SITALWeek #216
Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, cotton candy meat, and whatever else made me think last week. Please grab me on Twitter with any thoughts or feedback.
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In today’s post: slowing US fintech innovation; why aren’t music streaming and podcasts killing the radio star? Is it time to solder the cord back together and get cable TV again? China backs off its semiconductor investments; could Snap or Twitter end up owning TikTok? Risk seeking in private assets could go off the rails; Reader Q&A; and, lots more below.
Stuff about Innovation and Technology
Making Cotton Candy...Meat?
A so-called “cotton candy” machine for lab-grown meat spins at 30,000 rpm and constructs a lattice of gelatin to create more tender meat fibers. The gelatin serves as a scaffold for growth of cow or rabbit cells. Mmmm. This methodology is very early in development and hasn’t undergone the all-important taste test, but it’s nonetheless great to see innovation in this key market.
In-Home Delivery Brought to You by Walmart
Walmart launches in-home delivery for 1M households in Pittsburgh, Vero Beach, and Kansas City. For $49.99, Walmart will install a special lock on your door for delivery agent access; agents don body cameras, which allow you to watch your delivery. The delivery service is $20/mo with a $30 minimum per order.
More Health Care Initiatives for Amazon Employees
Amazon continues to expand into the healthcare market with the acquisition of Health Navigator, a service for virtually connecting employees with nurses and doctors after attempting to determine the best course of treatment. The service will be integrated with the pilot Amazon Cares health clinics for Amazon employees.
Amazon’s Search Advertising Share Gains, but Customers and the Supply Chain Lose
According to eMarketer, Amazon’s share of US digital advertising will climb to 8.8% this year (from 6.8% last year) while Google will see a dip to 37.2% (from 38.2% last year). In the search-advertising segment, Google took 73.1% share while Amazon grew 30% to 12.9%. It’s anecdotal, but when I search on Amazon, I see a lot of ad fraud problems similar to what Google experienced 10-20 years ago. Recently, I searched in the Amazon mobile app for an item that I purchase frequently – the first result was an ad for the most expensive purchase option, the second was an organic search result that was a little less expensive, and the third choice (which on a mobile screen may as well not exist) happened to be the cheapest Prime option, and it was the one I had last ordered a few months before. Obviously, this seems like prioritization of profit maximization instead of putting customers first.
Amazon’s “profit maximizing algorithm first, people second” Libertarian free-market philosophy is also evident in their apparel sales. The marketplace of 3rd-party sellers is filled with apparel going up for sale that is made in dangerous factories long-abandoned by other clothes makers (and not even used by Amazon’s own private-label apparel brands). This follows previous problems with toxic children’s items for sale on Amazon. Broadly, Bezos’ dedication to profit maximizing algorithms and technology is leading to harm despite his prime directive of putting customers first, and the free market is reacting slowly to correct the mistakes.
Government-Sponsored Cryptocurrency Coming to China; Meanwhile in the US...
In China, the government is readying a cryptocurrency version of the Yuan, which is likely to be successful at spurring further fintech innovation in the country. Meanwhile in the US, I am still writing out paper checks, putting them in envelopes, placing a stamp on them, and dropping them at the post office. The US government is increasingly stifling financial innovation. In my opinion, this is no doubt due to the credit card networks and established mega banks lobbying behind the scenes. This maneuvering seemed evident to me in the Congressional grilling of Zuckerberg on Libra this week. The reality is that the fight over Libra is much more about the big financial institutions’ desperation to keep tech companies from bringing the money industry into the Information Age. In another example of innovation-stifling news, the fasttrack path for a tech company to get a bank charter was cut off this week by a federal judge.
Microsoft’s Cloud is Becoming a Mega Cumulonimbus
After recently announcing a broader partnership with Oracle, this week Microsoft announced a new, wide-ranging SAP partnership AND a $10B Pentagon cloud computing contract (which many thought would go to Amazon; the deal was also hotly contested by Oracle). Azure has become the de facto cloud migration path for a large number of enterprise workloads, and is now likely to take share in the Federal segment as well. As a side note, I would speculate that the path to partnership in the cloud is likely to result in significant margin expansion for SAP and Oracle in coming years as they abandon their efforts to sell their own cloud offerings and re-orient their sales people back toward more practical objectives.
Is it Time to Solder the Cord Back Together?
