Why you should Invest in Platforms, not Companies or Cryptocurrencies — Market Mad House

If you want to make money in the 21 stCentury, you must invest in platforms, not products. Hence, you need to identify these companies; or cryptocurrencies, with lucrative, or potentially lucrative, platforms.

To explain, a platform is a network; or ecosystem, that provides goods and services to customers. For example, the Amazon (NASDAQ: AMZN) platform delivers goods and digital products like videos.

Correspondingly, Apple (NASDAQ: AAPL) is reinventing itself as a platform that provides financial services and entertainment, OneZero writer Jathan Sadowski reveals. Thus, Apple now offers games through Apple Arcade, movies and TV through Apple TV, and financial services via Apple.

Specifically, Apple plans to spend $7 billion on music and video content to drive visitors to its platforms in 2019, CNBC estimates. The $7 billion includes $1.7 Apple spent on entertainment in 1st quarter 2019.

Apple Embraces Platform Capitalism

Apple is switching from selling devices to the platform because it could make more money through a platform. For instance, some financial analysts estimate Apple’s platform could generate $7 billion a year in revenues from 100 million subscriptions in a few years.

Therefore, Apple is switching a to business model Sadowski calls “ platform capitalism “ from traditional capitalism. To clarify, in traditional capitalism businesses make money by selling goods and services.

However, in platform capitalism, a business sells access to a platform. Customers pay to get access to sellers, while sellers pay for access to customers.

How Platforms Make Money

For instance, Amazon, Alibaba (NASDAQ: BABA) and eBay (NASDAQ: EBAY) collect fees from both merchants and customers. Meanwhile, viewers pay Netflix (NASDAQ: NFLX), Hulu, Disney +, and Apple TV for access to streaming video.

Effectively, Amazon charges merchants “rent” for access to customers while Alphabet (NASDAQ: GOOG) charges advertisers for rent for access to its SEO platform. Plus Netflix and Hulu charge rent for access to viewers.

Not surprisingly, Disney is trying to avoid paying rent by offering many of its movies on shows through Disney + in the fixture. Consequently, Disney will collect “rent” instead of Hulu or Netflix.

How Platforms Make Money Through Rentier Capitalism

Moreover, another popular name for platform capitalism is rentier capitalism. In fact, Sadowski calls today’s tech platform model “ Landlord 2.0.

To explain, in Landlord 2.0 owners “rent” digital space to customers. For example, Alphabet (NASDAQ: GOOGL) rents advertising space through Google AdSense, etc., and Amazon rents cloud space through Amazon Web Services (AWS). Plus, Amazon rents advertising space like Alphabet.

When it succeeds, rentier capitalism can be a lucrative business model. For example, AWS generated $7.43 billion in revenues in the 4th quarter 2018, CNBC notes. Notably, AWS revenues make up 10% of Amazon’s quarterly sales. In addition, Amazon reports advertising revenues of $3.4 billion for 4th Quarter 2018, Geekwire estimates.

In addition, Amazon; which owns several rent-charging platforms, reports revenues of $72.383 billion and a gross profit of $27.597 billion for 4th Quarter 2018. Meanwhile, Alphabet reports revenues of $39.3 billion for 4th Quarter 2018. Statista calculates Alphabet’s revenues grew from $32.323 billion in 4th quarter 2017 to $39.3 billion 12 months later.

How Much Money can Platforms Make?

Strangely, neither Alphabet nor Amazon is not the most profitable cloud platform operator. Interestingly, that distinction belongs to Microsoft (NYSE: MSFT).

For example, Microsoft claims it made $9 billion from its Commercial Cloud business in 4th Quarter 2018. Hence, Microsoft is making more money from the cloud than Amazon. Additionally, Microsoft claims its Azure cloud business grew by 76% during 4th Quarter 2018, CNBC reports.

In fact, Microsoft owns several platforms; including Windows, GitHub, Azure, X Box, Azure, and Microsoft Office 365. Therefore, Microsoft can charge developers, programmers, companies, organizations, and individuals several kinds of “rent.”

Is Microsoft the Most Lucrative Platform in Tech?

Tellingly, Microsoft is making a lot of money from all that rent. For instance, Microsoft reports revenues of $30.517 billion and a gross profit of $20.401 billion for 4th Quarter 2018. In addition, Microsoft records annual revenues of $110.36 billion and a gross profit of $72.007 billion for 2018.

Moreover, Microsoft had $131.618 billion in cash and short-term investments on 31 December 2018. Microsoft accumulates lots cash of because it had an operating cash flow of $13.52 billion and a free cash flow of $10.955 billion for 4th Quarter 2018.

Microsoft’s Platform makes a lot of Money

In fact, Microsoft is making so much money I consider it more lucrative than either Amazon or Alphabet. Correspondingly, Alphabet records a total annual cash flow of $47.917 billion for 2018. Additionally, Alphabet had $109.14 billion in cash and short-term investments on 31 December 2019.

Meanwhile, Amazon reports an operating cash flow of $30.723 billion and a free cash flow of $19.4 billion for 2019. In addition, Amazon had $41.25 billion in cash and short-term investments on 31 December 2018.

