SITALWeek #200
Stuff I thought about last week 7-7-19
Greetings – legacy retailers try to fight innovation with regulation; some follow up thoughts from last week as the Hollywood studios move to direct streaming; the ending of Moore’s law benefits a host of other semiconductor companies amidst the backdrop of accelerating chip demand over the next decade; mutual fund pay to play schemes highlight the innovator's dilemma problem facing the industry; and, the great art of Brother Theodore....as always, grab me on Twitter with any questions or comments.
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Stuff about Innovation and Technology
The RILA, a trade organization composed of retailers with $1.5T in sales and over 100,000 stores including “Premier Members” Walmart, Target, Best Buy, Home Depot, Lowe’s, Walgreens, Target, Gap, and Dollar General, is helping lobby the government to punish Google and Amazon. That’s right, a bunch of dinosaur retailers are trying to get the government to stop the companies who are bringing choice, speed, and convenience to consumers all while lowering prices. Putting aside issues of Internet platform regulation for a moment, retailers have had over two decades to shift their spending and strategy from Industrial Age mechanics to Information Age digital solutions to meet evolving customer needs. I might suggest they take a little bit of the money they are spending lobbying against their customers having choices of where and how to shop, and maybe instead focus on fixing their own doomed businesses. The letter penned by the trade organization is worth reading – I’d say it comes down to the group believing that it’s unfair that other companies innovated while they sat on their hands, and so now the government needs to give them special protections. They also throw in some jabs at Mastercard and Visa just for fun. Retailers would like access to the data troves of Google and Amazon. I’m a fan of regulation that opens up Internet platform data to 3rd parties as long as users approve, but do any of us believe that Walgreens would have a better customer experience if they knew my Google searches? Bezos told retailers what they need to do to compete 22 years ago in 1997, and he has published it annually ever since in the Amazon shareholder letter: “We will continue to focus relentlessly on our customers.”
Meanwhile as legacy retailers fail to meet customer needs, Amazon has 540 job openings to help build up its last mile delivery technology team as it marches toward delivery of all of its packages, and likely will deliver packages from others as well competing head to head with FedEx and UPS in the US: “The technology innovations that are developed by the Last Mile Technology team help scale this exponentially growing part of our network and include a wide breadth of solutions from ML and operations research-based routing and planning algorithms, our own in-house maps and navigation platform, IoT and hardware innovations, doorstep delivery experience, and the consumer grade native mobile apps that brings all these experiences together.”
Los Angeles has signed a 25-year contract for power at a cost of 2c/kwh from solar and 1.3c from battery storage, which is less than half the cost from a new natural gas plant and 1/6 the cost of nuclear. It will be interesting to see the strains on the grid from the shift to electric cars, but combined with battery storage, a lot of inefficiencies should be removed from the system.
A facial recognition system used by Scotland Yard to tag possible criminals in crowds is found to be wrong 4 out of 5 times.
AI being sold to schools in the US is mostly a scam preying on a common human cognitive bias known as the availability heuristic. (That’s a very common mistake made by investors as well!). Charlie Warzel writes about this in “Welcome to the K-12 Surveillance State.”
Axon, the maker of Tasers, has expanded its market greatly over the last five years by entering the market for cameras and cloud-based data- and evidence-management software for police departments. The company recently said they will not be using facial recognition on their body and dash cameras. However, when the technology is ready, Axon is willing to use it; I am pleased to see company convened and learned from its ethics board on this topic.
Last week I made a rhetorical plea for someone to fix the problem of proliferating streaming apps that lack consistent UIs and universal search. This was rhetorical because I know the power is now nearly 100% in the hands of five studios in Hollywood (Disney/Fox, CBS/Viacom, WarnerMedia, NBC Universal, and Netflix) and there is no way they are letting go of the potential for direct consumer relationships now that they are getting them back from cable and satellite. I’d love for these companies to open APIs up for search and playback into their apps, but I just don’t see it happening. Each of them is large enough to build a direct customer base. So, while I believe platforms like Apple TV, Fire TV or Roku will bundle and sell subscriptions to multiple apps, perhaps at a discount, I don’t think the usability problem will be solved any time soon. Several readers sent me back great questions and comments on Roku. I like Roku, and I think Anthony Wood is a product genius – I owned one of the first ReplayTVs nearly 20 years ago, which had an algorithm well ahead of its time that autodetected and skipped commercial breaks. I think Roku will be a successful bundler based on their product experience. That said, I don’t know that they are in control of their own destiny given that the pendulum of power seems to have swung permanently back to content owners away from distribution. That doesn’t mean they won’t be successful, it just means that, as a platform, they may face pressure from their providers, not to mention pressure from potential bundlers of apps who have alternative business motivations such as Amazon’s Prime service. Roku is a classic example of an Optionality investment in our Complexity Investing framework: the range of outcomes remains very wide, but the asymmetry also remains very high and interesting. This is the type of investment where we would take a heavily Bayesian approach to analysis, taking each new datapoint objectively into account and adjusting the credence of our thesis. This article talks a bit about how content is all repatriating back to its original owners who will then sell it direct in their own apps, and how that process will feed into this fragmentation problem.
