In this second installment of a three-part series about some of the features that make TikTok successful (the first article was highlighted in the Aug. 18 edition of Beach Reads), Eugene Wei delves into the "magic" of the TikTok algorithm by illustrating how the app's design actually empowers the artificial intelligence (AI). Features on TikTok's For You Page (FYP) such as swiping to indicate pleasure or displeasure (much like Tinder) help TikTok's "machine learning FYP algorithm 'see' what it needs to see to do its job so effectively," Wei says. "An algorithm-friendly design ethos may become a model of how other companies in other verticals might achieve an edge in the age of machine learning." TikTok, Wei argues, creates network effects that are missed by other apps by effectively integrating the AI with the user interface (UI) to help power algorithmic development and user engagement. "Most software features or UI designs can be copied easily by an incumbent or competitor overnight," he writes. "But if you can create a flywheel, like TikTok's, it becomes much harder for a competitor like Reels or Triller to catch up. Triller may pay some influencers from TikTok to come over and make videos there, Reels might try to draft off of existing Instagram traffic, but what makes TikTok work is the entire positive feedback loop connecting creators, videos, and viewers via the FYP algorithm." While others focus on building a moat via advantages in scale or technology, TikTok does so by delighting customers (not far off what Sarah Tavel describes in her article in the Investment Philosophy section below), and I'm looking forward to Wei's insights on this approach in a further follow-up on the "network effects of creativity."

So why is TikTok so successful, while new short-form video format Quibi has so far struggled to gain traction, despite serious backing from Hollywood and Silicon Valley heavyweights? "Quibi's shows were designed to be watched by a single person on a tiny mobile screen and, surprisingly, the app does little to promote online social interaction between its viewers," says the author in this Reforge article. "TikTok is built for sharing, whereas Quibi made it deliberately hard to share from the app — by making it impossible to snap screenshots." Short-form professional video content with limited sharing and social features seems to be a fundamental design flaw of Quibi and also alienates the "creators" who have become accustomed to generating content for viewers. "TikTok's design takes a clear stance—snackable media is social media. The right rail of TikTok is entirely dedicated to the social interactions vital to the app's experience: following creators, reacting, commenting, sharing, and mimicking the current video," the article says. "Quibi has been thinking about itself as a film studio. The company needs to think about itself as a social network." The author uses two graphs to illustrate differences between video content providers such as TikTok, Quibi, Netflix, and YouTube. The Entertainment Value Curve maps social value vs. production value (the two seem to be polar opposites), while the Content Distribution Curve plots view count vs. amount of content (again, the two are opposites). I'm interested to see whether slightly altered versions of the curves can apply to other social media platforms. Perhaps video games (free to play games vs. traditional) would be a good case study.

Speaking of video games, this interview with Take Two CEO Strauss Zelnick delves into the future of the gaming industry. Or, according to Zelnick, the future of all of entertainment. "Interactive entertainment is the standard bearer of the entertainment business," Zelnick says. "It is the most important entertainment business. It is the largest, it is the most rapidly growing, and it appeals to a very broad audience. It's become America's pastime and the world's pastime." While clearly talking his book a bit, I do think that video games are laying the groundwork for a new entertainment paradigm. Perhaps paradoxically, the maker of Grand Theft Auto is approaching the new entertainment paradigm from a "quality" viewpoint, rather than solely a "mass" standpoint. Quality allows Take Two to exert a bit of pricing power and avoid the free-to-play strategy that Epic Games' Fortnite was successful in helping to pioneer. "We deliver a much, much bigger game for $60 or $70 than we delivered for $60 10 years ago," Zelnick says. "The opportunity to spend money online is completely optional, and it's not a free-to-play title. It's a complete, incredibly robust experience even if you never spend another penny after your initial purchase." So far, Take Two has had tremendous success with its hit titles, but I'm curious if a move to something more closely resembling the metaverse forces a change to solely free-to-play models (more on the future of media here). So far, it looks like things are heading that way. However, there might be room for a couple of different models.

Odds are you've had at least one package delivered to your home this week. That package may have traveled via a number of shipping modalities: ship, train, plane, truck, and even personal cars. There is a vast network of companies that operate the infrastructure behind the scenes that (hopefully) gets your delivery to your door quickly. This article is a helpful overview of different parts of the delivery network and focuses on FedEx, with the author putting forth an investment case in an almost activist fashion: the company should more deeply integrate its business segments (like UPS does) to drive efficiencies. "If FedEx integrates its domestic Express and Ground networks, I think it can add over $2bn to operating earnings and increase margins/asset utilization significantly," the author writes. "If it successfully integrates what's left of TNT and thrives in the European market, this will also remove a huge roadblock that has been weighing on the stock for over 2 years. Will integration ever happen? Under [founder, chairman and CEO] Frederick Smith, I doubt it." A number of roadblocks make combining FedEx's Express and Ground networks difficult (including the potential for unionization), but the author highlights that UPS is more efficient despite unionization. "On a per driver basis, therefore, FedEx handles about 133 packages and UPS handles 233 packages; on a per facility basis, FedEx handles 9,231 packages and UPS handles 17,500 packages." The market is excited about the recent appointment of Carol Tome as CEO of UPS, and it sounds like the author of this article believes something similar should occur at FedEx.

For those interested in finding out more about CoStar, "the number one provider of information, analytics, and online marketplaces to the commercial real estate industry in the United States and United Kingdom," this article is a comprehensive thesis and solid jumping off point. The company has two segments: "the most comprehensive commercial real estate database available," and "the largest research department in the industry." It also owns and operates leading online marketplaces for commercial real estate and apartment listings in the U.S. in LoopNet and Apartments.com. The author outlines competitive positioning and growth opportunities for these segments and concludes that CoStar "is priced for exceptional growth at attractive incremental margins, which is not surprising. I was a little surprised, however, that the stock looks reasonably priced even if growth is lower than recent history. You can even come up with a bull case on the stock if you believe that [CoStar] can follow the path of another impressive marketplace business, Booking Holdings."

Not too long ago, I read "The Billionaire Who Wasn't" by Conor O'Clery, a fantastic book about Chuck Feeney, a self-made billionaire who founded Duty Free Shoppers as well as private equity firm General Atlantic. While detailing how Feeney made his money, the book also chronicles his goal to give away every penny before he dies. "Over the last four decades, Feeney has donated more than $8 billion to charities, universities and foundations worldwide through his foundation, the Atlantic Philanthropies," this Forbes article says. He "has finally given all his money away to charity. He has nothing left now—and he couldn't be happier." According to the article, Feeney's approach to philanthropy was instrumental in the creation of "The Giving Pledge" by Bill Gates and Warren Buffett, "an aggressive campaign to convince the world's wealthiest to give away at least half their fortunes before their deaths." Feeney's logic for pursuing the goal is admirable and delightful. "I see little reason to delay giving when so much good can be achieved through supporting worthwhile causes," he says. "Besides, it's a lot more fun to give while you live than give while you're dead."

Despite stories about careless young people, this National Geographic look into the demographic and social aspects associated with the spread of COVID-19 points to a more nuanced and complicated reality. Specifically, young people are often on the front lines of the economy, keeping the proverbial wheels on the bus. "So while younger generations are being blamed, in some quarters, for the pandemic's spread, they are bearing the greatest burden of poverty and the brunt of the transmission risk that comes with keeping the economy going, all with little help in sight," the article says. While there is likely carelessness from people of all ages, those that are younger, have limited mobility, and simply don't have a safety net to fall back on can have no choice but to run the risk of working and being exposed. So be kind out there, and stay safe.

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