In our house, we cut the cable/satellite cord completely eight years ago in October 2011 (yes, we don’t watch a lot of sports!). Since then, everything has pretty much played out as many people predicted in the video ecosystem. Today, however, depending on who your cable or satellite video provider is, I am not sure I see a compelling case to cut the cord. In the near future, HBO Max, Disney+, and Peacock (along with a long tail of existing and new niche apps) are launching and withdrawing content from Netflix and to a lesser extent Hulu. So, in order to recreate the bundle, you would need to spend as much or more on multiple apps with various user interfaces that range from horribly unusable to barely usable. The amount of juggling, mental gymnastics, time, and frustration involved in navigating the video ecosystem today far exceeds the pains and cost of cable a decade ago. Recognizing the cord cutting threat, cable in some cases is partnering to bring apps like Netflix to their set-top boxes and working to improve their own technology platforms. The vMVPDs like YouTube TV, Hulu Live, AT&T Now etc. are raising prices to the point where they offer little advantage over cable, so if you watch live sports or news, the traditional video providers are adequate. So, why would anyone cut the cord today? I'm being provocative, but the point is we need a rebundling that gives the content owners and creators what they want (direct customer data access, pricing power) and consumers what they want (a convenient, usable interface/search for all available live and on-demand content). Keen readers will note the view I express here is in opposition to what I wrote last week...well, as I've paraphrased Penn Jillette in the past: it's good to be a hypocrite because it doubles your odds of agreeing with me!
Is Streaming Video Becoming a Loss Leader?
Another interesting development is the wireless subsidization of video apps: Verizon will now give you Disney+ if you are an existing unlimited wireless subscriber (or new subscriber to other Verizon services), AT&T might bundle HBO Max if you are a subscriber, and T-Mobile bundles Netflix for many customers. At a high level, what’s happening is that companies providing data service (like 5G or home Internet) are using free video content as a way to reduce churn and likely raise data prices over time. The logic is clear, but how far can this go if you only get some content for free, depending on your service provider, and meanwhile the industry continues to fragment into the intractable multi-app mess?
Will Podcasts Kill the Talk Radio Star?
People always describe video streaming as the digital version of TV, but they often compare digital music streaming to historical physical media sales (CDs, records) instead of traditional radio. Radio was free to consumers while CDs cost money, but why are people seemingly reticent to pay for streaming audio and podcasts compared to the ease with which they open up their wallets for streaming video apps?
In the radio analogy, podcasts are the digital version of talk radio (and sports radio, drive-time radio, NPR, etc.). Therefore, it seems plausible that we eventually see a large chunk of the multi-billion dollar radio advertising market map over to podcasts. In order to capture the ad dollars, you would want to maximize podcast distribution instead of locking content into certain streaming platforms. However, the existing wide distribution of podcasts has made metrics collection and ad targeting elusive, and it’s easy to fast forward through podcast ads. Paradoxically, this problem could argue for a single platform to win in podcasts, e.g., Spotify, could create a power law, winner-takes-most-ad-dollars podcast distribution platform. Disney struck a deal this week to bring Marvel podcasts exclusively to SiriusXM. So, there seems to be real demand and real value for well-produced audio programming, but in terms of generating revenue, the ecosystem is still in flux.
I’ve struggled in the past with the loss-leader nature of the music streaming industry and the leverage wielded by the music labels given the importance of the historical catalog of artists to listeners. If we can really mentally reorient to “streaming = radio” from "streaming = physical media sales," I think it changes the outlook for capturing more listening and more revenue. And, it opens up a wider debate on royalties and advertising revenue shares which are vastly different for streaming than radio.
One final point on the "streaming = radio" analogy: terrestrial radio used to have a very human feel to it – DJs, local news- and sports-casters, etc. Algorithms crept in over time, and today much of local radio seems like programmatic drivel. I think there is a real opportunity to bring back that local, human radio feel to streaming. I am probably dating myself here – some people tell me what they love about streaming is no DJs interrupting with traffic, news, weather, and local concert updates! Combining algorithms and the human touch feels too absent in streaming today (Spotify in the past has called this algotorial, which is a portmanteau that I love). The reality is that there is no algorithm running on any theoretical quantum computer that knows which song would be “best” for me to listen to next, even if it had all the information on every single atom in the Universe that my existence is entangled with going back 7,500 generations to the dawn of the cognitive revolution. That’s the beauty of human creativity and art: you can’t know. Given the importance of local sports and news to the popularity of radio even today, I can’t help but wonder if that’s where Spotify should be focusing its content budget. But again, maybe I’m living in the past.
