Ted Audio Collective.
HBR presents. Hi everyone, you're listening to After Hours.
I'm Yang Ni. I'm Mi here.
I'm Felix. Hey guys, how are you doing?
Great. So, should we tell everybody our new project?
Let's tell them. Do it.
So, we have been thinking of sending out periodic emails to all of you guys listening out there with maybe a newsletter, episode notes, information about if we're going to be in your city, and we're also thinking about doing some live events.
And so, what we've done is we have put together a very short survey.
Super short. We said that once before and it wasn't really true, but this time it's really true.
It's one screen. It will take less than two minutes.
I timed myself. It took less than two minutes to fill out.
And if you would like to be on this mailing list, just fill out this survey.
So, the way to find the survey is to go to the episode notes, the description for this episode of the podcast, and you'll see a link there.
Just click on the link and it will take you right to the survey.
You and I will also tweet it out.
Post it on LinkedIn.
For those of you who are on LinkedIn.
Felix will send smoke signals into the world since he's not on Twitter.
And then also, we have been just so delighted by how the podcast has grown.
If you would like to support this podcast in some way, the best way to do it is to go to iTunes and write us a review.
And for those of you who have already written us a review, we just wanted to say thank you so much.
Yes. It really is the best way for people to discover us.
Yeah, I mean, in terms of getting new listeners, having iTunes reviews turns out to be really powerful.
And so, we're really grateful for that.
Okay, as for tonight, Felix, you brought in a topic you wanted to talk about.
I did. So, I would like to talk about the contractor status of employees.
There's been some really interesting action in California, in Massachusetts, in other states, that it might actually redefine what it means to be a contractor.
And it might have huge implications for business models like Uber, like DoorDash.
This is California's AB5, right?
Yes. Okay, great. And then, I wanted to talk a little bit about Casper, which is now a public company.
But, you know, I also wanted to broaden the conversation and talk a little bit about DTC, Direct -to -Consumer Companies, more broadly.
Yeah. We get the geeky AB5, and then we do the sexy Casper stuff, too.
We'll do Casper first.
How's that? Okay. Casper.
Have either of you ever bought a Casper mattress?
I have not. So, we did, actually.
And it was a great experience.
It was super fun. It comes in this wonderful box, and you unbox it, and you kind of can't imagine buying a mattress in another way.
What do you mean? It's a really wonderful experience opening a box with a mattress?
Yeah, it's crazy, Felix.
It's amazing. Because it's vacuum -packed.
First of all, the box is so small relative to what you imagine the box size needs to be.
Meaning it's vacuum -packed.
Yeah. And it's all smushed.
And then you slit open the plastic.
Meaning it's vacuum -packed.
I have to confess, I have seen vacuum -packed things before.
This is a guy who suvies at home, right?
This is true. Okay.
So, let's get into it.
So, this is one of those high -flying, direct -to -consumer companies that at one point, I think about a year ago, was valued at over a billion dollars.
They went public earlier this month, and they went public at a price that was much, much lower than they had anticipated.
And since then, they've ...
Have been struggling.
Yes. It hasn't been the most auspicious debut.
And yet they were able to go out, so they are now trading as a public company.
So, let me start with a specific question about Casper.
Is this a company that strikes you as being a sustainable business?
Or do you look at this and say, no, this really shouldn't be a public company?
I have to confess, I'm skeptical.
There was a core of a good idea.
And the core of the good idea was that the traditional process of buying a mattress is terrible.
I mean, you go into these stores, you have salespeople with high incentives around you, so this idea that you can send the mattress home, that you can try it if it's not the right thing, you can send it back, I think that was a really good idea.
The problem with that idea is that lots and lots of companies can do it.
And so, how do you compete?
You compete by spending on marketing like there's no tomorrow.
And so, at this level of marketing spend, I cannot imagine how that's a sustainable business.
I mean, it's tricky, right?
So, the super cynical answer to all this is, look, you had a bunch of stupid VC money that is being used to subsidize young people in New York City and around big metropolitan areas to buy mattresses and then return them after 100 days.
