SITALWeek #237
Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, woolly mammoth construction, 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: an exploration of the three trends accelerated by the four 21st-century crises: rising pace of technological change, rising inequality, and rising nationalism; special guest post from Gibson Smith on the bond markets; is video conferencing a platform, or just a feature? Square becomes a real bank; the dollars behind the collapse of theatrical movie releases; and, more below...
Stuff about Innovation and Technology
Viral Impressions
In case you missed it, I went through my analysis and framework for thinking about the coronavirus crisis last week in SITALWeek #236. If you are unfamiliar with complex adaptive systems or ergodicity, these are excellent topics to help understand the world right now. I also have some more thoughts down in the Macro section at the end of this edition. While most of us are doing the right thing and distancing to reduce the burden on the healthcare system (at NZS Capital, we are working from home and living on Zoom; I’ve been largely remote from my team since 2008, known as Brad-distancing😁), now it’s time for politicians to get over themselves and help people. My main advice in times like this never changes: optimism wins and cynicism loses. Try to gain some temporal distance – put yourself five years in the future and look back to decisions you can make today; in the equity markets, be greedy when others are fearful. But, perhaps the best advice comes from Kenny Rogers, who passed away this week:
That the secret to survivin'
Is knowin' what to throw away
And knowin' what to keep
Increased Internet Traffic and AI to the Rescue:
—Netflix, Amazon Prime, Disney+, and YouTube are all cutting video quality in Europe at the request of the EU to counter the increase in streaming traffic.
—Verizon reported 75% growth in video game traffic and 12% growth in video streaming during peak hours. Overall, traffic was up 20% with social networking flat.
—Meanwhile, with canceled tours, artists are turning to live concerts on Twitch – quaranstreaming!
—BT reports that, although traffic us up 35-60%, it’s running far below peak network capabilities.
—Coronavirus work-from-home trends strain the IT supply chain as companies scramble for laptops anywhere they can find them.
—Redfin CEO Glenn Kelman reported a 24x increase in video home tours over the last week!
—IBM’s Summit supercomputer, which performs 200 quadrillion calculations a second (1 million times as fast as the laptop I am typing on), narrowed down a list of 8000 drugs to 77 candidates for testing against coronavirus in just 48 hours. The system uses over 27,000 NVIDIA GPUs!
Surging Food Pickup/Delivery:
—SWIPEBY is a provider of curbside pickup technology solutions for restaurants. The platform connects customers to restaurants via a mobile app without onerous commissions. In just the last few days they have seen a 1500% spike in site traffic and over 1000 new restaurants interested in the app according to a SITALWeek reader. Curbside pickup for a variety of businesses could be structurally on the rise.
—Dutch online grocery sales topped €1 billion as shoppers stock up (article in Dutch). The market leader, Picnic, has kept all delivery spots booked up in advance and is hiring 100s of people to keep up with demand and service levels. Already operating at capacity, the company has seen an approximate 50% increase in daily average app traffic. Here is a Bloomberg article from earlier this year on Picnic and their recreation of the ‘milkman’ business model.
—Rakuten Intelligence reports a 52% increase in food delivery (up from the run rate of 22% so far this year) compared to this period last year.
—Amazon Prime Pantry closed temporarily to restock staples.
—British online supermarket Ocado had to temporarily halt orders to restock and catch up to demand.
—CNN reports that downloads of the Instacart app surged 218%, while Walmart’s rose 160%, last Sunday vs. a year ago.
—Amazon is hiring 100,000 workers and Walmart is hiring 150,000 workers to deal with demand. Amazon is also increasing overtime pay from 1.5x to 2x normal wages.
Increased Work-from-Home Collaboration Tools and Video Conferencing:
—Last week, I heard about people holding cocktail parties and kids’ birthday parties on Zoom, in addition to the novel idea of all-day video conferencing! No word yet on whether people are holding all-day cocktail parties, or combination kids’ birthdays and cocktail Zooms. I’ve also seen lecture series turned into paid seminars using the Zoom seminar feature.
—Slack added 7k customers in the first seven weeks of Q1 compared to 5k new customers in all of Q4.
