[REPLAY] Alex Moazed – Building Modern Monopolies - [Invest Like the Best, EP.25]

I know firsthand how complex the tech stack is for asset managers, and seemingly every new tool and data source makes the problem even worse, adding more complexity, more headcount, and more risk. Ridgeline offers a better way forward, one unified platform that automates away all that complexity across portfolio accounting, reconciliation, reporting, trading, compliance, and more, all at scale. Ridgeline is revolutionizing investment management, helping ambitious firms scale faster, operate smarter, and stay ahead of the curve. See what Ridgeline can unlock for your firm. Schedule a demo at ridgelineapps.com. This podcast is sponsored by CFA Institute, the global association of investment professionals whose mission is to lead the investment profession by promoting the highest standards of ethics, education, and professional excellence for the ultimate benefit of society. CFA Institute serves a global community of investment professionals working to build an investment industry where investors' interests come first, financial markets function at their best, and economies grow. The Chartered Financial Analyst Credential is the most respected and recognized investment management designation in the world. The views expressed in this podcast do not necessarily represent the views of CFA Institute. Hello and welcome everyone. I'm Patrick O'Shaughnessy and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at InvestorFieldGuide.com. Patrick O'Shaughnessy is a principal and portfolio manager at O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast. I have a rule that when I love a book, I do my best to find and meet the author. I usually fail, but sometimes I succeed, and this week's episode is a great example of why I go to the trouble. My guest is Alex Moset, and the book in question is Modern Monopolies, which explores the platform business model, think Uber, Airbnb, or GitHub, and also explores the history of business in general. Most nonfiction books are three times too long, but I wish this one had been longer.

Alex is also the founder and CEO of Applico, a company he started in his dorm room and has grown into a huge enterprise, helping startups and Fortune 500 companies innovate with platforms. Alex and I talk about the history and future of businesses and different types of business models. There's a lot in here for investors, entrepreneurs, and historians. As you listen, try to wrap your head around the fact that Alex is still in his 20s. I had a blast and learned a ton, and I hope you do the same. For show notes, visit InvestorFieldGuide.com forward slash Alex. And now please enjoy my conversation with Alex Mozet. Alex, thank you very much for joining me today. We're going to talk a lot about new business models, the history of business models, and really get into the weeds, hopefully, on how to build platforms. So I thought a fun place to start would be exploring a bit of the history that you talk about in your book from the linear... business model, as you call it, to the platform business model. If we could start by you describing that big kind of picture growth and transition, I think that would set the scene for talking about platforms. Sure. So great to be here, Patrick. Thanks for having me. If we were to start at 100,000 feet up and you look back thousands of years ago and think about a bazaar in ancient Rome, connecting buyers and sellers, or now, say, the 20th century with shopping malls connecting buyers and sellers. It's the same underpinnings of the platform model, but using brick and mortar as opposed to tech and digital and data. Now, we look at, say, the 1700s, 1800s Industrial Revolution, companies being created to leverage machinery. and industrial mechanics to create products, create value, transportation systems, building cars, and a whole slew of other products and services that are now enabled. Those businesses for really the past 200 or 300 years have been getting bigger and bigger and bigger. Every 20, 30, 40 years, you see...

a way to incrementally improve upon that linear business model right so so value and information flow in a very linear way i have suppliers and then i bundle that up and i create something and i package it and then i distribute it and i sell it and so i have really one consumer one customer and i'm creating the value chain and controlling a lot of it internally over the past probably 50 years, particularly in the 80s with Malcolm Porter and the idea of vertically integrated value chains and economies of scale, that idea was taken to the next level, which was, okay, if you go a step farther and now own your supplier and your supplier's suppliers, you could shave a couple points of margin. and add it to your bottom line. And since you're a huge multi-billion dollar company, that creates an immense amount of value. And then you saw a lot of consolidation and a lot of things happen like that to be more vertically integrated, say, in the latter half of the 20th century. What we see now, though, in the late 90s and 21st century is the dawn of the platform business model essentially having a resurgence. It's somewhat always been around, but in niche markets and, again, through more brick-and-mortar means. But now, with the confluence of technology, the Internet, and then smartphones and so on and so forth, data, unlike anything we've seen before, and people's user behavior is actually molding to... these new interaction models, now you see that platform model really coming onto the scene and in a position of dominance. Do we have any sense for, you could use the S&P 500, I know a lot of these platform businesses are still private, but what sort of early market share? they have gained in, you know, measured by sales or market capitalization or something like that? Like how, how, how are they just a blip still on the radar or are they really starting to aggressively gain share? Yeah. So the quick and dirty definition of, of what makes you a platform company is you're taking a large fragmented network of individuals and or companies that create value. And your focus is on facilitating that exchange of value. So if we think about FAMGA, which is stands for Facebook and.

Amazon, Microsoft, Google and Apple. And I think at some point they own the top four or five slots. Yeah, recently. Right. And in terms of just net market cap and valuation on the U.S. markets, those are a sampling. But in private companies, you have Uber and Airbnb and Snapchat, which is just about to go public, obviously, that will then quickly be added to those ranks. So it takes. At least 10 years for these businesses to really hit a point of strong critical mass or the book I co-authored called Modern Monopolies, essentially to become that modern monopoly for these network effects and winner-take-all dynamics, which we'll discuss, the time horizon is a lot longer than, say, a traditional linear business. Like some of these books, we'll give it a timeline of maybe five, seven, eight years for those to hit that billion dollar mark. So we're still in the very early stages. But when you look at what in relatively short order, 15, 20 years, these companies have been able to do in terms of creating new markets and then reshuffling the value prop in some traditional industries, it's quite impressive. And you're certainly seeing that on the stock market. Now, what we see for, say, the next 20 years is these businesses have a new operating model, and they are extremely profitable, and they need to grow fast in the future. And some of their markets, like Google Search, is actually starting to decline in some ways, still generating a lot of cash. but they need to look for other ways for growth. And that's where you start to see a lot of those modern monopolies, that FAMGA market, moving into other traditional industries and seeking to do the same thing, bring their platform model into an industry with a lot of fragmentation where you can create a tremendous amount of value by reducing search and transaction costs. So if you think about what's an industry where

