Welcome to Stuff I Thought About Last Week, a personal collection of topics on tech, innovation, science, the digital economic transition, the finance industry, and whatever else made me think last week.

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In today’s post: advanced tools for scientific research are proliferating, including the ability to short-circuit evolution; the Summer Olympics will feature millions of custom AI recaps from a legendary broadcaster; the difficulty of rapidly deploying AI copilots is underscored by the simple math of the situation; extraterrestrial oceans; a 30-year low in Hollywood employment confronts the difficult truth of content value; a lesson for companies that fail to invest in the future comes from Walgreens' 80% decline; and, much more below.

Summer Schedule: SITALWeek will publish next on July 14th and July 20th. We'll return to weekly newsletters starting on August 11th.

Stuff about Innovation and Technology
Prompting Novel Proteins
A company called EvolutionaryScale has created a language model called ESM3 that it claims will make biology programmable. “ESM3’s multimodal reasoning power enables scientists to generate new proteins with an unprecedented degree of control. For example, the model can be prompted to combine structure, sequence, and function to propose a potential scaffold for the active site of PETase, an enzyme that degrades polyethylene terephthalate (PET), a target of interest to protein engineers for breaking down plastic waste.” The company came up with a novel green fluorescent protein (GFP), like those that create bioluminescence in sea creatures, that was so sequentially divergent from other GFPs that naturally generating such a variant would likely have taken 500M years of evolution. ESM3 joins a host of new tools proliferating for scientists. Take for example Microsoft’s new research tools Generative Chemistry and Accelerated DFT, which are aimed at dramatically increasing the surface area of experimentation. The NYT also reports on Terray chips, each with 32 million micro-wells, for ultrahigh-throughput biochemical screening to identify drug candidates. 
 
AI AL
An AI version of legendary sports announcer Al Michaels is set to create as many as 7 million customized recaps of this summer’s Paris Olympics for NBC’s Peacock app. This will be the first Summer Olympics where all events will be available to stream with over 5,000 hours of live coverage. In related news, Google, via its Labs experimentation group, is reportedly working on a plan to allow your Gemini chatbot to be personalized as your favorite YouTube personality. 
 
Upside Down Economics of Human Replacements
There are a slew of AI copilots coming to a wide variety of jobs in the near term. The result is likely to have two primary impacts. First, copilot-enabled productivity will likely contribute to the weakness in job openings for white collar vocations. The WSJ reports on the 21% decline in job openings on freelance task platforms, like Upwork and Fiverr, as AI takes over such jobs as copy editing, translation, sales, marketing, and customer service. The second impact is that cheating on your homework is no longer just for students. It’s no secret that ChatGPT took off like wildfire for academics; but, with custom bots for jobs as senior as Wall Street investment bankers (both MS and GS have announced plans), everyone now can cheat on their so-called homework. Unfortunately, AI shortcuts may set you up for a major fail during final exams, when you may not be able to rely on AI tools. For important decisions, or for fixing mistakes made by AI, will you really know the material well enough to improvise, plan, and problem solve? Is it possible to create value for your company if your hands are off the wheel, or will you just crash? And, of course, AI copilots raise the ultimate question: why have workers at all? (See Digital Surrogate Delusion.)  Why not just have a slew of job bots chatting amongst themselves? And, take, for example, this NYT article on AI bots being used in the real estate sector to deal with tenants. How long will it be before those AI bots are dealing with the tenants’ AI bots? (See AI Negotiators). Is this what we’re aspiring to with AI – everyone cheating on their homework and having their bots talk to other bots? It’s a depressing Avatar Apocalypse. 
 
Depending on just how many tasks continue to be automated, we could transition from a “do more with the same” work force to “do more with far fewer” employees. The big consulting firms working with large companies are targeting 15-20% productivity gains, which can translate to 15-20% fewer employees all else equal. This scenario, of course, is the Catch-22 of AI: the faster companies deploy advanced tools, the faster they curtail jobs in the economy, leaving fewer people able/needing to buy their products and services. This notion circles back to when I pondered how the economy could expand without job growth. Of course, the transition into the AI tech era is the same as prior productivity waves with one apparent difference: major technological disruptions in the past have taken decades (Information Revolution) or even centuries (Industrial Revolution) to play out. However, if you believe the optimistic prognostications (as the stock market seems to), AI will have that level of impact on the job market over the course of just a few years. Such a shift would require capital investments in the trillions and net new economic activity several times that. Here’s a simple back-of-the-envelope calculation: if big tech platforms are buying a few hundred billion dollars’ worth of GPUs to run AI in a few years (as the market thinks they might), it implies $1-2T in capital investment (when you include data centers, memory, servers, networking, etc., not to mention the massive amount of energy needed!). And these GPUs could have a shelf life of only ~2-3 years if they are meant to exclusively run leading-edge AI models, shortening the required payback in revenues. Big tech platforms have gross margins for their infrastructure businesses anywhere from 60-80%. So, doing the overly simplified math, it’s not hard to see that AI investments would need to generate many trillions of dollars in revenue to accrue enough gross profit to justify the underlying capex expenditures (our internal models suggest that we would need roughly $5-$10 of GDP to justify every $1 of GPU investment). And, here’s the tricky part: AI would need to be deployed in such a way that it somehow doesn’t offset consumption by net job obsolescence in order to rake in those profits. So, wholesale replacement of humans seems an unlikely near-term AI scenario. And, even incremental job destruction, via leveraging the productivity of copilots, may not progress very far before its economic impact causes a revolt. Here is another back-of-the-envelope calculation: if you assume companies spend one-fifth of an employee's cost to replace them with AI, then $1T of annual AI spend could replace $5T in desk jobs. At an average of $80,000/y in salary, that's well over 50M jobs displaced (a figure that would grow as AI adoption grows). While my math in this paragraph is intended to be theoretical, it illustrates that AI will need to be deployed at a more measured pace unless it can create significant revenue upside without eroding employment.
 
