The TAM Bubble

Years ago, marketers would try to quantify a company’s opportunity by talking about “the market”. The problem was, most of the market wasn’t realistically available to the company. So, in addition to misleading investors, the unrealistic market sizings misled the companies themselves, who would come to believe their own story and drive the company into the ground.

A new metric was needed – one that was grounded in reality – and so TAM was born.

TAM is the “Total Addressable Market”, and is meant to capture not just some marketer’s irrational estimate of the market, but only that segment of the market a company would reasonably be able to “address”. The TAM should lead anyone looking at it to understand the revenue opportunity in front of the business – not just some large, hard-to-digest “market” number.

Put a pin in that thought for a second. We’ll come back to it.

One of the issues our global economy has to deal with is the cycle of hype/bubble/crash that affect so many new markets and financial products. The easy mortgage money was a great deal – until it wasn’t. The valuation explosion of bad business models made investors rich during the dot-com bubble – until the bubble popped. You get the idea.

So it was with interest that I read this Financial Times article by Jamie Powell about the explosion of TAM measurements in investment guidance and S-1s (an S-1 is the investor document a company circulates in support of it’s coming IPO). Here’s a graph showing the increase in use of the term “TAM” in S-1s.

An excerpt from the article:

Now regardless of whether you think any of the total addressable market claims are fair, it’s generally accepted that when you speak of a market opportunity it constitutes revenue opportunity. For instance, if Uber took 10 per cent of the $5.7tn transport market it mentioned, that would mean potential revenues of $570bn.

Well not any more it seems. Following Yandex’s $5.5bn acquisition of Russia’s top digital bank Tinkoff, Bank of America reckons a total addressable market is not just about revenues, but an entire sector’s stock and flows.

From the note (TCS is Tinkoff):

Fast-tracked entry into $2 trillion TAM

Yandex’s TAM is c.$800bn today (we have not considered total transport for ride hailing TAM). Given TCS currently has c.10 per cent market share in credit card lending and 10m customers this could in principle give exposure to an additional c.$150bn TAM (retail loans ex-mortgage) or even $2.2tn if we include payments ($1.4tn) and retail wealth (c.$650bn) besides lending.

Yet even if Yandex does manage to get a foothold in this $2.2tn market opportunity, it will only make a much smaller slice of revenues — whether it be from the fees from wealth management or transaction charges on payments. So really, it’s not a $2.2tn TAM at all.

The issue here for me isn’t that some investors who aren’t reading carefully might get hoodwinked in investing in a Russian Digital Bank (which I would avoid anyway). It’s that this is how bubbles build.

One S-1 announces a TAM that is untethered from reality. They get a big valuation – bigger than they otherwise would have received. What happens next?

Naturally, others start doing it. Who wants to be the sucker who conveys the actual TAM – which, as Powell notes above, is supposed to convey the upper-limit of the revenue opportunity – when riches can be had with a more (ahem) “expansive” view of the measurement?

What’s the Net?

For the average person who doesn’t traffic in public offerings and foreign securities, the key is to re-commit to the purpose of calculating a TAM in the first place – namely, to answer a few key questions:

• Is this market big enough for us to succeed?
• Is this market big enough to support not just us, but our competitors as well? (In other words, is it a real “market”?)
• How expensive will this market be for us to attack? Grabbing 1% of the Chinese toothbrush market, as one book suggests, would be a lucrative business – but how complicated and expensive is it for us to pursue that market? I’m sure the Chinese toothbrush TAM is large, but pursuing it is likely expensive and complicated.

The way to avoid bubbles is a) to be aware of them as they form, and b) to not contribute to them.

Good luck!