SITALWeek #214
SITALWeek #214
Stuff I thought about last week 10-13-19
Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, air-breathing batteries, and whatever else made me think last week. Please grab me on Twitter with any thoughts or feedback.
In today’s post: Jeff Bezos’ “Reverence Power Law” that drives the Amazon flywheel; Libra under pressure from the credit card monopoly; astrophysicists help you with your wardrobe; the difficult relationship between freedom and equality, and how to deal with the crumbling Great Communist Wall of China; zero-cost stock trading enables creation of cheap, custom portfolios replacing index funds and ETFs; and, lots more below...
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Stuff about Innovation and Technology
Call of Duty Mobile has smashed the records that were previously smashed by Fortnite and PUBG, passing 100M downloads. It's a classic example of mobile expanding the market for a game to new players and new devices. (Note: there is more commentary on the Activision/China/Tencent controversy in the Macro Section at the end).
Automatic license plate readers are making obsolete the "getaway" car for criminals. Maybe they can switch to scooters or e-bikes?
Form, a grid battery storage startup, has developed a new type of “air-breathing aqueous sulfur flow" battery, which separates electrodes (energy delivery) from electrolytes (energy storage). This long article in Technology Review discusses Form as well as various challenges of large-scale energy storage.
Borophene, the one-atom thick version of boron, can be laid on silver to form one-atom wide nano wires in wearable or transparent tech and energy storage.
The New Yorker printed a very long article on Amazon and Bezos, which has inspired me to write my own indulgently-long paragraph about it (and, if this still isn't enough Bezosian news, here is an insufferably long and less interesting article in The Atlantic from last week). The New Yorker article rehashes many points and criticisms that have been published numerous times over the last couple of years, but its narrative makes some provocative points. One thing that came to mind as I read it was how Bezos seems to assign reverence in a power-law curve that drives the Prime flywheel. At the very top of the curve is an extreme amount of veneration for customers along with process supported by “what won’t change” for customers: lower prices, more selection, and more convenience; then, as we near the lower, irreverent section where the curve starts to flatten out, come the employees, who seem to be a means to an end (at least from an outsider's perspective); lastly, at the trailing end of the power law, as it approaches the asymptote of near-zero, are the creators and merchants of products sold on the site. In a sense, this is the "power law of trailing 12-month FCF" growth. Elements of this reverence diagram likely map over to the way amazon makes video originals and the AWS business.
When we think about Amazon from our NZS-framework perspective, it's clear they aren't maximizing NZS for all constituencies, and they are not broadening their definition of fiduciary duty to create more value for constituents (beyond consumers) than themselves. Surely customers are winning, but at a cost to suppliers, the environment, and employees. Many pillars of Bezos’s Libertarian philosophy are being questioned as the last stretch of our 300-year capitalism experiment has resulted in puzzlingly large inequalities. One quote from a "Bezos acquaintance" did seem to resonate: "clearly there is an empathy gap... It's how he sees the world." As long-time readers know, I draw a very important line between skepticism and cynicism. It's great to be skeptical, but it's almost always wrong to assume the worst. So, I’ve remained somewhat skeptical of Jeff Bezos over the last year amidst rising critical coverage, but not yet cynical. I want to believe that his recent moves with the Day 1 Families Fund and Amazon’s late – but welcome – environmental and labor initiatives are win-win motivated, but it's very possible they are simply more important to maximizing that TTM FCF than anything else. I suppose at the end of the day this is the free market working to influence outcomes, as Jeff’s Libertarian views would predict.
