316: Cloudflare Q2, TikTok vs Google & Facebook, Comcast & Charter, Twilio's Biggest Risk, Visa Founder Dee Hock, DALL·E 2, Wifi 7, and George Carlin
"explain all sides of the argument fairly to a 5-year-old"
Contrary to general belief, an artist is never ahead of his time. But most people are far behind theirs.
-Composer Edgard Varèse
🏁🛑🚦🚧 🆘 So much of what people say is social signaling... (Robin Hanson has been writing about this for decades)
People just want to say "the right thing" and have others nod along.
But if you start to discuss that thing in detail, you often — but not always — realize they were just repeating stuff they heard somewhere and have given it very little thought and don’t know the details.
They couldn’t explain all sides of the argument fairly to a 5-year-old, which is a good test of true understanding.
What’s scary is that it’s a lot easier to notice when others do it this than when *we* do it, but being humans, we can’t avoid it fully. So let’s be careful out there.
📰 Reader Mikel (👋) shared this podcast about the “creator economy” and a management company that represents a group of popular Youtube creators who banded together to have more leverage/access when dealing with Google, and to create their own platform (Nebula) where things that may not work well with Youtube’s algo can live and find an audience…
Anyway, while the whole thing was interesting, this bit by Dave Wiskus stood out to me:
For the entirety of human history until 17 years ago, there was no such thing as a middle-class content creator. There has never been a moment in time for people where somebody could wake up in the morning and go produce something that would be seen, heard, and consumed by an audience of potentially millions sustainably, with no gatekeepers. That is brand new and is really cool. You need a discovery system to do that. YouTube’s algorithm gets a lot of guff from creators — I think in some ways deservedly so — but they are constantly working on it
More generally, until the internet, if you had something to say to the world but weren’t “in” with the people who controlled printing presses, radio stations, and TV channels, how exactly would you go about it?
The very idea of just spinning up your own website and putting your words on it for anyone to read was powerful — we take it for granted now — but that was still very high friction.
Ever since Geocities, things have gotten easier in some ways, and harder in others, because when there’s low barriers to entry, there’s lots of noise and competition. But the central concept remains: You can put your stuff out there and see if it resonates, may you can even find your tribe of people who are sprinkled around the world in a density too low to ever assemble in person, but able to find your lighthouse online.
While there’s a steep power law and it’s still very hard to make a living being an indie creator, the fact that it’s possible at all shouldn’t be taken for granted.
💚 🥃 Speaking of which, if you feel like you’re getting value from this newsletter, it would mean the world to me if you became a supporter to help me to keep writing it.
Right now, only 3.2% of subs are supporters and 96.8% of readers don’t contribute anything.
I’d love to move that number to at least 5% paid/95% free, which feels like a more sustainable ratio to me.
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🗡 The Double-Edged Sword of TikTok-Style Algo-Driven ‘Social’ Media (+YouTube & Instagram implications) 🤔
TikTok’s innovation was getting the ‘social’ out of the ‘network’, and having a good enough algorithm to quickly learn what people like and find more of that somewhere out in the sea of content — needles in haystacks — while doing rapid tests of new content to figure what gets traction with a subset of users, roll it out to progressively larger and larger groups as long as it keeps doing well, creating cohorts based on interests, etc.
Nothing is stopping virality in such a fluid pool of users and creators, all potentially connected with each other.
In more traditional social networks, who you follow matters, and while these people can retweet/repost/link other content and things still went viral, there’s a lot more friction built into the system.
So now we’re seeing Facebook and Google turn parts of Instagram and YouTube into TikTok clones, and the scary thing for Google and Facebook is that it’ll probably work.
Why can’t TikTok defend itself the way that Facebook could take on all comers in the past?
It’s the other side of the coin of not having a *social* network.
People who onboard onto the clones will have to train them for a while, and the clones will have to improve their ML algos for a while as they get more users and content, but there’s nothing that stops them from getting there, and their existing large userbases mean that they don’t have to bootstrap.
TikTok is ahead, but if anything makes it stumble or reduces its velocity — say, distraction from regulatory troubles or a spin-off from Bytedance, which I think is in the cards — they could find themselves in trouble.
Creators will want to go to put their content on the best platform first. They’ll hedge their bets by dual and triple uploading things to various places for a while, but if TikTok ever stops being the #1 for the best creators of that short-form format, it could be in trouble quickly because for users (not creators), abandoning your account on TikTok isn’t nearly as painful as abandoning an account on Facebook/Instagram/Twitter.
Why? Because there’s not much of a network tying you down, not much of a social graph, less of an accumulated stack of personal interactions that you’ve invested in over years… GOOG META
⛅️ Cloudflare Q2 Highlights 🔥
Mr. Market (🤪) liked this one (unlike the past few quarters), with the stock going up over 27% on the day this came out. Let’s have a look:
In Q2, we achieved revenue of $234 million, up 54% year-over-year.
