After reading The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success, I wanted to learn more about the CEOs profiled in the book. I was especially interested in Henry Singleton, given that Warren Buffett likely borrowed from Singleton’s playbook when building Berkshire Hathaway.

Singleton didn’t do many interviews, and no one has written a biography about him. I managed to dig up Distant Force: A Memoir of the Teledyne Corporation and the Man Who Created It. It’s hard to find, but I got lucky and started reading it.

Singleton went on an acquisition spree during Teledyne’s early years in the 1960s. Two things likely led to Singleton embracing this strategy and making it so effective:

• The stock market valued Teledyne richly in the 1960s, and Singleton shrewdly took advantage. He used Teledyne’s stock as currency. Teledyne traded at a double-digit P/E multiple ranging between thirty to seventy times earnings (i.e., high valuation) as a public company, while smaller, private companies were valued at single-digit P/E multiples of roughly nine times earnings (i.e., lower valuations). Singleton recognized this arbitrage and paid for his acquisitions using overvalued Teledyne stock.
• World War II took place mostly in the 1940s. New technologies were created, and many small companies were founded to help the war effort. After the war, veterans benefited from the G.I. Bill, receiving tuition-free college educations, from which they learned new technologies and methods. This combination of newly educated and tech-savvy veterans and a wave of new technology led to a boom in entrepreneurship in the 1940s and 1950s. By the 1960s, many of these small companies had matured, and the founders were ready to sell or needed growth capital to reach the next level.

Singleton’s genius was in recognizing that he was positioned to benefit from twin tailwinds. Two forces were occurring simultaneously, and he crafted a strategy to take full advantage of both. There was a large supply of entrepreneurs interested in being acquired, and he could fund acquisitions using richly valued Teledyne stock instead of cash. His strategy led to over one hundred companies being acquired in a decade and Teledyne growing from $4.5 million in revenue and $58,000 in profit to $1.3 billion in revenue and $60 millions in profit annually by the end of the acquisition spree.

Leverage is the ability to multiply the output of your efforts. You achieve more with the same level of effort. Leverage allows you to 10x or more your outcome.

Today I started reading The Almanack of Naval Ravikant by Eric Jorgenson. You can download the e-book file or PDF for free here. Naval thinks about leverage in three classes:

• Labor – Having other humans work for you. You can get more accomplished if others are working on something than you could by yourself. This is the oldest form of leverage and likely the hardest to use. Managing people isn’t easy.
• Capital – Having money work for you. You can magnify your decisions with money. Entrepreneurs use capital leverage by borrowing money to help their company grow, while investors borrow money to purchase investments. More on this type of leverage here. This is likely the most dominant form of leverage used to accumulate wealth over the last century.
• Products with zero cost of marginal replication – Having your product work for you. Duplication of these products costs little or nothing. Think software or media. You write the code once (assuming you don’t update it) or record the video once. Your cost is the same whether one person or one million people buy the software or watch the video. This is the newest form of leverage and has been used by the new billionaires.

Naval also shares why the last of these forms of leverage is so powerful and the most democratic, accessible by all.

Labor and capital leverage require someone else’s permission before you can use them. People must agree to work for you or agree to give you capital. This limits who can take advantage of these forms of leverage. You can have the best business idea, but if people won’t work for you or give you money, the size of the business is capped.

Products with zero cost of marginal replication are permissionless. You can write software, create a video game, write a book, or record a YouTube video and share it anytime. If your product resonates with others, they can buy or consume it without your incurring additional costs. The upside potential of these types of products is hypothetically unlimited.

The book says we now live in an age of limitless leverage where the economic rewards have never been higher.

Naval’s thinking about leverage is simple and thought-provoking, especially for entrepreneurs.

If you're interested in hearing Naval discuss leverage in more detail, you can listen here.

I’m looking forward to finishing this book and sharing my takeaways.

Reading about John Malone’s and Shelia Johnson’s journeys gave me perspective on two great company builders and the rise of Black Entertainment Television (BET). Two things stood out about the company’s early days.

