SITALWeek #234
Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, mammoth dung, 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: YouTube might breath life back into the toy market; Netflix + Roku would be a powerhouse – why the streaming giant should enter the hardware market; activist investors are boring; is Disney becoming Sleepy Dwarf? the black holes of cloud computing; the increasingly playful relationship between fiction and truth; and, lots more below...
Stuff about Innovation and Technology
It’s Official! NZS Begins Partnership with Jupiter Asset Management
We are very excited to announce the official start of our new partnership with Jupiter Asset Management. We are thrilled to be working alongside Jupiter as we build an enduring investment management company focused on maximizing non-zero-sum outcomes for our clients, employees, partners, and the world at large. Our initial focus will be in the global institutional investor market, with products built on the foundation of our Complexity Investing and Non-Zero-Sum frameworks.
Data Centers’ Encouraging Energy Efficiency
Between 2010 and 2018, data centers grew compute capacity 6x and storage 25x while Internet traffic grew 10x. However, thanks to Moore’s law and the application of machine learning to improve data center efficiency, power consumption only grew 6% over that period. That’s 6%, not 6x! It now takes 1/9th as much energy to store 1 Tb of data and 75% less energy per server compared to 2010. Given that these numbers only go through 2018, I suspect they would look worse today with the explosion of power-heavy GPUs for machine learning, but this is a good sign for future growth in AI and cloud computing from an environmental-impact perspective.
Tesla’s Battery Breakthrough Could Achieve Price Parity with Gas Cars
Tesla is reportedly leveraging their Maxwell acquisition and internal production to drive battery costs down to $100/kWh, a level that would put EVs on par with gas engines without subsidies. Electrek pieces the clues together of Project Roadrunner ahead of Tesla’s battery event in April.
iBuying now 1% of US Home Sales
A new report from Redfin shows iBuyers purchased 1% of homes sold in the US in 2019, up from 0.6% in 2018. Some top markets did, however, see fewer homes sold to iBuyers in Q4 compared to Q3 of last year. Raleigh dropped from 8.5% to 7.9% while Phoenix fell from 6% to 5.7%. It’s not explained in the report what was behind the drop; but, one possible explanation might be local market attractiveness vs. other new growth markets for the big iBuying platforms like Zillow, Redfin, and Opendoor.
Gene Sequencing “Moat” Vulnerable
China’s BGI has announced an “extreme” gene sequencing machine that can sequence someone’s complete DNA for $100 compared to around $600 for rivals like Illumina. The room-sized custom setup uses robot arms and other process changes to achieve the price points for very large scale population sequencing. BGI has based the system off technology from Complete Genomics, acquired in 2012, a deal that Illumina at the time protested. The tension highlights potential monopoly pricing abuse by Illumina, who apparently has said they can also do $100 genome sequencing, but were apparently waiting until they had to, according to this MIT Technology Review article. In the future we will see many more examples of classic, pricing-power “moats” becoming vulnerabilities – a consequence of negative-sum behavior.
Frivolous Suits Foiled by MIDI Melodies
In order to stop frivolous, melody-infringement lawsuits, “Two programmer-musicians wrote every possible MIDI melody in existence to a hard drive, copyrighted the whole thing, and then released it all to the public in an attempt to stop musicians from getting sued.” – Vice
Which Came First – Toys or Cartoons?
If you’re a fan of the delightful Netflix docuseries “The Toys that Made Us” like I am, you will know that many popular kids television shows started as toys first. Essentially, such shows are just extended commercials created to sell merchandise, like Transformers, He-Man, Care Bears, and Paw Patrol. With kids migrating their video viewing to YouTube, it’s no surprise that we are seeing licensing deals for shows and characters on the streaming giant. Creators can earn 7-figure advances and see 10-20% royalties on merchandise sales. Toy sales declined in 2019, perhaps in part to waning TV viewing (or maybe just in anticipation of baby Yoda?). How long before we see a hit YouTube series created solely to sell a line of toys? Could toy sales grow again with this new, creative combination of streaming and merch?
