The Software Edition

Join the team as they discuss apps, software and which business model is best.

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For the next couple of weeks we'll be transcribing the Doddsville podcast. Please let us know in the comments if this is useful so we can decide whether to continue doing so. We're publishing the transcription as is. There will be errors, but we hope it's valuable nonetheless.

Name: Doddsville_2014_EP_6

Running Time: 50.03

The Software Edition. Welcome to the Doddsville Podcast for Thursday the 3rd of April 2014. Join the team as they discuss Apps, Software and which business model is best.

GS:Welcome to Doddsville I am your host Gaurav Sodhi, joining me today is analyst with the Intelligent Investor Value Fund, Matt Ryan, welcome Matt.

MR:Hi Gaurav.

GS:It's quite a handful we have got to come up with a short cut for your name.

MR:Just call me Matt, that's fine.

GS:That is also a good idea, yes. And we have got a special guest with us today joining us from … I don't know quite what to call you here, but he is the creator of the Stocklight app and a coding extraordinaire please welcome Jason Kotchoff.

JK:Hi Gaurav and hi Matt.

GS:I sort of expected Matt to clap there at some point.

MR:The world famous Stocklight app.

GS:Available in every country in the world now, right?

JK:Correct, yes.

GS:Well it's an amazing thing. Jason this is your first podcast ever I think, correct?

JK:That's correct.

GS:So you are sitting there all nervous and tentative?

JK:I am actually really looking forward to this I am a big fan of the pod.

GS:Oh, damn I was hoping we would be really intimidating and scary, but it's not to be.

MR:You have to work on that Gaurav.

GS:Yes, I need to borrow one of Jason's …

MR:Look a bit more fierce and you know intimidating.

GS:Scarier clothes might help yeah shorter sleeves. Jason you are an app developer, correct?

JK:I am now, yeah.

GS:So your association with Intelligent Investor … just tell us how you came to Intelligent Investor and why you are sitting in our offices at the moment?

JK:I suppose I have been developing apps for the last few years, I seen it as a real opportunity to generate new business through this technology and a lot of people are downloading this stuff and it's a great medium to reach people. Prior to that I was working in software for quite a long time including a stint over in the States, working for a Silicone Valley start up, and a couple of years ago I just decided well I really want to build a stocks out that I want to use and I had a bunch of ideas for what I wanted to see in the stocks out and it has just sort of taken flight and Intelligent Investors came on board and we have launched it together and its going really well.

GS:Was the Silicone Valley start up, was that, I mean does that match the stereotypical views of what a start up is, were you a bunch of guys sitting around a house pool in your swimmers and then coding …

MR:Boxes all over the place.

GS:Is that what really happened?

JK:Well it was stereotypical in some sense because I was actually flown to California by Microsoft, they recruited me for their Hotmail team and while I was there I decided to join a start up instead. And the start up I joined was reasonably mature it had taken a b round from Sequoia Capital and they fund a lot of the big stuff, the Google's and the Yahoo's of the world. And so when I joined it was sort of getting going and it was a real success story while I was there, I was there for maybe two years and we built the business up, got acquired and went to Vegas and celebrated, it was great.

GS:What happened then, how did you end up leaving that company?

JK:So once the company got acquired the business model shifted a little bit and I was missing home so I trained up some tech replacements and jumped a plane.

MR:And came to Intelligent Investor and really hit the big time.

GS:And Stocklight, first of all tell us a little bit about Stocklight what it can do, how you get access to it?

JK:Yeah, so Stocklight is an app available for hand held and tablet devices in both the Apple App Store and the Google Play Android App Store. The app tracks stock prices for the ASX but it also digs a little bit deeper and provides a whole bunch of ratios that give you some insight into the financial fundamentals of companies. But it also incorporates research and education from Intelligent Investor and has some extra funky features like upcoming dividends, and we have got some pretty cool stuff planned that we are going to be releasing for it shortly. It's sort of maybe half way through what we had planned for it and the product cycle is still pretty early but I think people are really going to like what is coming.

GS:Well we will talk about this a little bit later I suppose, but I am not quite sure why once you sold an app, why you need to continually develop it, is that because of competition or are you hoping to attract new customers constantly, why is that?

JK:Yeah, so I guess there are some apps that have a very singular focus and purpose and they do one thing and they do it really well, like Snapchat is a good example it's a really simple app for taking photos and messaging it to your friends and limited time messages. It does one thing but Stocklight is more of a research tool and I think there are a lot of opportunities within the app to provide extra filters and functionality and alerts, stock market investors are really going to be able to use.

GS:Well we are glad to have you here and you will be in Sydney for a couple of months?

JK:Yeah, that is correct.

GS:So we will have a chance to chat with you a few times, but while you are here I thought that we would have a podcast dedicated to software, apps and things that Matt and I are completely befuddled by.

MR:Scratching our heads.

GS:Matt did you know that as a podcast we are also on iTunes?

MR:I did not.