BET was founded in 1979, when the cable programming market was young. New satellite technology and outlawing pirated broadcast signals caused demand for programming to explode.

Per Johnson’s book, Malone acquired a cable system in Memphis, Tennessee, which had a roughly 40% Black population at the time. He needed cheap programming that resonated with the city’s Black audience. Bob Johnson, BET’s cofounder, knew Malone. Bob got permission to repurpose a proposal for a cable channel targeting elderly people. He then changed “elderly” to “Black” and pitched Malone. Malone loved the idea. He invested $180,000 for 20% ownership and loaned an additional $320,000.

At launch in January 1980, BET broadcast movie reruns during a two-hour time slot every Friday. It was a start, but not enough. Programming hours had to expand for the company to survive, and reruns couldn’t be the only programming.  

Entertainment and Sports Programming Network (ESPN) launched in 1979 and had early success broadcasting college basketball games. BET noticed that ESPN didn’t broadcast the games of Black colleges. BET decided to fill this gap and began broadcasting Black colleges’ basketball and football games. Programming expanded to six hours per week, but that still wasn’t enough.

In 1981, MTV launched. Consumer demand for music videos skyrocketed. Every artist wanted their video on cable TV. But MTV executives wouldn’t play videos from most Black artists. BET saw this “big cultural gap” in music videos as an opportunity. Artists’ desire for exposure on cable TV made creating music video programming cheap. And strong consumer demand for videos translated into strong viewership. BET saw filling the music video gap as a win for BET, artists, and consumers. In 1981, BET launched Video Soul, which aired for fifteen years.

Music videos and college sports helped BET find product–market fit. Things were going so well that in 1982, BET sold 20% of the company to Taft Broadcasting Company for $1 million. By the fall of 1984, less than four years after launching, BET had 24-hour-a-day programming, 18 million subscribers, and more than 36 employees.

BET’s early success boiled down to two strategic things:

• Cloning – BET didn’t try to reinvent the wheel. Instead, it took ideas that others had proven were viable, cloned them, and applied them to market gaps.
• Market – BET was early in the cable programming market, which grew rapidly. A rising tide lifts all boats. In BET’s case, the market was moving so fast that it yanked BET along. BET made a lot of mistakes early on, but being early in a growing market meant those mistakes weren’t deadly.

BET was a massive financial success for John Malone and Sheila Johnson. It’s interesting to see how two simple strategies, taken seriously, were central to their early success.

I finished reading Cable Cowboy: John Malone and the Rise of the Modern Cable-TV Business. I learned a ton about Malone as well as the cable industry and its importance in technological evolution.

Cable systems own and are responsible for the wires that deliver digital information to and from consumers’ homes. This book illuminated the impact that cable companies have had on life as we know it, how valuable their last-mile delivery service has been over the years, and why they made John Malone a billionaire.

Cable has gone through three periods:

• Antenna extension – In the 1950s, the big three broadcast networks (ABC, NBC, and CBS) ruled television, but their signals didn’t reach rural areas. Rural residents couldn’t watch the evening news or shows enjoyed by large and medium-sized towns. Cable entrepreneurs erected large antennas to pull down broadcast signals from TV stations in larger cities nearby. They ran wires to rural homes to pump the pirated broadcast signals to rural residents. These entrepreneurs charged a monthly fee but paid nothing for programming. Cable systems were antenna extensions that made broadcast networks more accessible.
• Programming – Regulators outlawed the pirating of broadcast signals in the 1970s. In 1975, the upstart HBO and cable system owner Time Inc. used satellites to broadcast to consumers the Ali–Frazier boxing match live from the Philippines. This was revolutionary then and something the big three broadcasters couldn’t pull off. Satellites transformed cable economics. Programming exploded, with channels such as ESPN, Showtime, WGN, CNN, and BET launching. Demand for cable service in urban areas also exploded, kicking off a rush to wire every home in America for cable.
• Internet – By the 1990s, it was internet usage that was exploding in America. The internet was the future, but accessing it was still painful. Dial-up services, such as America Online (AOL), were slow. Cable became the best option for delivering fast internet access to homes. Internet entrepreneurs, including Microsoft’s Bill Gates and Paul Allen, each spent several billion dollars buying into cable companies so they could own part of the infrastructure delivering the products and services tech entrepreneurs created. Cable companies went from mainly providing access to unique programming to also providing access to the World Wide Web.

