SITALWeek #195
Stuff I Thought About Last Week 6-2-19
Greetings – with most companies around the world now running on a handful of cloud software platforms, changes to usage terms could dictate social policy agendas – Salesforce provided a glimpse into that prospect this week; NVIDIA, maker of chips for graphics and AI, is increasingly leaning on rival FPGA chips; will passive investing stifle innovation and competition in the economy? As always, grab me on Twitter with any comments, feedback, questions or links.
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Stuff about Innovation and Technology
Salesforce is telling its retail customers to stop selling automatic and semi-automatic rifles or they will be blocked from using their software. Cynically, I could argue this is motivated by limiting their own liability (e.g., if Salesforce’s Demandware e-commerce software was used to sell a weapon subsequently used in a crime). However, maybe it’s more than that, or maybe it could be more. With simple “fair use” policy changes, the handful of cloud software platforms underpinning the entire economy could globally influence social change. Marc Benioff, Satya Nadella and a few other tech leaders could set policy and dialog for the world based on their end user agreements. Once you think this through, it's not a question of "how could they justify this?", but instead “how could they not?”
More than 2000 preschools in China are using the Walklake robot for morning health inspections as children arrive at school. A quick scan of eyes, throat, and hands can detect conjunctivitis, fever, foot and mouth disease, and more.
PatronScan is used by bars around the world to check IDs. It’s also connected in the cloud, so if one bar bans you for any reason, you could be banned at bars around the world without recourse. As my friend Elwood P. Dowd says of behavior in bars: “Youth and high spirits...time will take care of that.” Well, it looks like time won’t take care of it if you’re on the banned PatronScan list!
With a ~30% drop in solar panel costs last year, renewable energy is now the cheapest source of power for most of the world.
I am often intrigued that Gene Roddenberry predicted almost every piece of technology we have today in the Star Trek series, but he never predicted social networking (I even once asked Zuck about this!). And, as far as I know, there aren’t any other sci-fi authors who predicted a public sharing communication platform like Facebook. As a reaction to the problems of public social networks, this interesting post from Kickstarter founder Yancey Strickler discusses the rise of the “dark Internet” in mediums such as newsletters, podcasts, private social channels, etc. And, the risk of course is that collaborating in silos, cut off from outside views, has its dark side as well. It seems we are still waiting to determine the right balance of public and private sharing on the Internet.
AI and machine learning semiconductor king NVIDIA announced this week they will be using equipment and tools from Cadence to design software and firmware for new NVIDIA GPUs before those chips are actually manufactured. That’s not completely new, but what is new is that the Cadence Protium X1 platform stems from a joint effort with Xilinx. Xilinx is the largest maker of FPGAs, or programmable semiconductors. There are two main compute workloads for AI: 1) training the model, or machine learning, which NVIDIA dominates in the data center, and 2) testing data against the model and determining a result (i.e., inferencing), and FPGAs are excellent at this task (though NVIDIA is improving as well). For example, Amazon might train the model for Alexa voice interaction on NVIDIA GPUs, and then run that model using FPGA acceleration (or a custom chip designed solely for voice inference workloads). Prior to using the Protium X1 platform, NVIDIA was using a different Cadence product that only used x86 processors, not FPGAs. So, it is quite interesting to me that NVIDIA is effectively using their rival Xilinx to develop software that will eventually run on advanced NVIDIA GPUs! Advanced AI chips are now effectively giant SOCs (systems on chip) with embedded processors, memory, and other features. You could even imagine a scenario where a big data center AI chip contains both an NVIDIA GPU as well as a Xilinx FPGA and a processor, etc. Indeed, NVIDIA acquiring Xilinx is a fascinating hypothetical proposition. NVIDIA recently announced their intention to acquire Mellanox, which also uses FPGA technology for their networking cards. And, a broader point worth repeating here is that Intel continues to fall short of meeting the needs of modern data center workloads, and the gap is widening further for Intel as time passes, despite the company finally shipping their 10nm CPU as announced at Computex this week in Taiwan.