I want to connect this Amazon analysis to one last point: we've written recently about the rising regulation of technology platforms, which is likely to cement current monopolies while making new growth areas more challenging. It strikes me that Bezos focusing so relentlessly on those three things that "won't change" has created dangerous blindspots with regard to both negative externalities and misunderstandings of the power of Amazon's platforms and network effects. Platforms are reshaping capitalism through the lens of data network effects, which seems to be transferring profit pools away from legacy "moats" – away from distribution, suppliers, brands – in a way that benefits consumers and platforms, but not necessarily employees and society as a whole. To quote again from the New Yorker article on Bezos:
David Farber, a University of Kansas historian who wrote a biography of Alfred P. Sloan, told me that the G.M. executive “didn’t see himself as someone that needed to be loved or respected by the public, but eventually even he gave in.” He noted a pattern in American history: “There’s an economic revolution, it creates amazing new opportunities, and then the companies that seize those opportunities become so powerful that the people revolt—they say the winners have become too powerful, they start attacking the people who are the embodiments of winning, sometimes with gossip, sometimes with facts. And then we have an era of constraint enforced by the federal government.” We may be at a breaking point now. “It’s like the eighteen-eighties or the nineteen-thirties all over again,” Farber said. “The pressure is going to continue building, the powerful are going to continue being watched and criticized and gawked at, until something pops.”
Perhaps in anticipation for the New Yorker article, Amazon posted its views on various social, environmental, and regulatory policies here. Of note appears to be a small positive evolution in the company's dangerous laissez-faire facial recognition technology policy.
Rounding out Amazon news, the company’s $10B+ advertising business held its first conference for sellers and partners this past week with 400 in attendance (the massive AWS started out with a similar number of attendees at their first user conference). A main objective of the conference was to explain all the ways in which you can advertise on Amazon, whose marketplace and ad offerings have become so complex that a lot of Amazon employees have left to start consulting businesses aimed at navigating the platform.
Uber is going more vertical in food delivery. This week, the company acquired South-America-based grocery delivery company Cornershop. Uber also partnered with celeb chef Rachel Ray to launch 13 virtual restaurants for food delivery in conjunction with her latest book launch. Wendy’s also said this week that cloud kitchens will be a significant growth area in the coming years.
Pro sports continue to be very important to the media ecosystem, and the +5% rebound in NFL ratings is emblematic of that. NFL viewing is up 8% from the rocky 2017 season, and about flat with 2016. Sports broadcasting rights at CBS and Disney in particular are likely not getting enough credit from investors who are overly focused on the “or” of streaming rather than the “and” (linear TV and Netflix and Hulu and Disney+ etc. as opposed to linear TV or streaming).
This week PayPal, Stripe, and others dropped out of Facebook’s Libra transactional digital currency initiative. Libra faces mounting pressure from regulators mainly because it’s tied to Facebook. (I wrote last week about how regulators are killing fintech innovation in the US and Europe.) I am not sure if these recent dropouts have more to do with the likely regulatory failure to launch for Libra, or if it’s something more insidious: Mastercard and Visa have a lot to lose if something like Libra gets off the ground, and they have a history of bullying their partners into killing digital payment innovation; Stripe and PayPal are nothing without Visa and Mastercard. Anthony Bardaro made the analogy “PayPal could be to Facebook’s Libra what Starz was to Netflix’s streaming upstart.” That’s an insightful point especially because the “content” on a wallet platform like PayPal or a processing platform like Stripe is the payment mechanism itself: credit cards, bank accounts, etc. A new digital payments platform needs to own its “content” in order to escape the chains of the 1900s payment system currently in use (outside of China).
Oracle retrenches in the cloud wars to focus only on offering its database and apps as a cloud service, no longer competing head-to-head with Amazon, Microsoft, and Google for workloads. This still falls short of giving customers what they want – the ability to run Oracle products on the other cloud platforms. However, a recently announced partnership with Microsoft to make it easy to connect Azure workloads with Oracle Cloud workloads is an important step given the overlapping customer bases. I suspect the lowered cloud ambitions could be good for Oracle margins, but they may need to go the last step in giving customers flexible and optimized versions of the apps to run on other clouds as well.