—Microsoft Teams daily active users surged from 32M to 44M between March 11th and 18th, more than doubling the 20M active users as of last November. Microsoft’s high degree of product execution and strength of collaboration platform tools is shining along with the the global Azure data center and technology footprint. This week, Satya Nadella introduced some compelling new AI features on Teams video chat – including automatic background noise reduction using AI (the demo in that link is very cool). This elevated investment in Teams by Microsoft is something that should give investors a bit of pause when analyzing Zoom’s prospects. Is video conferencing a platform unto itself, or will it ultimately be just a feature of a larger collaboration suite? Zoom’s founder explains his strategy in depth in this great interview on Protocol. Zoom clearly has ambitions of becoming a broader platform (including potential plans for smell-o-vision!). Our NZS team certainly lived in Zoom last week as we all worked from home, and the obvious benefit of Zoom’s relentless focus on reducing latency to <150ms really shines in the product's useability. On the one hand, if there is extreme asymmetry in growth and outcome for a business like Zoom, you don’t want to lose the forest for the valuation trees. On the other hand, if Zoom stock triples from here, the video conference platform would have a market cap of around $100B, making it the 6th largest software company in the world, just behind Salesforce.com. 🤷♂️
Building a Better Battery
IEEE reports on the multiple advances in EV battery technology as we await Tesla’s upcoming battery spotlight event. Advances include decreasing or eliminating the need for cobalt, a switch to supercapacitors to improve charging time while extending battery life, and multiple anode technologies in development that could dramatically drop charging times. The WSJ also wrote about the promise of solid-state batteries. There are a lot of reasons why we don’t have a “Moore’s Law” of batteries, but the progress is clearly accelerating, and we should expect it to yield dramatic impacts to both EVs and grid energy storage.
Cloud Laboratories Automate Drug Discovery
Strateos is a lab automation startup that allows biologists and chemists to remotely develop new drugs with the use of robotics. Their robotic cloud laboratories allow for design and automated synthesis and biological testing of potential drug compounds. It’s not clear how many different types of drug compounds they can make; but, if the chemical diversity is substantial, the platform could be a boon for accelerating drug discovery.
Theatrical Window Shuttering
In 2019, the US box office was $11B, of which around $6.8B went to Hollywood Studios. The average time in theater was around 12 weeks before heading to home delivery, according to Vanity Fair. With movie theaters shuttered, there’s a very real possibility that some/most won’t survive the downturn due to high debt loads and potential shifts in post-pandemic consumer behavior. AMC Entertainment had net debt/EBITDA of 6.6x at the end of 2019, and their 2020 EBITDA is anyone’s guess. Cinemark was in better shape with 2x net debt/EBITDA, while National CineMedia stood at 4x. It’s certainly possible that a nostalgia for shared storytelling experiences (which is programmed into us after hundreds of thousands of years of gathering around a campfire🔥) and need for a date-night destination keeps people congregating and movie theaters going. It’s depressing to contemplate – but not hard to imagine – the tall odds against independent arthouse theaters surviving the recession without significant bailout if viewers don’t return to see movies like they did before. But, it also seems possible that there will be a wholesale shift to collapse the theatrical window and feed the content beast of the new streaming platforms controlled by the five big movie producers – Disney, ViacomCBS, Warner, NBC Universal, and Netflix. Disney, which was 38% of the US box office in 2019 (almost 3x #2 WarnerMedia), is leading the charge – they brought Frozen 2 early to Disney+ and now have pushed Pixar’s Onward to the digital purchase window after only two weeks in theaters. And, Onward will come to Disney+ early (April 3rd). Universal will release movies straight to purchase on popular streaming apps as well. The movie release windows are complex, but the big ones are theatrical, rental, DVD, and then basically streaming apps (and premium cable networks). After that, rights are complicated; but, most studios are retaining rights on new movies and clawing back old ones to feed their direct-to-consumer streaming apps. There is a lot of money in those various windows, so collapsing and going direct with “day-and-date” simultaneous release to everyone, as it’s called in the industry, would need to drive huge streaming subscriber expansions or come with premium charges, such as $20 to watch a movie in its first month of release or a premium subscription tier that included all new releases.
Fox and Roku Part Ways in Content Tug of War
Fox has sold its stake in Roku to acquire advertising-based streaming platform Tubi. I covered the evolving Fox-Roku relationship in SITALWeek #230, and the rumored Tubi deal along with the logic behind the rise of AVOD streaming in SITALWeek #233.
Oura’s Biometric Ring
Finland-based smart ring maker Oura raised $28M from Google and Square, amongst others. I’ve been wearing an Oura for about a month, and I am a big fan! It’s a little trickier than getting a fitness band or smartwatch because you do need to order their sizing kit (or find a friend who has a kit), and then wait for it to arrive from Finland. I think it’s by far the easiest tracker to sleep with. Also, fitness bands (in their current state) tend to cause what I call ‘tracking anxiety’, so I like that Oura feels more passive.
