Episode 40: The Economics of Book Writing, Temple Tumbles, Adir Breaks the Breakthrough Fund and what Should Warren do with his big Apple stake?
The guys chat about the financial secrets of the publishing industry, the risks of owning Temple & Webster, Breakthrough Victoria, and should Berkshire Hathaway sell its huge Apple stake?
Adam and Adir are doing their first live show! Join us on June 14th at Fortress in Melbourne for food, drinks, games, and a live recording. Tickets are $79 - book here.
The AI storytelling game that kept Adir up till 4am
Adir is hooked on Rimworld, a Steam game that “follows three survivors from a crashed space liner as they build a colony on a frontier world at the rim of known space.” Listed as one of the top five games he’s ever played (listen to hear the rest of that list!), Rimworld was created by one person and was banned in Australia.
“RimWorld is not designed as a competitive strategy game, but as a story generator. It's not about winning and losing - it's about the drama, tragedy, and comedy that goes on in your colony.”
While researching revenue figures for this game, Adir went down a rabbit hole about the economics of book publishing…
The economics of book publishing
Did you know Adam has sold over 5000 copies of his book, Pigs at the Trough: Lessons from Australia's Decade of Corporate Greed, which puts him in the top 2% of authors?
Adir went deep into the book industry in his sleep-deprived state, spitting out facts like:
The Very Hungry Caterpillar has sold 55M copies
50% of published books sell fewer than 12 copies
25% of readers account for 80% of book sales
In the US, they sell a billion books a year, and there are only 850M individual movie tickets sold each year
But without the back catalogue, there would basically be no publication of new books, because the hits compound - “so basically this industry is like the VC industry” (to which Adam says: “Everything's like the VC industry when you think about it. Any creative industry is like the VC industry when you think about it. So many people try it and most can't do it.”)
Adir says we’re living in an era where books have survived an experience that the music industry has not survived: the maintenance of the physical medium. “And so the reason that Spotify for books doesn't exist is because the major five publishers will not allow their books to go to such a service.”
The guys agree that the industry is largely driven by women reading fiction, what takes a book to the next level is when it’s turned into a successful movie, and some of the biggest books of the last five years have been written by people with large social media followings because marketing budgets can be kept low. But they disagree whether Amazon is killing independent bookstores.
Adir’s favourite quote on writing by Stephen King in his book on writing, called ‘On Writing’: “When you write a story, you’re telling yourself the story. When you rewrite, your main job is taking out all the things that are not the story.”
A live look at Adam and Adir talking about the Tetris movie:
Temple & Webster tumbles
Furniture and homewares brand, Temple & Webster, has incurred the wrath of shareholders after a tepid earnings update. The share price has slipped 18% in the last six weeks with EBITDA flat year-on-year. Management said a brand marketing campaign drove revenue higher but came at a steep cost.
With marketing spend jumping significantly, is Temple & Webster doing enough to justify its $1.2B valuation?
Adir has “said for a very long time, I think this business is at $100-150M valuation business and I stand by that.
“The problem is you've got a business that no matter how much incremental revenue they generate, they never get to keep any of it. The reason I think it's worth so much less is because it's going to be very difficult to translate top-line growth into free cash and profitability.
“If they transition to a business that makes free cash and profits on good margins, they can't justify the valuation they currently have. And I think that means they're stuck between a rock and a hard place because the minute they go and sacrifice top-line growth for profits, that valuation is going to plummet way below a billion.”
Adir Breaks the Breakthrough Fund
The embattled Victorian Labor government announced last week that the disastrous “Stalinesque” Breakthrough Victoria fund has had its investments slashed with the government stripping 90M annually. As a result of the cut, the fund has seen its investments cut from 10 to five annually.
Adir said he’s “proud to be associated with my criticism of this fund” and had this advice for the Victorian government: “You've got to come out and say, we're in favour of supporting innovation. But what we're going to do is not pick winners. We're going to find a more cost-effective way to support the entire industry, beginning with the immediate and complete cutting of Breakthrough Victoria.”
In other questionable government decisions, the Australian and Queensland governments set aside almost $1B for grants loans and equity investments in a firm called PsiQuantum, which is trying to build the world's first fault-tolerant quantum computer free from errors and instabilities.
Adir was pretty happy with this move: “I cannot think of a single way, no matter what outcome occurs, that this can be anything other than a terrible decision. Even if Australia makes 100x on our investment, that still will not justify this decision.
“These governments did not earn this money. We earned this money. They took it on the promise that they would use it to make life better for Australians and to make us happier. That's the social contract with regards to taxation.”
Adam: “The Queensland Treasurer, the aptly named Cameron Dick...”
The giving tree
At last week’s Berkshire Hathaway annual meeting, dubbed “Woodstock for Capitalists”, Warren Buffet announced a cut of their Apple stock by 12.9%.
Berkshire Hathaway invested $36B in Apple in 2016, which has since returned $120B in profit. Apple famously represents 50% of their entire public stock portfolio.
The late great Charlie Munger didn’t see Apple as a typical Buffet investment, but Adam disagrees - “he loves toll roads and Apple is the ultimate toll road.”
Adir liked the toll analogy and asked the question: “you buy this car that you love, but the only way you can get to work is on this road. And no one can drive on that road except people that have that car. And now I keep putting up the price of the toll. Isn't that ultimately going to end up with me switching to a different car as opposed to paying the increased toll on the road?”
Adam says “the only difference is you're not paying the toll. Somebody else is paying the toll.”
Adam doesn’t see how Apple doesn’t drop 50% in the next couple of years, but he also admitted to saying Apple was a sell in 2008.
Five other stories worth following:
OpenAI announced a new generative AI model called GPT-4o - the “o” stands for “omni,” referring to the model’s ability to handle text, speech, and video. OpenAI’s CTO, Mira Murati, said “we’re looking at the future of interaction between ourselves and machines.”
On the topic of AI, Apple has promised to unveil its long-awaited generative AI strategy at its Worldwide Developers Conference in early June. The company may showcase a new version of Siri - some are describing the upgrade as a "brain transplant" for Apple's voice assistant.
The Biden administration is preparing significant tariffs to block Chinese EVs from growing market share in the US. The tariffs will quadruple from the existing 25% to 100%, making it almost prohibitively expensive to sell them in the country. Support the local auto industry or be counterproductive to reducing emissions, that’s what Biden is deciding between.
A 62-year-old man who received the first-ever pig kidney transplant two months ago has died. The hospital said there was no indication that his death was due to the transplant. Meanwhile, Elon Musk’s brain-computer interface company, Neuralink, said its first implanted brain chip had its first setback but that the trial participant is unthreatened.
Not really a story “worth following”, but this 1989 Microsoft tutorial is going viral for being “the most boring video ever made”. It’s a nearly two-hour-long tutorial on how to use Microsoft Word, recorded by former motivational speaker Randy Smith - watch it here.
Adam and Adir are doing their first live show! Join us on June 14th at Fortress in Melbourne for food, drinks, games, and a live recording. Tickets are $79 - book here.