SITALWeek #235
Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, phleBOTomists, 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: Alphabet is showing signs of capital discipline, will margins follow?; Waymo is becoming the technology provider to auto companies; big plastic lobbying has us all eating plastic; ESG vs. NZS; interest rates vs. fiscal stimulus in the coronavirus recession; rational thinking masquerades as cognitive bias; and, lots more below...
Stuff about Innovation and Technology
Robotic Phlebotomist
Scientists at Rutgers have developed a robot that can use ultrasound, near-infrared imaging, and AI algorithms to draw blood and deliver IV drugs. The machine is said to outperform humans in accuracy and speed. 💉😱 A practical application in the near term would be in research involving lab mice that require frequent blood draws.
Superfast Image Sensor
A new type of chip builds the neural network for image recognition into the photodiodes, which are powered completely by the photons of light coming in. The system is very rudimentary today and can only recognize a few basic letter shapes, but it operates at 20 million frames per second vs. 1,000 fps in current high-end image recognition systems, with no external power needed.
Western Frontier of the Surveillance State
Bodycam maker Wolfcom is working to bring real-time facial recognition to its 1500 police, education, and government customers – encompassing 1M cameras globally. This move is in contrast to taser and police tech provider Axon, which has taken a more thoughtful, wait-and-see approach – they want facial recognition accuracy proven and regulatory guidance on its use before implementation. Wolfcom, short for Wolf Commander, started out in the paintball industry according to this detailed article on OneZero. Anyone else thinking about the Ed-209 “malfunction” scene from the original Robocop? Meanwhile, the state of Utah has given AI-startup Banjo real-time access to traffic (and other) surveillance cameras, 911 call feeds, and more; combined with social media and other data, Banjo is building real-time surveillance across the state. And, the NYT reports on how contested facial-recognition app Clearview was a “Secret Plaything of the Rich”, and Vice explains how – thanks to the new California Consumer Privacy Act – if you are a resident of California, you can retrieve your file from Clearview and have them stop collecting information on you.
The Truth is no Stranger to Fiction
Last week I talked about the increasingly complex interplay between fiction and truth. The Information Age was supposed to bring us radical transparency that could only lay bare the truth for all to see; instead, it elevates fiction, both at the individual and societal level, to new heights of influence. I came across this excerpt from Nietsche’s Beyond Good and Evil in an American Scholar article on humans tendency to have a “will to truth”:
“The Will to Truth, which is to tempt us to many a hazardous enterprise…what questions has this Will to Truth not laid before us! What strange, perplexing, questionable questions! It is already a long story; yet it seems as if it were hardly commenced. Is it any wonder if we at last grow distrustful, lose patience, and turn impatiently away?…We inquired about the value of this Will. Granted that we want the truth: why not rather untruth? And uncertainty? Even ignorance?”
The authors of the article (paywall), which is about finding comfort in the space between ignorance and knowing, comment: “As Nietzsche writes, when our demand for certainty is frustrated—when the quest for truth is longer and stranger than we would like—we often give up. And just as some people turn to authority, others abandon even the idea of truth, deciding that there is no truth to be found.”
Money ‘Laundering’
This week, the Louvre banned cash in response to virus fears, and it could represent a good example of this new truth-bending vector of the Information Age. An accelerated shift to digital payments today, while the incumbent monopolies are squarely in charge, would further entrench status quo and make any new payment platform threats futile. According to this PBS article on the Louvre ban, fears over money transmitting diseases date back to the Middle Ages when it was smoked to clean it.
Amazon Stays Ahead of the Curve
Amazon is cutting fees on FBA, their fulfillment service for 3rd-party merchants, by up to 30% according to Business Insider. Meanwhile, the company is also opening more fulfillment centers closer to customers. The new 100,000sf facilities will stock 100,000 items and sort up to three million more from other inbound Amazon orders for same-day delivery (in many cases within a few hours).
Alphabet’s Maturing Capital Allocation; Waymo Becomes Android of Autonomous
There appears to be some signals from Alphabet that the company is entering a period of more disciplined capital allocation in the post-Larry-and-Sergey era. Speaking at the MS TMT conference this week, the company’s CFO discussed both buy backs and a subtle shift that could open the door for dividends down the road:
“...in the fourth quarter of 2019, we more than doubled the pace of repurchase. And that was -- not to overuse the word journey, but that has been a journey as well, really consistently increasing the pace of capital return. And I think that given the cash flow business and where we are today, it's incrementally additive. It gives -- we still have tremendous flexibility, and that's the way we've looked at it.”
