Memo: The Type House

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Bundle and unbundle, bundle and unbundle, bundle and unbundle – but then generate profits on both. These weren’t his exact words but that was the message. In one sentence, my father described his industry. At 12, I sat in a cubicle in a Houston industrial park, an unofficial intern of his Time Warner Communications division. I would go on to work the traditional work weeks, each summer, between that year and my graduating year of high school. I was paid in perspective, and I mean that sincerely.

At the time, my father was the senior executive in charge of a fledgling broadband internet project called “RoadRunner.” (It would later go on to power Texas’ residential internet needs, but that’s a different story.) His words were transcendent to me because they explained that the value of a product could be amplified by how it’s packaged.

By now, you’ve heard of the TikTok influencer craze. (You may have even felt a twinge of fatigue by the momentum of it all. There is new terminology, dance moves and global political implications to keep up with, along with the excessive screen time required to digest it all.) This creative platform has further popularized the concept of the “collaborative house” made popular by YouTube creators David Dobrik (Vlog Squad) and Jake Paul (Team 10). For the most marketable of these houses, the platform began to matter less. Dobrik, a videographer and philanthropist who began on YouTube, nearly duplicated the magnitude of his audience on TikTok in just a month’s time. New members join, old members leave as their profiles grow. Collaborative groups are reminiscent of the cable industry’s intrigue: bundle, unbundle, bundle, unbundle.

In the land of TikTok, the Hype House is a particular group of 20-something content creators who live in or around Los Angeles; many of whom cohabitate. The group includes a number of the best and brightest creators in the space, including former members Charli D’Amelio and her sister Dixie. Together, the sisters have amassed 10s of millions of subscribers across TikTok, YouTube, Twitter and Instagram. Some industry analysts argue that the D’Amelio family is the next Kardashian clan. Objectively speaking, that anointing is the golden calf of media and commerce opportunities.

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D’Amelio family is the new Kardashian family.@charlidamelio + @dixiedamelio + @marcdamelio + @heididamelio

The TikTok house seems like it exists in an entirely different media universe than the email newsletter, but there are more similarities than it would appear. Critics of the newsletter industry say its missing the above frameworks: collaborative houses, bundling, unbundling, platform agnostic growth, and the power of media-driven commerce. There aren’t many venture-funded companies with as much raw potential as Charli D’Amelio or David Dobrik. In both cases, the young entrepreneurs mastered the physics of new media. In its own way, the newsletter industry is hoping to crown their own winners. Those winners will accomplish the same.

Consider the inevitability of “subscription fatigue.” It’s a common refrain made by critics of the burgeoning newsletter industry, one that Substack has helped to democratize and Ben Thompson’s Stratechery has helped to inspire. In 2019, Gartner’s Laurie Wurster wrote:

By 2020, all new entrants and 80% of historical vendors will offer subscription-based business models.

But the fear of paid subscription fatigue may be overstated. There are two categories of monthly subscriptions:

Category No. 1: entertainment, distraction, or light enrichment.

Category No. 2: helps to build a new world by enabling education, professional growth, or networking opportunities.

Each of our paid subscriptions can be placed, primarily, into one of the above categories. The first category has dwindling demand elasticity. This may explain Quibi’s current trouble: consumers can only tolerate so many distractions. There’s infinite substitutes for entertainment, sensationalism, dopamine hits. The subscription ecosystem becomes finite at a certain extent. This category includes streaming services, games, digital entertainment.

The second category has demand elasticity that may hold steady. This group of subscriptions may also compete with continued education, social clubs, or corporate networking. Certain newsletters may improve or outright replace certain social or professional functions. Some of the best newsletters are also building communities around ideas, possibility, and navigating the future of the industry.

A play on the TikTok craze, the newsletter industry has its own brand of collaborative house. In it: great ideas have been ideated, concepted, and executed.

Founded by Nathan Baschez, The Type House is a group of 40 newsletter publishers: former A16Z associate Li Jin, Turner Novak, David Perrell, Sriram Krishnan, Lenny Rachitsky, Brett Bivens, Blake Robbins, Ian Kar, Alex Kantrowitz, Cherie Hu, Packy McCormick, Adam Keesling, Dan Shipper, Polina Marinova, Sari Azout, Nikhil Trivedi, Nikhil Krishnan, Brad Wolverton, Josh Constine, Sid Jha, Laura Chau, Morning Brew CEO Alex Lieberman, Trapital‘s Dan Runcie, Byrne Hobart, Allen Gannett, Sarah Nockel, Brett G, Paul Smalera, Trends.vc’s Dru Riley, Justin Gage, Rui Ma, Cat Lee, Can Duruk, Alex Taussig, Seyi Taylor, and myself.

Bundle and unbundle, bundle and unbundle, bundle and unbundle – but then generate profits on both.