GS:I did not know that either.

MR:Please tell me more.

GS:Jason were you aware that we were on iTunes?

JK:I download you every week.

GS:Well he is probably two steps ahead as always. Well I didn't know that, I found that out fairly recently so if you are one of our listeners who listens to us via iTunes feel free to leave a rating or a comment in the iTunes's Store. I think that is how it works you go to iTunes and leave some sort of comment. It would help us out and we are interested in some of your feedback.

Gentlemen anything else before we begin on apps and software, Matt anything else happening in your world?

MR:Well we are just about to hit the end of March so we will be working on a new quarterly report soon, so those who track the fund we should have that out in a couple of weeks from now.

GS:Terrific, well one thing I have been thinking about in this whole software and app's space was prompted actually by some moves by Microsoft. So Microsoft recently announced that they would release app versions of their software for Apple products, so if you are a user of the iPad or an iPhone you will soon be able to download Office software as an app and use that as you do on your PC. And that is a huge change in strategy, Apple has rejected that idea for many many years and it's only recently with the change of management that they have been willing to do that.

MR:That is interesting because I would think the resistance would come from the Microsoft side of things, you know they have got their crazy sort of Windows product there, you need Windows to run Office so they only sell Office on Windows and that limits the potential competition to Windows. So it's interesting that there is resistance on the other side of that as well.

GS:You mean from Apple?

MR:Yeah, is that what you are saying?

GS:I think the resistance really came from Microsoft they were the ones who seemed to be unwilling to release the software. Apple released this terse little statement saying, yes Microsoft's app will be one of about 700,000 you can download, so they weren't going to give them any additional notoriety for releasing that app but they were happy to acknowledge it. But the difference between Microsoft as a software producer and Microsoft as an app developer is quite stark. As a software company Microsoft is and has been extremely dominant almost monopolistic, it generates wonderful margins and huge profits and its dominance has lasted for decades. Whereas as app producers tend to be less successful and certainly less dominant, where they do dominate they tend to do so in single areas, so you don't have one app producer who tends to dominate across a whole range of software. And I thought we would have a chat about why that was, why the new software was so much more competitive and less dominant than the old software and what that might mean for financial performance. So before we get underway we need Matt and I think in particular need to learn a few things from you Jason, so tell us first of all what is an app?

JK:So I guess an app is a piece of software that will run on a device usually a hand held device like an iPhone or an Android Phone or perhaps an iPad or an Android Tablet. And typically it will be an encompassed piece of software that will run natively on the operating system of the device as opposed to being a piece of software that you can access through your web browser.

GS:Matt I think we are both thinking the same question, would you like to ask it or shall I?

MR:You got it.

GS:Okay, what I have never quite understood what the difference is between software and an app, is an app just software but we call it an app because it's available only on line, is it just a naming convention or is there something more different than that?

JK:Yeah, I would suggest that an app is a naming convention for software that runs on hand held platforms.

MR:So anything roughly that doesn't run on Windows for example like if you have got a software application that sits on a phone, on a tablet. What about something that you know works on Chrome or something like that or on a Facebook for that matter?

JK:Yeah, conceivably platforms like that would refer to their software widgets as app's I mean it's a fairly loose term but I think associated with phones and tablets.

GS:And do we have some idea about how large this app market is compared to traditional software, have you got some figures?

JK:Yeah, so last year there was about 10 billion dollars in revenue from apps and of that about 65 per cent of it went to Apple and about 35 per cent of it went to Google.

GS:Sorry, 65 per cent went to Apple?

JK:Correct.

GS:You mean 65 per cent of that 10 billion dollars or the … is that right?

JK:Yeah.

GS:I am a little bit surprised by that because I thought that Google had the dominating operating system didn't it there are more Google users than there are Apple users?

JK:You are absolutely correct I mean in terms of market share Android commands 81 per cent of the market. So this distortion in revenue there is a couple of things you could put it down to, Android devices usually, a lot of the lower end smart phone devices run the Android operating system, Apple tend to focus on a more higher end product and so for a lot of those lower end products they tend not to commercialise quite so well in terms of app revenue. If you break down the stats you will see that Android has 81 per cent market share of overall devices but in terms of high end smart phones Android has got about 32 per cent market share to Apple's 13.

GS:And the other thing I have heard Tim Cook boasts about anyway, is that if you measure the amount of time spent on the device then in terms of data downloaded Apple had somewhere between 60 and 80 per cent of market share compared to Android devices. So the point he is trying to make is people who have IOS platforms tend to use their devices much more heavily than the Android platform.

MR:I wonder if that is the question of like the Apple platform being a bit more mature and its had apps written on it for a little bit longer, whereas the take up in Google Android has been a little bit more recent. Its interesting I read in the Steve Job's biography that the whole app thing was basically not planned, like it just sort of showed up in the second or thirds version of the iPhone and it wasn't something that they knew would take off, so there was no master plan behind it they just made it available so that you know the phone could do a few things that they hadn't designed, you know that third party providers could put in there and it sort of took off by itself, quite unplanned.