We added a record 212 new large customers, those paying us more than $100,000 per year, and now have 1,749 customers over this threshold. These large customers now represent 60% of our revenue, up from 50% 6 quarters ago.
They’re definitely morphing into much more of an enterprise company, while preserving a lot of the advantages that came from starting out with lots of tiny self-serve customers (with lots of them not even paying anything to use the services).
What are these advantages? Efficiency, frugality, rapid beta-testing and iterating of new products at scale, a wider funnel, getting in front of lots of IT people who may later influence corporate buying decisions, etc.
Our dollar-based net retention remained strong at 126%, down 1% over last quarter. While there may be some noise in this number from quarter-to-quarter, we won't be satisfied until it's above 130% and best of breed among the companies we consider peers.
As they keep adding products, bundling them together, and growing an enterprise sales force that can better cross-sell, I expect to see this number stay strong and grow (though not in a straight line, it’ll be lumpy I’m sure).
Most of their products are sold at flat rates, so the increase isn’t because consumption is going up — they’re climbing that ladder the hard way!
Our gross margin remained strong at 78.9%, up 90 basis points year-over-year and still over our long-term target of 75% to 77%
The efficiency I was talking about earlier is evident in their gross margins.
They do as well as a lot of pure software companies, yet they have enough physical infrastructure to have a significant fraction of total internet traffic flow through (last number I saw was around 20% of all websites are using Cloudflare as a reverse proxy, with spare capacity in reserve). That’s bonkers! 🤯
Our operating margin was right at breakeven, which continues to be our plan so long as we can deliver strong growth.
What I'm watching closely is our free cash flow margin. It showed significant improvement quarter-over-quarter, and we continue to forecast it will be positive in the second half of the year.
They explained the strategy a while ago, and it makes sense to me.
I know the mood of the market has changed a lot since then — and Cloudflare’s stock price certainly reflects that — but from a pure business point of view, if you can invest through the income statement at high ROIC in a land-grab dynamic, you probably should before some other competitor vacuums up customers that may have gone with you and been very sticky and profitable for years and years.
Here’s Matthew Prince with some
Fight Club macro commentary:
On our last earnings call, I got a lot of raised eyebrows from many of you when I said Q1 of 2022 would prove to be the hardest quarter for our industry since Q1 of 2020.
It didn't make me particularly popular around the CEO club, where the first rule of recession is not to talk about recession. However, transparency has always been one of Cloudflare's core values, so I'm going to call it like I see it. In that spirit, let me share some more details of what we saw and are seeing.
In Q1, our pipeline generation slowed, sales cycles extended, and customers took longer to pay their bills. We watched those metrics closely throughout Q2 and saw them all at least stabilized. They're not where we throw up hooray yet, but the metrics are trending in the right direction.
Given our visibility early into the economic downturn, we rapidly adjusted our go-to-market message. We shifted our messaging to focus on ROI, helping customers save money and consolidating spend from multiple point solution vendors behind Cloudflare's broad platform.
Messages about saving money and using fewer vendors didn't particularly resonate a year ago, but they do today. Having a broad platform to solve so many customers' problems while at the same time saving the money is a superpower in times like these.
As I look at our wins in the first half of the year, I believe it's fair to say that it's harder today than it was a year ago to sign up a new customer, but it's gotten easier to talk to our broad set of existing customers about doing more with us.
And customers are leaning forward to hear about how we can save the money, reduce their IT complexity, all while increasing their security, performance and reliability.
It’s great to be able to play both metal and hip hop like this, move from a pro-cyclical to counter-cyclical posture; when customers just want to grow and don’t care too much about the costs, Cloudflare has plenty to offer them to build on, and when customers want to consolidate and cut expenses, they also have plenty on offer.
No company is recession-proof. But some are more recession-resilient than others. Some things I know are universally true.
No matter how bad this recession may get, companies aren't going to abandon the Internet. They're not going to give up on the cloud and go back to on-premise boxes and packaged software. Hackers aren't going to stop hacking, so cybersecurity will remain a must-have, not a nice to have. And we're already seeing evidence of all of this with our gross renewal rate in every region for the first half of the year, hitting all-time highs since we went public. We are not recession-proof, but I wouldn't trade places with any other CEO right now.
Resilience is thy name.