And it's all unsustainable and it's all terrible.
I do also though have to pause and just admire what they accomplished, which is in a very short period of time, they built a brand that is well known and kind of associated with some quality.
They came in at a moment where I think foam mattresses were priced too heavily, the mattress buying experience was terrible, and they figured out something.
But I think the issue Felix is what you said, which is, what are the barriers to entry in this world?
They don't manufacture, all they do is they're a platform and that platform can easily be replaced by a number of other companies that will do something similar.
So in some sense I feel for them because I think they did something interesting.
That doesn't mean it's going to survive.
I have to agree with both of you.
When companies like this first hit the market, there's so much affection that is bestowed upon them.
And the reason is there's so many traditional inefficiencies in this market, not just unpleasant, but almost unsavory.
So when a company like Casper comes in and builds a modern mattress company, consumers experience it so, so positively.
However, as both of you guys noted, once a company has done this successfully, they've essentially provided proof of concept, which means that other companies can come in and do precisely the same thing.
And once competition jumps into the market, the cost of acquisition just goes up, up, up.
And so you see that in their financials.
And then now the second stage, of course, is this pivot.
So Casper talks extensively about becoming the quote Nike of sleep.
And it has a product pipeline that consists of, I think in their prospectus, they had 16 different products on the way.
Cheats, pillows, pajamas.
Vitamins, sprays, meditation apps.
Whenever someone calls themselves the Nike of anything.
It's trouble. It's trouble.
So you're saying that like the Nike of podcasts is not going to work for them?
Is that what you're saying?
And I think it really betrays such a superficial understanding of what it takes to build a brand like Nike.
But young me, isn't it striking that like they did it?
If you'd asked me like 10 years ago, oh yeah, you can build a brand, which has got some salience and some people know in a crowded market and you could do that in five, 10 years, like I'd be like that's pretty - But isn't this one of the major changes that has encouraged the whole direct to consumer?
So marketing, which used to be back pages of newspapers, television advertising, super, super expensive.
You basically couldn't enter.
Now the cost of marketing has come down dramatically because you do it via Instagram influencers.
And next thing you know is like lots of people are able to build brands.
But the moment lots of people are able to do it, lots of people are able to do it, then you're back to square one.
And I think in this context, the term brand has really lost a lot of its meaning.
The word brand I think exists on a continuum.
And so there's a superficial brand, which is a set of branded products, which Casper has done.
But if you think about Nike, what Nike has done is so much more embedded and deep seated than that.
They have built their brand through patronage, through partnerships, sponsorships by embedding themselves into the ecosystem of sports.
For example, they work with professional sports leagues.
They work with national sporting bodies.
The entire sport of running would really collapse if Nike got out of that sport.
So a brand like Nike understands how fragile it is to assume that they can rest on having a nice set of products with their logo on it and some nice advertising.
They understand the fragility of something like that.
And so you can peel back layer after layer and see that, no, no, no, this brand is so deeply embedded in the ecosystem of sports.
So for a company like Casper to come along and say, hey, we're going to be the Nike of sleep, I think it really betrays a misunderstanding of what Nike has done.
The other way to say that, though, Jungmi, is look at somebody like Harry's Shaving Club or look at somebody like Stance.
They kind of have done something, right?
Harry's Shaving Club built a business in 10 years, and they solved a problem, which is they kind of came into a market where you had a couple of competitors who had pricing that was probably not that great.
And they created a subscription service.
And it's a real business.
And that's kind of amazing, right?
So let's broaden this out, OK?
Because not just Harry's, in New York City, for example, you cannot escape advertising from quipped toothbrushes, untuck it, hymns, third love, lively, the list goes on and on.
Yeah, it's everywhere.
When you look at brands like this, what do you look for in discerning the sustainable brands from the ones that you think are much more likely to struggle down the road?
In other words, what are the warning signs you look for?
So many of the products that get attacked by direct -to -consumer, they have very profitable products to begin with.
So shaving was like the...
And so that's sort of how everything starts out.
And then I think it's motivated by two ideas.