The rise of “zero trust” or zero-perimeter security can’t come fast enough, but it requires a massive mindset shift for enterprises. This is one reason investing in security vendors is so risky: traditional security software has just been Whac-a-Mole without any enduring platforms. However, identity-centered security from companies such as Okta and Sailpoint is the future of security. Here is a good article in IBD on this topic featuring Okta’s co-founder Freddy Kerrest.
Salesforce announced their new blockchain service for enterprises this week. This short video is a good overview with some cool examples of why you would integrate the tech into your business. If it's as easy as they say, this could be a big catalyst for blockchain databases.
Intel acquires TriEye, which uses short-wave infrared (SWIR) to see in bad weather for autonomous vehicles, as the AV sensor market continues to be a very hot area of investment. In other cool automotive innovation news, the new Honda EV gets rid of side mirrors in favor of small cameras and dash-mounted screens.
70% of Hulu’s 28M households (representing 82M viewers) take the $5.99 ad-supported plan with the rest taking the $11.99 ad-free plan. With $1.5B in ad revenues, a quick calculation suggests both sets of subscribers generate similar total revenues of $11-12/mo. It’s interesting that this parity can be achieved in ad revenue and subscription revenue even without advanced targeting or performance-based ads. It suggests there is significant upside to video ad revenues for the industry, but also an easy path to decreasing ad loads for consumers. Ultimately this should keep prices for streaming services low for consumers.
In the rush to apply “AI” to everything, it’s worth noting that many systems are too complex to be accurately influenced by algorithms – making movies* is an example of this – the initial conditions and the production process wildly impact the outcome, with emergent and unexpected behaviors. Thus, it is very difficult to use an algorithm, as many in Hollywood are now doing, to pick actors (e.g., to maximize box office revenues), as the method cannot take into account complex system dynamics. I’d vote for keeping machine learning out of the creative arts for now. (*I know nothing about making movies.)
Some McDonald’s are getting 15% of their revenues from Uber Eats, causing the former to re-think some areas of their restaurant operations. Speaking of food delivery, the rapid rise of the service in China also brings a huge increase in single-use plastic containers and utensils. The vast majority of plastic was never really efficiently recyclable, and we probably should stop pretending that it is. How many of us buy single-use plastics thinking it’s fine because it will be recycled? Well, the plastic is piling up, and that lie is ending. An end to the plastic recycling charade could cause a psychological shift for consumers.
The lines continue to blur between hotel booking and private accommodation booking: AirBnB is changing its fees to better align with competitor Booking Holdings (formerly Priceline). It’s also interesting to see how investor perception has softened on Booking Holdings over the last couple of years. Back in mid 2017, the stock traded at over 25x next 12-months projected EPS. Today, it trades at just 16x that same metric, about 25% below the average multiple of the last decade. Growth has slowed some, Google has absorbed some of the economics, and competition seems to keep popping up in various accommodation niches and geographies. All of this has caused investors to question the durability of the platform. In this chart, the black line is forward p/e over the last decade.
Miscellaneous Stuff
Here is a well done 90-minute documentary on Loop Quantum Gravity, the alternative to String Theory that is gaining momentum amongst physicists (including yours truly). This video is fairly approachable for folks without a physics background, but it’s also probably just for us geeks interested in cosmology. There is a great lesson in cognitive bias in the evolution of String Theory vs. alternate theories like Loop Quantum Gravity. Much of the work done in the last three decades on String Theory has largely been a result of physicists being so committed to it, rather than having open minds about alternatives. With evidence of a positive cosmological constant and lack of evidence of supersymmetry, String theorists are now finally adapting to alternative models of the Universe. One of the cool things about Loop Quantum Gravity is the supposition that black holes contract and “bounce” into white holes, and that dark energy might be black holes that made it through the “Big Bounce” at the beginning of what is commonly called the Big Bang.
A fat found in soil bacteria is likely a key anti-inflammatory in humans...and maybe another reason to not reach for that antibacterial soap so often!
This 30-minute Bloomberg documentary on Shenzhen by reporter Ashlee Vance is a great overview of the amazing city and how it continues to innovate while plugging into the broader China surveillance state. There is no other equivalent around the world than Shenzhen for companies that want to design and make IoT devices.
2 brand new Teslas parked at our house this week...
