Benner on Tech: A Smile for Fab.com

Katie Benner is a Bloomberg View columnist who writes about technology, innovation, and the cult and culture of Silicon Valley. She lives in San Francisco.
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People are Talking About…

Fab, the online purveyor of trendy goods that was once valued at almost $1 billion, has finally sold to PCH for an estimated $15 million. Fab is widely being held up as an emblem of the e-commerce boom and bust and as a cautionary tale about the dangers of overvaluing a startup when it isn't able to create a viable business model. 

The firesale has no doubt hurt investors and employees who were counting on some kind of return, especially as they got swept up in the big valuation and the even bigger hype around the company. But the more interesting question for me is why would PCH -- which is essentially a manufacturing, logistics and packaging company -- want an online retail brand that has a reputation for selling a mass of goods that vary wildly in quality?

PCH runs a hardware incubator called Highway1, and publications including Re/code and the Wall Street Journal note that Fab can be used to showcase and sell products made by those entrepreneurs. That's great, but lots of companies have been laid low by both creating hardware and by online commerce. PCH is now attempting to do both. 

I suspect that PCH is taking on Fab because it's trying to increase margins at its business overall. The hardware-retail strategy completes a so-called "smiley curve." You can read about it here in an essay that PCH Chief Executive Liam Casey wrote for the Atlantic back in 2011. He quotes the author James Fallows who writes:

The curve is named for the U-shaped arc of the 1970s-era smiley-face icon, and it runs from the beginning to the end of a product's creation and sale. At the beginning is the company's brand... Next comes the idea for the product: an iPod, a new computer, a camera phone. After that is high-level industrial design--the conceiving of how the product will look and work. Then the detailed engineering design for how it will be made. Then the necessary components. Then the actual manufacture and assembly. Then the shipping and distribution. Then retail sales. And, finally, service contracts and sales of parts and accessories.

The smiley curve, which shows the profitability or value added at each stage, starts high for branding and product concept, swoops down for manufacturing, and rises again in the retail and servicing stages. The simple way to put this--that the real money is in brand name, plus retail--may sound obvious, but its implications are illuminating.

PCH mainly plays in the lowest part of the smiley curve, manufacturing and logistics, which happens to be the lowest margin, too. If the company can successfully add the high-margin parts of the smile to its business -- design and retail -- it will boost margins and create an end-to-end, integrated company that's much more than a hardware design firm, a manufacturing company or a retailer. Controlling all of the steps takes out a lot of risk and costs. If PCH can offer products that people want to buy, it should theoretically be able to move them at the speed and efficiency of a company like China's Xiaomi, which can design, build and ship without holding lots of inventory. Whether or not Fab works out for PCH, companies in Asia are already creating smiley curves of their own, and they're gaining a lot of traction in the hardware wars. 

Ventureland

Ellen Pao v. Kleiner Perkins: Kleiner Perkins partner John Doerr took the stand to defend his firm. His testimony shed light on Kleiner’s hyper-competitive, sometimes acrimonious culture, with descriptions of explosive arguments between junior partners and Pao’s irritation that she had to do secretarial tasks (speech writing, proofreading) while she believed her peers got to do more important investing work. Doerr also said that he wanted to fire Ajit Nazre after he lied about and then admitted to having an affair with Pao, a woman whom Doerr regarded as a “surrogate daughter.” Re/code has the best blow-by-blow account of Doerr’s testimony if you want all of the action.

Nextdoor, the social network for communities, raised $110 million and joined the growing cohort of private companies with billion-dollar-plus valuations, reports the New York Times.

Subspace, a mobile-device security company, was acquired by Box, reports Re/code. Deal terms weren’t disclosed.

Uber bought the mapping and navigation software company deCarta, Mashable reports. The acquisition should help the company break free from Google Maps and create its own driverless car. A spokeswoman told GigaOm that this isn’t the first deal that Uber has done.

Versa, which makes a commenting tool, was acquired by the petition site Change.org, Venture Beat reports.

Sandwich Fund is launching as a partnership between Detroit-based Ludlow Ventures and Sandwich Video, which makes videos for startups. Ludlow will pay the cost of a video in exchange for equity, reports Forbes.

Startups could work with private equity firms to rid themselves of late stage investors that have lots of preferences.

People and Personnel Moves

Garvis Toler III, will become the head of listings at the New York Stock Exchange, replacing Scott Cutler, reports Bloomberg.

Will.i.am tried to coin some terms during his Mobile World Congress remarks, including “screenagers” and “i-data-ty,” Bloomberg reports.

Jack Ma now is in the top of Forbes's list of the world’s richest tech billionaires.

Related: Bloomberg says that investors dumped Alibaba shares after JD.com reported better-than-projected earnings.

Companies

Apple…

The company is adding security guards that had been hired as contract workers onto its payroll, Re/code reports. The website also says that the SXSW app will incorporate Apple’s iBeacons. Bloomberg says that Apple wants to settle its lawsuit with A123. Fraudsters are targeting Apple Pay, the Wall Street Journal reports.

Facebook…

Bloomberg says the company is creating a competitor to Twitter’s MoPub, which distributes promotions to mobile apps and measures their performance.

Netflix…

The company struck a deal to be exempt from broadband caps in Australia, a move that seems to contradict the company’s support of net-neutrality rules, reports GigaOm.

Sony…

The company’s virtual reality headset will ship in the first half of next year, Re/code reports.

Twitter…

In an attempt to weed out trolls, the company is forcing Tor users to provide a phone number when they open a new Twitter account, TechCrunch reports.

Security Watch

A security flaw has left Apple and Android device users vulnerable to hackers for more than a decade when they visited websites such as Whitehouse.gov, NSA.gov and FBI.gov, the Washington Post reports.

Connecticut’s attorney general is investigating Lenovo over the Superfish software that it preinstalled on its computers, reports Bloomberg.

Media Files

BuzzFeed is the most important media company in the world, argues Stratechery’s Ben Thompson.

News and Notes

Insurance companies are now including self-driving cars in the risk section of their financial filings in a sign that insurers think the vehicles will come relatively soon, the Wall Street Journal reports.

Big tech firms are stockpiling land like they stockpile engineers, the Wall Street Journal reports.

The Smithsonian banned selfie sticks, Politico reports.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.