SITALWeek #218
Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, flaming water fountains, and whatever else made me think last week. Please grab me on Twitter with any thoughts or feedback.
Click HERE to SIGN UP for SITALWeek’s Sunday EMAIL (please note some ad blocking software may disrupt the signup form; if you have any issues or questions please email sitalweek@nzscapital.com)
In today’s post: Russian robots; Chinese batteries; streaming the “bundle”; disruption be damned for PE investors; the shape of the Universe; US housing market rebounds as people stop moving; the hot new trend in Silicon Valley: becoming a monk; Ray Dalio's sky is falling; and lots more below...
Stuff about Innovation and Technology
Adversarial Fashion Hits the Runway
Adversarial fashion makes you invisible to AI. The apparel is “meant to ‘trick’ object detection algorithms into seeing something different from what's there, or not seeing anything at all. In some cases, these designs are made by tweaking parts of a whole image just enough so that the AI can't read it correctly. The change might be imperceptible to a human, but to a machine vision algorithm it can be very effective”.
Russia’s Yandex Shows Path to Profits in Rideshare and Delivery
Russian online platform Yandex has launched a new autonomous delivery robot based on self-driving vehicle technology (Yandex has over 100 autonomous test cars on the road as well). The briefcase-sized bots called Yandex.Rover will be used for meals, grocery, and package delivery. Yandex.Taxi, the company’s rideshare division, turned EBITDA positive in Q219 on $140M in net revenue. Meanwhile Yandex.Eats, which launched early 2018, has over 50% share of the Russian food delivery market at over 1M orders a month and a ~$50M revenue run rate (data from recent Yandex investor presentation PDF).
China’s Supercharged Battery Manufacturing
China’s CATL has become the largest maker of electric car batteries in the world aided by high domestic demand (China's home to 60% of EV sales globally, compared to the US at just 13% share). Even Tesla, which previously made all their own batteries in partnership with Panasonic, is using CATL to supply batteries for Model 3 production at their Shanghai-based Gigafactory 3 (that deal is split between CATL and LG Chem).
Wal-Dryl, Wal-Mucil, Wal-Zan...Wal-Gone
Following 12 quarters of declining retail sales, the Walgreens Boots Alliance (WBA) is apparently considering a PE-bubble-topping (or toppling? Or popping?) attempt to take itself private. We’ve long discussed WBA as a poster child for mortgaging the future of a company in order to create short-term financial earnings today. The company has funneled billions upon billions into share repurchases while whistling past their own future tombstone in the Internet victims’ graveyard. Walgreen's is an example of a company that failed to become a platform, and will therefore be buried by a competitor (see the section here for more: “Platforms as a lens on the global economic transition from Industrial to Information”). At NZS Capital, we like this thought experiment: what would happen to the world if a company went away overnight? In the case of WBA, effectively nothing would happen. In nearly every location, there is an alternate retailer for those people who want or need to interact face-to-face with a pharmacist. I imagine not a single customer of WBA appreciates having to go to their stores, wait in endless lines (with other sick customers) for prescriptions that aren’t ready yet, and pay high prices for the same general merchandise available cheaper at other stores or online. Amazon, or someone else, is coming with free speedy delivery of medicines. Costco and Instacart are testing a free, one-hour Rx delivery in California and Washington. UPS is testing drone delivery of medicine in North Carolina. In 10 years, if Walgreens doesn’t exist, no one will notice, so best of luck to everyone who thinks the massive debt they raise will ever get paid off. Maybe pensions will fund purchase of Walgreens by PE shops, who in turn will increase margins by raising prices on prescriptions their pensioners are buying. (We discussed the paradox of pensions investing in PE last week.) There is a clear, growing need for health clinics and medical services that short circuit the difficult-to-navigate medical system in the US, but it’s highly unlikely an incumbent drug retailer wins that battle, especially if they are engaged in raising prices and participating in fixing the system against consumers (like CVS is).
Zoffers are Spot On as Zestimate Improves
Zillow’s nationwide Zestimate median error rate has dropped to 1.9%, which is an amazing feat of data science. Zillow also analyzed the sale price of 3200 homes that turned down Zillow offers and found that they subsequently sold for 0.22% higher than the Zoffer. The prices compared were Zillow’s Zoffer (which includes a 7.5% service fee – comparable to a broker commission plus the cost of repairs for inspection items, staging, carry time, etc.) and the net sale price (assuming a 6% commission).