The CEO of ARM discusses the current state of the business in this interview. The irreversibly slowing pace of Moore’s Law (cool graphical representation here) has created an explosion in demand for heterogeneous workloads and chips, driving a multi-decade expansion of the chip market for processors, GPUs, MCUs, FPGAs, embedded functionality, chiplets, 3D architectures, etc. As a result, open source alternative processor instructions, like RISC-V, are gaining momentum because they allow extreme customization. NVIDIA appears to be expanding its Shanghai-based RISC-V team, and ARM announced this week that they will begin allowing customers to make minor modifications of their previously walled-off core processor instruction set – a baby step in the right direction. ARM is focused on vertical functionality, but even inside of verticals, customers might want much more customization, particularly as we see the rise of systems companies like Tesla designing their own chips. In the interview, Simon also expresses some doubts over chiplets at the leading edge given the slowdown in interconnect speeds between various parts of the package.
India is also leveraging RISC-V in new domestic initiatives for semiconductor design. I suspect India’s highly skilled engineers and entrepreneurial spirit will result in significant growth for semis in India, perhaps rivaling US semi designers in the not-too-distant future. For now, they are likely to rely on Taiwan for manufacturing of the chips.
Miscellaneous Stuff
Nearly 700 years of records on the grape harvest in the Burgundy region of France reveal just how warm things have gotten over the last few decades. Harvests are consistently 2-3 weeks early to keep the sugar and acid levels lower in the grapes. For now, the heat is producing better wine in many cases, but rising temperatures will eventually change that. The temperature shift is also enabling new (and/or improved) growing regions for the Pinot Noir grape beyond France, California, and the Pacific Northwest to include Germany and Austria.
Astrophysics PhDs now face the tough decision of whether to ponder the vast scope of the Universe and meaning of life, or help design an algorithm to better sell t-shirts or make TV-show recommendations, as tech companies hire all the data scientists they can get their hands on. This might be one of the most depressing commentaries on humans this year:
“We discovered the size of the universe. We measured the speed of light. We found pole stars. We found black holes. A lot of those big things, like understanding how space-time works or how gravity distorts, are what get people interested in the study of space and cosmology. But what you’re really doing is contributing to a very small subfield where you’ll work about three years on a paper that about 10 people in the world are going to read. You’re not going to be Carl Sagan.”...“When I go and explain this to my parents, they’re like, ‘You were doing such amazing things with the universe, and now you’re making people watch stuff!’”
Massive cones of radiation shot out of the black hole at the center of the Milky Way 3.5 million years ago as ape-like Australopithecines roamed the Earth. The beacon would have been visible for about 300,000 years.
Buffett and Munger trained generations of investors to think about capital allocation, which likely contributed to the wave of vehicles buying and owning of private assets (with low rates obviously being a big catalyst). This training created a host of competitors for Berkshire, all using the latter's own business model. Interesting Twitter thread from @bluegrasscapital about how “Buffett proving out success of these alternative frameworks AND educating current generation of investors on this opportunity set sowed his own decline. In the process, he gave us a richer & higher returning opportunity set. Just not in Berkshire's own stock.” I think if all any of us ever accomplish is to help others be better at what we do, then that should be enough, even if it means we obsolete ourselves in the process.
Stuff about Geopolitics, Economics, and the Finance Industry
“Instead of selecting one truth from a multitude you are increasing the multitude. What this means logically is that as you try to move toward unchanging truth through the application of scientific method, you actually do not move toward it at all. You move away from it!” -Robert Pirsig, "Zen and the Art of Motorcycle Maintenance"
The Great Communist Wall of China is attempting to stabilize itself – as Beijing grapples with a slowing economy, Hong Kong demands freedom, and Westerners express indignation over censorship – by pulling back on the previously-important Belt and Road initiative aimed at global Chinese economic dominance. Signs of instability further manifest in the Chinese tech sector where startup funding is down over 60% this year and tech sector job postings have dropped 13% as the mega platforms deal with these new economic realities.
