British politics are right now, just about anything could happen, including no-confidence votes and the possibility of a new general election being called.

Wells Fargo CEO Tim Sloan will be in Washington on Tuesday, testifying before the House Financial Services Committee.

10. Building of the week: The Alhambra

Photo via Pablo Valerio/Pixabay

The Alhambra, in Granada, Spain, is the greatest of Spain's Moorish palaces, and it allows some 2 million visitors per year to experience the zenith of 14th-century Islamic architecture in Europe. A later mannerist addition, on the top right of this photo, was constructed by Holy Roman Emperor Charles V after the Christians reconquered Andalusia.

Felix Salmon