Tracking Coronavirus Exposure via Location Data
The US government is looking into whether the tech companies can help create a smartphone-based tracking app to see who has had potential coronavirus exposure, according to the WaPo. This situation should challenge our emotions on the topic of tracking: on the one hand, what a slippery slope; but, on the other hand, I envision myself opting into such an app on a temporary basis.
Square Banking
Last week, the WSJ reported that Square finally got their application approved to become a bank after 2 ½ years of waiting. The Journal described Square’s new designation as an ‘industrial-loan company’ as similar to a bank, but lacking Federal Reserve oversight given that it’s part of a broader company. Back in October, I wrote about Square’s stalled bid to get a bank charter license and lamented the potentially fragile reliance of fintech on community bank partnerships to make loans to their customers. It’s primarily the bank lobbyists who have gridlocked financial services innovation in the US – with their disturbingly-close connections to Washington and decades of regulatory capture, which has cemented their monopolies. One dissenter, FDIC Board Member Martin Gruenberg, objected “Square has yet to demonstrate its viability during a downturn in the economic cycle. In fact, it has failed to demonstrate its viability during the upside of an economic cycle”...well, we are about to find out the answer to that objection right now as Square has very large exposure to some of the hardest-hit small businesses in the US due to the coronavirus.
Miscellaneous Stuff
Osteo-Architecture
A 40-foot diameter, 25,000-year-old building made of the bones from 60 woolly mammoths was recently discovered in Russia. It’s difficult to ascertain the purpose of the unique building, but signs point to it being a commissary of sorts with evidence of fires and food remains.
Micro Dino
A hummingbird-sized dinosaur skull was found trapped in a Myanmar amber sample. This new, 99M-year-old sample sets an earlier date for when dinosaurs began to miniaturize on their path to becoming present-day birds. The sample has intact soft tissue as well; at press time, however, Ian Malcolm was not available for comment. A report by the NYT bummed me out by explaining how these great new Myanmar fossil finds are funding war and violence there.
Coronavirus’ Natural Origins Confirmed
There have been a few wild rumors circulating that the coronavirus was released (intentionally or unintentionally) from a research/military laboratory. However, thanks to a bit of comparative analysis by scientists from around the world (US, UK, Australia), we can put those rumors to rest. As detailed in Nature Medicine, researchers compared genomes of multiple coronaviruses, including SARS-CoV-2 (the scientific designation for the current coronavirus). Based on homology, the authors postulate that the virus passed from bats to pangolins to humans. They conclude: “the genetic data irrefutably show that SARS-CoV-2 is not derived from any previously used virus backbone…[and]...is not a laboratory construct or a purposefully manipulated virus”. They, of course, are not the first to suggest a bat origin. Indeed, scientists at the Wuhan Institute of Virology (among others) previously reported in Nature that the original viral host was highly likely a bat based on genetic studies.
Stuff about Geopolitics, Economics, and the Finance Industry
Ancient DNA Impacts Our Response to Crises
The trajectory of the first fifth of the 21st century has been an interesting one. The Internet has transformed the economy and our daily lives in incredible ways, and it’s only just beginning. The digital age has come with both positive and negative consequences, as humans take time to adapt to the new communication medium. We’ve been through similar adaptations in the past – with each new wave of communication technology bringing progress and disruption – from the printing press to radio, television, social networks, etc. Here is something I wrote for SITALWeek in 2017:
A paradox I have been thinking a lot about: each new media invention raises human empathy while also increasing our genetically programmed inclination toward tribalism. The printing press gave us glimpses into other people's lives that we could not previously understand, but it also helped, to pick one of many examples, enable Protestant vs. Catholic tribal entrenchment (which also yielded America!). Radio and TV/movies gave us incredible insight into other parts of the world and storytelling, and it gave us amplified voice for the first time – almost god-like – that helped create fascism, communism, Hitler, etc. We had a pretty hard time adjusting to the reality of radio and video, but we largely got there after a couple of decades for each. The Internet takes up empathy and tribalism by several more orders of magnitude. Each time the species invents a new media tech, we have a challenging and often deadly learning curve. We are neck deep in this struggle right now. It will get worse before everyone learns to cope with this new Information Age; but, just like the printing press and radio/video, I am super optimistic we eventually pull through with more empathy, but less tribalism than we are seeing today.
What has struck me lately is some of the common threads from the four 21st century crises – the dotcom crash, 9/11, the financial crisis, and now coronavirus (I apologize for my American-centric view of these events, as I know there have been a multitude of salient crises around the world during this period). Three aftereffects stand out to me: 1) the subsequent resolution of each crisis has increased inequality (see next paragraph), largely due to the nature of government response policies; 2) each disruption has accelerated the shift to the digital economy; and 3) nationalism has been on the rise during this entire 20 year period, and it seems to be in some way connected to the accelerating inequality and progress, respectively, of the first two trends.
