Quality Beats Money
No matter how much capital a company has, if it can’t provide a top-quality service, it will not survive in the long-term.
Think of the early days of Facebook and MySpace. In 2007, MySpace had close to 100 million monthly active users and much higher revenue than the then 3-year old Facebook with about 20 million MAUs. But MySpace’s quality was mediocre, and engagement rates were not strong. Meanwhile, students and kids were spending increasingly more time to Facebook. That race was soon over, with Facebook ultimately becoming the largest social network in the World.
A few years ago, we decided to invest in Lyft. That was at a time when Uber was already “global”, and was in process of raising its first billion of fresh capital. Everyone said it was crazy to invest in Lyft, given they were just a fraction of the size of Uber, had a fraction of the amount of capital, and had not even expanded outside the U.S. yet. (Disclosure: GSV owns shares in Lyft).
What impressed us was Lyft’s management — John and Logan are strong entrepreneurs — and the focus on providing a high-quality, cool experience to passengers and drivers. Lyft had developed its own culture with the pink mustache and the fist bumps.
Lyfting With Shaq (see video)
Over the years, the Uber vs. Lyft race became even more brutal, with Uber raising billions more, with Uber bullying Lyft multiple times, and Uber also expanding aggressively across the Globe. But what seemed to be internal quality issues at Uber, remained. At one point, Uber asked us to participate in their round, but we could not get comfortable with their culture and with the valuation. Plus, we felt strong about our investment in Lyft. As we passed on the opportunity, Uber’s management told us the race will end up like “Amazon versus Overstock.com”…
Their prediction is obviously far from true today, and over the past years, Lyft actually managed to go from about a fifth of Uber’ size, to close to half its size in the US, according to our estimate!
How did they do that?
Lyft’s internal culture and its service remain top. Millennials’s prefer using Lyft because of the brand and mission, and drivers prefer Lyft because they are treated better than at Uber. In fact, our research shows that nine out of ten drivers would rather accept a Lyft request than one on Uber.
These past few weeks have been bad for Uber, with negative stories emerging almost on a daily basis. Clearly, Uber’s inner culture is far from good, and its brand quality seems far from acceptable these days.
In a famous example in 2009, Apple’s Steve Jobs wanted to acquire Dropbox, and offered a 9-figure amount. But hearing the founders’ rejection, he quickly told them their company was just a “feature, not a product,” indicating Apple would soon “kill” it… (Disclosure: GSV owns shares in Dropbox).
Steve Jobs was wrong (for once), and Dropbox continued to thrive as the leader in the File Sync & Share (FSS) market. Today, Dropbox has over $1 billion in annual revenue run-rate, it is growing fast, it is free cash flow positive, and it has well over 500+ million users who are “spilling over” into the corporate environment.
In addition, Dropbox is competing against two other Goliaths — Google and Microsoft. In late 2014. Google reported it had 240 million users on its Google Drive service (the competitor to Dropbox), while Dropbox had over 300 million users. Today, Dropbox is at well over 500 million (they reached that milestone 10 months ago), meaning that Google Drive’s user base had to have grown by 150% over the past two years to be on par with Dropbox. We don’t believe this has been the case.
Because of Dropbox’s quality and the sharp focus of its management, it has remained the leader and the preferred choice for file sharing and collaboration.
In the music space, the story is very similar. Spotify has been the leader since first launching in 2006. Its innovative on-demand subscription service became a disruption to the then leading iTunes model that was selling music by the unit. In mid 2015, Apple decided to take on Spotify by launching its own, on-demand subscription model. With 900+ million iTunes users, and by being the largest company in the World, many expected Apple Music will soon “kill off” Spotify… (Disclosure: GSV owns shares in Spotify).
But because of the quality and its focus, Spotify not only remained ahead, but is pulling ahead even stronger these days. Last week, Spotify announced it passed 50 million paying users, up from 40 million in September 2016. At the current rate, Spotify is adding about 10 million subscribers per 6 months, meaning they are on track to hit 60 million by September/October this year…this would imply a +50% subscriber growth rate. Apple Music meanwhile has over 20 million users, adding about 6 million subscriber per 6 months, and has decelerating growth.
Taking Off — Spotify Paying Users In Acceleration Mode
Source: Company announcements
The difference is that Spotify has its entire company working on creating a best-in class music streaming service. Apple has just a division of its company working on the Apple Music service, and corporate hierarchy is an obstacle. Spotify has the better user experience with catalogues like Discover Weekly and Release Radar using personalized AI to suggest user-tailored content. And users love it, as was evidenced by the 40 million users and 5 billion tracks streamed on Discover Weekly as of May 2016.
In the video and broadcasting space, Snapchat is the one to beat. Snap has managed to create the coolest and most addictive app, beating Facebook, Instagram, and Twitter in terms of time spent and engagement. Especially among Millennials, Snapchat is the place to be for watching and broadcasting. (Disclosure: GSV owns shares in Snap).
While Instagram is showing strong user numbers after successfully copying Snapchat’s Story function, the actual engagement and time spent is still lower compared to that of Snapchat. Many Instagram users check out Stories, but they end up spending the majority of their time on going through pictures in the main feed. Snapchat on the other hand is mainly about Stories, and its lenses, filters, and effects are more creative. It will be a race to watch, but we believe Snap has the long-term quality edge.
As published in this week’s A 2 Apple: http://www.a2apple.com/snap-crackle-pop/