US Homeowners are Staying Put as Housing Market Rebounds
According to Redfin analysis, the average time between moves for homeowners has stretched from eight to 13 years since 2010, which is more than double the (six-year) average that existed for much of the 1990s and 2000s. Staying in a house for more than twice as long as we did before the financial crisis is a remarkably big shift in consumer behavior that begs for a better explanation. In other Redfin research, luxury homes over $1.5M bounced over 3% in price after three straight quarters of decline. (Note: I know folks frequently ask for my view on Redfin and Zillow stocks, and both reported earnings this week: overall, I get the sense that the housing market rebound, which Redfin also mentioned on their earnings call, was the main driver of better-than-expected core business results for both companies. Q319 didn’t yield much new data of significance regarding the transition of the industry to a transactional marketplace except general optimism that irrational VC money is going to take a breather, giving Redfin and Zillow a leg up in the all-important land-grab phase. Increasingly, the input funnel Zillow and Redfin have thanks to their leading websites/apps seems like a key advantage that would be difficult to replicate without significant cost.)
The Re-Bundling and Rising Value of Content
As content continues to gain power over distribution and we see the emergence of new app bundlers, streaming apps like Netflix could/should demand higher “carriage fees” from video distributors like Amazon Fire TV, Roku, Apple, and even legacy bundlers like Comcast. The way it works today, Netflix pays a cut to Amazon if Amazon signs up a new Netflix subscriber. But, if I am more valuable to the Amazon Prime flywheel as a Fire TV user, and I will only use Fire TV if it has Netflix and Disney+ (which I think is true of many households), then those two companies should get economic benefit from Amazon for making themselves available on the distribution platform, especially given the myriad ways consumers can watch streaming content. A good example of this is the recent spat between Disney and Amazon over the carriage of Disney+ on Fire TV boxes. I suspect it was Bezos who caved to Iger last minute, allowing the Disney+ app to be available to Prime users. If I sign up as a new video subscriber on Comcast today, they will bundle the $12.99/mo Netflix into my pay-TV channel lineup. Apple, Amazon, Roku, and others are just new bundlers of channels, and they are nothing without the apps (with apps = channels in the streaming world). This thought exercise shows the growing power of content, which is concentrated at Netflix, Disney, Warner, and ViacomCBS. The situation is due for a complete inversion of who pays who, or, at the very least, the distribution platforms' cut should be zero.
The new reality is that consumers are better off with a bundle than a bunch of disparate streaming apps. Right now the best bundle is the legacy one on cable. In the future, I expect there will be digital bundles that mimic the analog ones, but all the analog ones will include the digital apps as well. Previously, cutting the cord was more about hating cable than it was about loving the alternative. However, today it makes less sense to hate cable and more sense to be displeased with streaming experience: lack of common UI and search, fragmentation, subscription management, etc. Simple surfing functionality, like watching one thing on Netflix while browsing on Prime and Hulu for something different, are now easy features on legacy cable video, but frustratingly impossible on streaming platforms. As I wrote in more detail last week, I think the path forward for media and distribution is becoming much more clear.
Blanketing US Schools with Costly, Unproven Surveillance
Gaggle is a software tool used by schools paying $10,000’s a year to monitor over five million US students. The apps checks email and other communication on school systems for signs of problems. “Gaggle operates by a ‘three strike rule,’ meaning that mild rule violations could be flagged to school administrators if a student does it repeatedly. For instance, if a student said ‘fuck’ three times, school officials would be alerted.” Well, now all the students know how to jam the system up! Given how little student communication takes place using school email addresses, it seems obvious that Gaggle is an immense waste of hard-to-come-by US education funding.
Putting Memory to Work
This interview with the head of advanced computing at memory maker Micron is mainly interesting for the various anecdotes from Pawlowski’s long career at Intel. Pawlowski argues that analyzing massive datasets, like particle data from CERN or self-driving car data, might be ideal for in-memory AI. Micron recently acqui-hired folks to work on AI technology for their chips, but I think it remains hypothetical for now. If you are a semi buff, you’ll enjoy this article.
