Big Bites & Bold Moves

MARKET BUZZ

BRIEFING BOARD

🍔 McDonald’s shares fell 7% after the CDC linked an E. coli outbreak to its Quarter Pounder burgers, resulting in 10 hospitalizations and one death. The outbreak, reported in 49 cases across 10 states between Sept. 27 and Oct. 11, mostly affected consumers in Colorado and Nebraska. In response, McDonald’s removed slivered onions from its supply and paused their distribution in impacted areas. Quarter Pounders will be temporarily unavailable in several Western states, though other beef products remain unaffected. The CDC suggests the actual number of cases may be higher as many people recover without testing.

☕ Starbucks CEO Brian Niccol outlined plans for a company overhaul after another quarter of declining sales. The strategy shift includes scaling back promotions to focus on a more premium brand and simplifying the “overly complex menu.” Niccol emphasized the need to support baristas with better tools and leadership to enhance customer service, while also improving career growth and benefits, including free college degrees for U.S. partners. With nearly 500 unionized stores, Niccol aims to make Starbucks the best job in retail and reestablish it as a community coffeehouse that offers more than just a café experience.

📱 TSMC informed the U.S. that one of its chips was found in Huawei’s Ascend 910B following a TechInsights teardown, potentially violating U.S. export restrictions. TSMC notified the U.S. Commerce Department after being alerted by TechInsights and stated it hasn’t supplied chips to Huawei since September 2020. Huawei also confirmed it hasn’t used TSMC for chip production since the U.S. imposed rules in 2020. The Commerce Department acknowledged the report but didn’t comment on any investigation.

🎧 Apple has scaled back production of its Vision Pro headset and may stop manufacturing the current model by year-end, according to The Information. The headset’s initial excitement has waned due to its $3,500 price tag and competition from cheaper options like Meta’s $500 Quest 3. Suppliers have produced enough components for only 500,000 to 600,000 units, with one factory halting production in May. Apple is reportedly working on a more affordable version for 2025 while suspending work on a high-end headset.

CASE IN POINT

Spotify’s Profit Playlist: Skipping Ads, Boosting Cash

Spotify is a Swedish audio streaming and media service provider founded in April 2006 by Daniel Ek and Martin Lorentzon. As of 2024, Spotify is one of the largest providers of music streaming services, with over 626 million monthly active users. It is headquartered in Luxembourg, with its operational main office located in Stockholm.

A persistent problem that Spotify faced over the years was its lack of profitability. Despite enjoying a dominant market position due to its large user base, Spotify failed to translate its positives into sustainable profits. As such, the company identified three key concerns for its profitability. On one hand, a significant portion of the company’s revenue was blocked towards acquiring licensed music from various rights holders, while on the other hand, there was minimal Average Revenue per User (ARPU) generated due to users preferring the free version of the platform to its premium subscription. Incidentally, the profits suffered due to severe competition from rival platforms such as Apple Music and Amazon Music.

In a bid to improve upon the dysfunctionalities of the platform (as highlighted), Spotify adopted a multifaceted strategy. Such a strategy involved an emphatic promotion of its premium subscription through incentivising upgrades in the form of ad-free listening, reduced data usage, offline listening, and greater audio quality, besides offering family plans and student discounts. Spotify invested significantly towards producing original podcasts to differentiate its platform from its rivals. To generate advertising revenue and induce free-tier users to adopt premium subscriptions, Spotify provided an avenue for advertisements. To generate additional revenue and reach a broader audience base, Spotify adopted brand extensions through merchandising and strategic partnerships with artists, labels, and different brands. Simultaneously, they incorporated various cost management strategies involving negotiations with rights owners for better licensing terms and maximising its operational efficiency.

As of 2024, Spotify has a huge subscriber base of 246 million users with a 32.9% market share in the global music streaming industry with a market capitalisation of $75.04 billion (as of October 2024).

EXPERT EDGE

Smashing Windows: Why Breaking Stuff Won’t Fix the Economy!

The broken window fallacy is a concept in economics that is believed to have originated from a parable written by 19th-century French economist Frédéric Bastiat. It challenges the tendency of people to believe in the rather pseudo-intuitive notion that it is a good thing indeed that destruction stimulates economic growth. The parable has a shopkeeper whose window is broken by a boy. People propose this as a good thing because the glazier will be paid to replace the window and give work to the glazier. They argue that the spending helps the economy in terms of stimulation as income for the glazier, who then proceeds to spend elsewhere and thereby creates an activity cycle in the economy.

Yet Bastiat points out the fallacy in this reasoning. The broken window may force the shopkeeper to redirect to the glazier the money that he could have spent on other goods or services. The glazier is certainly the beneficiary, but the shopkeeper loses a potential investment or an improvement in his enterprise. This opportunity cost is quite often missed while analyzing the net effect of this situation. In other words, the fallacy is in concentrating solely on observable short-run effects of economic activity without looking into the long-run, not so observable ones. The principle applies to a number of economic policies that focus on spending on either repair or defense without looking into the possibilities of using it elsewhere.

In fact, it is argued that war might precipitate economic expansion by generating employment in defense-related sectors. This again undervalues the possibilities of investing in education, infrastructure, or innovation with resources allocated to the war. More importantly, war frequently destroys wealth, causes human suffering, and generates long-term instability, all of which can impede sustained economic growth.

The broken window fallacy teaches one very important economic lesson: Focusing on immediate, visible benefits of spending ignores the hidden opportunity costs; all kinds of mistaken conclusions follow about economic growth. Repairs and replacements create jobs in the short run but divert resources from other uses that could have been used more productively elsewhere. Understanding this fallacy helps us avoid the trap of thinking that destruction or inefficiency can really benefit an economy in the long run.