GS:That sort of pattern emerges again and again throughout history that the greatest successes are the ones that weren't planned, I cant help but think about the comparison between, I am a little bit off topic, but the comparison between Toyota Corporation and Hindustan Motors from India which began operating companies at the same time in 1953 and you know one was a start up, one was a Government backed monopoly and 60 years later Toyota became the worlds largest car manufacturer and Hindustan Motors makes the same model it did in 1953 with almost no amendment. And again once you plan something it doesn't necessarily mean its going to succeed. Just to come back to your point Jason that 10 billion dollars in revenue from apps that sounds incredibly small?

MR:It sounds like a very large number to me, but to put it in perspective I think roughly Microsoft do 100 billion annual revenue so it's really small change compared to the big guys of the old software world.

JK:I think one thing you have got to take into consideration here is the maturity of the platforms. The Apple platform for apps and revenue coming from those apps is a little bit more mature than the Google Play platform and I can tell you from first hand experience trying to extract money out of a Google Play app is very difficult because the software is still very immature. But I think you will see at the moment Apple has got about 65 per cent of revenue through apps, I think that number is going to shift in short order as the Google software development kits become more mature.

MR:Apple Store has quite a high share in tablets, right like the Microsoft has fallen away a bit in smart phones and tablets its quite strong still, is that right?

JK:Apple has 7 out of every 7 tablets.

MR:You would imagine you know following a similar story to the iPhone that market share will come down over time, I would think anyway.

GS:But does that mean the threat of apps is overstated perhaps, if its only representing a 10 billion dollar slice of the market then Microsoft alone makes ten times that in revenue. Is it possible that the traditional software companies can still be as powerful in 10 years time or is there an inevitable shift going on?

MR:I think there is certainly some shift, there is a shift in usage and I think that is probably the first thing that lends you know more power to the mobile stuff, so people are just spending less time on a PC and more time on mobile devices. I think Jason is right on the maturity of the platform, I think the other thing I would throw in there is that your PC is something that people use for work at the moment, mostly with some exceptions mobile devices are things people use for consumption. So I think there is probably some natural limits, its natural I think that the more expensive bits of software probably still belong on a PC for the foreseeable future.

GS:So Jason does that mean that apps aren't necessarily cannibalising traditional software but it's a new market, a new entertainment sort of home focussed market and it may not ever overlap with the traditional software market?

JK:I wouldn't go so far as to say it's not going to overlap at some point but at this time apps are different to desktop software. I mean if you have a look at average revenue for desktop software you are looking at 22 bucks for a piece of software on average for top Android software on Apple compared to average software for an iPhone app. If you look at average revenue for software on a desktop platform like OSX you are looking at 22 dollars and install as opposed to an iPhone app which on average will generate 2.50 dollars worth of revenue per install.

MR:And then if you move into the world of enterprise software you know those number like 22 dollars they are going to be much much higher.

GS:I am even thinking what can you by for 22 bucks, when is the last time you bought a piece of software for 22 dollars?

MR:You can buy you know sort of … I don't know what you call them but you can buy little utilities and little gadgets and things like that.

GS:It must bring down the average …

MR:But you know if you are looking at the Microsoft products you are in the 100's of dollars, if you are looking at things specific to a business and that has such a massive audience you could quickly sort of knock into the 1000's and 10's of 1000's of dollars a year.

JK:And I think one of the things that is quite interesting here is that the software development process is getting easier, 10 years ago or 20 years ago creating Microsoft Word was an extraordinarily difficult task, whereas today some programmers sitting in their bedroom in India can create a Microsoft Word knock off for the internet and get it going. So I think the ease with which software is developed today comparatively to the older stuff.

MR:So a huge jump in productivity basically?

JK:A huge jump.

GS:What is the reason for that is it just the tools available or are people now just better at coding?

JK:It's definitely the tools that are available in terms of the programming language and platforms that you develop with, they have just matured to the point where things are a lot easier and more reliable to do. So there is this shift towards for example test driven development where programmers are writing tests before they create software and those tests are testing the reliability of the software that they are creating and this is a bit of a new paradigm in the software world over the last 5 or 10 years and it makes it a lot easier and quicker to rapidly prototype really high quality stuff.

GS:Matt do you reckon the profit share of the industry is actually going to the developers of these tools rather than the end software developers, or do you have absolutely no idea what I am talking about ?

MR:I think the overwhelming benefit goes to consumers at the end of the day, you know there are a few businesses in software I guess have got a nice little niche, kind of stitched up for themselves, they have got some network affects or some sort of natural monopoly. But I think overwhelmingly you know the benefits haven't been going to IT companies as much as consumers.

GS:Well lets have a look at the traditional business model, how does Microsoft traditionally make its revenue, talk us through the product cycle as its seeing a piece of software, what happens to the cash?