Meanwhile, in another sign of fiscal discipline at Google, Waymo did an outside fundraising round of $2.25B (at a $30B valuation!) instead of tapping into Google’s own treasury. The same FT article also implies that Waymo is increasingly looking to become a tech supplier to other automakers:
“‘Our role could be just focusing on the Driver’ — the name given to its driverless technology — ‘and leaving the rest of the customer [experience] to others in the industry,’ said [Waymo chief] Mr Krafcik, indicating a possible shift from bona fide self-driving car maker and robotaxi operator to supplier of autonomous-driving technologies to other companies.”
In SITALWeek #231 I wrote about this likely evolution for Waymo: “we could see Tesla becoming the Apple of cars, and Waymo, or some other technological enabler of competitors, playing the Android role.”
Back to Google’s margins and capital discipline: the search giant intentionally took its pro-forma EBITDA margins from 42% in 2009 to 28% in 2019 as they invested in both the core product and “other bets”. Could that trend reverse? Margins rose 170bps in 2019, reversing the long decline. It’s anyone’s guess, but worth keeping an eye on. There are certainly still plenty of new growth areas for the company to invest both opex and capex, including enterprise, gaming, etc.
The EV Moving Target
In a press event where the press was banned from taking photos, car maker GM announced they would have EV cars in 3-5 years that are on par with Tesla’s current models. Competition is of course great to assure the pace of innovation rises ever faster; but, legacy car makers need to at least catch the leader, not get lapped while they play catchup. GM boasted about future EVs with 400+ mile range, however, the focus on range has consistently puzzled me. The vast majority of people don’t need more than 100 miles of daily range; and if they do, they can have a longer-range 2nd car, or leverage ridesharing and car sharing rental programs. So, I’d much rather see a broader selection of cheaper, quick-charge, 100mi-range vehicles with a smaller environmental footprint. We’ve been driving a Nissan Leaf with 80 miles of range for over six years as our primary car, and never had any range problems. One thing is for sure though, with all the focus on EVs from an R&D perspective on one end, and consumer demand on the other end, we are likely to see a faster-than-expected shift to EVs in the base of consumer vehicles over the next 10-15 years.
Video Apps are Just the New “Channels”
As the pay-TV ecosystem steadily declines in favor of streaming, the big content owners and creators are reprioritizing spending – focusing on both in-house shows and their own streaming apps. A good example of this is ViacomCBS canceling a few shows on the Pop cable network that were produced by outside studios. But, at the same time, it’s highly likely we see all six vertical streaming apps – Netflix, CBS All Access, Disney+, HBO Max, Peacock, and to a lesser extent Prime Video – become integrated parts of existing pay-TV bundles. Already, Netflix is available in the cable bundle on Comcast, and CEO Brian Roberts, speaking at the MS TMT conference this week, noted both Hulu and CBS All Access would soon be joining Prime Video as integrated components of their X1 TV platform. Comcast-owned Sky also announced a deal with Disney+ outside the US this week (glad Brian and Bob have buried the hatchet as I figured they would in SITALWeek #228, but this likely has as much to do with Sky’s strong position as it does Disney’s strong content). So, this isn’t necessarily the studios de-funding their cable networks in favor of apps, but it is a reprioritization and ultimately a rebundling of the same content. We have yet to see an effective, digital-only re-bundler emerge as Amazon, Roku, and Apple have all fallen short (in my opinion) of meeting consumer needs. Either the existing pay-TV players will be the re-bundlers, or, as I suggested last week, a streaming app like Netflix could make a play for this as well.
Netflix’s Global Focus
Netflix’s Ted Sarandos sat down with Jason Hirschhorn recently to discuss several interesting topics (video). Netflix is producing 130 seasons of local language shows this year outside the US as they continue to be well ahead of streaming competition on the global front.
Spotify Trying Everything to Reduce Royalty Rates
Spotify is testing out whether or not record labels will pay an “ad” fee to promote songs in users’ music feeds. This attempt to create lower net royalty rates feels disingenuous – if I am likely to enjoy a song in a playlist, Spotify’s algorithms should know this without charging the label a fee, which really just amounts to a discount to the royalty Spotify would pay to the label to begin with. However, if hearing a song more often would lead to me to buy a concert ticket, this clearly benefits the musicians (but not the record labels). With the music industry set to surpass its 1990s sales record of around $15B in the next ~5 years, the range of outcomes remains wide for the revenue split between musicians, labels, and streaming platforms.
Miscellaneous Stuff
Plasticastrophe
From Rolling Stone’s long read “Planet Plastic”: we ingest about a credit card’s worth of plastic particles every week thanks to lobbying efforts of the Big Plastic Hydra – big oil, big soda, and big tobacco – to keep the plastic industry going and polluting. Since 1950, 91% of plastic waste produced (6.3 trillion kg!) has never been recycled. A dumptruck’s worth of plastic enters the ocean every minute. In Colorado, microplastic fibers come down from the sky in rain and snow. Senator Udall is working on the “Break Free From Plastic Pollution Act” that would transfer some of the $100B’s of annual cost to the plastic producers, but the legislation faces a tough uphill road.