One is, let's cut out the intermediary.
We will build a brand that doesn't have stores, doesn't have wholesalers.
By going direct -to -consumer, there is a lot of margin that's on the table.
And then, what we talked about before, the way to build a brand these days is much cheaper than it used to be.
If that's all it is, I will always be super skeptical because that's going to be true for everyone.
If it's just a DTC play and nothing on top of it, yeah, you might be the first one to see it.
But for sure, you'll have 15, 20, 170 competitors before you know it.
I think you're right.
These are not network effects models.
These are not markets where there's a winner -take -all.
So given that, you want to look at what happens to their marketing costs over time because when you see that customer acquisition costs start to creep up, that's really concerning.
When you hear them make claims about customer lifetime value, which is a function of some metric associated with projected retention, I'm super dubious.
Even if they have a subscription model, it makes me really dubious just because the switching costs are so low now.
Other warning signs are when they start to really begin to expand their product portfolio as a way to try to jump -start growth again.
I think those are all warning signs.
I think also, though, one that I want to pick up on what you said, Young Me, is I love this kind of mania for recurring revenue in subscription businesses.
Everybody loves subscription businesses because it's recurring revenue.
That is, by the way, an investor's way of thinking about the world, which is, oh, yeah, we need recurring revenue.
Super sticky. But then you ask yourself, do I really want to subscribe for a toothbrush?
Do we really want to live in a world where everything is on subscription?
Because I think so much of this is predicated, Young Me, on subscription models.
Oh, yeah. But there's an outdated sense of the stickiness associated with these subscription models.
I mean, it used to be if you wanted to cancel a magazine subscription, you would have to actually write them.
And so, yeah, that was really sticky.
But today, you'd go online and you just cancel your subscription.
It's not that hard to do.
And you switch to someone else.
Yeah, exactly. When the subscription model works best from a loyalty retention perspective, the economics are terrible.
And as a result, yeah, I have no incentive to ever switch because you're not really making all that much money off.
What is it that you see in these brands that makes you think they might be successful?
In other words, when you're confronted with a brand that you think, oh, this one might actually have something to it, what are the indicators that this is a brand that really might be onto something?
I mean, I think about it in a very narrow way, frankly.
I think about it as, what problem does this solve?
Like in my life, do I need to subscribe for a toothbrush?
Do I want socks that are more interesting than the ones I have?
So I think about it as, what problem do they solve?
And for most of them, I come up lacking in answers because I don't see the problem they're solving, and I'm quite happy with my solutions.
Now, you're asking, I think, a more sophisticated question, which is, yeah, but how do you create a brand that might attract me to kind of get interested in it?
And I confess, I'm not sure.
I don't know. What do you think?
I do think what's interesting about direct to consumer is the default was, of course, to have brick and mortar stores.
And that's an expensive solution.
And for some products, the store doesn't really add anything.
Because touching the product, experiencing the product is not really relevant.
And so there, I do think direct to consumer models can have better economics.
And it doesn't mean that it's a successful business.
But at least there is extra value created over and above what the traditional solution was.
Yeah, whenever I'm confronted with someone who says, hey, I'm creating this DTC brand, the question I always ask them is, tell me the hardest thing you're doing.
What are you doing that is really hard?
And if it's really hard and they're trying to solve a hard problem, not just a problem, but a hard problem, the kind of problem that would dissuade 90 % of the other entrepreneurs out there, then I start to get interested.
So for example, one of the companies that, full disclosure, I'm associated with is Warby Parker.
That's a company where it's really hard what they're doing.
It's a quasi medical category.
That's a good point.
Or if you think of a company like Stittrix, where there's this amazing, complicated prediction problem where you think, oh my god, can I predict what this person will like?
I think there you see there's something that gets created.
And who knows, maybe successful, maybe not successful, but something gets created that cannot be replicated.
If the idea is just cutting out the margins of the middleman, that's just not an idea for our business.
I think that's right.
Just to close this out, next time you buy a mattress, are you going to buy a Casper?