Walmart Still Throwing to See What Sticks
Walmart has launched a fulfillment service for 3rd-party sellers to compete with FBA at Amazon. Walmart’s commitment to 3rd-party merchants for its ecommerce has been spotty, and this doesn’t seem like an obvious choice to me. Walmart has also been trialing various last-mile delivery options from multiple vendors for several years. They launched a competitive service to Amazon Prime in 2015, then shuttered it in 2017, and are now rumored to be launching Walmart+ to once again compete with Prime (yet they are also rumored to be selling their video service Vudu, leaving a need to bundle another video app). It’s good to experiment, but it’s also 2020; ecommerce has been around for a quarter of a century, and time may no longer be on Walmart’s side.
Could glass bottles make a comeback?
While glass remains questionably economical to recycle, the rise of grocery home delivery could make it easier for refillable glass containers to enter into a new, efficient supply loop from producers to consumers. The WSJ reports on the glass bottle market.
Should Roku Go Home to Netflix?
As the power pendulum swings evermore to content owners from distributors (like cable and satellite), there remains a wide open opportunity to create a connected-TV device that has a great user interface, universal search, billing, and account management, which would create powerful upside for both consumers and apps/channels (via data) to drive a smaller number of higher ROI ads. As I’ve pointed out in the past, both Apple and Amazon have motivation and hardware to effectively subsidize this business to benefit their broader ecosystem of iPhone and Prime-membership users, respectively. Google also has the ecosystem to subsidize, but hasn’t yet infiltrated the living room TV hardware space to the degree others have. Roku has the hardware and market share, but doesn’t have a big ecosystem. Roku started out as a project by Anthony Wood inside of Netflix, and Netflix even provided the original funding for it in 2008 when it decided not to enter the hardware market itself. Today, I’d suggest the killer combination would be Netflix buying Roku and creating an open ecosystem for data, apps, and channels. There is an opportunity to create a high non-zero-sum outcome for consumers, streaming apps, content creators, and advertisers by using data combined with high revenue shares for all of the apps/channels involved. An open data exchange in particular would drive higher ROIs for advertisers, higher revenue shares for apps, and fewer commercials for consumers – a win-win all around. Unlike other Information Age transitions, video won’t be a winner-takes-all market because one studio shouldn’t make every movie and TV show in the world, and creative folks won’t all work for one boss. But, Netflix could continue to thrive and enable an even broader ecosystem by entering the connected hardware market with an open data platform and a great UI/universal search. Add this to my list of other crazy, Netflix-related ideas such as Netflixland.🎢
Disney Becomes Sleepy?
Much has been written about the early and surprise appointment of Disney Parks head Bob Chapek as CEO. Iger, who was already due to end his remarkable run as Disney CEO at the end of 2021, will stick around to run the creative side of the business as Exec Chairman for 22 more months. After Iger leaves, the company has said it would not have a chief creative/content officer as the studios can run independently. On the one hand, the decentralized model works very well for creative businesses; on the other hand, Iger has clearly been an important sounding board and key conductor of the company’s roadmaps and content acquisitions. When Tim Cook took over Apple, innovation turned from revolutionary to incremental, and risk taking subsided dramatically. It feels like Disney will be entering a similar era. My intention is not to pass judgement on Tim Apple or Bob Disney here, but it’s worth noting that we’re coming out of a period of disruption in media and entering a period of relative stability – where the big Hollywood studios can have their cake and eat it too. As long as Disney can keep the creative talent motivated across the organization, Chapek could be a successful leader. But, I admit, a little bit of my passion for Disney will leave with Iger. The Verge covered some of the backstory of the Disney CEO change. It will be a baptism by fire for Chapek as Disney grapples with what could end up being a global shut down of their parks and travel business amid COVID-19 fears.