If not human replacement, what, then, will the AI Age really be about? The real value for AI will likely come from invention. And, on that front, the promise of applying AI to scientific breakthroughs in healthcare, energy, etc. is tantalizingly close (like the examples in this week’s opening paragraph). So, while it’s tempting to allow people to cheat on their work at their jobs, that may ultimately be something we look back on as a flawed experiment, while the real value comes from applying the new tools to complex problems that create large new industries and applications that are net positives to the economy and our quality of life. 
 
Hollywood’s Hemorrhage
In 1948, two-thirds of the American population went to the movie theater every week. That year marked the peak of the industry, which fell by more than half by the end of the 1950s. The handoff between the big screen and the small screen was taking place as TV entered American living rooms. A similar situation is now facing the 100-year-old Southern California industry. The LA Times reports that employment levels for Hollywood-based content production are at a thirty-year low (excluding the disruptions from the first few months of COVID and recent strikes). Overall, industry employment is down from around 150,000 pre-pandemic to 100,000, and that does not include impacts to the large base of freelance and part-time workers. Factors influencing the downturn include new technologies making jobs more efficient, some shift of production to lower cost cities, and, of course, the swiftly rising tide of infinite content across YouTube, social networking, gaming, etc. 
 
When professional content began to shift to streaming, studios banked on subscriptions and ads to support their continued blockbuster spending. However, when the necessary subscriber base didn’t materialize fast enough to offset the decline in linear viewing (the very same linear television viewing that disrupted the movie industry seventy years ago), the streaming spending bubble began to deflate, and now it appears the last white knight, ad dollars, is in jeopardy as well. It’s becoming clear that expensive, studio-generated content is not any more valuable to viewers or advertisers than the plethora of lower cost alternatives. Certainly, there are examples of must-see entertainment from studios; but, as Variety reports, the industry is now facing an advertising problem. Disney has apparently been making major concessions in order to sign advertisers, leaving the other studios scrambling for the receding tide of ad dollars. It remains unclear if Hollywood can face its Vaudeville moment without a significant refocusing on high-impact, high-value content that engages users in a way that is equally as valuable to advertisers. Netflix co-CEO Greg Peters said in a recent interview that advertisers will value Netflix ads more. Perhaps. I have some optimism that ads might become higher value over time for certain bits of content, but it could still be a race against other entertainment alternatives to capture enough user time to display those ads. Despite my ongoing skepticism, I’d love to see a Hollywood renaissance, so, as this story plays out, I am rooting for what has now become the underdog: the storytellers themselves.

Miscellaneous Stuff
Oceanic Asteroid?
Samples from asteroid Bennu contained materials consistent with mid-ocean ridges on Earth, implying the flying chunk of rock could have originated from an ancient, water-rich planet. The water-soluble phosphates were found along with nitrogen, carbon, and other organic compounds, all critical to creating life.

Stuff About Demographics, the Economy, and Investing
Extinction Event
In the 2010s, a lot of companies propped up their stocks with buybacks while ignoring the deteriorating customer experience, effectively gambling with their own stock while ignoring the threat of increased digital transformation of the economy. A prime example is Walgreens, which announced a $10B share repurchase in the summer of 2018, while, speaking as a customer, their in-store experience continued to suffer. I discussed Walgreens and other legacy businesses in this September 2018 oped: 
The differences between companies that succeed in making the digital transition and those that don’t may become clearer as the era of ultra-cheap money ends. If they were serious about becoming successful platforms, 20th-century business models should have begun making the necessary technology investments more than a decade ago instead of pandering to yield-hungry investors who rewarded share buybacks and rising dividends with higher equity prices.
For companies that have under-invested in their futures, the ramifications are likely to be difficult to recover from.
Walgreens stock has declined around 80% since the aggressive share repurchases, and the company announced last week that they would be closing a significant number of underperforming stores in the US, perhaps numbering in the thousands. In an era of easy money, it was convenient to lever balance sheets and recapitalize companies by buying shares back (in the case of Walgreens, the decline is more complex, as the company shifted from buybacks to large acquisitions of doctor networks and urgent care clinics, while continuing to ignore the issues concerning their core business). The tide is going out with higher rates, and a reckoning is coming for companies in all industries that underinvested in transformative digital tech. Now, with the next platform shift to AI already upon us, an additional layer of investment is needed to keep up with customer expectations, and many of these companies are likely to face extinction as their debt costs soar and their customers find better alternatives. Many of the “moats” that once protected these large, relevant companies have become tar pits, dooming their victims to fossilization.

✌️-Brad

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The content of this newsletter is my personal opinion as of the date published and is subject to change without notice and may not reflect the opinion of NZS Capital, LLC.  This newsletter is an informal gathering of topics I’ve recently read and thought about. I will sometimes state things in the newsletter that contradict my own views in order to provoke debate. Often I try to make jokes, and they aren’t very funny – sorry. 

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