The Sidecar: The Strategic and Financial Brilliance Of Great Companies Investing in Mediocre Businesses

  • Why does Netflix run their own studio, rather than outsourcing the low-ROI and lumpy studio business to companies that have been doing it longer?
  • Why does YouTube pay stars, and pay to promote them, instead of using free home videos and cheap licensed videos? And why does Google build a Pixel instead of letting Samsung and Xiaomi fight over who will own the Android handset market?
  • Why does Uber, an app and logistics company, want to be in the crowded and competitive auto financing business?

Headcount Constraints and Capital Constraints

As companies grow, things break. If their growth means accreting features onto a software product, they break a lot faster . Software isn’t just a way to tell machines what to do: it’s a way to tell humans what the software is doing. There’s a whole cultural edifice you need for a large number of people to contribute to the same project. When you read about what it’s like to work at companies like Facebook and Google, you often read about an obsession with standards and best practices. And these companies like to hire weirdos, not boring nitpickers. They care about process because they have to.

BATNA

If you can build a better, cheaper studio, you don’t just have more cash on hand: you have a BATNA with every other studio. When Netflix’s coopetition with Hollywood leans less towards co-op and more towards -tition, they can always call up their bankers and say that this year, they’re putting some real money into originals.

What About Facebook?

Facebook is enormously profitable, scaling their core business as fast as they can, and yet they don’t fit my theory: they haven’t found some capital heat-sink that can absorb the $12bn or so in free cash flow they’ll generate this year. And it’s completely unclear to me why. Maybe there isn’t an adjacent business they can really invest in. What’s adjacent to human connection? Maybe they’re more disciplined — they never raised as much money as they could, so maybe cheap capital isn’t as tempting to them as it is to others.

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Byrne Hobart

Byrne Hobart

I write about technology (more logos than techne) and economics. Newsletter: https://diff.substack.com/