The existing players are creating value, and they're also handling the distribution of their product or service. And you think about it in a macro way to say, is that actually being distributed in an efficient manner? And if I were to bring a new model, the platform model, into that industry that could more effectively coordinate that exchange of supply and consumption, essentially, could that business create a lot of value? If you're checking off yeses to a lot of that, then those are some of the things that these businesses just as a core value prop for the business model. we'll be able to bring to these new industries. So there's so, so much to unpack in all of that. And maybe an interesting place to start would be a few examples to make sure it's very clear the difference between a linear and a platform company. So I think this is right. But if you look at Apple, it's an example of both where the hardware business, which is obviously most of its business is linear, right? Economies of scale, very efficient production, supply chain, value chain. iTunes is an example of a platform where you have consumers on one side, producers on the other. Apple is not, at least not yet, producing any content. It's relying on musicians and movies, et cetera. But it facilitates the connection. So is that a clean example of a company that has both kind of old line linear business alongside platform business? Apple is a great example. I would prefer to use the app stores as their. A platform example, the only caveat with the music is just because the labels and the rights in music give you somewhat of a consolidated supply ecosystem for where you get the rights from. But yes, at a high level, the idea, you're spot on. And you see a lot of these, even Amazon, started as just a book reseller, right? So another way to think about linear versus platform is if you were thinking about the balance sheet of these businesses. those assets, the things that they're selling are going onto their balance sheet, right? If you are a grocery store or an Amazon book reseller in the mid to late 90s, you're taking that inventory and it's going onto your balance sheet, right?

For the marketplace model that Amazon has been growing immensely over the past 10 years, and actually in their most recent quarterly earnings, is why they missed on the, some of the analysts will say that's why they missed on the revenue but hit on the margin, was because the revenue of selling a product through the Amazon marketplace, they don't recognize the revenue, but they get their commission. an 8% to 20% commission off of the goods that are sold by third-party sellers in the Amazon marketplace. And that's where they make the predominantly large portion of their profit from their e-commerce unit is from the third-party sellers who are also paying rent to store the products in Amazon's warehouses if they want to be in the Amazon Prime program. So, yeah, you see a lot of this kind of blending of linear. and platform you also see amazon creating a lot of their own their own white label products to undercut say png and many of their business lines and product lines because they can't and they can create some additional margin and sell some quality products at a lower price point. Your book, which is, people know that I read and share a lot of books and I have various clubs. And one of them is the 100 Club, which is books that I took more than 100 highlights and notes in. And Modern Monopolies is one of a fairly small list in that group. It's a fantastic book. And it kicked off for me. an interesting journey into the history of the corporation. So I'm going to read a quote, which I came across in some of my reading, which I think is really interesting. The company outsourced as much as it could, not least the manufacturer of goods in the East, its shipping, as well as its ultimate retailing of its products. The value it added to the process was in the selection of goods and the efficiency of delivery. In a situation characterized by extremely poor information, the company's strength lay in its ability to achieve an equilibrium between supply and demand on opposing sides of the planet. Now that sounds...

almost sounds like uber like when you order an uber you see those little lines connecting you know basically doing that supply and demand equation but that's actually being written about the british east india company so the first corporation in 1600 so instead of ride sharing it was you know spices tea and opium right but like you said this idea has been around forever and for me what fascinated me most about the book was this idea of transaction costs and core transactions. So I'd love to get into those topics. So you talk a lot. I love books that surprise me. And what I was surprised by a bit in your book, just because I'm used to business books being business books, was a very interesting and detailed history of the thought. You know, guys like Ronald Coase and the theory of the firm, which are explored in detail. And he talks a lot about transaction costs. So could you get into some detail about... what are transaction costs? Why is it good business to reduce them for people? What types are there? Because I think that those ideas may be applicable to anyone out there that's, you know, on the personal level, reducing other people's transaction costs is good at the business level and so on. So let's dive into those. Yeah. So when we think about transaction costs, they often come hand in hand with the concept of that core transaction, right? And when you look at In the taxonomy of platforms, there are multiple different types of platform business models, particularly in, say, service and product marketplaces, which is how we would define where an Uber fits on a service marketplace because the driver is essentially exchanging a service, or in an Amazon, you're exchanging a product. And in those kinds of businesses, we call them exchange platforms, the value prop of reducing search and transaction costs is probably the strongest point of value that at a macro level the platform is able to bring to that industry. And what that means is if you were to take the traditional business model canvas of a linear business,

and look at all the costs that go into sourcing the labor coordinating the labor having the upkeep for either the product or the car how efficiently you're then able to fulfill the demand and what kind of opportunity costs you may have by not having inventory readily available. Or maybe you see this a lot with the heavy equipment rental industry where United Rentals, the biggest player, will actually go and lease equipment from other smaller rental companies to fulfill the demand that they're getting but they can't fulfill. And all the costs that go along with having those assets on your balance sheet, them depreciating and so on and so forth, all roll into this bucket of overhead. Now, if you were to say, how do I create a more efficient model where I can reduce those search and transaction costs? All I want to do, I want to separate the two roles in fulfilling the demand, right? Just finding me someone or a product or a service who's going to give me what I want. And then I want the person or good or service that I'm receiving to just focus on giving me that good or giving me that service. And I don't want that to be the same company. I want to separate these things so that the platform as facilitating the exchange can focus on just creating the best exchange possible. and there is the least bloat and least overhead involved in actually connecting those two things. And where you see that possible are in more fragmented industries, where if you were to just think about it and say, okay, if I have an industry where it's more fragmented, that probably means that the cost is duplicated a lot more across all these different providers who are both, say, providing a service.