Malone was recruited to TCI in 1972, at the end of the antenna extension era, and was CEO until the company was sold to AT&T for $48 billion in 1998. While Malone couldn't have predicted how technology would evolve over his decades as CEO, he recognized the value in what TCI had. A direct line into American homes. A way to get data and information in and out of homes. His genius was keeping a finger on the pulse of where technology was going and partnering with the entrepreneurs building technology that improved consumers’ lives. Over the years, TCI partnered with and owned stakes in programming channels, satellite companies, cable box manufacturers, internet companies, and others while continually building its cable system and increasing the number of subscribers.

Malone’s career highlights to me that to have outsize success, predicting where technology is going isn’t necessary. Sometimes, owning the infrastructure that new technologies will likely rely on for distribution will be lucrative and allow you to continually benefit through numerous technology cycles.

As I’ve been reading Cable Cowboy: John Malone and the Rise of the Modern Cable-TV Business, I’ve gotten a clearer picture of John Malone. Malone is brilliant and shrewd. I’d consider him more of a financial engineer than anything else. He excelled at deal making, strategy, and capital allocation—but not at building a cable service customers loved or a company that was sustainable long-term.

Between 1973 and 1989, he completed 482 deals, or one every two weeks or so. From the company’s low in 1974, not long after Malone joined, through mid 1989, the stock rose 55,000 percent, a spectacular return.

Malone’s constant deal making created remarkable shareholder value. But it came at a cost. Customers hated TCI. Malone’s goal was to charge as much as possible for his service but spend as little providing it as he could get away with. This strategy maximized cash flow but resulted in notoriously poor customer service, massive rate hikes, unreliable service technicians, and inconsistent cable service. TCI’s poor reputation with customers and its business practices (including others not mentioned here) led to Malone being forced to appear before Congress to defend himself and TCI’s business practices. He and various state and federal politicians became enemies. TCI’s shareholders were happy, but Malone and the company were under constant attack.

Malone was in a service-oriented business selling to consumers, but he didn’t approach it that way. He focused on engineering financial outcomes, not making customers happy. He got the financial returns he wanted, but he and TCI were vilified by customers, politicians, and competitors. It all took a toll on Malone over the years. As I read this part of the book, I couldn’t help but wonder if all the hate he encountered was worth it. Couldn’t he have gotten a similar outcome if he built something people loved, not hated?

Last week I learned about John Malone while reading The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success. This inspired me to buy and begin reading Cable Cowboy: John Malone and the Rise of the Modern Cable-TV Business.

Tele-Communications Inc. (TCI) was a cable company founded by rancher and cottonseed salesman Bob Magness. TCI laid wires to allow cable to reach homes and charged monthly fees for access to its infrastructure and programming.

Magness used debt to expand TCI and got in over his head. In 1972, he recruited Malone to get the company’s finances in order and take it to the next level.

Malone focused on increasing the long-term value of TCI, not short-term profits. He ignored reported profits and concentrated on the company’s cash flows, not net income. He reinvested cash flow in ways that would generate a high return and increase TCI’s market capitalization (i.e., valuation). Here are two key things I noticed Malone did:

• Depreciation – Cable systems were depreciable assets. Once a system was acquired, TCI depreciated this cost over time, which minimized (and often eliminated) TCI’s tax bill. The lower the tax bill, the more cash TCI had to buy more cable systems. The more cable systems TCI purchased, the more cash flow Malone had to reinvest and the more depreciation lowered TCI’s tax bill. The bigger the system became, the more subscribers Malone had to use as leverage in negotiations.  
• Programming – Cable system operators thought programming was a commodity they had to pay for. Malone realized programming companies were valuable because they had two revenue streams: advertising and payments from cable systems (like TCI) based on subscribers. New channels increased fees to cable systems as popularity increased. Malone realized that owning part of new programming (i.e., new cable channels) would allow TCI to profit twice by owning “both the pipe and the water flowing through it.” He could offer new channels broad distribution early and negotiate lower programming rates for TCI, a win-win. Malone started seeding new cable networks. He provided capital and access to subscribers in his system in exchange for 20% of new programming channels.