Deloitte reports on crisis-driven rising inequality: “After both twenty-first-century recessions, the upper-income bracket showed significant discretionary income growth. The same pattern held true after the Great Recession. However, a substantial portion of the US consumer base—consisting of the low- and middle-income groups—is not materially better off today than they were nearly two decades ago. This income bifurcation—more than region, gender, or generation—has impacted spending patterns.” (PDF) Further, throughout the recovery from the Great Recession, e-commerce accounted for all of the growth of retail – doubling to 20% of total retail sales.
If I had to guess, the coronavirus pandemic will accentuate all three of these trends, leading to: 1) increased inequality as the recession and government responses disproportionately impact people at either end of the income spectrum; 2) increased creative destruction, promoting faster adoption of the digital operating system that is already taking over the economy; and, 3) increased nationalism and fear of foreign impact on domestic life. To me, current events underscore a rising rebellion against the increasingly interconnectedness of the world as a result of the Internet revolution. Our ancient evolutionary programming – from living in small tribes separated by distance on the open savannah 200,000 years ago – is something that hasn't yet been overwritten in our brain’s operating system. Shocks to our everyday lives, such as the current pandemic, are more likely to stimulate the nerve cells in our brain’s more primitive regions (primitive from an evolutionary perspective – those most closely related to fight-or-flight survival), and the resulting psychological responses may not be quite in sync with modern-day life. This programmed-in, primal fear, combined with the rising inequality between the haves and the have nots and the pace at which technology is changing our lives and world around us, makes the world vulnerable to destructive ideology now more than ever. Indeed, it sets us up for a repeat of the strife of the first half of the 20th century – if we aren’t careful. Government bailouts that assist the 99% (instead of corporations and the top 1%) will be instrumental in stemming the dangerous trajectory we are on. Kindness and generosity also go a long way in times of crisis. I remain optimistic that humans will adapt to living in the connected, digital age brought on by the Internet. This crisis gives the tech sector in particular an opportunity to thoughtfully accelerate the digital economic transformation in better ways for everyone. We will come together – both locally and globally – to help each other out.
What’s Going on With Bonds?
The bond market has shown significant signs of stress during this crisis. Leveraged loans – preferred by private equity and other high-risk balance sheet borrowers – are at record levels of $1.2T, according to the WSJ. And, there are signs that the growing bond ETF market is not well supported by underlying liquidity of the market, with Blackrock and Vanguard quadrupling fees to sell some ETFs.
Below is a special guest post from Gibson Smith of Smith Capital Investors. Gibson has nearly three decades of experience in the industry, and we’ve had the pleasure of knowing him for the last 2 decades. It’s safe to say you won’t find a more thoughtful or talented bond investor to learn from in times like this. Information about Smith Capital’s products can be found here, and you can connect with Gibson on LinkedIn or Twitter for more insights.
Gibson Smith, Smith Capital Investors:
The corporate bond market has fallen victim to the coronavirus and the sharp decline in energy prices. Both surprises come at a time when a large number of companies were vulnerable to downgrades by the rating agencies. The potential downgrades were a result of elevated leverage within Corporate America, a result of the borrowing binge over the last decade that fueled large mergers and acquisitions and shareholder friendly activities. Our 2020 theme of Downgrades and Defaults is playing out, albeit in a much more extreme fashion than even we expected.
The moves in the credit markets have been violent and extreme in nature. On January 2nd of this year the Investment Grade spread (premium paid by companies to borrow money) stood at +68 basis points. Today that spread is +330, an almost 5x increase over a 2 ½ month period of time and a decline in price of 16.8 points (114.8 to 98.0). In the High Yield market (below investment grade rated companies, so called junk bonds), the spread on February 20th of this year was +331 and today it stands at +1012. This resulted in a 20 point drop in price in one month. The Energy sector has been the greatest casualty to date with many Energy bonds trading in 40-50 dollar price, usually a foreshadowing of defaults on the horizon.
This great reset in the credit markets will have a significant longer term spillover into how management teams think about their use of leverage and desired capital structures, as well as adjusting how they think about their cost of capital. For investors, once the dust settles, this will likely create some incredible opportunities in fixed income, likely creating historical equity type return potential. Equity investors rarely need to pay too close attention to the credit markets, but in today’s market where anything with leverage is vulnerable, it makes sense to stay engaged and understand what is playing out.
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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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