This next excerpt is a bit long, but it’s good story-telling by Prince:
Personally, if I think back, my career has been defined by recessions. I think a lot of people's are. Recessions have always been hard, but they're also formative moments to focus and ultimately improve. In 2000, as the first dotcom bubble burst, the law firm I was supposed to go work for said they didn't need any more securities lawyers, but they could probably find a spot for me in their bankruptcy practice. At just that time, you reflect on whether watching companies implode was what I wanted to do with the rest of my life and pivoted to become an entrepreneur.
14 years ago, in 2008, at the onset of the last global recession, Google pulled their full-time offers for all their summer interns, which included my co-founder at Cloudflare, Michelle Zatlyn. If that hadn't happened, Cloudflare would have never been born.
At the same time, I learned what a margin call was and, simply embarrassingly, literally had to borrow money from my mom to pay my rent. That's when I got an extremely personal lesson on the importance of free cash flow, and it's why I'm ensuring right now in this uncertain time that Cloudflare is prioritizing being free cash flow positive. Tough times force you to reevaluate everything you've done and become better.
It's why the best companies come out of tough times even stronger than they went in. So maybe it's a bit masochistic but I'm looking forward to have Cloudflare get even better during some of the tough times for the global economy that seem likely ahead.
That’s the spirit. Never let a crisis go to waste, use it to temper your steel and make it stronger. 🔥🗡
On getting a FedRAMP certification to streamline selling to the U.S. federal gov’t:
it's like being in line with the DMV. We've pulled our number and are just waiting for it to come up for us to get our FedRAMP certification. And so we expect that we'll have very positive news for that next quarter.
But we're basically at number — we're #84 and it's showing #83 on the sort of red number accounting board at the DMV.
I wrote in the past about “stacking S-curves over multiple acts”, but it’s good enough to be worth highlighting again:
we think of Cloudflare as stacking multiple adoption S curves on behind another, and so our first act were how do we protect the infrastructure of customers around the world. And it is incredible to see how we've been able to do that successfully where today, more than 20% of all websites use our infrastructure.
We're continuing to sell those products, but I think that where we are earlier in that S curve is with our Zero Trust products, and we're able to go to all of those people who had adopted our application security products and now say, "Hey, we can help you with Zero Trust as well." And I think that, that is the big act that we're focusing on right now.
Act 3 for us, which I think will really start to hit in a material way around revenue in 3 to 5 years is really around Workers, and I think we have been very pleasantly surprised how that adoption has happened faster and sooner and earlier than we expected. R2, which is our object store and our Amazon S3 competitor went into public beta last quarter, and we expect that it will go into GA right at the end of Q3. And so I think that, that's an opportunity for us to do more and we continue to invest in it. And again, we think that the real durable nature of Cloudflare is that we're able to continue to stack these acts one behind another behind another.
They gave hints in the past that Act 4 will be around connectivity, taking over some of the roles played by telcos, but in a more global and more software-defined way. NET
Are you sure you’re looking at the same business? 🕵️♀️
A while ago, I wrote about how people look at long-term charts of the S&P 500 or Dow Jones as if they’re looking at a single thing, but just because it kept the same name doesn’t mean that what’s underneath hasn’t changed quite a bit. (wow that’s a long link)
From rail & steel companies to energy companies to Big Tech having the biggest share of indexes, the underlying economic characteristics change over time.
The same applies to many businesses, so when you look back at financials to understand the present, make sure you’re looking at something comparable.
Friend-of-the-show and Exra-Deluxe supporter (💚💚💚💚💚 🥃) Byrne Hobart writes:
For qualitative investors, the problem is direct enough that it's a little easier to deal with. Looking at financials for a company like Alphabet or Netflix from inception to the present can be illuminating, but the earlier data points are for a completely different business. There is not much that DVD rental numbers in 2008 can tell you about streaming's ability to increase prices faster than inflation in 2022.
Comcast & Charter’s Wireless Play
Friend-of-the-show Alex Morris (⚾️) removed the paywall on a post he did about ‘Cable's Wireless Moment’, and it’s worth a look:
as of Q3 FY21, Charter and Comcast had 3.2 million and 3.7 million wireless subscribers, respectively. Despite the fact that they only sell to customers within their cable geographies, its estimated that the cable companies have accounted for roughly 30% of wireless industry net adds over the past year. Based on recent trends, Comcast and Charter will each have more than five million wireless subscribers by the end of 2023. (Charter CFO Chris Winfrey: “I think our [wireless] penetration potential on our 30 million Internet customer relationships is very, very high.”) [...]
In summary, wireless has been a nice addition for the cable companies; as Comcast CFO Mike Cavanagh said in September, “We can win by improving lifetime customer profitability through lower churn and by having a stand-alone profit for the wireless business.”
As I mentioned before, an interesting dynamic is that because they already have the backhaul and lots of wifi access points, the cable companies can offload traffic from the MVNO back onto their existing network where it makes the most sense (higher ROI), and leave Verizon to pick up the rest, further improving their economics on the deal.
