Jeff Ubben On Structural Improvement
From ValueAct Capital 2015 investor letter:
We are pleased to see structurally improving business models at most of our portfolio companies. One common theme we have explicitly chosen to invest in across multiple industries is direct customer engagement and disintermediation. Said another way, we look for opportunities where a company can remove intermediaries that distribute, resell, install, service and maintain their products. In the case of a company with diffused customers and limited internal resources, the "middlemen" can be extremely helpful. However, this help comes with a cost as the middlemen need to get paid, extracting economics from the industry. They also own the customer relationships, often leaving the supplier in the dark as to the customers' identities, locations, behaviors, preferences and level of activity. In the case of intangible goods, such as software or media, this loss of control can lead to widespread piracy. A direct relationship with the customer can enable more specific market intelligence, fostering faster, iterative product development cycles that work to further align interests between companies and their customers.
Cloud computing has enabled Adobe Systems Incorporated ("Adobe") and Microsoft to build two of the largest software as a service ("SaaS") businesses in the world with Creative Cloud and Office 365. Importantly, with each, a direct connection with the end user has been established allowing a real-time study of usage patterns, near-continuous product updates and a host of other features. This was not possible when their software was indirectly distributed and ran on the island of a PC or a corporate data center. Today, files can sync seamlessly in the cloud across devices and offices. The cloud processing power also allows for heavy duty computation, including de-blurring photos and videos, 3D simulations, fast search queries across disparate data sources and almost limitless data storage. Adobe and Microsoft are now benefiting from the information that comes with having direct insight into what the customer wants, empowering them to continue to improve their products, giving the customer more and then getting paid more as a result.
Join our free newsletter for exclusive insights we don't share elsewhere.