VCs are Feeling the Heat from the Public Market’s Rebuff
Over the last few years, private funding in Silicon Valley has slowly become more irresponsible and overvalued. I first discussed this publicly in early 2016 (interview in The Information), but the past few years have been one heck of a low-rate, risk-seeking, capital-oversupply mania – far more than I could have anticipated. This risk-seeking private capital joyride is now colliding with public markets, whose investors are still very willing to invest in companies with good management and paths to profitability, but won’t take shoddy investments off the hands of increasingly desperate VCs. I’m a big fan of companies going public even before it’s not completely obvious they are ready, and there all sorts of reasons it’s a good idea, as long as their business operates within the constraints of planet earth. But when the public markets balk, the very investors who created the shell game need to provide life-support by investing more money in the already over-valued companies – as Softbank did with WeWork this week. Similarly, Peter Thiel is raising a $3B fund to plow more money into companies that should already be mature enough to be public. Low rates and the doubling down on bad investments is a sign this bubble will be sustained for a while longer.
Quantum BS
Longtime readers know I am quantum computing skeptic. I think the commercialization of the tech in the next 10-20 years is hype, and maybe even in the next 30+ years. That doesn't mean that there aren’t important milestones and interesting scientific progress to be made. However, Google did not achieve any meaningful quantum supremacy, as was widely reported, and we don’t need to be fretting about encryption being broken anytime soon. Here is a levelheaded but still optimistic article on the Google achievement from the professor who coined the term quantum supremacy several years ago.
“In the 2012 paper that introduced the term 'quantum supremacy,' I wondered: 'Is controlling large-scale quantum systems merely really, really hard, or is it ridiculously hard? In the former case we might succeed in building large-scale quantum computers after a few decades of very hard work. In the latter case we might not succeed for centuries, if ever.' The recent achievement by the Google team bolsters our confidence that quantum computing is merely really, really hard. If that’s true, a plethora of quantum technologies are likely to blossom in the decades ahead.”
China Paring Back its Semiconductor Ambitions?
Back in 2014, the China Integrated Circuit Industry Investment Fund launched a $22B effort to spur activity in the country’s lagging and highly Western-dependent chip industry. This followed a decade of largely failed attempts to fund homegrown semi capabilities. Then last year, as trade tensions rose, China announced plans to launch a $47B fund. But, that never seemed to materialize, and now the WSJ is reporting the 2nd fund might be happening, but at a much diminished $29B. Perhaps China is facing the reality that it would take a lot more money, effort, time, and luck to wean itself off of US and European semiconductor intellectual property and know-how. This is the reason I’ve said in the past that Taiwan, home to TSMC – the most advanced semi fab company and touchpoint of 70% of the global semi supply – is the ultimate chess piece in US-China tensions. Despite the US dominating the semi tech landscape, there is concern we don’t have enough domestic leading-edge chip manufacturing. TSMC is considering opening a fab in the US for the first time; however, it would require heavy subsidies (I’ve previously floated the idea that Google, Amazon, Microsoft, Apple, Qualcomm, NVIDIA, etc. should create a manufacturing joint venture on US soil).
Semi News: Non-Traditional Substrates, Heterogeneity, and Ongoing Open-Source Disruption
There were three articles in Semi Engineering this week that are of interest to all the chip followers:
-Silicon Carbide and Gallium Nitride continue to gain share against traditional silicon as a substrate for making chips for high power applications (such as in autos, solar, power supplies, transportation, etc.).
-Distributing data and computation across billions of processor chips in the IoT world is effectively fueling a rise in heterogeneous compute and lowering the need for complex SoCs (systems of chip) which contain many compute cores in one semiconductor. (The article has less meat to it, I’ve summed up most of its content here).
-This panel with several RISC-V-based (my explainer on open-source semis is here) companies discusses the virtuous circle the new processor movement is seeing right now. I continue to think the market is underestimating the negative impact of RISC-V on current ARM licensees, especially given the momentum for the cheaper, more customizable architecture in China. My 2 cents: If you are a chip company with a big ARM-based business, you could risk your customers building their own custom RISC-V chips or Chinese companies copying your ARM versions for far less money.