MR:So it tends to, they either sell the products as a one off upfront fee I think increasingly as more programs are sort of put on the Cloud or available just through the internet you are seeing more of the recurring revenue style things, where they say rather than sell this to you for 400 dollars upfront you know why don't you pay 100 dollars a year ongoing.

GS:And that's of course after they have spent 10's of millions, perhaps billions of dollars developing the core software first up. So it's a huge upfront cost and the marginal cost is very very low?

MR:Yeah, and software businesses show a lot of what we call operating leverage so it doesn't cost too much more to sell you know 2 million licenses as what it would to sell 500,000 licenses. You might have to employ a few more customer services people, there is not a lot of extra development, etc. that happens. So the marginal costs of acquiring new customers is very very low, so they tend to be really lousy businesses to a certain scale and once they pass that scale they rapidly become very good businesses.

GS:I found that as well software is either fantastic or hopeless, there is no such thing as an average software business is there?

MR:Yeah, and it's the same sort of thing like on economies of scale you know your marketing spend is the same so you can … you know if you have got a 100 million customers you can leverage marketing spend, you can leverage up your development so you have got more revenue, you can spend more on your product to make it better all of those things kind of provide power to the larger players.

GS:And Jason what happens within apps, so if I as a consumer want to purchase an app what happens to the cash trail do you know?

JK:Yeah, that is a really good question Gaurav, in fact it all goes straight to the market place which will be either Google Play or Apple and they all immediately take a 30 per cent cut of all money that you put in and the developer will get the other 70 per cent.

GS:Okay, so a 10 dollar product bought on Android or App Store …

JK:The App Store.

GS:Sorry, the App Store 3 dollars actually go directly to Apple and the developer will only keep 7 dollars?

JK:Correct.

MR:Has there been much work done to try and escape that 30 per cent fee, by for example having software that just runs off a mobile website or something rather than a specific app?

JK:Yeah, that is a great question Matt, in fact from a developers perspective it would be a lot more advantageous to just create software with mobile websites. But the problem is getting the audience and the beauty of the App Stores are that there is a huge audience looking for stuff there and so if you go through the App Store you can find that audience, whereas if you build it via a mobile website it's a lot harder to attract business.

GS:And what you are saying about the ease of programming I think makes itself known with the costs of the app as well. So we talked about making a Word and how it would probably cost 100's of millions of dollars if not billions of dollars in initial Capex. And the point that you are making about lower costs in app development are probably relevant here because we were talking about creating a Word product and how that would probably cost 100's of millions of dollars in upfront Capex costs. What sort of scale are we looking at for app development, you have created an app yourself you don't have to give us exact figures, but what sort of order of magnitude is it to create an app?

JK:Well the guys I used to work with at Project Project in Melbourne created a lot of apps for customers and they would kick off at about 15 grand for a pretty base level, something up to maybe …

GS:From idea to completion?

JK:Conception to completion, but that is for something pretty basic, anything reasonably complicated you are probably looking at more 50 to 100 grand.

GS:Well that probably explains why there is so much competition for apps and why the profit margins aren't quite as ripe as they for traditional software, right. I mean the fact that they are so cheap means so many people can create new software?

JK:And I think you are seeing it at the moment there is people quitting their jobs left, right and centre to create an app in their back yard and become a closet millionaire. But the reality of it is and I see a lot of people that I know working on this sort of stuff that it's very difficult to commercialise apps to the point where they are actually making money.

MR:If you take say 10 billion dollars of revenue and say you know your average programmer wanted to earn 100,000 dollars you know that is 100,000 people that can potentially work in the industry, like it's not massive.

GS:No that's right, and I think you actually end up with a superstar affect in apps where the top 50 apps probably contribute to about 90 or 95 per cent of the revenue is my guess, am I somewhere close Jason is that what happens?

JK:I think it's very, what is the word when something just kind of goes viral, like something takes off that can really take off and those people make it rich. But for every one app that does that you know there are 100's and 100's that just never get the audience.

GS:I wonder, do we know what it is that makes an app successful because when Microsoft sits around releasing a new Word product they know there is an instance market for billions of laptops or PC's that are going to install that, so there is an assumed revenue base that is fairly large. Not quite the case with an app release is there, there is no assumed take up rate and it's very hard to predict which app is going to be successful and which isn't?

MR:I think it's interesting with Microsoft Word because they have already got everyone on the software you know it's a relatively easy transition to the next version. I think if you were to start up with no Word processor having a dominant market share I think its much more of a lottery at that point, right like Microsoft come up with their products, Apple come up with theirs and who knows how that goes.

GS:Which tells us that the beauty of old software was the entrenched dominance of those network affects and those have just been eliminated with apps. Jason is there any chance of replicating those in apps as well?

JK:Well I guess you could look at the makers of the app.

MR:I think one like Whatsapp was a great example that you can actually have that network affect on a mobile world, and you know Facebook paid some outrageous sum for a company that barely even recognised any revenue at that point. And I think the network affect was behind that huge premium.