Cloud Computing Event Horizon
Over the last 20 years, we’ve seen a few giant black holes form in the consumer Internet/app space such as Facebook, Google, Amazon, and Apple. These mega platforms accrete all the adjacencies and value around them into a central core. There are a lot of reasons why this is a natural progression resulting from the evolutionary fitness functions operating in the Information Age. Mega platformization has had some negative consequences, but it’s also created a significant amount of win-win, progress, and productivity – enabling an enormous new part of the digital economy (see: How I Learned to Stop Worrying and Love the Monopoly). Will the same thing happen in enterprise, as businesses shift apps and processes to the cloud? While consumer apps have been largely monolithic (search, photo sharing, ecommerce), there have also been a large array of category winners in gaming, streaming video, and a very long tail of niche applications. The same trend could play out with enterprise IT, as Amazon, Microsoft, and Google (and Alibaba in China) become massive black holes absorbing the $3T+ global IT spending market. So far, the infrastructure layer has proven sufficiently horizontal, monolithic, and generic enough that these cloud platforms are absorbing much of that functionality. On the opposite end of the spectrum are the huge, specific vertical applications, which are likely to remain independent, but increasingly run on top of the big clouds. In between, however, is a grey area of horizontal building blocks that may or may not be sucked into the cloud black holes. Database is one example – will proprietary and open-source databases at the big cloud platforms take the market from startups? Or, will Kubernetes-enabled, multi-cloud, portable workloads make it easy to have technology layers like databases dominated by independent companies? What about horizontal collaboration platforms? Are Slack and Zoom ultimately just features that will migrate to Office 365 because of the Azure black hole? And, then there are the large applications that are becoming powerful black holes themselves like Salesforce or Adobe. In general, I’ve argued it’s going to be “and” not “or”; we are very early in this multi-trillion-dollar migration, and for the foreseeable future, everyone is winning.
Abundant Wet Cement in AI Chip Market
While NVIDIA continues to dominate the market for running large, machine-learning workloads, once you have a model and want to run data against it (known as inferencing), the solutions are diverse and still forming. This article in Semi Engineering is a good overview of the state of inferencing today.
Azure Sphere Finally Here
After announcing in 2018, Microsoft has launched its chip-based Azure Sphere solution for IoT. The Microsoft-certified MCUs, from companies like MediaTek, NXP, and Qualcomm, run a version of Linux developed by Microsoft to run Azure services embedded in connected devices. The solution is focused on security, and Microsoft has some videos and examples on the website for the new Azure Sphere devices. GOJO, maker of PURELL, is using the chips in hospital dispensers to identify missed opportunities for hand sanitizing.
Who Should Decide Who Runs Twitter?
In the most desperate ploy ever to wrangle a hard-to-get blue “verified” check mark from Twitter, activist “investor” Paul Singer of Elliott has demanded no less than the ousting of co-founder and CEO Jack Dorsey. Well, maybe Singer is not angling for the check mark, but as a long-term Twitter shareholder, I think Jack is the best person to steward the company – both for the sake of long-term returns and guiding Twitter’s important role in society (I wrote a bit more on that idea in this post from a year ago when I got back into the stock). That said, I am also open to alternatives if those solutions create the most value long term for all constituents (not just shareholders). There are some investors who have different views of how companies should be run, and they thoughtfully engage with boards, but then there are “activist investors” that are moochers in the Ayn Randian sense of the word (they remind me of Mena Suvari’s character in American Beauty – a desperation that can only be described as boring and ordinary). When I have interacted with some of these bully campaigns in the past, they have amounted to nothing more than name calling in an attempt to drive short-term gains at the expense of long-term employees, investors, and the world at large. As an advocate of companies being public, I acknowledge activists can be a real agitation. My advice to boards is to stand up for what’s right, focus on long-term value creation, and know that you have no fiduciary duty to short-term moochers aggravating your stock (if you can’t do that, you shouldn’t be serving on a public board). It’s important to listen and reach a reasonable truce as quickly as possible to avoid distraction. Like dealing with any playground bully, you just need to let them think they’ve won; bones to be thrown include cost cutting, share buybacks, exploring strategic options, shuffling management members to new areas, or bringing in some outsiders. You can also slow down attacks by choosing a middle ground on corporate governance (such as having a staggered board, like Twitter) that protects long-term investors while not completely entrenching management. The rising number of passive shareholders is a big complicating factor – when 25-30% of your shareholders vote passively (soon to be 50%), it clearly makes it harder to fend off attacks. You can, however, be clear about your long-term objectives and cultivate allies in long-term investors who understand your vision. But, most importantly, just make an exception and give this guy that blue check mark so we can all move on.
Miscellaneous Stuff
Supermassive Explosion Sets New Record
The explosion of a supermassive black hole at the center of the Ophiuchus galaxy cluster has been detected by scientists using the Chandra X-ray Observatory (with help from instruments made by Ball Aerospace). The cluster is 390M light years from earth, meaning this event happened over 390M years ago (the time it takes the light to reach us). The eruption out of the black hole was 5x bigger than any previous energy burst we’ve observed in the universe.