Miscellaneous Stuff
The Gall of Wasps!
I recently became acquainted with a very interesting botanical phenomenon created by gall wasps. Galls are growths formed by a plant/tree in response to gall wasp (or other insect) eggs. The egg delivers special instructions to the tree, causing the protective (and nutritious!) growth to form around the egg, from which a larva hatches and eventually eats its way out. The galls come in remarkable shapes and sizes, as this short YouTube video explains.
Patagonia Dreams Small
I enjoyed this interview with Patagonia’s founder Yvon Chouinard:
“Look at Amazon. Amazon doesn’t make a profit. They don’t pay any taxes. Nothing. But they’re growing like crazy. It’s all growth, growth, growth—and that’s what’s destroying the planet. I’m dealing with that myself. We’re a billion-dollar company, over a billion, and I don’t want a billion-dollar company. The day they announced it to me, I hung my head and said, “Oh God, I knew it would come to this.” I’m trying to figure out how to make Patagonia act like a small company again.”
I loved it when Patagaonia earlier this year decided to not sell corporate logo gear to companies they felt weren’t ecologically aligned, quickly cutting off the supply of VC-branded puffy vests in San Francisco!
Tricking the Immune System with a Trojan Horse
A phase 2 trial at Northwestern Medicine looks promising for reducing gluten intolerance and controlling celiac disease. The tech uses a nanoparticle containing an antigen to trick the immune system into thinking the offending protein is safe, a technique that could be broadly applicable to other autoimmune diseases with known triggers.
A Carbon Sink that Rocks
The Deep Carbon Observatory project aims to understand the long-range carbon cycle that involves geochemical transformations deep within the earth’s mantle. So far, studies have yielded insights into how carbon could be stored in rock formations at large scale going forward. And, there’s this cool discovery: “The DCO has also boosted optimism about the possibilities of life on other planets. Pure diamonds are made of nothing but carbon, but most contain small impurities. They may make poor jewelry, but they’re priceless in research. These impurities, called inclusions, have revealed "abiotic" methane as an energy source for life deep inside Earth.”
Stuff about Geopolitics, Economics, and the Finance Industry
Regulating US Internet Platforms and the Threat of China’s Innovation
At the WSJ Tech Live conference this week, the head of the US DoJ said breaking up tech giants was “perfectly on the table.” As we’ve written in the past, “breaking up” a technology platform is a misguided Industrial Age view of regulation in need of a fresh perspective. I am reminded of Mark Cuban’s warning nearly two years ago that over-regulating US Internet platforms could cause an irrevocable gap in the AI race between China and the West. It’s a fair argument, and it’s been used by others since – most recently, Zuckerberg made similar claims in front of a regulatory hearing in D.C. this week. (Cuban’s provocative suggestion to de-list Chinese companies from US markets also got some attention recently from Trump.)
Will TikTok be Domesticated?
There has also been a rising bipartisan chorus to investigate TikTok, which is owned by China (technically it’s owned by Chinese Internet giant Bytedance, but there are no completely independent companies in China) because of the alleged risk of Chinese censorship of the US teen social app (TikTok denies this is happening). TikTok is also a big ad spender on social networks like Instagram, Facebook, and Snap. If CFIUS or some other government body were to force out foreign ownership of TikTok, Bytedance cold shut it down or choose to sell it. It’s unlikely Facebook would be allowed to buy another social network, but it could be an intriguing and inexpensive acquisition for Twitter or Snap (thought it would hurt Snap’s ad revenues short term to lose revenue from this the big spender).