And then handling all the marketing, the SG&A cost to actually have that service consumed. If we just take the heavy equipment rental market for an example, right? You have a lot of small players, mid-sized players, and then you have a few big players in markets where you see the biggest players having maybe... half of the revenue in an industry, that means you have thousands of other companies that are small that all have to figure out how to go get customers using probably a lot of the same channels that the big players do. And that's one of the advantages. The big players say, okay, I'm going to buy you. And now I can reduce all the similar overhead SG&A costs. I can just roll that into all these existing cost centers of mine and I have a more efficient business, right? So the platform is able to reduce that by saying, You just focus on having equipment ready and having it be of good quality and ready to be serviced, having good customer service. And I'm going to focus on getting you, the customer, figuring out what their needs are, making sure it's an optimal price. So a lot of these industries, there's a huge transaction cost inherent in a lack of pricing transparency. So one of the inherent ways that transaction costs are reduced by a platform, by a marketplace model, is by bringing pricing transparency and then pitting all the third-party suppliers against one another to make sure they're giving you the most optimal price. Because what happens when you have a lack of pricing transparency is you then have arbitrary pricing. which again is just increasing the cost of whatever that service or good is to the end customer. So you're ripping a lot of that out by centralizing it and saying that the platform is the central arbiter and understands the market better than anyone else. So they can do the best job in matching supply and demand better than any one individual on either side of that ecosystem can. When you look at more commoditized

products or services like Uber, which we've talked about, you start to see the opportunity for that platform to essentially reduce transaction costs even more by standardizing price rather than letting the third party sellers or providers set their own price because they don't know how they should be setting the price. And there isn't too much differentiation in the service or good that they're selling. So the platform should be able to look at the handful of variables that influence price and then standardize and set it for the ecosystem. One of the cleanest little phrases in the book for identifying why this works so well is, I think it was GitHub, where it was their original line that X, fill in the blank, no longer a pain in the ass. That if you can find some platform that... finishes that sentence for you, you know, finding a car quickly, no longer a pain in the ass, finding the right block of code, no longer a pain in the ass, that that is a great, simple little rule of thumb for identifying the power of this platform that sits in between consumers and producers. One of the things that I'm really interested in, and you talked about the importance of the rise of data, the internet, transparency, as kind of coinciding with the rise of the platform business model. is the idea that most of the value is now there's more consumer surplus being captured by the consumer versus the producer in the past. So if you think about consumer surplus as I'm willing to pay $10 for something, but I only have to pay $5, that's $5 of surplus. And I always try to think about all of these things, especially when it comes to business models, from the perspective of investors and entrepreneurs. If I want to start a business or I want to invest in, if I'm a venture investor investing in businesses, I'm curious what you think platform business models represent as an investment because there's no doubt that they seem to dramatically increase consumer surplus. They are good for consumers and producers because they just get to use the winner, right? They get to use the platform that emerges victorious in a very competitive, you know, it's hard to scale into a network.

Whoever wins, great. I'm going to win. And then the end user wins. But it seems like because there are relatively few things to colonize and be a platform for, you know, Facebook colonized social identity and LinkedIn colonized professional identity. If I'm a VC, if you're sitting across from a VC or an entrepreneur, are you encouraging them to build a platform? Because it strikes me that maybe the odds of success would be lower, even though. If you're the winner, obviously, you're going to do incredibly well. So it's like more of a power law that already exists in VC. So what do you think about all that? Do you think that the platform business model is good for entrepreneurs and VCs? Or is it just for the lucky founders of the ones that turn out? And then the externalities, the consumers and the producers that just get to use the winner? Yeah, I mean, I think it comes in waves. We saw a huge race to the internet when the internet first came out. which lets you build essentially web apps. When mobile and smartphones and iOS and Android, you saw another wave of opportunity. And so somewhat I think about it is development platforms are one type of platform that we've identified of the eight. The development platform would be iOS or Android. It's letting third-party software developers create software. the platform is enabling that software to be consumed and interacted with, et cetera. And every time there is a dominant or new development platform that comes to fruition, you then start to see all of the other kind of platform types become repopulated or have fresh blood or fresh approaches to solving similar problems, with consumers that interact with the software in a different way or with a different set of data that the development platform is providing to you than wasn't, say, previously accessible. So if you were to think about the difference between a lot of the apps that we've seen come to light that are on your smartphone versus on the web and what literally just having knowledge of where your location data is.

brings to light for, say, Uber, as an example, to match you with a car, because it knows where you are and where the car is pretty easily, versus the idea of ordering a car service online, which was technically possible, but is that really going to have the impact and the success that that services marketplace would have on the internet versus the web? So I think when we look at it like that, I think when you look at the timelines in each one of those development platforms, like I think some new development platforms that are on the horizon for us, I think auto is going to present a really interesting development platform set of opportunities. If you if you're talking about expand on that a little bit. Yeah. So, you know, your idea of kind of like excess kind of consumption or, you know, finding that right. If you think about all the. passive time that people spend in cars on their phone using probably software and the tens of millions of hours that exist in a very, you know, I mean, you're captive, you can't go anywhere. And you think about what kind of software and experiences you could create better when enabled by all the data and sensors and equipment that are in the car. I think you're going to see a tremendous amount of opportunity. Apple, Google, and Baidu are trying to move pretty heavily into that. And some of the existing autos are in the midst of trying to figure out that question. So there's obviously a ton of talk and writing and interesting things about self-driving cars, which if you think about resources. Again, thinking back to, like, the East India Company, it started with this kind of mercantilist, zero-sum, land-based. There's a limited amount we're going to explore. Then there was productivity growth. So we've kind of explored everything, but we're going to get more efficient per capita. And now there's this, like, attention-based. Maybe COAS is the right economist for this.

We are trying to free up as much time as possible, like a washing machine freed up time in the 50s or something like that. And now, I don't know what the number, maybe you know, the number of dead hours where you are actually driving, which now you'll be able to, who knows when it'll happen, let's say it's 10 years, you won't drive at all. So you'll have... tons of extra time and attention so so is that what you're talking about is mining that new source of attention in like new and interesting ways yeah pretty much right you have an existing tranche of time which is huge if you think about just passengers and cars right and then you're about to have another whole wave on top of that of people who have been driving that won't be driving anymore. So when you look at the next 5, 10, 15, 20 years of that space and how software is going to be able to play in that space, and then you think about the literally trillions of dollars that are spent on transportation services and how could software, again, which has now access to a functioning automobile, figure out how to make that a more efficient and optimal transaction. I think you're going to see a load of opportunity. One of the, again, neat little tricks that I keep thinking about from the book is in identifying potential. You basically, you've just given one example, but in identifying potential opportunities for new platforms is to look for untapped supply, like big kind of dead sources of supply. And by far the most interesting example here is Airbnb. So you've got. All of these residences, extra beds originally, places to stay that weren't generating any very efficient, right? You're generating a lot more often untapped supply. So one, that's a great test. I'm curious, other than autos, looking forward five, however long you want to look forward, where do you see that opportunity densest for? the platform business model? Like what are some, what are some really interesting areas of the economy that you're focused on or thinking about as you look at platforms? Yeah. So unfortunately I see too many to actually focus well enough on all of them. But I think if I were to call out another development platform, part of the economy, I really think, I mean,