Consequently, I argue that Microsoft is a better value investment than Amazon or Alphabet because its stock traded at $129.70 on 1 May 2019. Meanwhile, Alphabet was trading at $1,184.29 and Amazon was selling for $1,939.22.

In addition, Microsoft plans to pay a dividend of 46₵ on 13 June 2019. In contrast, neither Amazon nor Alphabet pays a dividend.

How Warren Buffett Invests in Platforms

Interestingly, one of the first people to notice the platform economy was Warren Buffett. To explain, Berkshire Hathaway (NYSE: BRK.A) invests in several platforms.

For instance, Berkshire held 249.5 million shares of Apple in 4th Quarter 2018, CNBC estimates. In addition, Buffett tried to invest $3 billion in the digital transportation platform Uber last year, Bloomberg reports.

Notably, Apple reports $225.4 billion in cash on hand on 30 April 2019, CNBC reports. In addition, plans to buy back $75 billion of its own stock. Hence, Buffett invests in cash-rich platforms that treat their shareholders well.

In addition, Apple will pay a 77₵ dividend on 16 May 2019. That dividend grew by 4₵ from 11 February 2019 when it was 73₵. Plus, I think Mr. Market priced Apple shares fairly at $213.21 on 1 May 2019.

Moreover, Buffett admits he made a mistake by not investing in Amazon in 1994, 1997, and the 2000s. On the other hand, Uncle admits he is leery of Amazon despite his admiration for CEO Jeff Bezos, Business Insider notes.

Thus, Buffett either invests in stable platforms that generate a lot of cash (Apple), or potentially lucrative platforms at a good price (Uber). In addition, Buffett will pass on any risky but lucrative platform that is not cheap.

Warren Buffett’s Version of Platform Capitalism

Uniquely, Buffett thinks of platform capitalism as a “toll bridge” rather than rent. For example, Seeking Alpha contributor Tim Au describes Buffett as practicing a “ toll bridge model “ of investment.

To elaborate, a toll bridge is usually the only connection between points, like the two sides of a river. If people want to cross the river they have to pay the toll, swim or spend more money on a boat.

Consequently, it is easy to think of companies like Netflix, Microsoft, Amazon, Alphabet, etc. as toll bridges or rather toll booths. To explain, these portals control access to a digital ecosystem others want to enter. Hence, the companies earn revenue by charging a toll.

In addition, some companies allow free access to the ecosystem but charge for some of its features. For instance, Google’s search engine is free for anybody to use, but Alphabet charges you to advertise on it.

How Buffett’s Toll Bridge Capitalism works

Thus, Buffett looks for toll bridges he can buy or invest in. Not surprisingly, current Berkshire Hathaway (NYSE: BRK.B) holdings include some toll booths.”

For instance, the Burlington Northern Santa Fe (BNSF) railway charges a toll for hauling many kinds of freight. In addition, the BNSF has an effective monopoly on bulk freight transport in many parts of the United States.

Other Berkshire Holdings include; Business Wire (a platform for press releases), pipelines, utilities, and many newspapers; BH Media. Moreover, Buffett used to be a big investor in television stations. To explain, newspapers like the Buffalo News held an effective monopoly on print advertising and news in most American cities for generations.

In addition, broadcast TV stations used to operate an advertising monopoly reminiscent of Google. To explain, the TV stations give their product television away for free. However, the stations charge for advertising during the broadcasts.

On the other hand, Buffett is leaving television and newspapers as those businesses lose money. Uncle Warren understands that a toll booth without toll is useless.

How You can invest in Platforms

In the final analysis, platform capitalism is lucrative and likely to get more lucrative in today’s world. Hence, you could make money by investing in platforms.

Here are my tips for investing in platforms:

1. Look for businesses in a position to collect tolls or rents. For example, Amazon collects “tolls” from merchants, Prime subscribers, movie producers, companies that use the AWS cloud, and many others.

2. Look for businesses like Microsoft, Apple, and Alphabet that generate a lot of cash. Remember, a toll booth with an empty cash register is pointless.

3. Look for undervalued; or under-appreciated, landlords such as Microsoft and Apple.

4. Look for companies that own multiple platforms. For example; Microsoft, Apple, Amazon, and Alphabet.

5. Look for unusual and unlikely platforms other investors ignore. For example, Microsoft, and lesser tech companies like Oracle (NYSE: ORCL), the Ocado Group PLC (LSE: OCDO), NVIDIA (NASDAQ: NVDA), eBay (NASDAQ: EBAY), and PayPal (NASDAQ: PYPL).

6. There are platform possibilities far beyond Silicon Valley; for instance, Ford (NYSE: F) is building a Transportation Mobility Cloud to harvest data from vehicles. Furthermore, even retailers like Kroger (NYSE: KR) and the TJX Companies (NYSE: TJX) have platform attributes.

7. Remember that no platform is foolproof or permanent. Consequently, any platform can stop making money. In particular, the slow deaths of broadcast television and newspapers demonstrate that no platform lasts forever.

Finally, research platforms carefully before investing, and be leery of any new or unusual platform. Even though a few platforms generate lots of cash, most platforms will never make money.


Originally published at https://marketmadhouse.com on May 1, 2019.