SITALWeek #201
Stuff I thought about last week 7-14-19
Greetings – I’m grateful this week to a couple of folks who created some excellent content and dialog on Twitter based on our Complexity Investing whitepaper (you can find those tweetstorms here and here.) We finished the investing framework back in 2014, and we love it when it finds new readers – we always learn from the feedback and criticism people send to us, so keep it coming and welcome to all the new subscribers to the newsletter this week.
Here are a few of the many topics covered this week:
-Multi-chip packaging is yet another tailwind in the accelerating semiconductor industry
-Why “Teams” collaboration tools like Slack remain small niches in office productivity
-Ecommerce growth is now driven by lower income households
-TikTok is the frictionless synthesis of music+memes with a ton of capital and a great product
-Updated thoughts on Spotify following some great debate this week
-Taiwan and its semi market remain at the center of the China-US tensions
-Fee pressure escalates for investment managers as Australian giant Unisuper pushes for flat fees instead of a percentage of assets
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Stuff about Innovation and Technology
What do you get when you combine twigs, generic servos, basic sensors, and deep reinforcement learning? “Improvised Robotic Design with Found Objects”! This report is cool – researchers built stick robots that learned how to move on their own!
Designing a robot to high five: “The study showed that a facially reactive robot seemed more pleasant and energetic. A physically reactive robot seemed less pleasant, energetic, and dominant for this particular study design and interaction. I thought contact with a stiffer robot would seem harder (and therefore more dominant and less safe), but counter to my expectations, a stiffer-armed robot seemed safer and less dominant to participants. This may be because the stiffer robot was more precise in following its pre-programmed trajectory, therefore seeming more predictable and less free-spirited.”
And, rounding out robot news, this nurses' aid robot for hospitals has been a big success:
“The robot was so popular that the Diligent team programmed superfluous activities for Moxi to do once an hour so that the robot would wander around the floor and flash heart eyes at people. ‘In between tasks Moxi would make a social lap to talk to her fans,’ Thomaz says.”
Amazon is going to spend $700M to retrain 100,000 workers over the next five years due to increases in automation, like fulfillment center robots. The numbers here are interesting: it costs Amazon only $7,000 to get someone a completely new skillset like “data mapping specialist, data scientist, solutions architect and business analyst, as well as logistics coordinator, process improvement manager and transportation specialist within our customer fulfillment network.” Cynically, this could be viewed as a defense against rising regulatory opposition, but let’s just take it face value: it’s a good thing and the cost is remarkably low. This strategy could be a roadmap for other companies to follow with the rise of AI and automation. Amazon actually has had a long standing program to train its line workers (I visited a fulfillment center almost 10 years ago and observed a class in progress), and like prior programs, employees don’t need to remain with Amazon after the training. I am left wondering if it truly costs this little to retrain someone for the 21st century?
Is the ratio of luck to skill in poker skewed much more toward skill than people think? A new poker playing AI developed by Facebook and Carnegie Mellon engineers has achieved new victories against human champion players by varying its betting strategies. Essentially, it played erratically in a way that was more effective than when humans use that tactic. Similar to what we saw with Deepmind’s Go engine, this will likely change the way Poker is played by introducing new strategies. The researchers are not releasing the code to the public because it could be used to beat humans in online poker, but how long before others can recreate this technology, calling an end to the billion-dollar online poker industry as we know it?
Why aren’t there a billion Slack or Microsoft Teams users? Microsoft overtaking Slack’s daily users obviously reinforces the value of the Office productivity suite, but daily use probably doesn’t indicate actual engagement, where Slack still leads. However, here is my big question: we’re five years into the creation of Slack-like, team-based communication tools, and there are well under 100M daily users (probably less than 25M across all the tools) compared to billions of daily email users at corporations. There doesn’t exactly appear to be an inflection happening anytime soon to take this to 1B+ users – why is that? Atlassian, Dropbox, Box, Google, Facebook, Salesforce, and many startups have tried to capture this market for general-purpose enterprise team collaboration. Atlassian is the poster child for winning in the IT professional vertical market, and I wonder if their example of focused success offers an explanation – perhaps what we need are heterogeneous, industry-specific tools that capture the nuances of how different teams collaborate rather than another general-purpose messaging service? Afterall, we already have general-purpose messaging services that work: email and IM. Meanwhile, Slack and Atlassian’s Trello are finding increased usage with consumers for managing their households; however, I think I still prefer the post-it on the fridge.