GS:But the difference is once you start monetising that network affect everyone just shifts to a competitor who doesn't, its not the same thing as when your work is paying for software, right when you as a consumer have to pay whatever it is?

MR:And it will be interesting to see what Facebook do, well obviously they have got some grand plans that justify their enormous premium that they are paid. But whether they really try to monetise that channel or not or whether its just used for advertising or whether its just used to protect Facebook, will be interesting to see.

JK:It will be quite interesting, I think the first big acquisition of that kind was for me YouTube when Google went and spent a whole lot of money just acquiring eyeballs and no business model and it seems to be working out to some extent.

GS:I remember the criticisms of the deal at the time because Google was famous for spending an awful lot of money on data, it had all this vide and it couldn't keep up its spending on storing all that video and so the argument was that Google was spending a billion dollars a year to lose billions of dollars a year more on data storage. And you are right that has turned out to be one of the greatest acquisitions of the last decade I would say. Let's have a look at some of the most successful apps, do they tell us anything about what makes an app work or is that a bit like the movie industry it's a bit of mystery, something of an X-factor that no one can quite nail down?

MR:So I have got a list here of top apps on the Android platform.

GS:Very industrious of you Matthew.

MR:Candy Crush you know which might show up in long or short later is the number one top grossing app. The other ones below it you know Farm Heroes, Slot Mania, I am looking at a lot of …

GS:Games.

MR:What they call quite fickle games as well, ones that you can just pick up and play straight away and I think with the platform at its maturity it's at at the moment people are looking for that instant gratification while they are waiting for the bus and they have got their phone handy. So I don't think there is a lot of rhyme and reason to which apps hit it off, I think its really down to fickle consumer preferences.

JK:I think there is a definite trend towards games that are very addictive, I have a bunch of friends who have Clash of Clans on their phone and their children have borrowed their phone and somehow got into their iTunes account and spent up to 1000 dollars in an afternoon on coins in Clash of Clans.

MR:I actually did have Clash of Clans on my list but I couldn't read my own writing I was about to say Clash of Claws and I thought that doesn't sound right, so I didn't say it.

GS:Yeah, you would have been better off not admitting that at all Matt.

MR:And Clash of Clans am I correct it's actually a free game to download and start paying, so you don't actually pay for the game upfront you pay for it as you go once you are sort of addicted?

JK:Yeah, that is absolutely correct it's following the freemium business model whereby you download a piece of software for free and they hit you up like crazy once you get into it and get addicted to it.

GS:Is there any choice not to pay or do they only pay for additional things like extra characters and lives or to go forward in the game do you have to then pay?

JK:You don't have to pay at all, however I have a friend who is a very successful business man and has lots of spare pocket change and he wants to speed up his Clan so he can slaughter people quicker and so he spends tons of money on that game.

GS:I have got to say I don't understand this, I really don't because the same is true of, I think its one of those Chinese internet companies, I think its 10 cent, or not 10 cent its Sina Weibo I think it is which is the equivalent of Twitter in China. They generate all their revenue from people purchasing smiley faces and stickers and sending them to each other and they generate billions of dollars in revenue, and I find that just unthinkable, I cannot believe a business that makes money from people being so irrational?

JK:I guess one of the big things you have got to take into consideration that software quite often comes bundled with a desktop computer or its quite necessary in order to use the desktop computer, Microsoft Word for example so in terms of desktop software on Apple for example only 4 per cent of desktop software has a freemium model. Whereas for an iPhone or an iPad you actually have to go and grab that software and one of the big barriers to entry in terms of someone downloading your app is the cost of the app and people are less willing to spend money on something that is experimental and so that is why I think you see a lot of the apps on the Apps Stores with the freemium model and in fact of the top 100 apps in the App Store 50 per cent of them have a freemium business.

GS:Matt are they apps that you have to buy upfront and which ones of those are successful?

MR:Yeah, so there is a list on … and I just logged on the Android Play Store, a list of you know top paid apps and the striking thing there is whereas the top grossing apps which include the freemium type things are overwhelmingly games. The top paid apps are really looking at productivity things, so I have got one here that is called Swift Key I think it's like an optimised keyboard for your mobile device. One here called Trip View Sydney which I assume is just …

GS:Even I have got that.

MR:Just one of the top paid ones in Sydney, probably not elsewhere. And I have got another one here that is a weather application, one that say application launcher so you are just looking at things basically that make your phone, you know easier to use and more powerful.

GS:Traditional software is moving away from that upfront payment business model and moving towards a pay as you go, I think Jason they call it software as a service am I right in saying that?

JK:Yeah, and I think you will see a lot of product out there like Google Apps for domain where a lot of peoples e-mail is shifting to Google mail and businesses pay an annual fee for their users.