We hear a lot about IoT, particularly in the B2C space, so in the home, which there's an opportunity. But I think what actually is a bigger opportunity is industrial IoT. And when you think about the trillions of dollars that are flowing through machines, say, in the factory, and all the things that are happening behind the scenes, I think... There's a load of opportunity there from letting software developers tap into the machines that are on the factory floor, from suppliers to workforce management to ERP and inventory management to prototyping better products more iteratively. So that's a whole slew of things. Also, I think when you look at a lot of B2B industries in general and you look at what Amazon business is doing. moving into the B2B distribution space, which by some estimates is a $3 to $8 trillion series of industries. That's building materials to industrial supply for factories, to electrical supply, to metal distribution, to chemical and petroleum product distribution. I mean, it is massive. There is a big... rave of this in the late 90s which we talk about in the book with b2b marketplaces and those didn't pan out and we go into more detail as to why And why also when you line that up with why I think right now is very different. Amazon business has been growing at about 20% month over month. They've had over a billion dollars in revenue. And they see this as a kind of blitzkrieg for them for the next few years because they can kind of catch a lot of these distribution companies before they really figure out how to combat this. So that, anything also related in transportation when you look at. freight transportation, when you look at heavy equipment rentals, there are a lot of things like that where there are trillions or billions, tens of billions, hundreds of billions of dollars where that marketplace model.

is the platform type that you're going to see create huge efficiencies. You mentioned Amazon. And one of the little things that I always found interesting was how they are taking search share from Google because people, they've done such an amazing job as a business. I do this. Like when I need to buy something, I don't search for it on Google. I just go on Amazon because I just know that they're going to provide me the best experience. And it begs the question, how consolidated? is this going to get? Like how many platforms do we actually need? Because I could, I could see if they continued on this trajectory, like relying on Amazon for virtually everything. So is there an end game like that, that where this is, and it's called modern monopolies. And I want to get into that in a minute because usually monopoly people think that's a bad thing, bad for, bad for consumers, but this is very obviously the opposite. But how many, is there going to be like one platform to rule them all? How do you think this will go? I think a lot of that is up to entrepreneurs, VCs. I think also the large traditional businesses that are in the crosshairs of a lot of these modern monopolies. I think that we've seen the ability for multiple marketplaces, some being more niche than others, coexist. If we think about eBay and Etsy versus Amazon. And now you're seeing actually a few startups, even just in the kind of local peer-to-peer on mobile set marketplace models. There's actually two or three startups that have each raised over $100 million and are growing like gangbusters, which is kind of like the mobile platform version of yard sales or different versions of that, right? So you're seeing multi-billion dollar marketplace opportunities. be able to carve out their own niches if you can prevent amazon from bringing their model into your industry is really up to a lot of these companies and and entrepreneurs and and how that ecosystem combats the threat because the threat is clear and it's coming if they don't do anything then sure you're going to see an extremely centralized you know very dominant and continuously

increasing role of say an amazon i think if the traditional enterprises can't figure it out or the entrepreneurs can't figure it out then eventually what you'll see and and this could lead into that next point is other modern monopolies saying well the linear companies aren't doing justice to themselves and i don't want amazon to become that powerful So I need to go create a marketplace. You know, I'm Google and I need to create a legitimate marketplace initiative to combat Amazon because these guys aren't doing it for themselves. So that a couple more examples now pop to mind where, you know, Google did that with social and failed or has failed thus far. Amazon, there's a VC here in New York, which you mentioned in the book, named Fred Wilson at Union Square Ventures, who talks about how software on its own is a commodity. It's extremely easy to replicate software. So then I'd like to get into what is hard to replicate. So how do these... companies create a moat like what would it be that that peer-to-peer yard sale idea does or could do to stop amazon which obviously with its resources could replicate the technology so what are the what are the other key ingredients here to building a successful platform you talk for talk through four things that that a platform has to do to be successful so maybe we could start with with audience building or matchmaking you know take your pick as two of the really interesting ones what are they what how can you how can you build a moat can you build a moat right and if so how can you do it so great question uh we'll try and tackle as much of that as we can at a high level right to to kind of finish the quote right software alone is a commodity the value is in the ecosystem the software is enabling you to build an ecosystem and those things play hand in hand with one another so the four core functions of the business model audience building being one when you think about i have at least two different user groups, consumers and producers on either side of this ecosystem, I need to stage my focus and very often switch my focus back and forth between these two different groups as I look to hit a point of what you would call critical mass. The technical definition of critical mass is where the cost of a new user joining your ecosystem is less than the value they receive from joining.

Literally what that means is when you... See what a lot of people would say is kind of like viral growth where these network effects start working for you and everyone wants to join because the value prop is so clear. Now that you have that critical mass, now that you have enough consumers and producers and that value prop is really functioning as it should be. So audience building, you can look at how do you really subsidize that value. So until you hit critical mass, the equation is in reverse and it's more costly to join. the value you get so you need to subsidize the value you can give monetary subsidies like referral codes which everyone which a lot of people do product feature subsidies if you think about giving away software for free like open table did when it first rolled out to restaurants in san francisco it said we don't even have a platform we just have this like reservation management software here you go and it's free And then they got a lot of restaurants and they got they said, hey, these restaurants have a lot of open tables. So I'm going to call myself open table and let consumers book that. So cool. And I'm going to take a fee. So that'd be a great product feature subsidy. And the last one is kind of interesting. It's like psychic rewards. And that's more you see it a lot in social networks or in content platforms. That's getting likes on your photo on Instagram. Right. These things that don't really have a monetary or product value. But. Exposure. They make you feel good, right? Or they give you an audience, right? It's kind of like that attention. And then once you get a lot of that. Maybe you could monetize that separately. And you see a lot of Instagram folks now selling ads and product sponsorships and stuff. So audience building is very tough. It's the idea of overcoming this chicken and egg problem. I need consumers to get producers and vice versa. Where do I start? And it keeps changing. Do you think one of those, the one that really resonated with me was that open table example where even if you're not bringing a single consumer to the table, you're still doing something.