Revenues for semiconductor design and IP licensing saw a rebound with the largest growth ever recorded for maintenance and license revenue at 18%. Employment for the sector also grew 5.8% y/y. We’ve talked a lot in the past about the attractive dynamics of this near-duopoly with Cadence and Synopsys as they see an expansion of customers to OEMs like Tesla, Apple, Amazon, Facebook, Amazon, etc. along with increased sales of blocks of intellectual property. Chips are getting much more complex as they go three-dimensional (stacking dye vertically in a single package), and heavier simulation is required earlier in the design cycle. A reader kindly pointed me to the concept of “chiplets” based on what I wrote last week about the de-integration of chips. Basically, the leading edge chips need all the space they can get to optimize speed/performance, so previously integrated functions are being split back out into discrete chips, and smaller processors are being added to offload specific workloads. And, all these positive trends are happening following a decade of consolidation/rationalization (with a possiblenew round of M&A coming), and ahead of decades of future growth driven by 5G, IoT, AI, Cloud, etc. It remains a remarkable industry setup for long-term focused investors. Here is a great articleon the “tsunami” coming in multichip packaging: “Frankly, in the recent history of microelectronics, I cannot think of a more interesting time to be a product architect.”
This report on changing consumer behaviors from Deloitte’s Kasey Lobaugh and colleagues contains some surprising conclusions. It dispels plenty of conventional wisdom on millennial spending and living patterns as either wrong or simply part of a much longer multi-decade trend that began with Gen X. The two biggest takeaways for me: 1) ecommerce growth is now heavily driven by lower income households; 2) consumers are breaking into large, heterogeneous groups that are more important than the traditional definitions of income, race, location, etc. Further, the shift of spending toward student debt and healthcare is likely the biggest explanatory factor constraining millennial wallets, which is offset in part by deflation in food and apparel (and, I’d argue, the large increase in value per dollar spent on entertainment today vs 20 years ago form video games, streaming etc.). The report busts the narrative that younger people are spending more on entertainment and experiences – only the very affluent cohorts are doing so. The data seems to support Jamie Dimon’s (and others) view on student debt: eliminating it could have a significant multiple effect on millennial spending, and it could make home ownership much more achievable for many more households. I understand the moral hazards here; but, in our vernacular, student debt elimination could be a very high non-zero-sum, or win-win, outcome for the US economy at large. The author of the report also recapped things on this episode of the Jason and Scot ecommerce podcast.
A new, long article on the streaming wars by Matthew Ball over on Redef is a must read for those interested in the state of competition in the increasingly Balkanized world of video; his article is especially relevant in light of new details this week on WarnerMedia’s HBO “Max” service. And, here is an interesting article describing how Disney/Fox is dominating the prime dates for theatrical releases far into the future, effectively, it would seem, pushing all other movies to direct streaming.
There’s more evidence of settling co-opetition amongst the big tech platforms as YouTube comes back to Amazon Fire TV and Prime Video lands on Chromecast. This news follows other signs of increasing cooperation earlier this year between Apple and Amazon. It’s hard to know where the power lies among all these companies, but it seems like they have all now decided to play nice with music, video, and hardware distribution, which could make it harder for smaller companies to challenge their dominance.
This insightful article on TikTok contains some quotes that crystalize why teens are flocking to it at the expense of legacy social media platforms. TikTok allows teens to communicate with a frictionless synthesis of music and memes. It feels like what MTV was to my generation, except you, the teenage viewer, create and program the network yourself. And, here is another great article to help you understand TikTok that also recaps the shift in power at last week’s VidCon (the annual cross-platform event for social media video stars and their fans that brings in advertisers, influencers, and even Tencent, who wants to bring US video stars to China). A few more of my thoughts: similar to the problems that Snap faces, teens grow up. Further, this demographic is a fickle group to serve, and even more fickle to monetize. We talk about the risks of steep s-curves on page 21 of Complexity Investing, and social network apps tends to live life more like a fruit fly than an elephant. I spent quite a bit of time on TikTok this week and here are my, likely naive, conclusions: 1) it's an extremely well done product, 2) it feels like a purely teenage form of expression; I can’t imagine adults latching on to it or teens sticking with it as they age, 3) the speed and scale with which TikTok's parent company, Chinese Bytedance, has spent billions on infrastructure and ads (on Snap and other social networks to lure users away) is a fascinating accomplishment that would terrify me were I running a big US Internet company.
