SITALWeek #239
Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, virtual worlds, 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: deep dive into what might (or might not) change emerging from the coronavirus lockdowns; the metaverse could come from the business world instead of video games; what types of movies and tv shows will we want when production starts back up? TV gains advertising as radio and billboards lose; smartphone usage changes at home; app store inequality; esports takes hold; US-China tensions rise over semiconductors and Taiwan; and, more below.
Stuff about Innovation and Technology
Gateway to OASIS
Interactive virtual worlds have existed in various forms for decades – MMORPGs like World of Warcraft or Fortnite and other simulated environments like Second Life or Minecraft. While some of these have tens of millions of users, they remain a small albeit rapidly growing market relative to other forms of entertainment. It’s been surprising how quickly a broader swath of the global population has adjusted to virtual interaction in the last couple of weeks, primarily through video conferencing (PSA: you’ll want to password protect all your Zooms, or better yet switch to Microsoft Teams or Google Hangouts due to new hacking threats like zWarDial and FBI warnings). Video conferencing and real-time collaboration tools are perhaps gateway drugs to the inevitable augmented-reality virtual worlds of the future, like the Metaverse in “Snowcrash” or OASIS of “Ready Player One”. Even business collaboration software Slack started out life as a video game. Wired wrote this week about the rise of socializing in MMORPGs, and The Verge reports on students recreating their entire school campus in Minecraft. In what would be a surprise to many, the new metaverse platform may be more likely to emerge from business and education than video games.
Actions Define Brands
Despite the difficult times, management teams and boards need to realize they do owe their fellow humans respect and support. As Mark Cuban said recently, how companies treat their employees during the crisis is going to “define their brand for decades.” An example of a company's destructive actions was reported by Ben Bergman, of the new SoCal tech news site dot.LA, detailing the fumbled mass layoff at Bird scooters this week. The degree to which companies can take care of their employees and meet the needs of their customers during the crisis may be a strong indicator of their potential success and trajectory as the economy starts moving again.
Real Sports Meet eSports
We’ve talked about NASCAR drivers competing in esports, and now we have F1 drivers doing the same. When will we have NASCAR drivers face off against F1 drivers in a video game tournament? The virtual Grand Prix series will be broadcast on YouTube, Twitch, and Facebook, and I am surprised they won’t be on broadcast or cable as well, given these types of events are doing well on TV. The NBA, meanwhile, is planning a virtual esports tournament with real NBA players via the game NBA 2K. When real-world events start back up again, will we keep these new esports tournaments as well – effectively doubling the sports industry? The popularity of these virtual events is likely to create a new set of younger fans for the sports leagues around the world. Indeed, leagues will increasingly be targeting the next gen of fans, like in the new deal between the NFL and ViacomCBS to broadcast postseason games on the Nickelodeon network.
Advertising's Punctuated Equilibrium
The pandemic has hit advertising revenues especially hard for radio, newspaper, and outdoor advertising as people stay home and watch more TV. Dating app conglomerate Match Group is decreasing its advertising, but also shifting it: “The marketing landscape is also changing: while out of home, cinema and rush hour radio are no longer effective mediums, we see television and digital platforms with increased impressions becoming more attractive.” If working from home sticks for some percentage of folks, and media habits change while we all spend more time at home, this could represent a dramatic and final nail in the coffin of many legacy ad mediums.
Stay-At-Home Shifts Wireless Usage
Stuck at home on video conference calls and distance-learning apps with a big screen TV and lack of daily commute, our use of smartphones could be changing. Time spent on our phones grew at a similar pace to prior quarters – around 20% y/y. But spending on mobile apps in the US grew a meager 5% in Q1. AppAnnie shows that China saw a much larger increase in mobile usage than what the US is experiencing. We know TV viewing was up anywhere from 20-40% across traditional and streaming in March. Homebound parents on video conference calls have turned to YouTube Kids to entertain the little ones – the YouTube Kids app took the top slot globally for time spent in a mobile video app in March, according to this report from Apptopia (PDF, page 17). YouTube also reported 100% increase in cooking video views, 200% for workouts, 55% for meditations, and 500% for videos tagged “at home” in mid-March (as compared to a typical day) as the video site grows in popularity. I suspect console gaming is up a lot, but mobile game downloads were up 30% in March compared to the average weekly downloads in Q4. Mobile traffic is also shifting to WiFi. As a result, we could see a pushout in wireless network capacity increases and decreased demand for new phones (such as Apple’s rumored 5G model this fall).