As Moore’s Law is now a historical trend rather than a future predictor, the decades-long theme of adding more and more functionality to a chip might be reversing. The System on Chip or SoC was a popular design medium that integrated out of existence many discrete chip sockets on board designs. Now that designers need all that space on those expensive leading edge chips for speed/power, the trend may be to go back to discretes. Improvements in I/O on boards may enable the trend as well, which could be a big benefit to discrete, analog, and RF chip makers in the coming AI+Cloud+5G+IoT tsunami of chip demand. Further, TSV (through-silicon via) and COWOS (chip on wafer on substrate) allows you to go vertical, stacking on top of expensive digital chips. I’m speculating a bit here, but I suspect companies like Texas Instruments and Maxim could see a benefit, and, to the extent you see a proliferation of smaller processor chips that offload specific workloads from a larger processor, this trend would benefit microcontroller companies like Microchip as well as processor IP such as ARM and RISC-V.
“But rather than relying on shrinking features to open up more real estate, design teams are beginning to explore what they can remove from the die without impacting performance or cost. There are certainly tradeoffs in performance by moving some features off-chip, such as a SerDes or analog IP, but if that area is used for more processing and memory, then chipmakers can still achieve significant performance improvements. The key is prioritizing data at a system level, and working backward in designing the silicon.”
The India Institute of Technology has created a series of open-source processors called Shakti based on RISC-V. The processors are now ready to have software apps created for them for uses in IoT, computers, and servers. It’s surprising to me that, over the years, India has not been a stronger creator of semiconductor designs given the engineering talent in the country – RISC-V is perhaps changing that trend.
Hulu, Awesomeness, and Magic Leap are launching an augmented reality experience for the upcoming release of Light as a Feather: “In the first “Light as a Feather” XR experience at VidCon, attendees will be invited to lie down in the center of a physical booth and then will be virtually levitated by the chanting avatars of Violet (Ramm), McKenna (Liberato), Alex (Tju) and Isaac (Rivera). At the end of the experience, fans will receive a video of themselves acting out a scene with the cast that they will be able to share on social media.”
Congress officially halted Facebook’s cryptocurrency plants until they can get a handle on how it could undermine the entire global financial system (perhaps a little hyperbole from Congress!).
Good article on the Brave browser and what the company is doing with their attention tokens which pay you to see ads while protecting your privacy, and in turn that money can be returned to sites that you spend time on.
Miscellaneous Stuff
“All the great religious leaders are dead. Jesus is dead. Abraham is dead. Buddha is dead. Mohammed is dead. And I’m not feeling so well myself.” The beauty of Brother Theodore’s art: was he playing a character or was he speaking from his heart? It was an intriguing tension that connected the audience to him.
The NYT writes about bacterial electrical networks across the planet and how we might leverage them, at some point in the future, to make biodegradable sensors and wires. Geobacter are a type of bacteria with "living wires" (pilli) that can shuttle excess electrons (a byproduct of their metabolism) to rust or even other bacteria, allowing the latter to convert carbon dioxide to methane. More recently discovered "cable bacteria" exhibit similar electroactive behavior (albeit via a distinct mechanism): “Each wire runs vertically up through the mud, measuring up to two inches in length. And each one is made up of thousands of cells stacked on top of each other like a tower of coins. The cells build a protein sleeve around themselves that conducts electricity...As the bacteria at the bottom break down hydrogen sulfide, they release electrons, which flow upward along the “cable bacteria” to the surface. There, other bacteria — the same kind as on the bottom, but employing a different metabolic reaction — use the electrons to combine oxygen and hydrogen and make water.”