I had a great experience buying a Casper, but I would comparison shop and I would look for what the prices are and what the return policies are, and then I would optimize over them.
That's what's interesting.
I mean, it's unlikely that we will ever buy a mattress again that doesn't come to us in a really convenient way, in a box that comes to your door and that is priced really well.
And we have Casper to thank for that.
On the other hand, what we buy might not be a Casper.
Yes, so true. Okay.
Thanks, guys. Okay, Felix, you want to get us started?
So this is the topic about the classification of employees.
In the United States alone, there are about 12 million people who are classified as contractors.
And for many of them, it's not completely obvious that they're not employees of companies.
I give you one example that is often discussed, and that's the example of truckers.
Many truckers actually are not employees, even though they end up exclusively working for a particular trucking company.
And there's been significant conversation nationwide.
A couple of states, including Massachusetts, New Jersey, and then most recently California, have now decided to find new ways of describing what a contractor really is.
And the direction of that change is to make it more difficult to classify someone as a contractor.
In California, I think most famously, this is assembly bill number five.
That actually went into effect on January 1st.
And it basically has three tests that you need to look at in order to figure out whether someone's a contractor, whether someone's an employee.
The first test is, are you free to perform the activity in any way you wish?
The more the company gives guidelines, tells you how to do your job, the more likely it is that you're actually an employee and not a contractor.
Second test is, are you in a different line of business from the company that you work for?
This is relevant, for instance, in Uber's case, where the argument is, well, Uber is arranging rights and drivers are performing rights.
That's essentially the same business.
You cannot easily say that these people are not employees of Uber.
And then the last test is whether or not people operate their own business.
So my first question to both of you is, if you have been members of the California, legislature, and you have been part of this debate around Assembly Bill number five, would you have been supportive of making it more difficult to classify people as contractors?
I think the short version is, this is well intentioned, but kind of misguided.
The first reason it's misguided is there are numerous carve outs.
And so they exempted a whole bunch of different professions.
And in fact, even the truck drivers, I think, have figured out a way not to be covered by this.
It was really an effort to go after ride sharing companies.
So it feels like a bludgeon of an instrument to like go after something much more targeted.
And rather than try to force people into one of two categories, which is you're either a full time employee or you're an independent contractor, I would have tried to be a little bit more surgical about going after what you're particularly worried about, which is, I think, a living wage for people who are in the ride
sharing business. So I confess, I appreciate the motivation.
I would have gone with something that was more targeted.
If you really want to go after ride sharing, I think I would have done it in a more surgical way.
You know, I think I agree with me here.
My sense is that this is really sloppy legislation.
And I think it's sloppy for the reasons that we hear laid out.
And then it's sloppy for some other reasons as well.
It's designed to go after the new world of gig work, like driving for Uber.
But the old world of gig work is getting hit too.
And by the old world of gig work, I'm talking about things like freelance writers and photographers.
And so what's happened is a lot of small media companies, they're essentially shutting down or laying people off in California in particular, right?
I mean, yeah, it feels very sloppy.
The second thing is if you're an Uber driver, this legislation doesn't necessarily help you.
If Uber is forced to classify their drivers as employees, what that means is that they're going to think really hard about how many drivers to hire.
So the legislation will help drivers that Uber decides to hire, but it will hurt the rest.
If you think about Lyft or Uber, think about the drivers you've met and think about their stories.
Grad students who are driving a few hours a week, mothers who drop their kids off at school, you can't, gig work is here to stay.
You can't begin to classify all of these people as employees now.
I think I'm with you in the sense that there are really two types of labor arrangements here.
And one is a employee relationship and the other that's also equally valid is an independent contract relationship.
One is not better than the other.
And the question is here, what we're trying to do is shift a bunch of people who we think are effectively misclassified as independent contractors and shift them over to the employee setting.
But it's a very sloppy way to do it because it's going to affect a lot of other people.
They're not the full time workers that some Uber drivers are, but a lot of them are more along the lines that what young me describe.
One of the really tricky things in making progress is trying to create the circumstances under which people who choose to be contractors because they're like the flexibility that we don't wipe out all the benefits of being a contractor in the first place.