GS:Yeah, in fact we do that here in the office as well. Adobe is one company that has moved from selling extremely expensive software, Photoshop's offer I think it's over 1000 dollars right to buy Photoshop. So their revenues have been crushed in recent years from a lot of competition, I think from simple pieces of software. But what they have done to respond to that is they have started selling their software on an annual subscription basis and that reduces the cost to the consumer but it also creates something of a lock in I think, because from there we knew that when you are paying an annuity to someone for insurance for example its much harder … it becomes harder to switch to a new product. If you have to buy a new product upgrade from time to time you are more likely to try a different product but if you are just paying a service charge year after year you are less likely to switch to a competitor?

MR:And for the user I think that has some benefits as well, like you get upgraded …

GS:Continually upgraded.

MR:So you are not stuck on a version that is a couple of versions old and then thinking, oh do we have to spend a few thousand dollars here to make the upgrade.

GS:Well Adobe say that half their revenue now comes from those re-occurring sources and because they are so stable they can actually afford to re-invest much more in software development.

MR:Yeah, so it's a stable source of funding and they can develop their product continuously as well.

JK:I wonder if this has implications on software piracy, the annual revenue because I know a lot of people download software illegally but introducing that annual recurring fee I wonder if that makes it impossible to pirate the software.

GS:So Adobe and Microsoft are just a few examples of big companies that are changing revenue models in response to the challenge from apps and other software. Matt does that make them better businesses or worst businesses, or is there somewhere else you would rather put your investment dollars?

MR:I think it potentially makes them better businesses, so I think you don't have that risk around each product development, you know is the new version a hit or not a hit which you might have in Windows at the moment, so you know when Windows Vista came out it was a big flop that is no good for Microsoft. So I think you lock in a stable source of revenue and so I think investors love that. Apps I don't think themselves are a great business but I think Apple and Google are onto something really good with their app platforms and I think you think about the 30 per cent revenue share they take and you know really the only reason they are entitled to that money is that people sort of tend to click on the App Store rather than go looking on the web for you know a mobile website, so for them that is a fantastic business.

GS:Yeah, well if you think about what made Microsoft a wonderful business it was the dominance of the eco system and that is probably true again for Apple and Google. Jason as an app owner and developer yourself what is the likely pay off for ... or do you not think about the pay off, is your mission to create something useful and then monetary reasons come secondary?

JK:Well I think you have always got to take your business model into account and I think anyone who is creating an app without figuring out how they are going to be able to pay themselves a wage out of it at some point is going down the wrong path. But I am definitely, yeah in that space of trying to get the user model right, if you create good software that people use and that is extremely sticky they are going to come back to it and as you evolve it you will be able to figure out the revenue side of things a little more so, but if you don't have something in mind for that from the get go I think you are really wasting your time with apps.

GS:So we are used to seeing a lot of new age software, working on capturing audiences and then working on monetising that audience at a later stage is that a sensible thing to do, is that something that you would advocate do you think?

JK:Well there is a lot of businesses out there that seem to be doing quite well out of that, the really big ones, the Snapchats of the world and your Whatsapp of the world. But 9 out of 10 apps or 99 out of 100 apps aren't going to get a big audience and so I think trying to build an app with that in mind is pretty short sighted.

MR:I don't write software but I think if you had a bit of software that you thought was fundamentally disruptive and applicable to a huge audience.

GS:I get it, applicable.

MR:Applicable, sorry bad pun. You know in those sorts of situations you might delay gratification I think in trying to really grab bibles, but most of the time most bits of software you know they don't have those attributes and it's a big threshold to meet. So I imagine you know having a revenue model in mind when you first start is a pretty sensible idea.

JK:To be honest one of the biggest things to me about apps is figuring out how you are going to grow into getting an audience and so marketing and sales is possibly one of the most important things to me about creating an app.

GS:Even more so than the software side of things?

JK:Yeah, just about I mean if you can market an app and make money from it, you know you are going to improve the quality of the software at some point.

GS:That is a pretty cynical way of thinking about it.

MR:But you are right, I mean its something most people get into I think because they are passionate about the product, having a great product means nothing if you can't get it in front of people and people never uptake.

GS:Do we know why it is that companies tend to only produce one hit, I can't think of a business that has made multiple app successes. So the business that makes, what is that bird app called?

MR:Angry Birds.

GS:Angry Birds, yeah that is actually a little bit addictive I have played that. That company has a few different games and it's really only able to make money from its Angry games franchise. Farmville is another one, the business, I think its Zenga that made Farmville they have got a whole suite of games and nothing has come close to matching Farmville. And of course then there is Candy Crush itself, the King Entertainment Business they have got I think over dozens and dozens of games but make the bulk of their money from that single title. There is no Microsoft of the app business waiting in the wings is there?

JK:Yeah, Gaurav I tend to agree with that a lot of these apps are coming across as a bit of one hit wonder for the development houses and I am sure they are working very hard on trying to get their next big hit. But, yeah there hasn't been any sort of activations or blizzards or electronic arts style businesses that have really emerged out of the app world that I am aware of.