What better way to motivate and empower a counter-culture movement like cryptocurrencies than have the President of the United States declare it unlawful, volatile, and subject to regulation? Meanwhile, China is more concerned that Libra will be a success and be too closely tied to the US dollar.
Facebook (who will be paying a $5B FTC fine with pocket change) started giving users some transparency over why they see certain ads, including all the data brokers involved. It’s apparently somewhat alarming, according to this BuzzFeed reporter, who found 79 data brokers linking to personal his Facebook profile.
It’s been over a decade since my first meetings with independent game developers in China, where I learned that Tencent’s take rate ran as high as 70% (!) – quite high compared to typical rates of 30% at the time, not to mention the newer gaming platforms that are now trying to drive rates down to 5-15%. It depends on the publisher, but Tencent dominates games distribution in China, and the recent crackdown by the government seems to be cementing their dominant position even more: the smaller number of games coming to market makes it that much more important to secure prime real estate on Tencent for distribution. This situation is similar to what we see with GDPR-type regulation in the West: it makes it easier for the incumbent platforms like Facebook and Google to be the single point of data on users.
This teenager used Nissan Leaf battery cells and Arduino control boards to convert a Porsche Boxster to an all-electric drivetrain.
Self-powering IoT devices with energy harnessing will dispense with the need for batteries, which are a special burden in remote-sensor deployments. This tech has been in development for a long time, and it’s a little surprising how slow it’s been to arrive. It was necessary to develop alternative energy sources in part because, according to ARM’s estimates, 1T IoT sensors powered by batteries would be 3x the current annual supply of Lithium! Soitec’s substrates, which I’ve mentioned in the past, also help lower the power needs of IoT devices.
Silicon photonics is a cool tech that I’ve been writing more about lately. Putting photonics directly on chips allows for things like optical-based microphones or even light-based MRIs without electro-magnetic interference and a host of other applications. This lengthy article explores the opportunities and challenges facing the technology.
Satellite wars: tens of thousands of mini satellites will be launched in the coming years to provide Internet service around the world, but spectrum and interference problems mean they can’t all succeed. This articlein Technology Review is a great overview of the problem the industry faces in the race to dominate the skies.
I had a terrific back and forth on Twitter this weekend regarding the piece I wrote on Spotify earlier this year about music as a loss leader and the challenges Spotify faces. I think the debate boils down to a fascinating open question regarding supply-side vs. demand-side network effects. There is a very good argument that Spotify is growing large enough to extract better economics from the labels. My counter argument is that people tend to anchor on certain artists from certain periods in their lives (like high school or college) well into old age. So, even though more and more people are discovering and listening to new artists, streaming services can’t get away with dropping the catalog. And, it’s a question of frequency – I might easily be able to live without my favorite movie on a video streaming platform, but a music streaming platform without Bob Dylan would be unusable to me. So, I think the power is a little more balanced with suppliers even as Spotify continues to grow. And, I think people may very well have multiple music streaming services, some of which may be part of a wide variety of bundles. We think a lot about non-zero-sum (NZS), or win-win outcomes, and I worry that every point of increased Spotify margin takes dollars away from the artists powering their business, i.e., win-lose instead of win-win. But, I wouldn't lose sight of the forest for the trees either, potentially billions of folks globally might be streaming music subscribers (or monetized through ads) creating more win-win. Another challenge to Spotify’s margins could come from more recent popular artists creating new, powerful labels through consolidation that have just as much bargaining power as the incumbent labels. I think Spotify would still be a home-run acquisition for Amazon, Alphabet, Apple, or Facebook, but that regulatory ship probably sailed already. Like many stocks I look at, Spotify really comes down to “I don’t know” for me – I can justify points on both sides of the argument, so I will keep absorbing data points as objectively as I can to sway my opinion one way or the other.