Charged-Up Bees
Bees return from searching for pollen with a positive net charge due to the in-flight collisions with particles in the air. The waxy exoskeleton acts as an insulating layer, causing charge to build up to produce voltages of 450 volts (that’s higher voltage than a fully-charged Tesla! No need to worry about electric shock though, bee amperage is quite a bit lower). The accumulated positive charge helps attract pollen from flowers, which tend to carry a negative charge, as well as identify recently-visited vs. fresh flowers. Here is another article from 2013 on the electric field interaction of bees and flowers that NZS head-beekeeper Brinton recently sent me.
Stuff about Geopolitics, Economics, and the Finance Industry
Peters Argues for Replacing GDP with DDP
Ole Peters argues that GDP is particularly good at masking inequality because a small number of people (or companies) gaining a lot outweighs a large number who are worse off. He proposes using DDP, or democratic domestic product, which would equal weight people instead of dollars. There’s a more in-depth explanation in his technical post here.
Ole, Ole! Peters Mathematically Refutes Cognitive Bias in Probability Weighting
And, in a double dose of Ole this week, here is a new post that shows humans are NOT acting with the bias that behavioral economists have assumed. Instead, when we make a decision, we are acting rationally by taking into account our path through time. Ergodicity economics explains the decision as based on rational thinking, so we don’t need to bring in psychological factors of bias.
ESG vs. NZS
Brinton and I have long used the concept of non-zero sum as a way to gauge the future success of companies (first discussed in our 2014 whitepaper Complexity Investing). We think NZS is very different than ESG. Maximizing for NZS, as we wrote in this whitepaper, means solving for the best outcome for customers, employees, the environment, society, and investors. ESG, however, has become a game that companies are playing to score high ratings and attract ESG investors who are just lazily checking boxes, without digging into whether a company is really making the world better. Here is how Al Gore’s wildly-successful Generation Investment Management describes sustainable investing:
“A sustainable company is: one whose current earnings do not borrow from its future earnings; one whose sustainability practices, products and services drive revenues, profitability and competitive positioning; and one that provides goods and services consistent with a low-carbon, prosperous, equitable, healthy and safe society.”
This seems intuitive enough, but when I look through Generation’s holdings, I see several companies that I would classify as low-NZS businesses (e.g., I wrote just last week about gene sequencer Illumina, which has kept prices artificially high, possibly slowing the advancement of gene research). A company can seem fine from an ESG perspective, but might be falling far short of maximizing NZS outcomes for society. We believe NZS maximizers will take an increasing share of investment returns over time.
Print Money
The Fed dropped rates 50 bps this week. It’s certainly important to keep liquidity in the system, especially for economically-sensitive companies with near-term debt maturities or interest payments that might require access to short-term borrowing; but, I think there are better ways to tackle an economic shock. We are in the decades-long, slow burn(out) of capitalism – likely caused by declining birth rates, the shift to an information-dominated economy, and tech-driven productivity, which all seem to be feeding the excess liquidity and decline in rates (see the end of SITALWeek #217 on interest rates, birth rates, tech-driven deflation, and hope). The recession of 2020 will have a much better liquidity situation than 2008-2009. The best action here might be one that is similar to my suggestion in #217: governments would be better off cutting checks to citizens than further lowering rates. Lowering rates can feed fear, but providing cash could drive hope and safety. The economic strain from coronavirus is likely to be from reduced spending, not necessarily illiquidity.
Don’t Take Health Advice From Investors
VC Sequoia rang the panic bell for the 2nd time in 12 years by asking their portfolio companies to make “fast and decisive” adjustments in response to the coronavirus. When Sequoia posted their “RIP Good Times” slide deck in 2008, predicting death spirals and a lengthy recovery, it was largely an alarmist “sky is falling” set of instructions that, in my opinion, looked silly at the time, and certainly looked silly in retrospect. I chuckled at the title of their new warning: “Coronavirus: The Black Swan of 2020” because the point of black swans is that they aren’t supposed to happen every year! But, it actually makes a good point: something crazy can happen at any time, so your company should be adaptable and ready all the time, not just right after something crazy has happened. As I say often: in long-term investing, it pays to be skeptical, but it never pays to be cynical – skeptics are looking for the truth, cynics are assuming the worst. Anyway, don’t take healthcare advice from me or any other investor, but please do wash your hands!
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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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