good. Do you think that any one of these in your, in watching all these platform companies and also the ones that fail, maybe ask this negatively. So are there ones that don't work as well as some of the, among that menu that you listed? Yeah. I mean, I think that there are, there are a lot of fun and horrible examples of platforms failing pretty aggressively. What's your favorite example? There's, there's an app that we talk about in the book that raised $40 million and It was like a hyper-local Instagram. And so the idea was you'd only see posts from people that are within a couple hundred meters of you, right? Oh, is this color? Yeah. And so they said, this is going to be great. All the content in there is going to be very contextual and relevant and local. We're going to kill it. And they launched. And within an hour of launch, the founder knew, oh, boy, we botched this. And we spent the bulk of all the money we raised. No investor is going to give me more money. And everyone has blank feeds because they didn't have, when you think about audience building, they didn't have a hyper-local audience building strategy. If they have a rule, essentially rules and standards is one of the other four. and they have a rule in there that says you only see posts from people 200 meters radius from you, then that means when you think about audience building, you should be hyper-focused on really block by block getting people on this content platform. And if those things aren't all in sync, then it can fall on its face. I read an interesting book I've referenced a few times called The Systems Bible, which is a fascinating book. And one of the things it talks about is that there never has been, there's no examples of a complex system that people have designed and dropped in and then it's worked. Right. Complex systems that work are invariably the result of a simple system. that gets scaled up. And Peter Thiel talks a lot about this when it comes to entrepreneurship and venture capital, that to use your block analogy, you should effectively, for color, should have started on one New York City block and then moved out from there. Instead, they tried to do it all at once. And that was a lesson from your book as well, that in the platform business model, the early days, it just struck me that you have to be a hustler. You have to really focus on a niche.

You have to really do right by the early adopters, like OpenTable did, and that that's probably the best way to build a platform early on, which is an incredibly hard thing to do. Yeah, we like to say that actually a lot of the things you're doing in the beginning don't scale at all. Right. They're actually super manual and have no ability to handle. let alone tens of thousands of users or certainly hundreds of thousands of users. It's super manual, but you're really just trying to, back to our earlier point, is really hone in on that core transaction and figure out, how do I just get these two different parties to transact? And if I can see that happening, okay, now let me optimize around that. But you don't want to bog it down and prevent producers and consumers from transacting, particularly when you're first. I love that story of the Airbnb founders who, you know, you think about these platforms as these kind of technological, automated, fancy algorithms. But they started by literally themselves going and helping people take better pictures of their apartments to better sell them on the platform. And it's so funny how the origins are so analog. And then, you know, you figure out what works and you can amplify it. But that seems to be a key, really seems to jive. I'm assuming you like Teal's kind of way of thinking about starting. very local or small and then scaling up from there. Yeah. And a lot of investors are comfortable with that model. A lot of investors are very comfortable with the idea of saying, hey, look, I've done this in one market. It's working. Give me this money. I could make that more efficient and do more of it in this market. And then I'll expand to five other markets. And that's a level of comfort that I think a lot of VCs have come to find. Even in China, there's a lot of lessons learned that we could talk about if we have time in terms of, say, how Alibaba did things differently than, say, eBay when we think about audience building, when we think about rules and standards. But I'll let you transition us. So let's just go there. So as I understand it, Alibaba's model is much more about advertising than taking a cut. So maybe describe the lesson from Alibaba.

So the interesting thing, and to Teal's point, to what we've talked about keeping it simple, in the Chinese market, when you're talking about connecting buyers and sellers, the idea of haggling on price and these things between those two parties is pretty much table stakes, right? That's how they do business over there. So eBay took its model from the U.S. and brought it to China, which meant that eBay was going to monetize the transactions by taking a cut of every sale. And that meant that if the buyers and sellers could talk with one another, there was a high... probability that they would lose out on monetizing and have something that we call platform leakage, where the core transaction happens outside of the platform, and now you don't get to monetize that transaction. So they had rules and standards which were much more strict and which had a very specific flow that that core transaction needed to follow because they needed to monetize it. Alibaba instead really just kind of opened it up and said, just come and match. And I don't care how you transact. I just want you to be coming here and finding yourselves here because then I'll figure out how to really optimize my own core transaction. So they said for the next three years, we're not going to charge any fees. And that was really the beginning of their path to defeat eBay. And now all the buyers and sellers went to Alibaba rather than eBay. It was cheaper. and they could transact in the way that they were comfortable with. Alibaba kind of stumbled upon this idea of saying, let me just let my sellers advertise to my buyers. And they actually created kind of like a Google AdWords-esque model, which was much more profitable than what eBay or even Amazon had at the time by taking a cut of the transaction. So it was interesting, but it all really kind of started with saying, I'm going to make this simple. I want people to transact and just keep coming back again and again. And what is not as attractive with investors, I'll figure out monetization. I'll figure out business model as we go. It worked there and the funding climate was able to support that way of building your business, which now could be a little tougher. I want to come back then to my earlier question, which we didn't get into, which is.

The title of the book is Modern Monopolies. Monopoly has a negative connotation, meaning people are getting fleeced because Standard Oil has cornered the market in oil and can charge whatever it wants. Pick your example. Why, in the modern sense, are these not bad at all but actually good for consumers? So the idea for consumers, if we think about the timeline of a platform, let's just say you've got a 10-year horizon to really kind of hit the modern. monopoly status in those 10 years for the most part you're going to be subsidizing a lot of value in one or multiple ways from what we talked about monetary subsidies product feature subsidies giving things away for free you're going to see a lot of subsidies it's when they hit a point of that modern monopoly status which is where Theoretically, they would have more leverage where if they wanted to really kind of turn on monetization more heavily and that could potentially put consumers at a disadvantage where you would see that happen. So this would be like Amazon all of a sudden has complete share and they just jack prices and they start to improve their margins. And I would say, you know, Amazon, you hear reports of Amazon knowing who you are and where you're logging in from. So they show you more expensive things and things like that. So it's not that. These entities are completely pure, but it's the idea that when you look at the competitive environment of these modern monopolies, you now actually have, as we've said, five or ten of these things that since their ecosystems and since their reach is so big, if Amazon or if Uber or if Google were to really kind of overstep that boundary and then... hurt the consumer in a way which was, you know, the market wouldn't tolerate, that you would have plenty of other modern monopolies there ready to take advantage of that and then try and grab market share from them. And that's one of the big differences when we think about the structure of these dominant businesses versus the linear monopolies of the 20th century is you have a strong first place player.