The group is diverse in every sense of the term. Within it, you can observe the mechanics of media-driven commerce at work. Of the highlights, consider David Perrell. The writer-turned-teacher has monetized with educational courses. His company is now generating seven-figures in annual revenue. Morning Brew is one of the most promising newsletter-driven companies in business today. Dan Runcie has pivoted from media to consulting those in the hip hop industry. In doing so, his existing Trapital product has become top-of-funnel for lucrative consulting projects. 2PM continues to successfully navigate high level consulting and the growth of its own paid community of senior executives, artists, scientist, and independent thinkers. Polymathic is nearing its first year in existence. But, perhaps, the greatest indication of what’s to come is a throwback to my time in the Houston cubicle. Bundle and unbundle, bundle and unbundle.

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Of Substack’s brightest opportunities to solidify its place in the creator ecosystem, the Everything Bundle began as an experiment between Nathan Baschez and Dan Shipper. It has since grown to include Adam Keesling, Li Jin, and Tiago Forte’s work. By bundling their individual efforts, they’ve developed a flywheel of business that has propelled them to Substack’s famed leaderboard. Though each of them are very capable of self-promotion, its their collective works that seem to drive new consumers to sign on for $20 per month or $200 per year. With each new property that is added to Everything, a new wave of subscriptions follow suit. I’ve likened the pivot to Basche and Shipper building The Athletic of business and intellectualism. And it just might work.

The value of prolific writing and creativity is that you’re always in a pattern of thought. You’re constantly assessing beliefs and designing paths to further your understanding of a topic. When entrepreneurial thinkers begin a newsletter on the platform of their choosing, they are doing so out of sheer passion. Their minds are always thinking of enrichment, improvement, development, and progress. Like the YouTube videographers of yesterday, or the TikTok minds of today, or any creator of tomorrow, the art is rarely contained by the platform. The great secret of creativity is that it can evolve. Many of today’s brightest businesses were yesterday’s projects-turned-ventures.

There is great potential for any subscription-driven media company to grow beyond its early intentions. If and when subscription fatigue begins to hinder the newsletter industry’s growth, the best and brightest will identify new mediums for their message and their engaged communities will follow. From YouTube to Vine to TikTok, this is what great digital creators have always done. They’ve outworked fatigue. It’s due time to place newsletter entrepreneurs in this coveted category.

By Web Smith | Editor: Hilary Milnes | Art: Andrew Haynes | About 2PM 

 

Memo: Shopify’s ‘Cool Kid’ Paradox

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An open letter to all eCommerce merchants. In a recent chat with 2PM Executive Member Damian Soong, the DTC founder replied with a poignant thought:

Someone needed to say that DTC isn’t Shopify.

Paul do Forno, the Managing Director of Deloitte’s Commerce Practice, chimed in with the data to support Soong’s thought, adding:

If you plotted by total platform revenue: HCL Commerce, Oracle, SAP, SalesForce would be towards the top.

Shopify has made the industry more interesting, accessible, and newsworthy. But it is not the only participant in this burgeoning ecosystem: Magento (now Adobe), Demandware (now Salesforce), SAP, BigCommerce, Squarespace, BigCartel, WooCommerce, Webflow, Square, and Wix have played pivotal roles in the development of either enterprise or merchant-level markets. Shopify is neither the biggest platform with respect to merchant volume or gross merchandise value (GMV). It sits squarely at the center of the two extremes. Yet somehow, it became the de facto operator of the DTC era.

To understand the direction of eCommerce, you must understand its past and present. During what was likely the most pivotal year in my early eCommerce career, I studied Magento from the perspective of an eCommerce brand that employed 100 or so. That earlier version of Magento was a complicated platform to understand. Its management required the employment of a dozen engineers and an equal magnitude of talent in user experience and front-end design. When I soon had my own opportunity to build an eCommerce brand alongside Kevin Lavelle, we went not to Magento, but to Shopify. We didn’t have the money to hire technical talent, nor did we have the patience to manage it on top of the challenges that we faced in manufacturing and early customer acquisition. But it’s important to recognize that this decision was made nine years ago – a lifetime in technology.

That same company of 100 is now over 1,000 strong. In under one decade, a small industry competitor became a global manufacturing leader all through direct-to-consumer channels. And they’ve done so on Adobe’s Magento. If any SaaS platform has the right to claim the dawn of the DTC era (2008), Magento could easily make that argument. Instead, it gets lost in the conversation.

Standing in a hallway of Shopify Plus’ most recent New York City conference in 2019, I sat with Shopify CEO Tobi Lutke, one of the industry’s most admired executives. I remember marveling at the production of the event. The friends, the networking, the branding of the space all communicated Shopify’s place in the eCommerce ecosystem. I applauded the entrepreneurs who shared their stories on stage with highly produced short films. Also notable was the accessibility of the C-suite executives who, frankly, should no longer be that accessible. This availability is a part of Shopify’s secret sauce. You won’t find another retail CEO of his caliber who is willing to respond to customers on platforms like Twitter and Instagram.