MR:I think again there is an issue there of maturity, like I think software developers are still working out how to create great products for that sort of device, you know where its hand held, where its touch screen, how to make a game that is really entertaining. I think as people hone their skills you might start to see certain businesses have a bit more repeatability about them. I don't think it will ever be as steady as software, I think there is an element of the movies sort of business in it where it's a bit hit and miss but I think you will start to see sort of more consistency.

GS:I was going to say there I think it looks a lot more like the movie business in the traditional software business where the hits are huge hits and no one can explain why that it so until after the fact. And eventually I am sure there is going to be a formula and Jason you hinted to it already that app developers are looking for that addictabilty function and once someone comes up with an idea about what addictability is I am sure we are going to be flooded with it and it's no longer going to work anymore. But yeah I think you are right Matt that apps probably don't entice me, and I don't think they are great businesses. Jason what do you think from a developers point of view are they great business?

JK:Well again hawking back to the project example, we had entrepreneurs coming in left, right and centre asking Project Project to build apps for them and I would say that maybe 9 out of the 10 entrepreneurs who walked through the door and spent 50 grand on an app didn't have a business model that was sustainable enough to be spending that 50 or 100 grand on an app. It's definitely, its tough gig.

MR:You always hear in Australia that investors aren't sort of switched on enough to IT and they don't fund people who don't have sort of have more developed ideas I guess or more experience. Is that a case of Australian investors missing out or are the potentially a bit too eager over in the U.S?

JK:Well I think there is a whole different culture over there, I mean if you go to the bay area there is just a vibe, everyone is very enthusiastic about what they are doing and everyone is a lot more open to new ideas especially in software. And so in talking to someone over there will quite often lead you into an opportunity that you just wouldn't see here in Australia there is just so many investors and VCs and you know so many opportunities to do stuff over there that we just don't have anything like it here.

GS:The maker of Candy Crush Saga, I think that is the full name of the game I am told is King Digital and is now listed on Nasdaq the company share price dropped 20 per cent on listing which is always taken to be a bad sign of a lot of angry bankers in the room that day. And the business earns about 500 million dollars a year, 80 per cent of which comes from a single title Candy Crush. Matt that sounds like a pretty hairy business it's not one, I am not sure its one I would be too interested in. Would you be lining up to the King Digital IPO?

MR:I am actually a founding investor and I even sold out … no I am just kidding. It's always a question of price for me so I will look at businesses with maybe one product that is behind it that is subject to risk or a slightly dodgy business model if the price is right. I think the price isn't right here, the market caps it's about U.S 5 billion, I had a quick look at their prospectus and it did about 1.8 billion of revenue the year before it floated. I understand its doing about 600 million of revenue a quarter and that number is being basically static for a few quarters so the rapid organic growth seems to be at and end. And yet you are still paying ten times earnings and I think you know paying ten times earnings would look great if the thing is going to stick around for 10 years or if it's going to grow you will make squillions. But a product like this I just think it has quite a short shelf life, so I would be very wary I am short.

GS:Jason?

JK:Yeah, I would tend to agree with everything you had to say there Matt, I mean I would be surprised if they came up with another hit on the scale of Candy Crush and I would be surprised if people are still playing Candy Crush in 5 or 10 years time.

MR:You don't think people get so addicted that they would give up the rest of their life and keep buying Candy Crush?

GS:Have any of us actually played it, have you guys played it?

MR:I haven't played the game I must admit.

GS:I must say I have never played it either, Jason?

JK:No.

MR:Its some sort of Tetris like a puzzle sort of game I think.

GS:Which would appeal to you, right?

MR:Yeah, I love my Tetris.

GS:Well I know what you are going to do as soon as this is over?

MR:Get back to work?

GS:I don't think so I think there is a bit of a Candy Crush.

MR:Tonight or maybe the weekend.

GS:Of course the boss is listening, right. Look Jim [name: 0:42:38] often says that one of his key ideas for shorts is looking for a company that has produced a fad and he takes as an example Cabbage Patch, I cant remember the company that came up with the idea but they made a motzer out of selling Cabbage Patch kids which are little baby toys avaialbel in the 80's and they made heaps and heaps of money out of it and investors extrapolated that success and priced the business as if the revenue from Cabbage Patch kids would be re-occurring all the time, not recognising that it was a one off boom that would inevitably fade.

MR:I think another classic example Gaurav and you have just covered it yourself is Fleetwood the same sort of model there where they were reaping in from this rental business, you know more money than they could ever hoped for because of the mining boom and of course it just wasn't sustainable.

GS:And that's I think the mistake that investors are probably making here. The numbers do look attractive if you assume that they are re-occurring but I don't think there is any sensible view that says that Candy Crash numbers will be re-occurring. It is in my mind clearly just a fad that has become very successful but in a few years time some other fad will take its place and I would be very very wary of investing in this. I would almost say at any price, but I do agree with you Matt that price does matter, but I couldn't put my finger on a price where I would buy this stock.