It’s a bit like Amazon building its own logistics for last-mile delivery where population density is high, and letting USPS/Fedex/UPS deal with the low-density rural routes…
For Comcast and Charter, this is proving to be an important short-term and long-term win. In the short-term, wireless is an avenue for improved customer LTV’s (through a stickier customer base and lower broadband churn), and possibly attractive standalone economics (Liberty Broadband CEO Greg Maffei: “I think this will be a $1 billion EBITDA business within four years”).
For more, Alex also has a more recent piece about competition from fixed wireless (paywall $). CHTR CMCSA
Biggest Risk to Twilio? 📱📵
Q: What is the biggest risk to Twilio, to the firm? What could kill the firm? A: I think the biggest risk is a really a manifest change in the way that over-the-top messaging works before Twilio is ready to fully transition financially. Say tomorrow, as I said, Apple and Google sign an agreement that RCS and iMessage will interoperate. This would mean that no business in the world needs to send an SMS message using the traditional phone number. That would be a really big change. There are already changes happening, such as the new password [standard Passkey].
Podcasts: Retrospective on Dee Hock’s Life (he’s the Founder of Visa) 💳 💸
Friend-of-the-show David Senra (🎙📚) just published two podcasts about what he learned from Dee Hock’s books, to pay his respects after his recent death. V
I didn’t know that much about Mr. Hock, but this is fascinating stuff. He clearly was an original thinker who thought independently and lived his life his own way:
Check out my podcast with David:
🧪🔬 Liberty Labs 🧬 🔭
Using DALL·E 2 to generate logos 💡🤖🎨🖼
Jacob Martin wrote about his experience using OpenAI’s text-to-image AI to create a logo for an open-source project.
What’s fascinating is that he shows all the intermediate steps and text prompts that he used to narrow his search through visual-space all the way to something that he liked and that fit his vision.
In some ways, it’s surprisingly like working with a human illustrator. You try to explain what you want — but can never quite convey the image in your head with words — and they give you their own perception of what you said.
Then you iterate based on that starting point (“How about more like this? How about with darker colors… How about more cartoony eyes? etc”).
Wi-Fi 7 standard @ 5.8Gbps, available by 2025 🪄
Should I add a “home is where the wifi is” joke here? Nah
Wifi is one of those things that we now take completely for granted, but I think it’s worth taking a moment to remind ourselves of how great and magical it is.
Imagine if you could only access the internet when plugged in with a physical cable, like an animal?
The Institute of Electrical and Electronics Engineers (IEEE) 802.11be standard, also known as Wi-Fi 7, is expected to leverage the 6GHz band in addition to the 2.4 and 5 GHz bands while delivering a max channel bandwidth of 320 MHz, compared to Wi-Fi 6/6E's max of 160 MHz.
Wi-Fi 7 will also increase throughput by up to 20 percent by moving from Wi-Fi 6/6E's 1,024 quadrature amplitude modulation (QAM) to 4,096 QAM while adding multi-link operation (MLO) and multi-resource unit puncturing. [...]
The standard is expected to provide data rates of up to 40Gbps, according to the IEEE, up from 9.6Gbps with Wi-Fi 6/6E. But that figure is a bit lower for devices like PCs and laptops, even though it still represents a gain over Wi-Fi 6E numbers.
Currently, Intel expects laptops equipped with its future Wi-Fi 7 technology will support a potential max data rate of 5.76Gbps if the system supports the 320 MHz channel, 4,096 QAM, and MLO. (Source)
What are we going to do with all this bandwidth? Well, we’ll figure it out, I’m sure!
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George Carlin's American Dream (HBO Documentary, 2022)
Do I even have to warn that the trailer contains some words that you can’t say on TV and that you may not want to play around kids?
If you like George Carlin at all, I think you’ll really like this one:
It’s a good mix between showing some of Carlin’s comedy work over the years, highlighting the ups and downs, and the unbelievable evolution from his early years (if like me you had never seen his early stuff, get ready for a bit of a shock). And they also give you plenty of more biographical stuff — interviews with friends and family, early childhood stuff — to help you get a better sense of the actual person.
To me, he was always just who he played on stage, I had no window into the rest of his life. Learning about his drug difficulties and how he had to reinvent himself multiple times to stay relevant was particularly revealing. He was fundamentally a lone wolf, even if he tried to connect and work on more collaborative projects here and there.
The years of incredible fame and wealth followed by years of semi-obscurity and becoming the butt of jokes as the passé old guy reminded me of the fame roller-coaster that Tony Hawk also went through (I wrote about it in edition #311).
"If you scratch a cynic, you'll find a disappointed idealist”