Vertical Integration of the Auto Industry
As the value in a car shifts from the chassis and engine to batteries, autonomous systems, sensors, etc., car makers are hiring semiconductor engineers and increasingly insourcing parts (that they’ve previously sourced from outside suppliers) in order to design and iterate faster around common platforms. Ed Sperling at Semi Engineering comments: “For the Tier 1, 2 and 3 suppliers, this raises some serious questions about their role in the development of these electronic systems, as well as their financial model. If carmakers develop these electronic architectures, then it’s likely that none of them will be standard outside of their own subsidiaries.” Vertical integration is a trend we’ve noticed in the past when an Industrial Age product transforms into an Information Age one – see: The Inevitable Vertical Integration of Information-Based Platforms from SITALWeek #219. Vertical integration could be one of the trends that accelerates as a result of coronavirus.
App Store Inequality
Apple is now allowing Amazon to do in-app purchases in its Prime Video app without giving Apple a cut. I don’t see how this can apply to only Amazon and other video apps; game makers and the like should demand the same treatment if they have users with accounts (and credit cards on file), as Epic’s Tim Sweeney pointed out. If Apple and Google don’t ultimately lower their 30% app store take rates for all developers, then behavior like Apple’s comes off as big companies colluding against smaller ones. It would also be the right, high NZS, thing to do – the fees on the app store are too high and represent a regulatory vulnerability. Such a change in fees could represent a significant headwind to app store revenue growth for Google and Apple and a boon to digital media and gaming companies.
Amazon Aiming to Become Ultimate Gaming Platform?
Amazon is reportedly investing hundreds of millions of dollars into becoming a video game publisher, according to the NYT. It’s possible the NYT is overstating the effort by Amazon in gaming given that only nine months ago the ecommerce giant was laying off dozens of its game developers. As I wrote in SITALWeek #231 with regard to the rising battle for gaming platforms between Microsoft, Google, and Amazon: “no one has everything it would take – cloud+games+social – to win if game streaming becomes a big business; however, if Amazon or Google were to acquire a major game publisher, that could change things overnight.” Polygon also had a great story on Microsoft’s plan for the new Xbox Series X, Xbox Game Pass, Project xCloud, and Xbox All Access as the company looks to hold its foundation in console gaming and extend its position into the cloud as rivals Amazon and Google circle.
Pilot Season a Bust
As discussed a few weeks ago, the disruption of production for new shows is going to cause an air pocket in new content for all the streaming apps. Now, the LA Times has reported on the disruption to pilot season, with 55 out of 56 shows vying for a spot in this fall’s broadcast TV lineup not completing their pilots. Pilot season is a microcosm for pandemic-accelerated change, as we are now likely seeing a permanent end of the idea of doing pilots in favor of “straight to series”. I thought these comments from producer Gail Katz were interesting: “So much depends on how long this whole thing lasts. And it feels like a lot of things could be done online, without driving all over Los Angeles, because we are already doing so many things online...But one question is, what will people want to see after this? Will they want comfort food, escapism, feel-good programs, comedies or more medical dramas?” Is any of the video content we enjoyed pre-virus going to fit in this new world we suddenly find ourselves in? What’s going through writers’ heads right now – what new themes of humanity will they probe when production starts back up? Will we still want billion-dollar comic book lollapaloozas, dark anti-hero shows, and surreal reality TV that have dominated our viewing for the last decade?
