The Economy of Scale Analysis: Physical to Apps

In Moat versus growth investing, companies could be classified into growth categories or moat categories. Investors need to be very careful in this field.
Economy of Scale
source: freepik

Online-ing physical business doesn’t necessarily translate into financial profit. Teladoc, Uber, Doordash, and even the European counterpart Justeat Takeaway1 still recording losses. Investors may believe once economies of scale are reached – the long-awaited profit will be materialized. Here we perform an economy of scale analysis to get deeper into that issue.

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In This Issue

Investors always try to catch the future. The mindset behind this is: In this popularity contest, the one who buys before “it happens” is genius. Thus, buying a promising company, even when the profit is non-existent yet, is alright. They will wait till “it really happens”. Unfortunately, sometimes it works, sometimes (honestly, most of them) fails. The key is understanding the cost structure and economy of scale analysis.

Key Takeaway

The Economy of Scale Analysis of Teladoc Cost: Problem, It is not Medical

Teladoc starts at $49 per visit if you use a nonsubscriber plan. The doctor, physician, take 25 bucks, leaving Teladoc with a delicious 50% profit margin. We have no problem here. Overall, if consider both subscription and visit plans, Teladoc operates at a remarkably 64% profit margin. Again, no problem.

But why is Teladoc still recording loss? Intuitively, we think that The telemedicine provider’s highest cost is the doctor – well, true, but when we investigate deeper at its financial report, it turns out that something is not good in its business model.

In 2020, the combination of sales, ads, marketing, and technology reach 49.9% of total revenue, topping its “doctor’s cost” with only 36 %. The highest cost of a leading telemedicine company isn’t its doctor part.

And this isn’t a fixed cost. Our exploration through last 5 years bring that “non-doctor” cost component (the combination of sales, ads, marketing, and technology) is moving along with the revenue – thus, even when the number of subscriber rise, the profit still questionable. It seems that to “attach” certain organizations to stick with Teladoc’s services need many resources.

Breaking Down Teladoc revenue helps us to understand and build the economy of scale analysis.
Cost Structure of Teladoc

Breakdown The Cost Component

The Doctor Cost


Sales Cost


Ads, Marketing Cost


Tech and Development


We’ll back to this issue but let’s go to the food delivery business for a while. Do we find the same problem?

The Economy of Scale Analysis of DoorDash: Delivery, The Driver Take The Cake

Another business revolution, Doordash – and any other food delivery – face the same fate: The elusive of earning. Try to take a look at this cost structure:

Average Doordash Order in 2020


Dasher/ Delivery Person


Restaurant Food include DD Commission




As you can see, apart from its eye-popping order growth, this phenomenon translates only slightly profit to its financial statement

As a consequence of its both channel – connecting the restaurant to the buyer via dasher (and apps) – the largest cost component is that 3 parties with the delivery person get the largest chunk.

The Doordash itself gets shyly 0.9, You need to multiple this number with a remarkably high amount of users to cover all non-operating costs like management salary, staff, HR, finance, etc.

And we have so many hurdles to achieve that. When the pandemic is over, and it will, dinner will come back. Coffeeshop will decorate themself – Doordash simply doesn’t have experience economic or Instagram economic advantage which Millenials really love.

So we have a problem for both business model: Teladoc seemed has no solution since even the number of customer get larger, the cost component will follow. DoorDash has a better cost structure – at least there is a solution: A massive scale.

Efficiency As The Answer: But It is Running Out the time.

Teladoc has done well for its doctor – the largest cost component should be. But they need much improvement. When the competition gets hotter, Teladoc surely can’t reduce its ads and marketing cost – as well as sales cost. The choice left is technological and development expense – the problem is, when Big tech enters this business, you don’t think cut the tech budget is a good idea. Management has to fix it out – and we don’t see Teladoc has considerable progress on this. The last effort we see is Teladoc uses adjusted EBITDA to show that its business model is profitable, we need to see more than this.

And as we mentioned earlier – the other online-ing business model – food delivery – could achieve profit if it expands the scale. Actually, there is another way – to make customers order more in a single delivery. Or to charge more, but we doubt it will happen – it is difficult to change buying pattern. You could transform the way people spend money – but to change how much people spend the money is a difficult task. Only companies with magic brands can do it.

Our final thought on this business model is – no matter advanced your technology is, it can’t be the sole determinant of financial advantage. Online – ing everything doesn’t always result in real earnings.

The Economy of Scale Analysis: Lesson From Netflix and Tesla, Why They are Different

The bull may argue that all businesses are making losses at the beginning of its phase – even Amazon needed 14 years to record its first profit. Tesla – finally make a profit in 2020. Another example of “greatness takes time” is Netflix. The streaming company narrows its debt in 2021 – showing that original production kicks start its economic advantages. So, somehow, Doordash and Teladoc will arrive at this point of the journey.

Problem is – they operate in different kinds of industries and most importantly different kinds of business models. Please note that even all of these companies use app app-based approach – it doesn’t mean that they are all equal. Apps are nothing new in 2021. Completely. Every company now is a tech company – like Satya Nadella said.

First, Lets us take a look at the Netflix case. When Netflix hires Henry “Kal-El -” Cavil and Anya Chalotra for The Witcher series, the streaming Giant could distribute this huge amount of expense to all global subscribers. This is a “one for all” production, something that Teladoc and Doordash don’t have.

Netflix could cast one smoking hot Anya Chalotra to all its audience – Teladoc can’t stream one doctor to all users or make FGD-like. Teladoc needs to be delivered personally and intensely. Doordash faces a similar situation – it can get the Dasher to take multiple orders with a single services fee – far from possible. It is always the order and the food – far from Netflix’s advantages.

Even Tesla’s positive earning reinforced by carbon transactions, Elon Musk-led company situation is far brighter. Its Giga factory that manufactures all its EV parts will contribute massively to economic profit when the scale is reached. It has a Netflix-like advantage. One production – a Giga factory – to all.

Transforming Business Model: To Be More Vertically Integrated

Honestly, this section will more likely be speculation rather than analysis. Instead of being inspired by its apps approach, both Teladoc or Doordash could replicate the business model of Telsa and Netflix. Here is the detail:


Vertical Integration for Teladoc could mean that the telemedicine company has its own medical force or its own medicine. This will bring costs down and help the company generate earnings. The toughest barrier to implementing this is the regulation – and this also sparks competition since it is easier for drugstores or hospitals to deliver telemedicine service than Teladoc brings the drugstore or medical team. Another solution for Teladoc could be its latest acquisition Livongo. Maybe become data provider more profitable than do the whole business. We don’t know.


DoorDash could have its own Dasher and vehicle – it is much easier than the Teladoc case. Or, Doordash could transform its business to multi-finance, giving credit for a new car for a new Dasher. If Doordash could become “your daily” platform, this company could become something big.

Final Thought, Question, and Answer

Ok, what do we have?

The winner is always different. Every Wall Street darling has clear characteristics – revolutionizing the industry and – this is the most forgotten component – the growing earnings. No matter good the apps or business model is, no matter how different it is, it can’t translate into earning, it is not good to invest.

  1. even when we expand the territory to the Asia Pacific, the result will be the same []