Space rock (the music, not the minerals; also synonymous with drug culture) was popular during humanity's early space voyages and explorations in the 1960s and 1970s; however, as many mysteries of the solar system were solved, the genre declined. Bowie was at the center of the genre, and I coincidentally watched his movie The Man Who Fell from Space recently on the new Criterion App. Will the new, accelerating race to colonize the solar system spawn a new era of space music? Nick Closterman writes about space rock in this Technology Review article.
Perhaps musicians will also be inspired by the attempts by physicists at Oak Ridge National Laboratory in Tennessee to confirm evidence of a mirror world (yeah, sort of like in Stranger Things, which just debuted season three on Netflix – never underestimate the ability of scientists to leverage popular scifi to secure research funding!). The idea is that 1% of neutrons may oscillate into a parallel universe (or mirror world) before decaying into protons, allowing them to exist longer or pass through impenetrable objects in their short lifetimes. The researchers think there's probably only a small chance of their experiments yielding positive evidence for a mirror world, but it's worth the exploration.
The maximum amount of carbon a human should produce per year in order to stop climate change has been calculated as 0.6 tons. One international, roundtrip flight in a first-class seat could release 9.8 tons of carbon – 16 times the max amount (I used this calculator). This article in The Guardian covers a few things that can help, most notably moving to a shorter work week (something I’ve argued in the past is one of the easiest things we could do to help keep employment high as AI takes over more human functions, not to mention the psychological health benefits it would provide).
Meanwhile, Dutch airline KLM is at the forefront of eco-responsibility with their new ad campaign encouraging people to NOT fly!
Do meetings always have to take place face-to-face? Could you take the train instead? And could you contribute by compensating your CO2 emissions or packing light? “We all have to fly every now and again,” it concludes. “But next time, think about flying responsibly.”
Stuff about Geopolitics, Economics, and the Finance Industry
Al Gore’s Generation Investment Management firm has racked up an impressive track record and garnered a lot of assets with their sustainable investing strategies. Here is a link to the firm’s 2019 annual report, and I often refer back to this 2015 article.
The FT’s Moral Money newsletter reported this week on a speech by an SEC commissioner referring to sustainable investors as “self-appointed, self-righteous authorities”:
“We are seeing a similar scarlet letter phenomenon in today’s modern, but no less flawed world. In these remarks, I will focus specifically on the way in which corporations are being assessed according to Environmental, Social, and Governance (ESG) factors. Here too we see labeling based on incomplete information, public shaming, and shunning wrapped in moral rhetoric preached with cold-hearted, self-righteous oblivion to the consequences, which ultimately fall on real people. In our purportedly enlightened era, we pin scarlet letters on allegedly offending corporations without bothering much about facts and circumstances and seemingly without caring about the unwarranted harm such labeling can engender. After all, naming and shaming corporate villains is fun, trendy, and profitable.”
This Barron’s article discusses the “pay-to-play” problem of revenue share arrangements mutual funds often shell out to secure distribution on broker platforms which act as gatekeepers between retail investors and mutual funds. While these might not be additional fees, it’s hard to argue they don’t raise the overall cost to investors, and it’s noteworthy that Vanguard refuses to participate in these schemes. New SEC regulations plan to shed some light on this which is one of the many issues in an industry that seems unwilling to face problems that began well over a decade ago. Low fee ETFs, whether they are active or passive, and the rise of financial advisor gatekeeper power represent a classic innovator’s dilemma for legacy mutual fund shops both in terms of product and distribution. I’ve discussed the problem of platforms and advisor gatekeepers as it relates to mutual fund distribution in the past: if an individual fund company is not large enough to become a full financial services platform (similar to what Fidelity has accomplished), then can it plug into someone else’s financial services platform while still maintaining its own economic viability? The answer increasingly appears to be no. Instead, fund companies must differentiate with legitimately active products and/or performance based fees that align investor outcomes. Further, they should pursue an ETF structure for their mutual fund products, especially given the tax advantages over a 1940 Act Mutual Fund structure. Calling back to my first paragraph this week on Amazon and retailers - mutual fund shops need to focus on the customer, and the customer is not being served by high fee funds that are not sufficiently differentiated from inexpensive index funds.
58 ETFs were liquidated in the first half of 2019, a new record. The reason seems to be increased competition as many of these were high-fee products.
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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