You've seen this more generally.
The response to assembly bill five has not been unanimously positive even among contract workers because some workers actually look exactly for the kinds of benefits that you have when you're not classified as an employee.
So somehow the trick is get protection for those who are weak, who are likely to be abused while at the same time in a smart way, preserve the degrees of freedom that the contractor status guarantees.
If you think about Uber and Lyft specifically, if you were to advise them on here are some of the things that you should just do unilaterally to avoid a lot of the negative sentiment that people have about how you're treating your independent contractors, what are some of the things that you would recommend
they do? One of the things that I find interesting to think about is whether the enthusiasm for classifying people as independent contractors is really always justified just from a narrow business point of view.
And I'll make two arguments.
First is if people are truly independent contractors, they are completely free to work for the competition.
If you look at ride sharing as a business, one of the really big challenges is among many other things.
It's the intensity of competition that makes it so difficult for Uber and Lyft and other companies to become profitable.
So there is an interesting trade off here.
The second, I think really important consideration is what's the quality of service?
Because independent contractors, you can tell them what to do, but you cannot tell them how to do it with independent contractors.
It's super, super hard to excel to really build high quality services because you cannot train, you cannot intervene.
You cannot have monitoring whether people follow particular process steps.
And so I would not be surprised if I don't know, five years from now we look back and oh, remember in 2020, we used to think contractors was like this really big blessing.
And then we realized that in order to build really wonderful businesses that have sustainable competitive advantages, contracting is actually a drawback.
It's not a benefit.
You know, it's interesting.
Why wouldn't you kind of go the way that some corporations have gone, which is say we are going to ensure that per hour of driving, there's going to be a $15 floor on what people make.
I think what the evidence suggests that it's averaging out something more like 12 or $13 right now for some of these companies.
And so if you wanted a private initiative, young me, to address the concern, the private initiatives to address the concern should be, okay, look, Felix has worked four hours providing rides for us over the course of this 24 hour period.
And at a minimum, he has to make $60.
So there's a $15 floor that we are imposing.
It's perhaps above kind of local minimum wages.
And that I think is the most surgical way to address this.
My intuition is very similar.
I really do believe these companies, they have to treat their drivers better, but more generally, my mind keeps going back to Felix, your point about.
You wouldn't be surprised if several years down the road, we look back and these companies will say, what were we thinking to try to manage this business with a hundred percent of dependent contractors?
You see it in trucking.
There are some truck companies that treat their drivers as employees and there are some that treat their drivers as contractors, but it's not a foregone conclusion which model is the better model.
You know, I gotta say we're trying to brainstorm ways they can treat their employees better.
Meanwhile, they haven't yet been able to demonstrate any kind of sustainable profitability yet.
So it just really underscores how their current business model and the prices that we pay when we get in to take one of these rides, just not representative of the costs associated with running that business.
And so something's got to give at some point.
It's such a good point, Youngmi.
I saw, I don't know how accurate it is, but I saw a recent cost estimate.
What's the Uber compared to a taxi company in California?
What's the actual cost of operating for, say, one passenger, one mile?
And the investment bank came to the conclusion that there's barely any difference, that literally all the difference that you see in the fares that are being charged are just subsidies from overly optimistic investors.
And if that's true, I think the current debate is also misleading in the sense.
We shouldn't change the rules.
So we shouldn't be overly influenced simply because Uber and Lyft might be bad ideas for how to provide ride sharing services in the first place.
And they shouldn't dictate how labor legislation evolves over time.
So true. They might prove themselves to be unsustainable on their own.
That's the worst part of this whole piece of the puzzle, which is it really feels like the tail wagging the dog in the sense of, you know, concerns about, you know, DoorDash and Uber, which are relatively small players in this larger independent contractor world.
And then we're redesigning independent contractor legislation around this particular concern.
And that's really feels like tail wagging the dog kind of territory.
On a more optimistic note, I think what I love about the current debate and also the legislative action is that it's now, I think after some break, it's a renewed conversation around what's the best way to protect people.