and you have a second place player. And these ecosystems, if you look at their consumers and producers, they overlap pretty greatly. So the idea of linear monopolies ramping up oil production is a very timely, costly, capex-intensive thing to do if standard oil oversteps its boundaries. But in this kind of a competitive environment, they already are touching your ecosystem, and many times they already have Bing versus Google search, or you have Lyft versus Uber, or you have iOS versus Android. And there are alternatives there that are always looking for a way to capitalize on a misstep that the market leader may make. So there's kind of an element of inherent checks and balances that we've seen now that we're 10, 20 years into this. I think where it's a little bit more difficult is if you look at China, there's a lot of really great advancements that their platforms have made. But they have, say, three extremely dominant platforms, and that's a lot less than, say, five or ten. And we have a number of others that I think are going to be added to that list over the next few years. So the fact that we do have a more open, vibrant VC entrepreneurial ecosystem here that has let other modern monopolies sprout up from kind of the grassroots. is only creating a more vibrant, more competitive environment at scale, which should protect those consumers. So some of this is coming back to this idea of moat, where if Uber does 10 things that everyone hates, Lyft is a pretty clean alternative. Funny, I've never actually used Lyft, so I don't know that to be true. But it seems to be the case. So I'm curious, as an investor, again, there's this interesting idea of... capital intensity or asset intensity, where obviously these businesses are super asset light. They don't own the cars. They don't produce the cars. Maybe someday Uber would. Maybe then it wouldn't be a platform company. I guess it wouldn't be a platform company, kind of like Netflix produces content. But I wonder if there are any platforms which are asset heavy. Is that even possible, given that a key feature of platforms is that you outsource? Would you say Apple's asset heavy?

It is, but I would say that the portion of its business where all the capex is happening is linear, is a linear business, is a hardware business. So I don't know. I just think about, again, like, okay, let's say I've got $100 million. I'm a foundation. And I want to, you know, I've got my asset allocation and part of it's venture. And I buy that the platform business model is the model of the future and that the best returns will be somehow positioning my dollars at early stages in winning platform companies. You can see where I'm going with this. I'm trying to identify markers for... What to look for as a VC or as more and more of these companies go public, you know, if I'm looking at Facebook relative to some competitor, that's a public market competitor, which doesn't really exist today. What are the markers of a potentially good investment? in a platform company. And the reason I bring up asset heavy is, yeah, it's hard. It requires, like, I don't know if there's going to, you mentioned, you know, heavy machinery, but I always think like a mining company or an EMP company or something, you're not going to be having an EMP platform, but maybe you might. And in some ways that asset intensity is a... can be a mode it can also be a huge drag and make things very cyclical and hard but i'm just trying to think ahead to like i would love to invest in some platform companies but i'm just worried that if i tried i would fail miserably because so many people are trying to do a platform in every space like how the hell am i going to pick a winner yeah how do you how is it is a you know is snapchat facebook or twitter uh which is a which is a debate that we have a lot internally so i think if if you were to look at all the different platform types any platform any development platform that has hardware that you know essentially like an apple is going to have a higher barrier than say a social network from if you're looking at kind of a capex and from really moving into that arena

Because you now need to have hardware if you're, say, going to compete against that. Or you need to create a hardware alliance like Android did with other smartphone OEMs. So there's definitely, I would say, a tangible step up in terms of the longevity or timeline or durability or whatever metric you would want to look at when you look at successful development platforms. kind of switching costs of their producer base, right? So if I'm making software, I'm making an iOS app for the iPhone. For me to go make that app on the Windows phone is probably one of, if not the highest amount of kind of switching costs for me to go and create the same value that I'm creating, but create it for someone else's platform. So when you look at that time invested, or say how commoditized that service or that product or that value is, those are some metrics that you could look at in terms of defensibility. So development platforms kind of, I think, help shape entire platform ecosystems where other platform types are then able to grow and build on top of these development platforms. So those are kind of like the underpinnings of these communities in some ways. If you were an Uber shareholder, would you want them? to go into the business of building a fleet and owning the fleet. Let's say we're going in the direction of self-driving cars. Would you, as someone thinking about platforms versus linear business models and wanting the highest return on your investment, would you want them to go into the fleet business or would you want them to use independent owners of self-driving cars and just stay a pure platform? Yeah, I actually, I think Uber should try and go public as soon as it can because The next five to ten years are going to be very difficult. I think the fundamental underpinnings of their business model is going to change because autonomous cars are going to be here. And I think that if the Google and the Androids, the Apples of the world, and other players like BlackBerry's Kunix and other autos can figure out how to essentially create

an operating system that lives on the car, and now Uber could be one of 20 different transportation apps. Well, if we think about switching costs, right, it's a much higher switching cost for me, a driver, to flip on the Lyft app or the Juno app. Which isn't that hard, but it's a much higher barrier than getting consumers to just say, you know, okay, Uber or Lyft, you know, if I'm not using my car, you know, you can put it on your network and whatever. And certainly the price of every one of those transactions is a lot lower. So I think they certainly have their approach. Well, I think they have many approaches for how to solve it. But at the same time, they don't really have... too much control over how it's all going to sort out. I think they're trying things with Volvo and Mercedes and others, but can Uber get auto manufacturers to figuratively hand over the keys and, you know, do a one-off integration with Uber? Maybe, but is that truly the operating model? I mean, to me, I just, I see. Another iOS, I see the iPhone moving into the car and having a developer ecosystem that can tap into transportation apps. What are one or two really interesting platform businesses that maybe people have not yet discovered that you've seen and find really interesting today? Some interesting stuff. If you want a fun one. Sure. Maybe a fun one and a really good one. Which honestly shouldn't even exist. It actually only exists for arbitrary reasons. It are these secondary sneaker marketplaces, which I actually think are a viable threat to the likes of Foot Locker and other kind of like shoe retailers. Because if you look at the supply. There's only like three shoe manufacturers. There's no reason that a marketplace should be created. But a marketplace is being created, going back to the consumer thing we were talking about earlier, because there's an arbitrary amount of limited supply for designer sneakers. And a certain consumer base is willing to pay an extraordinary amount of money to get these things. And they don't want to wait in line. So a lot of people will put it in the sweat equity.