Miscellaneous Stuff
Japan landed their robot craft Hayabusa-2 on an asteroid again to collect material (this time from the asteroid’s interior). The spacecraft will soon start its 5.5M-mile journey back to Earth.
Astronomers find a pair of blackholes on a collision course. Unfortunately, we won’t be able to detect the resulting mega gravitational waves for a couple billion years (set a calendar reminder); however, we still hope to learn a lot from studying this binary system – in particular, we aren’t sure whether black holes ever end up colliding, or if they just remain 1 parsec (3.2 light years or ~20 trillions miles) away from each other.
“The first detection of the gravitational wave background from supermassive black holes should therefore come within the next five years or so. If such a detection isn't made, that would be evidence that the final parsec problem may be insurmountable.”
I had to flex my Neverending Story street cred this week on Twitter following the Stranger Things season 3 ending. (ST3 was great, but it would have made an excellent three-hour feature instead of a one-dimensional 80’s movie plot stretched into eight episodes!)
The Red Hand Files #50: “To stand before this great, blank, heartless cosmic event and say: ‘We believe in you’. ‘We love you’. ‘We care for you’. This is the definition of grace...”
Researchers have found evidence of an early human migration out of Africa and across Europe that predates Neanderthal dominance, significantly re-writing our species’ early history.
Stuff about Geopolitics, Economics, and the Finance Industry
Schwab’s subscription-based intelligent portfolio has pulled in $1B in its first few months. I covered the high breakeven on this product for investors back in SITALWeek #186 and #187:
“As a result, you now need at least $125k in the product for that fee change to crossover into saving you money on an ongoing basis. However, there is also a $300 up-front fee in addition to the $30/month. So, amortizing that $300 over 3 years, for example, you would need $165,000 in the account to breakevencompared to the old 28 bps. Of course at $1M you’d be paying only 5 bps for the robo-service, including access to a Schwab advisor, amortizing that up front over 3 years.”
I wonder how many investors in the $1B are actually paying a higher fee than they were before!?
“Today’s consumers expect simplicity, transparency and value – and how they invest should be no different.”
In related news, JP Morgan Chase is offering a 35 bps robo-advisor service with no fees charged for the ETFs the robot selects for you. This service is estimated to save people around 15 bps. The more interesting aspect to me is the $2500 minimum and the ability to get started from the Chase app, which has a large installed base.
However, the most interesting news on investment fees this week comes from Unisuper in Australia pushing for flat fees in lieu of % of assets, which could threaten over $10B in fees going to asset managers. I’ve reported on this trend in the past, and frankly, we think it makes sense when coupled with performance fees, as it would align the interests of all parties involved. There is one potential unintended consequence in that this fee structure could introduce volatility to smaller asset managers when they have explainable periods of bad performance, thus favoring larger managers, who are much less likely to outperform compared to smaller shops. As such, it’s a bit of a catch-22 for institutional investors, but we have some thoughts on how to solve for it.
More information was released on Morningstar’s move to factor fees into star ratings; they will also be rating different fund share classes for the first time. These changes could negatively impact funds that big broker platforms rely on to generate extra fees for themselves to the detriment of their clients.
Investors have pulled $140B out of equities this year and mostly put the money in low- or no-yield government bonds. Speculation on what’s driving the market higher? Share repurchases and lighter volumes – in other words, supply and demand, like always!
It’s been a little while since I rattled on about the role of Taiwan and its dominance in semis. Brief recap: 70% of all semis are made or packaged/tested in Taiwan...China is heavily reliant on US chip makers and Taiwan...the US is heavily dependent on Taiwan’s semi supply chain. Taiwan is the ultimate chess piece in the US-China trade negotiations. The US is prodding China with big arms shipments to Taiwan, and China does not like it. As I’ve said in the past, there are really only two outcomes given the stakes: 1) status quo with a higher structural cost and risk of doing business in China for US companies, or 2) an escalating tension that results in a war over who controls Taiwan (covered in more detailhere in #186). At the moment, I still believe #1 is the expected outcome, but #2 is by no means off the table. China is also making military connections to its Belt and Road global domination network. In the meantime, Taiwan (and the US) are getting a boost from a major supply chain spat between Japan and Korea – the strategic value of US-based Micron is probably underestimated by investors in the rising global tensions (remember when China tried to buy Micron four years ago!).
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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