MR:If it was selling at less than next years free cash flow you would buy it, right?

GS:Indeed, but yeah.

MR:So there is a price, there is always a price?

GS:You are right there is always a price. So we have agreed we have got one piece of consensus perhaps we can come up with another. Jason I might begin with you this time since there is a chance you are a user of this particular maligned long or short and it is …

MR:You have just gave away you're …

GS:I think I might of a little bit, I am supposed to keep neutral, alas. Jargon is often used to impress rather than inform and it has a terrible reputation just about in every field of life, no one likes to hear it, no one likes to use it but yet it persists. Is there something invaluable about jargon that we would lose if we suddenly decided not to use it, is it unfairly maligned would you think, would you go long or short jargon?

JK:So I guess if you were to classify slang as jargon, yeah I kind of work slang in certain situations I think it brings people …

GS:Isn't that just changing what the long or short is and saying, well if by cars you mean aeroplanes I think it's great?

MR:I think slang in jargon its kind of close, yeah.

GS:Do you reckon it's the same thing.

MR:Yeah.

GS:Alright we will let you get away with that, continue.

JK:I don't know I have played basketball before and I have heard someone say, make him dance or you know he is so wet right now and they are talking about like mastery of dribbling a basketball and making the defender dance around or he is wet right now because he is shooting so well like he is making it round in the basket. And I just have a good laugh when I hear that stuff.

GS:I didn't understand any of that.

JK:Well I don't know, like the footie coach in an Ozzie rules team might address his playing group and tell them to take it down the fat of the ground and I guess that is jargon but to me its something that binds people together and I have a good laugh when I hear that sort of stuff. So I am long jargon.

GS:So I guess it is language used by insiders for insiders, right?

JK:Yeah, right I mean if you are talking about terms like Web2.0 and Synergy and the Cloud and things like that I cringe every time I hear those sorts of things, but in certain social situations I think jargon works well.

GS:Matt you and I probably use a lot of jargon without even realising it in our work lives, using terms like EV to EBTA or leverage or these sort of things, without using those terms life would be a little bit harder wouldn't it?

MR:Yeah, I think so I cringe when I hear management speak or brokers speak. I think one thing we do well at Intelligent Investor is just like learn how to communicate things in language that people can understand.

GS:We learn good.

MR:We learn good, yeah. Because it's so easy especially when you are surrounded by people with similar skills, similar interests to fall into a language that works great for the two of you but someone else would find absolutely incomprehensible. So my girlfriend used to work as a nurse and if we were ever out for dinner and she is with other people in the heath care industry I cannot catch a word of what's going on. It's so dense with acronyms and the financial world is the same, the IT world is probably even worse, you know there is just acronyms all over the place. So it's an efficient means of communicating between two people who know the same thing, like we can just talk faster and convey information better. Management speak though just by itself it's like so bad that I have to go short on jargon just for the kind of stuff that you hear from management when they are just saying something that is nonsense or the opposite of what they really mean and then just disguising in some sort of nonsense sentence. So short.

GS:Maybe management speak deserves its own category?

MR:Its own special thing.

GS:I think so because it's different to jargon, jargon you are right it's supposed to be a discussion between the insiders and it's supposed to be about efficiency and making things more synced.

MR:I think jargon is bad when you deliberately try to come up with jargon, I think jargon kind of naturally comes up as you are doing something, you know you just naturally sort of start to take shortcuts on things that you say and the other person picks it up. But whenever you are trying to make jargon sort of stick I think that is kind of disgusting.

GS:Well I think unfortunately the mastery of jargon is probably important but I am less convinced by the use of jargon. I think it's important if you are learning a new field to understand the way the inside is communicated.

MR:Yeah, you have got to be able to hear it and hopefully not speak it I guess.

GS:And hopefully not speak it, I think that is probably the best way to go. So I don't know whether that is long or short but …

MR:I demand an answer Gaurav you can't sit on the fence.

GS:You are sounding a lot like me now, alright I am going to go short as well for the same reason you are because I think I hate the management speak stuff so much. Well we are almost to the end here Jason is there anything else that is going on, anything we should know about, share about, plug?

JK:Well you guys should definitely get everyone to download Stocklight if they haven't already.

GS:I knew that was coming.

MR:Its quite good those of you who aren't sort of into apps, I downloaded it the other day and just read a few articles, its good for reading just Intelligent Investor publications on a tablet so it does a ton of other stuff as well but I use it just for that.

GS:Alright Matt you have got your quarterly coming up shortly?

MR:Yeah, that should be out in a couple of weeks.

GS:Okay, so we will check on the II funds website for that. Matt, Jason thank you very much for joining me today, Jason welcome for your very first Doddsville?

JK:Thanks for having me Gaurav.

GS:Yeah, he gets a little bit of a clap that almost destroyed the microphone. For everyone else thank you for listening.