...but no wheels on these Powerwalls, we still drive our beloved 2013 Nissan Leaf!
Stuff about Geopolitics, Economics, and the Finance Industry
This interview with Huawei founder Ren Zhengfei was so bizarre I had to check its authenticity – it’s like a fake news gag, but it’s real. In the interview, he seems to indicate that Huawei will be like a plane flying without wings once it runs out of its stockpile of US-designed semiconductors. He also implies Apple has made the world beautiful, and China should keep supporting Apple, who makes 100% of their phones in China. If Huawei dies, Ren says, please come put a flower on its grave.
China’s Minister of Defense spoke at the IISS Asia defense summit. While he spoke of driving win-win outcomes, he also was quite clear with regards to Taiwan, the epicenter of global semiconductor manufacturing (here is a link to download his speech, and more info from the summit is here).
“The Taiwan question bears on China’s sovereignty and territorial integrity. Not a single country in the world would tolerate secession. I visited the US last year. American friends told me that Abraham Lincoln was the greatest American president because he led the country to victory in the Civil War and prevented the secession of the US. The US is indivisible, so is China. China must be and will be reunified. We find no excuse not to do so. If anyone dares to split Taiwan from China, the Chinese military has no choice but to fight at all costs for national unity. Hereby, I have a message for the DPP authorities and the external forces. First, no attempts to split China shall succeed. Second, foreign intervention in the Taiwan question is doomed to failure.”
China further pushed the idea of “win-win” outcomes, mentioned 7 times, in this whitepaper the country officially released today on the US-China trade war. Essentially, China is happy to cooperate, but won’t be bullied by the US. June 4th is a good reminder of the complicated situation in China.
The FT reports on the rise of ESG (socially responsible) investing. As I mentioned last week, we feel the right approach is a fundamentals-based strategy that uncovers companies genuinely making a difference, rather than a quantitative, top down sector allocation or passive ESG strategy. Further, active ESG investors can engage with company managements and boards on behalf of investors to drive positive outcomes. We cover this topic of a broadening definition of fiduciary duty in our NZS whitepaper.
Vanguard is a network effect platform – putting even more market share distance up against its competitors as it grows. This year through April, Vanguard took in $106B, 4x the next biggest competitor.
Speaking of passive investing, which now comprises over half of assets in the US, here’s an interesting question: when you don’t have active investors making different capital allocation decisions between competing companies, is that hurting competition and innovation? That would be a serious flaw that would unravel Vanguard’s network effect. This Barron’s article argues it is:
“Two companies should have a very strong incentive to compete, by innovating and lowering prices. That could hurt profits in the short term, but it would help consumers and, in the long term, the innovation and greater market share would help earnings and therefore investors. But when the competitors are both owned by the same big investors, there’s less pressure to compete and innovate, since their big shareholders benefit from both of their holdings keeping prices high.”
US institutions, including public pensions, have funded private investments in two Chinese AI companies at the heart of China’s surveillance state.
Two weeks ago Mark Cuban provocatively suggested the US threaten to pull stock listings of Alibaba, Baidu and other Chinese companies – over $1T of US listed market cap – as a negotiating tactic. Apparently, that threat landed as Alibaba is considering a listing in Hong Kong. Another provocative thought from Cuban this week: in a world dominated by AI, you’re better off being a liberal arts thinker than a computer programmer.
I continue to watch for signs of legislation increasing renter rights as the single family housing market in the US shifts from family home ownership to institutionally-owned rentals (I discussed more about that trend in the Redfin section here.) Here is some evidence of increased focus on renter rights in California, although capping rent increases at 7%+inflation annually seems rather toothless.
Disclaimers:
The content of this newsletter is my personal opinion as of the date published and are subject to change without notice and may not reflect the opinion of NZS Capital, LLC (“NZS”). This newsletter is simply an informal gathering of topics I’ve recently read and thought about. It generally covers topics related to the digitization of the global economy, technology and innovation, macro and geopolitics, as well as scientific progress, especially in the fields of cosmology and the brain. I will frequently state things in the newsletter that contradict my own views in order to be provocative. I often I try to make jokes, and they aren’t very funny – sorry.
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