What I remember most about that particular meeting is the intensity of Lutke’s product focus. Suggest an idea that is outside of Shopify’s product pipeline and he will explain why Shopify isn’t right for it. He rarely waivers on his vision for what Shopify and Shopify Plus are to the eCommerce industry, or the functions that they are willing to build.

It’s this same galvanizing vision that rallies Lutke’s base of thousands of platform evangelists. Shopify’s ability to amplify its message through its partnership ecosystem has done wonders in furthering its narrative of perceived inevitability. In Shopify Unite and Network Effects [1], I wrote:

If you were to sit in a room with BigCommerce or Adobe’s c-suite and explain that product differentiation can be more than a software iteration, you won’t be sitting there for long. And that is part of Shopify’s mounting advantage. It’s unclear whether or not the original intent of the Shopify Partner ecosystem was to be a catalyst for network effects. But that’s certainly the case.

Founder Tobi Lutke, Harley Finkelstein, and team stumbled upon a new form of competitive advantage in commerce SaaS. Here, at the intersection of influence and efficacy, sociological advantages of retail brands have interfaced with an ecosystem of software as a service.

Shopify’s primary arguments for the attention it gets are valid. Its holistic approach to fulfillment, returns, and no/low code architecture will become fixtures in North America’s market as eCommerce’s percentage of retail continues to inch above and beyond 20% or 25% or 30%. And consider Squarespace or WooCommerce’s volume and Magento’s GMV: Shopify’s ability to capture mindshare despite these other companies’ advantages are as much the fault of the competitors who haven’t valued the marketing and branding aspects of business.

By weaponizing network effects, Shopify has become the proverbial cool kid of SaaS. Its brand voice is the life of the party and the center of many public discussions. There is market value in this positioning. Like Amazon, Shopify’s fortune is tied to eCommerce’s continued growth in North America. Public investors reward Shopify simply for being tied to the movement towards direct-to-consumer. It’s deserved.

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The Traditional, The Cool, The Quirky, and The Hustlers

It is important to note that this is not winner-takes-all, and what Shopify does next matters. There are eCommerce founders building on custom sites that have accomplished profitable growth. There are leaders who’ve chosen Salesforce or BigCommerce to fit their technological or philosophical needs. And in the process, they’ve built companies spewing $10s of millions in monthly EBITDA. Of course, there are examples of these feats on Shopify, but that’s the point. The democratization of eCommerce doesn’t only refer to platform simplicity.

Shopify’s ecosystem stands to benefit greatly by expanding the definition and character of the DTC industry to reach out and include the brands, founders, agencies, and technologies enabled to support them on other platforms. Some of the best and brightest stories, people, and brands are building outside of the spotlight.

The cool kids often earn the lion’s share of attention. But some of the most notable progress happens where the cool kids aren’t. That’s the paradox.

By emphasizing stories and anecdotes from founders who’ve eschewed the industry spotlight or brands that have managed growth differently than is commonly advertised, we’re closing the knowledge gap. Perhaps there was a brand founder who chose to use WooCommerce to scale and now has insights that could help Shopify-based brand founders accomplish the same. Or perhaps a Shopify Plus founder who’s successfully captured five years of year-over-year growth could explain a key strategy to a brand owner who’s built on Magento 2.3.4.

As eCommerce grows beyond 25% or 30% of American retail, we will see more examples of brands and retailers achieving a growth velocity that would have previously seemed unimaginable. In some cases, these brands will not be built with one’s preferred technical architecture. But the credibility or inclusion of these founder perspectives shouldn’t hinge on their platform preference.

Shopify Inc.’s job is two-fold. Their sales team works on converting potential users into new merchants. Their partnership ecosystem plays an essential role in replatforming existing merchants to Shopify or Shopify Plus. There are limits to this, but Shopify’s pronged ecosystem that pulls in new users and levels up existing ones is an advantage in the market, and it has an unparalleled opportunity. Where it reaches from here will determine its next phase of growth.

But they’re on notice. For every great success narrative that you hear from a Shopify partner, there five stories on competitive platforms. The DTC industry isn’t Shopify, it’s bigger than its technology or its ecosystem. This means that there is a greater opportunity to learn from, endorse, encourage, or evangelize the great work of builders who chose a different approach to a positive outcome.

