Tren Griffin+ Your Authors @trengriffin I work for Microsoft. Previously I was a partner at Eagle River, a private equity firm established by Craig McCaw. I am on the board of directors of Kymeta. Sep. 27, 2019 2 min read + Your Authors

The future of any business (including Peloton) depends upon expected long-term cash flows discounted by the cost of capital. Software and SaaS tend to have higher margins but hardware can create effective distribution. Or not. This depends on many factors. 

Apple proves that hardware can be an excellent means of distributing software and SaaS and that the size of TAM really matters.

There are plenty of hardware businesses that haven't created any software or SaaS advantages that create a barrier to entry. You know who they are.

Some businesses can spend a lot on sales and marketing and yet show no earnings because they are creating annuity value. That annuity value depends on the churn assumption and a few others. Get the churn assumption wrong and you either:

1. Overpay; or

2. Miss an opportunity.

4/ To understand the power of getting the churn assumption right or wrong, the extreme case is instructional. Do you know a business where customers were acquired at ~$800 CAC? AT&T purchased DirecTV for $49B, or $67B including debt. What is it worth now? 

5/ Another example of the importance of making a better churn prediction than other investors is Amazon Prime. What is monthly churn of Prime and how does that impact the value of that stream of cash flow? Here is one set of assumptions. What are yours? 

6/ One claim is DirecTV has a value of $40B. 

Divide $40B by 17.9M subscribers as of Q2 2019 = a valuation of $2,235 a subscriber. Really?

Expected Q3 churn is ~1.1M.

What's the value of the discounted cash flow? Here's a model: 

7/ In the last episode, focus was on sensitivity of a DCF to changes in churn. In this episode, the mix includes different factors interacting like COGS and CAC. Why would AT&T say this? Anything to do with $1.5B a year in fees? Wholesale transfer pricing? 

8/ "DirecTV loses more than $500M annually on the football package, people with knowledge of the deal said."

Is that $500M COGS or CAC? Or is it some of both?

What do you need to know about the economics of bundles to manage this negotiation? 

9/ Might AT&T hope the NFL terminates the Sunday Ticket deal early? Might AT&T be preparing the market for that? How much will churn rise if that happens?

"Tren’s view is that the variables of the LTV formula are interdependent not independent...." 

You can follow @trengriffin.


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