The US ramped up the spotlight by putting visa restrictions on communist party members over alleged human rights violations. Meanwhile, Western companies find themselves in an increasingly challenging position, having to either overtly accept censorship to do business in China or draw a line in the sand with respect to freedom of expression. Activision, who depends heavily on China for revenue (and Tencent specifically for game development support and distribution), punished a professional gamer for supporting Hong Kong. Apple is facing difficult decisions and pressure from China over their product usage in Hong Kong. South Park creators Matt and Trey continued to stand up for freedom of speech despite its potential impact to their distributor Viacom. Many more companies will be facing moral decisions as China plays the victim with its citizens and dials up the Nationalism rhetoric to 11.
As investors focused on maximizing NZS (win-win), our framework attempts to go beyond ESG, and Western relations with China present a puzzle that requires a lot of 2nd- and 3rd-level thinking. This is an old debate, but the question is: is no NBA in China better for the world than a censored NBA? Is no Disney or Activision properties in China better for the world than censored versions? These are hard questions. We know that information velocity is increasingly difficult to control, but it's also easier than ever to fabricate any version of the truth. In "Zen and the Art of Motorcycle Maintenance," Robert Pirsig notes that the more information you have, the shorter the lifespan of any scientific truth (by accumulating more knowledge the more you observe and experiment, you often disprove, or refine, ideas that earlier seemed valid). This is the beauty of the scientific method, but it’s also a challenge in the Information Age as we try to wrangle the outputs of hyperspeed processing and informational overload. Throughout human history, there has been a spectrum of freedom and equality: if you have 100% freedom, you tend to end up with extreme inequalities; if, you have 100% equality, you tend to end up with very little freedom. Capitalism, on the one hand, has tended toward freedom, thus causing ever-rising inequality, while Communism strives for equality by suppressing freedom. There is some threading of the needle of equality and freedom that we still need to do as a global society, but for now the path isn’t yet clear. I’d suggest the ultimate tact to take for companies and investors struggling to make sense of the China situation is to support rising freedom over the long term.
As commissions for equity trading are now at zero for retail customers, we could see the rapid rise of custom portfolios and the rapid devaluation of ETFs and indices. New platforms are emerging to create custom "benchmarks" for individual needs, which allow advisors and brokerages to provide tailored performance with no fees to funds, ETFs, or indices. One such emerging platform is OpenInvest, which allows for custom values-based (i.e., ESG) portfolios. With zero cost trading any individual can just replicate an index for free with a list of stocks. You can make your own S&P 500 portfolio knowing publicly available market caps for free instead of paying 10 bps to someone. Previously trading 500 stocks and rebalancing them once a year would cost $2500+, now it’s free. At 10 bps, $2500 would be the annual fee on a $2,500,000 investment in a passive fund, but if an individual wants to take advantage of tax loss harvesting or more frequent rebalancing, the breakeven would drop quite a bit. Custom, modular benchmarks are likely to be in demand by institutions as well, so what’s the value of any of today's big index companies in the future? This is another example of a homogeneous, expensive 20th century business becoming a much larger and cheaper heterogeneous set of consumer choices.
Zero-commission brokerage Robinhood has launched it's 2% interest rate cash management product, further pressuring profit pools at traditional brokers. I mentioned one of the less-than-honest ways that Schwab and others make money last week, and I was disappointed to hear Charles Schwab himself give a very squirrelly answer when questioned on CNBC on Monday (6 minutes into this video) about the practice of sweeping client cash into low-rate products while Schwab makes money on the cash. This will be the next profit pool to disappear as the disruptors like Robinhood shift the broker model to data-based revenue streams (which is also a bit sketchy!).
Correction: I wanted to add an important point regarding the paper I linked last week demonstrating that all types of ETFs underperform in a similar fashion to active funds. In emailing with a reader (who happens to be my dad!), it occurred to me the authors of the paper didn’t take taxes into account. In retirement accounts, their conclusions would hold, but in taxable accounts, ETFs are often more favorable because they forego the annual distributions that you get hit with in mutual funds. Still, the underlying performance similarity of active funds and ETFs is striking.
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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