Or schmooze the people at the stores to get the sneakers retail and then flip them. Or hold on to them for a year and let them appreciate and then flip them, right? And there's now a viable marketplace. One just raised another $30 million, I think, today they announced it. And Dan Gilbert from the Cavs owns one. And now some of the sneaker brands are actually... doing a release. They just released LeBron's directly into this marketplace going around a Foot Locker. So for no reason, it doesn't need to be there. You have a marketplace and now it's actually creating a digital channel that I think is a legitimate threat to traditional sneaker retailers. So this is an interesting one because it reminds me of like Hamilton Tickets, the very popular Broadway play where I don't know what the face value is. Let's say it's 100, but they're going for 1,000. And same idea here. Like if I'm the producer of the shoe that everyone wants, why am I not just raising prices? Like it seems like a horrible misunderstanding of the. of demand. Exactly. And so such an interesting idea, right? And the same thing could be applied to tickets. It's because you have like MSRPs and in place and retailers don't want to cross that line. And so you have literally the creation of a marketplace that doesn't need to be there. Right. So I've always found that funny, but now there's, you know, there's real money going into this and, you know. So let me phrase it slightly differently and it'll just be purely about self-interest. So if you could build a portfolio of Your goal is the next 10 years, that's the timeframe we've kind of talked about, best total return. You get to build a portfolio of three platform companies. Which three would that be? Ooh. I would go dev platforms with Apple and Google and probably Facebook. Yeah. What I would also do is I think you could make a bet that I think would outperform.

any of the other traditional indices, if you were to say, I want to bet on platforms as a whole. And sure, there's losers like a Twitter or Groupon or Zynga. But I think you'll find the winners greatly outweigh the losers. And I think if you looked at those returns over a 10-year horizon, I think it would probably outperform most indices. I'm so interested by this because... My DNA is value investing, which is literally the opposite. These companies fall in the glamour category of very expensive valuations, which as a category historically has done very badly relative to value. maybe coming out of, but have been in for a long time, a period where big cap tech, despite crazy valuations, has just crushed everything. And the question is always, well, can that last? And my view based on the data is no, these things are cyclical. And who knows how much of this is fueled by incredibly cheap money, which drives money to VCs who give it to these places to subsidize growth. And it all looks fantastic until it doesn't. So who knows how it goes, but such an interesting idea of building a little platform. platform portfolio. It might be something that I short instead of buy, but interesting nonetheless. I'm curious, given how much of this has centered around, and the original, the origin of the conversation was your book, if you could list a couple of the most formative or influential books that you've read for how you think about things. Yeah, I mean, I think, well, some of the books that I know... we read with myself and co-author Nick Johnson while putting the book together was Tim Wu's book, The Master Switch. It really does, especially if you want to dig deeper into this kind of old monopoly versus new platform, modern monopoly conversation, it really helps provide some great context for how those things... operated quite differently versus these. I think some of Peter Thiel's work, as we were talking about, is great. Really fast, quick, easy reads like zero to one, but the concepts are there and pure, and he's definitely a strong stalwart in the arena of this thinking.

Those two would be where I'd start, but I could probably send you some others. Can you tell me a little bit about your business, about Applico? So what you guys do, how you started, and kind of what the evolution was to get you so focused on the platform business model specifically. Yeah, so I started the company eight years ago. I was in college. Had some credit cards. It was 08, 09. BlackBerry still had 75% market share. And I was saying to myself, you know, I think these app things are going to be pretty big. Let me get in there. So I maxed those things out and started building apps for myself and for others and had some best sellers. And people said, hey, can you build apps for me? What was a good early example of one? We actually did some stuff. In the first early, early days was for BlackBerry here commuting between Greenwich and New York. And it would give you your train schedules in the app. And that became a bestseller because the browser was so bad and you couldn't get the schedule and all these things. And then we fueled that into doing iOS apps and Android apps and all these things. But then over the years, while doing that, I started to see some of our clients have what came to be known as platform businesses and was always wondering why are we building things this way or why are we doing it this way not that way and when I would do the research there really wasn't any substantive body of work that was describing what these things were and why they were very different from all the other businesses and large enterprises that we were working with. So started focusing on helping to advise these businesses between startups and then more large enterprises. And while putting together the book and actually doing this work, helping to build platforms from an advisory and an execution standpoint, from a product development and user acquisition standpoint. Today, what the focus of APLICO is, is we call ourselves the world's first platform innovation company. Because we see, we're 20 years into platforms, from the mid-90s really. And we see the next 20 years as this intersection of the modern monopolies with large traditional enterprises. We actually see these traditional enterprises as having a lot of assets that they could use to their advantage.

having billions of dollars of cash that they very often give away in distributions, like touching at least one or sometimes both sides of the market with consumers and producers, having very strong brand and trust amongst those user groups, which is very hard for these platforms to instill, especially even, say, an Amazon coming into B2B distribution. Everyone is very scared of actually working with Amazon and think of it as the devil. So these enterprises actually have A lot of advantages. What we believe is if you take that Silicon Valley recipe book, and if you take that playbook of the platform and you put it in the hands of these large enterprises, they could beat the tech companies at their own game. But now it's really a time to put that. To the tests, we've seen some companies dabble with this and do internal efforts like Walmart had their marketplace initiative that they started in 09 and it failed. And then they had to buy jet for $3 billion. Right. So when you look at buying versus building versus investing, there's a variety of ways that these businesses could start to play offense rather than defense. And we want to help them figure that out and help them actually. have that be successful. Really neat. So you're working with not only startups, but also some really old line businesses potentially getting into this game. Yeah. Mostly now all large enterprises where, you know, the work that we're doing can have a real material impact on that industry and on that company's long-term trajectory. What was the most, what has been the most memorable individual day of your career so far? I think the book launch was a pretty huge milestone. I never thought I'd be an author to begin with. But I am that title. And I was invited to a conference. And they had my bio. And they said author. And I looked at it and said, I guess so. So that was pretty amazing. That was three years of really hard work. And not just the thinking, but then organizing the thinking in an easily digestible manner.