In situations where employees are weak or where workers are weak, where you can't really negotiate effectively, we have to find out in a modern economy with gig work, with all kinds of contractual relationships, are there better ways to protect those who are weak?
And that's, I think actually what's really good about what's happening right now.
That's great. Okay, recommendations.
Do you have picks for me guys?
I have, this is this website, the points guy that many of you probably know.
And one of the many things that they do is they provide these monthly valuations of points and miles.
And the calculation is not a precise calculation because the value depends on tricky things, like what's the likelihood that you can redeem?
What are the prices at the time when you redeem?
But if you're looking for some approximation of real value and then lots and lots of smart tips, what to do and what not to do, the points guy is your site.
You know, I have to say there's like a little genre of video that they specialize in that I once went down the rat hole of watching, which is they will kind of do these reviews of, you know, here's what the economy class service looks like from.
Particular flights.
I've done that too in here.
So embarrassing, but it's oddly addictive and they go inside the cabin and they look around.
They also do even pre -flight, you know, so here's the ticket counter and this is, oh my God, we're helplessly nerdy.
Oh my goodness. Um, how about you over here?
Did you bring in? Yeah.
So I am not in general a fan of science fiction, but there is a writer whose name is Ted Chang and he came out with a book of short stories last year.
Uh, it's called exhalation.
Oh, I'm reading that right now.
I think it's amazing.
Okay. I'm only about a third the way through, but go ahead.
It's so good. It's so good.
Right? So this guy is a really interesting character, right?
So he actually writes, I think software manuals and he's only written two or three collections of these short stories over like 30 years, but they are beautifully crafted and their sci -fi in their sense that it's futuristic and technology oriented, but then they're like deeply philosophical and each story
has a theme and that theme might be, for example, time travel, but then it's not just about time travel.
It's about all the questions that that evokes.
And usually I find all that stuff kind of weird and futuristic and not that interesting, but with him, it's always super interesting and really philosophical.
And so I don't know.
I think he's kind of amazing.
And also, I think there are little pieces in there that stay with you, but then the entire thing feels cohesive.
Yes. Even though they're disconnected stories as a whole, they leave you in a very particular mood, don't they?
Like when you put the book down, you walk away and you find, it's a little mind bending.
I agree with you. I think it's fantastic.
So what's it called?
Can you say again? The collection of stories is Exhalation and it's by Ted Jiang.
But I think young me, you're right.
They cohere in like a really interesting way at the end of it all.
Really nice. Yes. Okay.
That's a great recommendation.
So I don't really have a recommendation.
I have a rant. Can I rant?
Oh, yeah. So I think that 20 years from now, we are going to look back at all the photos we took during this era, and we are going to think what is up with the hoodie?
Hoodies are ridiculous.
They look so schlumpy and I came to this realization over winter break.
So we were traveling and there are moments I would look up and my two sons and their girlfriends and my husband, everybody's wearing hoodies.
Like everybody's just wearing hoodies all the time.
And then they would go out and come back having shopped for more hoodies.
I'm with you on this in the sense that they've kind of become like glorified sweatpants, but they've kind of dressed them up in a way to make it kind of a little bit more formal, but they're kind of shapeless.
And also there are people who wear the hoodies, but never use the hoods in which case, why are you wearing a hoodie?
And then there are people who actually use the hoods even indoors.
And I mean, I don't even know what to say about that.
Come on. I mean, seriously.
You're throwing down.
It's like overalls.
Remember we used to wear overalls.
There was a time when people wore overalls and we looked back and we're like, yeah, I get that they're comfortable, but they're stupid.
Similarly, we're going to look back and say, why did we all wear hoodies?
I think you're really throwing down and I'm going to predict a viewer response analogous to British Bake Off.
But I think more positive, I think you're tapping into something deep here.
And by the way, one of the reasons I'm friends with you guys, I don't think I've ever seen either one of you in a hoodie.
That is true. There you go.
So that's it for this week.
So thanks everyone for listening.
This is After Hours from the HBR Podcast Network.