YouTube Pits its Algorithm Against Twitch and Mixer
As Microsoft Mixer and Twitch battle for exclusive, live, video-game-streamer content, YouTube wants to remind you that 200M people watch gaming content DAILY on the site, and its sheer volume of traffic gives it a huge ability to promote live streamer content. YouTube’s head of gaming Ryan Watt says the platform is focused on live gaming this year; the Verge also has more on the story of YouTube signing exclusives with streamers, who collectively have 3M followers on Amazon’s Twitch.
Rearranging Deck Chairs on Printing and Mail Titanics
Xerox, a company from the 1900s and maker of machines that repeatedly deposit ink on trees that are cut down despite consequences to the future of humanity, declared this week that the printer industry is “long overdue for consolidation, and those who move first will have a distinct advantage.” Personally, we here at NZS Capital wish for all Xerox and HP products to meet Ron Livingston’s bat.
In related news, the USPS, the insolvent purveyor of items printed on trees that are cut down despite consequences to the future of humanity and operator of gas-guzzling vehicles laboring to doom the planet, announced their new relationship to use NVIDIA GPUs on HP Enterprise boxes to better sort your anachronistic mail.
Miscellaneous Stuff
Asceticism is Becoming Trendy in the Valley
Dopamine fasting!? I can’t tell if this article in the NYT was a joke on the reporter, a joke on the reader, or a joke on the year 2019. It describes the new fad in Silicon Valley of fasting from everything that is potentially stimulating – food, screens, music, conversation, etc. Historically, of course, this has been called “becoming a monk.”
Get Ready to Get Wet!
Wet is the creator of the Bellagio fountains and hundreds of other projects around the world involving lots of water, fire, lights, and of course: laminar flow. Ashley Vance's tour of the facility with Wet’s founder is stunning – everything you’d hope the creator of the Bellagio fountains lair/lab/production warehouse would be. At the end, Wet’s founder indicates they are working on backyard fountains for your home too!
A Peek at the Edge of our Cosmic Bubble
Our little solar system orbiting around our little star is cruising around the center of the Milky Way at 450,000 miles an hour. About a year ago, the Voyager 2 probe went past the heliosphere – the roughly spherical expanse of electrically-charged particles thrown off by our sun (a.k.a. solar wind) – that extends 11 billion miles beyond our planet and constitutes our solar “ecosystem”. According to NASA, newly-published reports parsing the data collected at the interface “help paint a picture of this cosmic shoreline, where the environment created by our Sun ends and the vast ocean of interstellar space begins.” As Kilgore Trout said: “The universe is a big place, perhaps the biggest.”
Parallel Lines may Meet After All (at least in this iteration of the Universe)
And, speaking of the big universe: is it flat and expanding, or a closed loop that goes back in on itself? In other words, do two parallel lines stay parallel forever, or do they eventually cross? For a couple of decades the flat, inflationary model of the universe has reigned, but new interpretations of the cosmic microwave background (CMB; the same CMB from last week’s paragraph on Hawking Radiation and ghost blackholes) has enlivened the debate. This new research was presented in the journal Nature, and it remains open to active debate. The ultimate answer has no bearing on our current situation here in our little corner of the Milky Way galaxy, but could help resolve a number of unanswered questions in cosmology. And, as we see more and more data collected around us – and more and more AI and machine learning applied to it – it’s a great time to remember that the lifespans of many truths tend to get shorter and shorter. I posted the following quote a few weeks ago (from Robert Pirsig’s Zen and the Art of Motorcycle Maintenance): “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!”
Data Brokers Fuel Manipulation of College Admissions Stats
The adminstrator of standardized high school test in the US, the College Board, sells student data to “elite” colleges who then market to “dumb” students who don’t have a chance at getting in, so those same colleges can report lower admission rates and boost their national rankings. College is fast becoming a caricature of itself and desperately needs to evolve in the Information Age.
Stuff about Geopolitics, Economics, and the Finance Industry
TGI...Thursday?
