Very interesting. What is the underlying reason(s) for the difference between high gross margin and negative operating margins? Is it mostly the cash-burning customer acquisition arms race kinda dynamic, or something else?
They justify it with 'spending to grow.' Some say it's a bit of an accounting trick—the COGS aren't a true representation of what it costs to produce & keep updating the software + customer service, and that's pushed into R&D. Then as you mention, S&M spend is huge and seems to keep growing in line with revenue.
The belief was that they'd reach some steady state where they own enough of the market to turn down S&M and start printing cash in perpetuity, but I think that's the wishful thinking element. Before they get to this steady state they're often disrupted which either leads to churn or a smaller terminal TAM than expected.
Some do reach/approach this steady state, but it seems the # that actually can/do was vastly overestimated.
Gotcha. I knew about this dynamic for e.g. Uber/Lyft or PayPal/X but didn't appreciate the extent of it! Crazy to think of how much consumer surplus must have been generated at the direct expense of LPs (probably public market investors too). I think for Uber alone it's something like $30 billion in effective cash transfers 🤑
Very interesting. What is the underlying reason(s) for the difference between high gross margin and negative operating margins? Is it mostly the cash-burning customer acquisition arms race kinda dynamic, or something else?
They justify it with 'spending to grow.' Some say it's a bit of an accounting trick—the COGS aren't a true representation of what it costs to produce & keep updating the software + customer service, and that's pushed into R&D. Then as you mention, S&M spend is huge and seems to keep growing in line with revenue.
The belief was that they'd reach some steady state where they own enough of the market to turn down S&M and start printing cash in perpetuity, but I think that's the wishful thinking element. Before they get to this steady state they're often disrupted which either leads to churn or a smaller terminal TAM than expected.
Some do reach/approach this steady state, but it seems the # that actually can/do was vastly overestimated.
Gotcha. I knew about this dynamic for e.g. Uber/Lyft or PayPal/X but didn't appreciate the extent of it! Crazy to think of how much consumer surplus must have been generated at the direct expense of LPs (probably public market investors too). I think for Uber alone it's something like $30 billion in effective cash transfers 🤑