By Web Smith | Editor: Hilary Milnes | Art: Andrew Haynes | About 2PM

Memo: The Nike Report, Part II

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American economics is, often, the true driver of lasting change. In this context, Nike has served as one of numerous leading indicators at the intersection of sports and social change for nearly 40 years, from Steve Prefontaine’s rebellious nature (pictured), to Compton’s own Serena Williams, to Lebron James’ philanthropy and social activism. In an earlier 2PM report on the apparel and shoe brand, I explained Nike’s deeper intentions for the then-controversial agreement with former NFL quarterback Colin Kaepernick:

You’re going to read numerous reports on the disingenuous nature of Nike’s co-opting of activism. And through the lens of journalism, their assessments are mostly correct. But through the lens of LTV / CAC ratio (lifetime value / customer acquisition cost), there is a different perspective to consider.

Socio-political arguments flooded the news in response to the deal, but few assessed the economic justification for it. That is, until last week. In a recent essay, NYU professor Scott Galloway explains:

Nike embraced Colin Kaepernick and took a calculated risk that paid off. The math? People of color have a higher representation in Nike’s customer base than the population at large. Most of Nike’s consumers are under the age of 35, live outside the US, and are willing to spend $200 on Vapormax Flyknit shoes. This is Latin for progressives. This was a genius, shareholder-driven move. [1]

Galloway’s thoughts of Nike’s intent was short-sighted, in my opinion. At the time, an important segment of Nike’s target demographic was comfortable with the deal. But Nike was betting on something far greater than the consensus that existed when the deal was first announced.

Nike is renown for casting light on the American consumer and how we think. In 1990, twenty-seven year-old Michael Jordan quipped, “Republicans buy sneakers too.” Nike stood by those comments. Objectively speaking, that was probably the smartest take that he could have had at that stage of his career. At 57, the same man pledged $100 million to social justice causes on behalf of same brand.

There is an even bigger story developing. When 2PM published the analysis of Nike’s Colin Kaepernick decision, 2PM lost more subscribers in one day than in the trailing twelve months. In that report, I justifed Nike’s marketing rationale:

Nike wants to own iconography. For a company that wants to own history, they own very little of it today. If you’re a history enthusiast, you can watch clips of Jesse Owens in 1936 Berlin exhibiting heroics in first-generation Adidas track spikes, hand delivered by Adi Dassler. Or you can watch Muhammad Ali swinging at other boxers with Everlast on display. Now, Under Armour owns his rights in a protective attempt to prevent Nike from using their marketing wizardry to build their cache. And in a similar attempt, Adidas owns the rights to Jackie Robinson. [2]

Last week, the NFL’s own social media team subverted the league’s commissioner to release a now-viral video featuring several players including the league’s face, Kansas City’s Patrick Mahomes. In it, they were all but demanding attention for the same issues that contributed to the league’s discontent with some of its most visible players. The athletes on video hinted at the importance of Kaepernick’s potential reinstatement into the league.  It’s been four years since the former Super Bowl quarterback played an NFL game. Within 72 hours, Commissioner Goodell released his own response, one that has been positively received. Just two months ago, this sequence of events would have been unheard of. It was Hemingway who once wrote: It happens “gradually and then suddenly.”

In one way, Galloway was correct. Nike’s math contributed to their decision to bet on a divisive American figure. But even Nike’s math was wrong. No one in Beaverton, Oregon could have predicted 2020, this interesting age. The week of that advertisement’s 2018 release, the U.S. president tweeted his distaste with the decision:

What was Nike thinking?”

Within two years, a marketing decision that garnered criticism from all circles of media has begun to pay off. Nike was thinking less about the consumers who already approved of the Kaepernick endorsement deal. They were thinking about the new consumers, the ones that are just now beginning to understand the messages that contributed to his early retirement. That foresight is how Nike makes its money. Not by being safe and calculated but by being right before anyone else. Nike wanted a re-do of sorts. In Inspirational Brands, I explained the story of Adidas and Jesse Owens.

As a culture, we’ve always relied upon the symbolism of achievements, the words of orators, the photographs of journalists, the penmanship of authors, and the impressions of brands that we trust. Another globally relevant event happened in 1936, the year that Coudert’s colleague wrote the letter with the now-famous quote. A young man from Ohio showed up to race in Berlin. With world record speed and a prototype of a shoe designed by a young German cobbler, he defied myths of supremacy en route to four Olympic gold medals. [3]

I concluded that essay with a prompt: What great symbolism will come of our own interesting age? Michael Jordan, Nike’s most famous athlete, avoided the moments that defined cultural or political history beyond the court. He was opinion-less, he rarely defied convention. With Kaepernick, it is Nike’s effort to own a new genre of iconography. It’s unlikely that an NFL team will sign the quarterback. Regardless, the athlete’s original message is no longer unpopular; social attitudes have shifted. Imagine the story that Nike will share if he does find his way back to the huddle. For Nike, that’s the story that they’re hoping to tell.

By Web Smith |Editor: Hilary Milnes | About 2PM

Part One: The Nike Report (2018)