Investmenting in Illiquid Assets is Getting Out of Control (or I'm Crazy)
The hunt for risk, errr...I mean returns, continues as half of BlackRock’s institutional clients plan to increase their allocations to private assets. The firm’s new $12B fund, targeted at private company ownership, is called “Long Term Private Capital” (does anyone else think that’s a bad name?). Let's be honest: 7-8% long-term returns no longer exist at the same risk levels for institutions like pensions because of 1) decelerating population growth, 2) technology-driven deflation, and 3) the shift to an information-based economy that, by definition, requires less capital. I watched these two interviews with private investing giant Brookfield's CEO and pension giant CalPERS' CEO on CNBC over the last two weeks, and all I could do was think of Kurt Vonnegut: "a sane person to an insane society must appear insane." I perhaps appear insane. I would argue that the global stock market is a liquid asset that approximates the returns available in the global economy. In the hunt for higher returns, investments in illiquid assets could theoretically surpass the return of the public markets with the *significant* added risk of much debt and much less liquidity. Would a better approach be to take return assumptions down, and communicate to constituents that they may not receive all of their future benefits because the world has gone through a paradigm shift with the arrival of the Information Age? It’s a problem that likely needs to be solved at the government level with taxes and income redistribution.
Twitter Q&A:
This week I queried Twitter followers for SITALWeek Q&A. I got many great topics and will tackle a few of them here. I will probably do this again in the future, but if it’s something you want to see become a regular feature, let me know. I have paraphrased and combined some of the questions. (If I didn’t answer your question, it's probably because it was outside of my knowledge domain.)
What are your base case and best/worst case outcomes for tech regulation?
This is tricky, and I am going to fall back on my main base case, which is: the range of outcomes has clearly widened, but the high odds of regulatory capture is likely to cement the current Internet platform positions while making it harder for them to expand into adjacencies. The worst case would be paralysis that causes companies to curtail investment and ultimately hamper innovation in the US and hurt free cash flows. Paradoxically, the best case for investors could involve breaking up the companies, which might unlock hidden value and possibly allow the new, smaller entities to expand into adjacencies like fintech; however, this scenario involves numerous parlay bets, so odds are low.
What is your updated view on Zillow and what metrics are you looking at?
I don’t have a big change in my views on Zillow in terms of the business (articulated here in detail) – the range of outcomes is wide, but the asymmetry is high, which informs a potential small Optionality position for now using our framework. However, two things have changed recently: 1) the stock has gone down and is closer to what I estimated their core media platform business to be worth, which causes much of the other opportunity to be OOTMO (out of the money optionality); 2) IF we see more rationality coming to the VC market, this will help the public companies who have better access to capital (e.g., potentially Zillow and Redfin) to win in the iBuyer market.
How are you thinking about SaaS valuations?
Well, I am thinking a lot about them. Cloud software has typically scored very high in the Quality, Growth, and Context framework of Complexity Investing. However, an important part of the Context filter is valuation, and many great SaaS companies have gotten way too far ahead of themselves. Historically, very few software companies have outperformed once they pass a valuation of 10x revenues, and this generation is no different. That said, several great companies have pulled back to 6-8x enterprise value/forward sales, which can be a more attractive entry point.
What’s your 10-year view on the paradox of rising car ownership while food delivery and ridesharing simultaneously are taking off?
I would consider both of the following broad (or safe) predictions: transportation as a service and meal delivery will both grow dramatically, but the range of outcomes for individual businesses as that happens remains very wide – it’s a classic setup of a long tail of Optionality investments.
I think car ownership is cyclical and tied to the tight labor market. I suspect over time car ownership, especially in cities, will transition to fleets of on-demand services. On food delivery, I have a much more bullish view: our current system of agriculture, distribution, grocery stores, and at-home cooking is going to be entirely disrupted (more on that in this piece from September).
Could AI startup Graphcore become a challenger to NVIDIA?
I think this is likely to be an “and” not an “or”; in other words, we are in the very beginning of an explosion in heterogeneous workloads driven by data, AI, machine learning, 5G, IoT, cloud etc. All of this is happening because we’ve dropped off of Moore’s Law, and it makes sense to have more custom architectures (a reason to be bullish on RISC-V). There will be a lot of winners. NVIDIA’s efforts to turn their GPU into a much broader system that incorporates other features, as well as their strong network effect around the CUDA language, appear for now to be growing in strength. Graphcore has attracted a lot of interest, importantly from Microsoft and Google (via DeepMind’s founder). The risk for all AI startups today is that the landscape is evolving fast, and so optimizing for any one language or process may be a costly mistake when it costs hundreds of millions of dollars to make each chip.
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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Nothing in this newsletter should be construed as investment advice. The information contained herein is only as current as of the date indicated and may be superseded by subsequent market events or for other reasons. There is no guarantee that the information supplied is accurate, complete, or timely. Past performance is not a guarantee of future results.
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