And now it's being translated into Mandarin and Japanese, which I'm pretty excited about because Asia is a very, very great place to look for platforms. Lots of interesting lessons learned from them. And yeah, it's just exciting stuff. The people that I've given it to have, most of them have come back and said the same thing, independent of one another, which is I'm just amazed by the level of detail. in the history and the thinking. And I always appreciate when books make you think of questions and then go there, like go to the actual answers to those questions. And the book really does that. So I highly recommend people read it. The last of my kind of standard questions that I ask everybody, and then I want to talk a little bit about FinTech to close up, is the kindest thing that anyone's ever done for you. I'd probably, I would just default to my mom. My mom raising me, you know, for the most part, you know, single mother, figuring out how to put me through private school and boarding school and college and has always been unbelievably supporting and positive and just an amazing figure, just such a great role model. And, you know, she's the best. And that's actually who the book is dedicated to. Awesome. You know, I have to go back and look. Now we're 25 or 26 into this show. But I think you're the first person to say mom, which is shocking. You'd think that that'd be like half the answer. But that's as good and as pure an answer as I can think of. So last, we've got about 10 minutes. And I'd love to hear your opinion on platform opportunities within the financial world. My perspective is always, since I'm on the asset management side, interested in the robo space, which I think is fascinating, but really complicated and hard to do well. And it's a good example of what you just said, where... incumbents are actually crushing. So Vanguard, Schwab, they were late to the game, but their orders of magnitude bigger than a betterment or a wealth front because they had captive audiences. And client acquisition has been really hard in the B2C model. So I'm curious in the fintech space where you see opportunity and maybe where you see some fluff or skeptical of things like blockchain or what have you. Where I see a...

If there's trillions of dollars of opportunity in those other industries, there's probably at least tens of trillions in finance. I mean, one of the first places that we look at is when you just think about the exchange model and what an investment platform, what a kind of marketplace brings efficiencies is matching that supply and demand. And I look at supply and demand in the context of the allocation of capital. to people that are then making investments with that capital. So I think the 2 in 20 model as an industry standard, I'd say if we were to look for a place where there's a lot of bloat, I'd say there's a lot of bloat in the 2 in 20 model. And I think that you, I mean, it's one of those systems where it's a great model. Why change it? But I think if you were to just conceptually think about a lot of people and or robots that are doing investing and you think about the appropriate compensation of the the people creating the value to do the investing if you can create a more efficient way to bring capital that wants to be invested to the people and or robots that will do the investing You could create a lot of efficiencies in that market, whether it's robots or whether it's, you know, different types of managers or investment managers that, you know, don't have a strong brand or a billion dollar fund. But, you know, maybe they have a small track record of like 50 million or 100 million dollars or in whatever space that they're in. Is there a better or more efficient way that. you can enable them to get capital and create some interesting marketplaces that standardizes reporting, standardizes compensation, standardizes... how the capital could flow between, you know, different people that are then investing that money or different robots or algorithms that are investing that money that then is created by the quants and the mathematicians, right? But do they, do the quants and the mathematicians need all the overhead of the people that are really responsible for going and selling and closing the LPs and the investors to put the money in and all the overhead and marketing and research and like,

investor-related things that go into the kind of consumption, getting the demand, getting the consumption side of that marketplace. Yeah. That's a can of worms. And you talk about bloat. And what's interesting about the 2 in 20 model is it's kind of like growth investing in the public markets, buying expensive stocks. Because Some companies are worth way more than $2.20, and you'd happily pay $3.50 for the privilege of putting your money with certain managers. And it's always the hope that you're going to find the next one that I think has perpetuated people's willingness to pay these fees, which are very hope-based. And I don't know how that will work because... On the one hand, it sounds great. If you're a guy that just likes to dig, tear apart companies and find 10 great investments but don't want to deal with any, you don't want to create a firm, you just want to be an investor, it would be phenomenal for there to be a marketplace where you can show a track record or something. Are there any companies like that? Has anyone tried to start to break into this as a marketplace model? There are some firms that I've seen kind of do this internally. but not necessarily on the consumer demand side. But I've seen, if you look at how they manage, say, their traders or their investment managers internally, it's a system that... will look at their performance and it's in a standardized way. And then based upon their performance, they're allocated more or less money and their compensation is tied to a lot of that, right? And that means that you may have a revolving door of people that come in and it could be streaky and then they leave. But I've seen some places that have trialed this internally. The idea of this going end to end, I think there are investment platforms out there. on the, say, like VC side, like an angel list, which have a syndicate model, which is kind of in the vein of this. There are other places like iCapital, which I think are more about getting access to the really large firms that you wouldn't have access to otherwise. Millenniums, Citadels. Exactly. And so that's kind of getting access to consolidated supply. But where I see, again,

Huge value of the business model is taking fragmented supply and bringing order and bringing order to that chaos and getting efficiencies from it. So, you know, does there need to be such a lumpiness of capital in a relatively small number of very large firms? I'm sure I'm not saying that those folks are not good. They're probably very good at what they do. But could there be a more. say, evenly dispersed amount of capital to people that, you know, maybe they don't have an investment thesis that scales to over a billion dollars in capital, but maybe they have a great investment thesis for a couple hundred million dollars, and they don't need all the other overhead that goes along with that. I just think it could be interesting to see what would happen if you could open up a marketplace that lets some of that creativity shine. It would be fun to watch. I really appreciate all your time. This has been a blast. This is going to be one I have to listen to a few times to make sure I understand just all the interesting angles for entrepreneurs, VCs, consumers and producers on other sides of the platform. It's been a blast. So thank you very much. Yeah, thank you so much. Hey, everyone. Patrick here again. To find more episodes of Invest Like the Best, go to InvestorFieldGuide.com forward slash podcast. If you're a book lover, you can also sign up for my book club at InvestorFieldGuide.com forward slash book club. After you sign up, you'll receive a full investor curriculum right away and then three to four suggestions of new books every month. You can also follow me on Twitter at Patrick underscore Oshag, O-S-H-A-G. If you enjoy the show, please leave a quick review for us on iTunes, which will help more people discover Invest Like the Best. Thanks so much for listening.