Gravity Distortions Offer Early Earthquake Detection
Earthquakes quickly displace chunks of earth locally, which results in minute changes in gravity (on the order of 1 billionth of the earth’s gravity!). These difficult-to-detect PEGS (prompt elasto-gravity signals) can now be more easily seen with algorithms and sensors. Because PEGS travel at the speed of light, the gravity changes are detectable far in advance of the seismic wave. Further testing could allow for critical information to be determined about earthquakes (like their likelihood of causing a Tsunami) in advance of damage.
Thank Mammoths for Pumpkin Pie
In SITALWeek’s ongoing coverage of mammoth dung (🐘💩...the new wooly mammoth emoji doesn’t launch until Emoji 13.0 later this year): last week we learned that the big beasts and their fertilicious poop were instrumental in spreading the seeds of various large squash species across continents, thus setting the stage for gourd domestication by humans.
Stuff about Geopolitics, Economics, and the Finance Industry
COVID-19 Illuminates Decoupling of Reality and Truth
There are two interesting topics to me regarding COVID-19. The first is the fascinating trend of the ever-blurring line between fact and fiction, and the increasingly small role that truth plays in the functioning of the global economy. The narrative reflexively dictates behavior, which influences the narrative. In that narrative, “objective” reality plays an increasingly small role (I am reminded of Kurt Andersen’s book Fantasyland, or how Adam Savage’s “I reject your reality and substitute my own” has gone from quip to canon within the last 15 years; of course, humans are fantastic storytellers, so it's not terribly surprising that our fickle relationship with truth is, historically, a frequently recurring theme). However, in the Information Age, the playful relationship between fiction and truth interacts on an entirely new 4D chess board. Proximally, as investors, we care about the money, which will, over the long-term, track the underlying truths. But, only to the extent that those truths themselves aren’t altered by the fiction of everyday life. Most of the move in the stock market last week was driven by fiction (or, at least speculation) rather than truth, and helped along by algorithms, which have their own special new role in our socioeconomic story. The biological truth of COVID-19 is not yet completely known; however, it is perhaps inline with the 1957 influenza, according to Bill Gates. The fictional accounts of the virus won’t instantaneously change it’s DNA, but fictions driving fear could slow its spread, which could actually meaningfully impact it’s evolutionary trajectory (e.g., to make it less virulent with longer incubation) and physically rewrite it’s DNA. That brings me to the 2nd, related COVID-19 topic of interest: will the narrative of the virus result in a long-term change in behavior, i.e., a change in the actual truths of how we operate as a society? The obvious changes would be an increase in video conferencing (and decrease in travel) and an increase in home delivery of goods and services, etc. I’m not convinced this virus will change actual behavior in the long term, but it bears watching and understanding. In the meantime, it’s worth remembering that volatility represents opportunity, not risk, so keep an eye on the long-term truths and how they are evolving based on short-term fictions.
Future of Chinese-Based Supply Chains?
The Economist reports on the potential decoupling of Western supply chains in China as a result of the virus. Long term, I think the supply chain will adapt irrespective of pandemics, and it was already moving away from China for reasons of competitiveness. Meanwhile, the FDA is monitoring 150 prescription drugs made in China that could face shortages, some of which have no alternatives.
Majority of PE-backed IPOs Underperform
Over 70% of IPOs by PE-backed buyouts from 2010-2014 underperformed their benchmarks by an average of 12 points. Often, PE shops will sell a portion of shares at the IPO and then sell in subsequent offerings, so the underperformance matters to the funds. No doubt the added leverage likely introduces volatility, and perhaps weighs on the IPO’d assets. Also, frequently this type of PE-backed company cuts costs and defocuses on R&D in order to boost numbers. In the meantime, PE deals may stay private longer or look for strategic buyers to avoid an IPO. Buyer beware.
Growing Awareness of Taiwan’s Lynchpin Status
Bernie Sanders told 60 Minutes he would intervene if China invaded Taiwan. I wrote more on Taiwan’s problem as the center of a tug of war between Trump and China last week in case you missed it. Semiwiki also covered the topic in more detail.
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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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