Microsoft saw sales per employee rise 40% in a month-long experiment with four-day work weeks. One of the more obvious solutions to AI job displacement is reducing hours per employee, but if that generates another 40% productivity, it could make things even worse! Maybe try a one-day work week?!
“The 'Work-Life Choice Challenge Summer 2019' saw full-time employees take off five consecutive Fridays in August with pay, as well as shortening meetings to a maximum of 30 minutes and encouraging online chats over face-to-face ones. Among workers responding to a survey about the program, 92% said they were pleased with the four-day week...The summer trial also cut costs at Microsoft Japan, with 23% less electricity consumed and 59% fewer pages printed.”
When Chips are Down, China Gives
Semiconductors are now the largest import in China, even bigger than oil. Modern communism’s command-and-control surveillance economy depends on those chips. When it seemed clear that the US was willing to pressure semiconductor king TSMC in Taiwan to halt shipments to China, I think that could have been the breaking point for China to realize they need to submit for now. A couple of weeks back, I discussed how China was backing off its commitment to homegrown semis, and this week news hit that Tsinghua University, a key backer of chip development, is having a little trouble with its debt payments. Despite the seeming ceasefire, and China’s offer to make it easier for Taiwanese companies to do business in China, Taiwan remains concerned about potential for military conflict. The island’s Foreign Minister recently said: “We need to prepare ourselves for the worst situation to come...military conflict.”
Funds Downgraded after Morningstar Reads Fineprint
Morningstar began implementing their new rating system accounting for expenses, which resulted in around one quarter of funds analyzed being downgraded – largely from Bronze and Silver to “neutral” and “negative” while Gold-star funds were largely unchanged.
Someone Tell Ray ‘it’s Going to be OK’
What happens when your worldview doesn’t seem to account for the role of luck or emergent properties in complex adaptive systems, AND you have a tough performance year in the markets? You apparently become yet another economic and political pessimist. Thus was the case of Ray Dalio last week, who went on what I would describe as a crazy LinkedIn rant titled “The World Has Gone Mad and the System Is Broken.” The post envisions central bankers are drug dealers “pushing” money onto investors who in turn are drug dealers “pushing” money onto poor, victimized companies (I discussed Dalio’s analytical blindspot in more detail in SITALWeek #209.) It seems clear that the world is in a monetary-policy blackhole, and we need to either accept the reality of the Information Age's impact on inflation and rates or try to escape the event horizon. This monetary cosmic phenomena is causing dangerous bubbles to pop up (especially in private assets) while increasing and exacerbating inequality and uncertainty.
The economy is increasingly data based, not asset or capital based, and productivity, even though it can’t be accurately measured, is rising – we are all constantly getting more for less. Lowering rates via monetary policy and fiscal spending are both forms of “printing money.” There are two options for the years ahead that don’t depend on lowering rates: 1) tax the rich and redistribute moola, or 2) ramp up fiscal spending and pay for healthcare for all, universal basic income, and fund pensions/retirement savings, etc. (Actually, there’s a third option because you can do a combination of 1 and 2). Either way, there is not much use for Dalio’s sky-on-fire “buy gold!” rants – humans are smart, and progress moves in only one direction. There have been cynics ever since Homo sapiens first mustered a grimace, but they’ve never been right in the long term. If you want to signal optimism and restore hope (see the end of last week’s newsletter), then you can pull rates out of the black hole through spending. So yeah, I think gold will underperform the broader economy over the next century. As I said on Twitter last week, if anyone finds themselves near Ray, pull him off the ledge, offer him a warm piece of pie, and tell him everything will be ok.✌
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.
I may include links to third-party websites as a convenience, and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by NZS Capital, LLC (“NZS”). If you choose to visit the linked sites, you do so at your own risk, and you will be subject to such sites' terms of use and privacy policies, over which NZS Capital has no control. In no event will NZS be responsible for any information or content within the linked sites or your use of the linked sites.
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.
Investing involves risk, including the possible loss of principal and fluctuation of value. Nothing contained in this newsletter is an offer to sell or solicit any investment services or securities. Initial Public Offerings (IPOs) are highly speculative investments and may be subject to lower liquidity and greater volatility. Special risks associated with IPOs include limited operating history, unseasoned trading, high turnover and non-repeatable performance.