Malone ended up building a powerful flywheel that increased TCI’s long-term value. The more cable systems he bought, the more cash flow and subscribers he had. The more subscribers and cash he had, the more leverage he had with new cable channels. The more these new channels succeeded, the more revenue they had and the more valuable they became. The more valuable new programmers became, the more valuable TCI became.

Using this approach, Malone ended up owning stakes in BET, the Discovery Channel, the Family Channel, and others.

I haven’t finished the book yet, but I can already see why Malone is considered one of the best capital allocators.

I’m wrapping up reading The Perfect Store: Inside eBay, which describes eBay’s early days (through 2001) in great detail. eBay’s growth was astonishing. In September 1999, four years after Pierre Omidyar created an online auction in his spare time, the company had 1,500 employees (half of whom had been hired in the last six months) and hosted $5 billion in annual auctions.

International growth was a significant growth strategy, and lessons can be learned from eBay’s experiences:

Germany

• In March 1999, six friends studied eBay and decided to launch a German version. They called it Alando.
• Alando acquired 50,000 users and 250,000 listings in two months, which indicates that Germans were adopting the internet rapidly.
• eBay took notice. In June 1999, eBay bought Alando for $42 million in stock.

United Kingdom (UK)

• UK consumers paid their phone company to surf the web by the minute, an expensive proposition.
• eBay decided to hire UK talent and build a site from scratch. It launched eBay UK in July 1999.
• Within a year, eBay UK surpassed its main competition, QXL.

Japan

• Japan was the second-biggest internet market in the world and growing.
• In 1999, Yahoo offered to partner with eBay on a Japanese auction site. Softbank, a Japanese telecommunications company, was a major Yahoo investor and understood Japan. eBay declined to partner, perceiving the terms as unfavorable.  
• In the fall of 1999, Yahoo Japan launched its auction site.
• In February 2000, eBay launched its auction site.
• In 2001, eBay Japan had 4,000 listings and was ranked fourth in the country, while Yahoo Japan had 2 million listings and ranked first.

By the first quarter of 2000, eBay UK and Germany realized $87 million in combined auction volume, double the volume of European rivals. eBay deemed its upstart European sites successes. Japan, however, was a disappointment and a missed opportunity.

When a company expands outside its core geography, it often evaluates building versus buying. Cultural and other factors must be considered. One that’s important is the growth rate in the target geography: how fast is the number of people experiencing the problem growing?

The UK market grew slowly, so eBay could afford to build a solution from scratch. But in the rapid-internet-adoption markets of Germany and Japan, building from scratch meant ceding market share to competitors who had closely watched eBay’s success in the U.S. and understood their home markets better.

eBay learned from its Japan experience and, in 2001, bought the majority of Internet Auction Ltd, South Korea’s largest online auction. This gave eBay a dominant position in Asia’s second-largest internet economy—but even that couldn’t make up for eBay’s decision in Japan. Without that country, the second-largest internet market in the world, eBay couldn’t have a dominant position in Asia when the book was written. That title went to Yahoo, and so did the revenue and profits associated with it.

eBay CEO Meg Whitman openly regretted not partnering with Yahoo. Opting to build rather than buy meant that competitors satisfied consumers’ needs while eBay was building and figuring out cultural norms. Convincing them to switch after their needs were already being met proved difficult and cost eBay revenue and profits.

Instacart’s largest revenue segment is its marketplace and delivery business connecting buyers and sellers and facilitating delivery of purchased items. Instacart gets a percentage of every transaction as revenue; i.e., a take rate. Let’s hypothetically say that Instacart’s take rate is 5%. For every $10 purchase on its marketplace, Instacart generates $0.50 in revenue. The take rate can be charged to the buyer, seller, or both.

