An abundence of scarcity

We are coming out of an era where an amazing amount of stuff was given to us. For free.

Without getting too far into the weeds, this was a gift from the Federal Reserve. For nearly a decade money was free, or close to free, and when money is free only a fool fails to spend it. The focus among startups, and even big, established companies, was on empire building, land grabs, and growing user counts. With money free, there was no reason to focus on profitability and earning more of it.

As we now all know, that has changed this year. Money now has a price. And because it does, there is less incentive to burn through it in the name of growth and more incentive to try to earn more of it from customers. Free isn’t over, but it is a lot more limited.

Like all waves, there will be an overreaction. And times where this pattern holds even when it seemingly makes no sense.

Take Twitter, for example. Over the last week, it has started limiting the number of tweets a user can see, with the harshest limits on those who are not paying to use the service. There are a lot of theories as to why they did this. It is possible Twitter failed to pay its server bill, just as it apparently doesn’t always pay for real estate these days. But based on totally-not-in-charge Elon Musk’s tweets, it seems likely the move was done to try to get those who are currently scraping data off the site for free to instead begin to pay for it via subscribing to Twitter’s APIs.

(Elon has expressed these sorts of desires before.)

It seems insane for a business that currently relies on eyeballs and advertising for most of its revenue to throw up barriers to how many eyeballs and how much advertising is seen each day. Then again, years ago HBO proved it possible. I wouldn’t advise it, but I think it is possible that at some point Twitter will no longer be available for free. Or at the very least, at some point the free version might no longer be worth using. (Whether the paid version that remains will be worth paying for is a whole separate debate.)

This is showing up all across the entertainment spectrum. I’ll confess I’m more immune to it than most. Our household for the most part doesn’t watch a lot of television. But on vacation, with more downtime, we did. And my wife and I were taken with Brooklyn 99 on Netflix. It was much to our surprise to discover that while the show is available on Netflix in Portugal it is exclusive to Hulu in the States.

We don’t have Hulu. Or Disney Plus. Or even Apple TV. (That U2 documentary we caught was while on another vacation.) And as fun as Brooklyn 99 season one was, I’m not going to subscribe just to see how it turns out.

The question for these businesses is, is all of this scarcity good? To some extent they have no choice, and the simple answer is that it beats the alternative. Better to have walled gardens than burn money now when money actually costs something to acquire.

But it is also a very different world from the land-grab mentality of the last decade. And one investors need to understand. There is just no way this household is ever going to pay for even half of the available streaming services. At best we are Netflix, at least until the kid is off to college, ESPN Plus, and Peacock for as long as they keep the Premier League. Amazon Prime as long as it is included, at least for now, but with every nickel and dime move Amazon makes my certainty about the value of free two-day shipping diminishes slightly. We’re certainly not staying with Prime to watch Jack Ryan.

In theory we could become one of those tourist households that temporarily subscribes to a service, binges on what we want to watch, and then moves on. But as a consumer that seems more like a hassle than fun. And I know few businesses that thrive in a world of heavy churn. That’s not a bull case.

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But to my eyes, the biggest risk is to the U.S. sports leagues. The biggest beneficiaries of easy are now suddenly going to have to justify their worth.

They used to have to do just that. I’m old enough to remember a time when every night’s baseball game wasn’t on television. Out of college one of my few splurges was the extra expense of “Home Team Sports” in order to see all of the Orioles games. From memory it was a pretty substantial outlay, at least for me at the time. My only connection to English soccer was visiting the international news stand in Farragut Square in Washington, D.C.

This all changed dramatically, and quickly. And to me, a sports fan, definitely for the better. The cable bundle, and the ability to have millions of non-sports fans subsidize those of us who are fans, helped. But, and in particular with things like English soccer and other sports not previously available, it was also a free money play. The land grab had begun.

It is already changing. Today, at my house in Atlanta, we can watch all of the Orioles games thanks to our subscription to MLB.tv. But because we don’t have cable, we can’t watch the Atlanta Braves or the Atlanta Hawks or Atlanta United even if we want to. We don’t pay the extra to Bally Sports for the Braves, or pay Apple to watch the soccer team. And without them on the television, they have become largely an afterthought for me.

There’s no way this works out well for the sports teams. A lot has been written about the inevitable financial pressures that will come with the breakup of the cable bundle, as non fans begin to pay less and less to subsidize those who are interested. I think the loss of mindshare is just as significant, if not more significant.

I might not be a diehard Atlanta United fan, but I do love soccer and will watch them when they are on. Watching them, I get to know some of the players. I become more attached to the team. I build a bond. I begin to get excited when they win, sorry when they lose. Nowadays, I usually notice the score when it pops up on my Google assistant but there is little more.

We’re evolving into a sports world where diehard fans remain willing to pay whatever it takes, but the second-tier fans are increasingly alienated and less likely to spend at all. The only choices for the team, it appears to me, is to charge their most loyal fans more, or get by with less. Or, unfortunately, both.

Which brings us back to Twitter. The thing about scarcity is it works best when the product is one you can’t, or don’t want to, live without. The problem Atlanta United faces is that although I really did enjoy it when it was in front of me, I can live without it.

I truly love Twitter. Much more than I should. It brings out the worst in me, just as it brings out the worst in most of us. I would really miss it. But I have zero desire to pay for it. I’ve spent the last week or so on Blue Sky, Jack Dorsey’s Twitter competitor. [@louwhiteman if you want to find me!] It isn’t perfect. It isn’t the same. But it is certainly good enough. Especially if it is free.

There are no good choices for sports leagues right now. It is possible there are no good choices for Twitter either. The business model made sense when money was free. But does it work at all in the current world?

The investing takeaway here is that there are things that have become commonplace, routine, over the last decade that will simply cease to exist in the decade to come. We’re entering a Darwinian period where consumers will have to choose between “wants” and “needs.”

I’m not predicting the doom of Hulu or Major League Soccer or anything that dramatic. But there are a countless number of young public companies offering either a service or software that was handy when free, but might seem more like a feature or superfluous if you have to pay for it. For some of them, an eventual sale at a questionable valuation is likely the best case scenario.

Do your best to limit your investments in companies that could get caught up in the carnage.

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