The take-rate revenue model allows companies to increase their revenue as the value they provide increases. This is good, but this revenue has an overlooked downside. As a former customer of various marketplaces and software companies that used take-rate revenue models, I’ve experienced it firsthand, and I’ve watched other entrepreneurs have a similar experience.

As a customer’s merchandise volume on the marketplace or software platform grows, the take-rate dollars become larger, even if the percentage is flat. The larger the take-rate fees become, the more visible they are to the customer’s internal decision-makers. Five percent of $1,000 is $50 and may be an overlooked expense. But 5% of $1,000,000 is $50,000, which is less likely to be overlooked.

Imagine that a customer reviews its P&L, and someone asks, why are we paying XYZ Company so much money every month? That amount could materially boost our margins or support growth plans. They do some forecasting and start thinking about ways to replace the marketplace or software provider (if possible) or reduce its fees. The customer’s perspective changes. It no longer views XYZ Company as a partner that provides more value than it charges for. Instead, it sees XYZ as a company whose cost exceeds its value. The customer wants the cost it incurs to better align with or be less than the value it feels it’s receiving.

When the customer’s perspective changes, the relationship and interactions change. When the dollars at stake are high, the relationship can become adversarial. If your biggest customers are constantly fighting you, it takes a toll on your team and in extreme cases can affect the culture of your company. 

The various lawsuits over the years against Visa and Mastercard by retailers, Block, and other partners over take-rate fees are great examples of what I’m describing.

Take-rate revenue models work, but this dynamic is something founders considering them should be aware of. The good news is that take-rate revenue models can be crafted in various ways that prevent some of this tension with your largest customers.

I’m friends with an entrepreneur running an automotive service business focused on consumers. He’s been at it several years and is thinking about possibly selling the business one day. He would need to grow revenue and increase margins to make it attractive for acquisition. He has various ideas about how to do this, but his current model creates obstacles:

• Consumers need his service only once every five to ten years, so he must acquire new customers every month.
• Consumers view his service as an expense (i.e., its cost exceeds its perceived value) and negotiate hard, which negatively impacts margins.
• Managing relationships with consumers is a constant pain point for his staff and requires that he run at elevated staff levels, reducing margins.
• Each consumer has a different car, which adds operational complexity to servicing vehicles and reduces throughput.

He recently shared an idea he’s experimenting with. The automotive service he offers is something fleet owners can use too. Instead of continuing to focus on consumers (B2C), he may switch to targeting businesses (B2B). Here’s what he learned from some customer discovery:

• Small fleet owners are growing in his area.
• Each vehicle in a fleet needs to be serviced annually, so he could expect monthly repeat business.
• Down vehicles reduce revenue, so fleet owners view his service as helping them generate revenue (i.e., its perceived value exceeds its cost), which positively impacts margins.
• Working with repeat fleet owners simplifies relationship management, reducing the burden on his team and making it possible to operate with a smaller team, thereby increasing margins.
• Fleet owners buy the same vehicles, which simplifies operations and increases throughput.

Through trial and error, this entrepreneur has learned a valuable lesson: why some businesses are better suited to focusing on other businesses (not consumers) as their core customers.

It’s early, but I suspect this entrepreneur will pivot his business from B2C to B2B and finally reach the scale and profitability that’s eluded him thus far.

Today I heard about an interesting technique. The objective is to improve your decision-making by getting feedback on the thought process you used to make a decision, not the outcome. The outcome of a decision isn’t a reflection of decision quality. Bad decisions end up turning out well, and vice versa, because of chance and randomness.

The technique involves sharing your thought process, including the variables you considered, with credible people who make good decisions. How did you think about the decision? What information did you factor in? The twist is that you don’t share outcomes with them (ask for feedback on decisions that have had good and bad outcomes). These people then explain the shortcomings and strengths they see in your thought process. They might even tell you how they would approach the decision if they were in your shoes. From all this feedback, you’ll learn how other people approach making decisions and improve your own decision-making.

This technique caught my attention because most people ask for feedback on decisions by leading with the outcome. This is completely different but makes a lot of sense to me (in theory). I’m curious to try it out and see how it works in practice.