Location Data Tracks Stay-At-Home Adherence
Google has made available anonymized location data (by country and region) around the world showing compliance (or lack thereof) with stay-at-home recommendations. Also, the CDC is using location data – collected when mobile ads are served – to identify places where people are still congregating to guide the next iteration of pandemic response. As I mentioned last week, Google and Apple are in a unique position to combine anonymized location and health tracker data to provide important insights that could help stop the spread of COVID-19 infections.
Miscellaneous Stuff
Devs
I’ve been enjoying the new FX show Devs (available on the new FX hub on Hulu, along with a lot of amazing FX shows). I’m hesitant to reveal any spoilers, so I’ll just say it's one of the best explorations of the deterministic universe I’ve seen, and it also has some fun with the quirky tech culture of the Bay Area. This type of show exploring the increasing interaction between tech, science, and human life might rise in popularity as we try to understand our new post-virus existence.
AI and Humans are Equally Bad at Predicting
Predicting the future in a complex adaptive system is impossible, and machine learning and AI won’t help. Here is an interesting example: “Three sociologists at Princeton University asked hundreds of researchers to predict six life outcomes for children, parents, and households using nearly 13,000 data points on over 4,000 families. None of the researchers got even close to a reasonable level of accuracy, regardless of whether they used simple statistics or cutting-edge machine learning.”
First Ripples of Disruption in Food Supply Chain
Unintended disruptions to the global food supply chain could result from restriction of movement of people to pick crops as well as the delivery of those crops. “In Florida, a lack of Mexican migrant laborers means watermelon and blueberry growers face the prospect of rotting crops. Similar shortages of workers in Europe mean vegetable farms are missing the window to plant.”
Stuff about Geopolitics, Economics, and the Finance Industry
Chinese Asset Management Opens to Foreign Firms
This week, China began allowing international financial institutions in the wealth management sector to sign up mainland citizens as clients. JP Morgan Chase took the opportunity to buy out their joint-venture partner in China. This new directive comes as global virus turmoil has caused a 31% drop y/y in the US imports from China, the largest since the data were first compiled nearly 30 years ago, according to the April economics and trade bulletin from the US-China Economic and Security Review Commission (PDF). So far, despite China being through the worst of the virus, the country is not seeing capital inflows to their markets. The report also points out that, leading up to the pandemic, 50% of the world’s PPE (personal protection equipment) was imported from China – a supply chain that, along with critical pharmaceuticals (e.g., penicillin), we might consider repatriating. In related news, India has banned export of hydroxychloroquine, another signal that drug manufacturing will likely permanently return home.
China vs. West Posturing Continues
Meanwhile, the Trump administration is once again threatening China with our most effective weapon: cutting Huawei off from advanced semiconductors. This is the “nuclear” option for the US, with potentially far-ranging consequences, as discussed in SITALWeek #233: “Trump’s ban here would effectively cut Huawei out of the 5G market, and force China to rely on foreign suppliers for all of their wireless communications (which would obviously give the West complete ability to spy on China). Taiwan continues to be the ultimate chess piece in trade negotiations, and China fancies TSMC a Chinese company while the rest of the world (including TSMC and Taiwan) do not. This move by Trump would also put Samsung in South Korea in the hot seat. I can only continue to conclude this is yet another surprisingly savvy negotiating tactic with an ulterior motive by Trump, because it would appear to force China to play nice, or use their “nuclear” option and take military possession of Taiwan.” Huawei’s chairman had this to say in response to last week’s posturing: “If the Pandora’s box were to be opened, we’ll probably see catastrophic damage to the global supply chain -- and it won’t just be one company, Huawei, destroyed. I don’t think the Chinese government will just watch and let Huawei be slaughtered on a chopping board. I believe the Chinese government will also take some countermeasures.” Despite a trade ban in 2019, Hauwei managed to spend $19B on US components, up from $11B in 2018, according to the FT.
WHO’s Pandering to China
Speaking of igniting tensions with China, the US State Department held a virtual forum calling for Taiwan to be recognized by the WHO. The WHO, which seems to have lost credibility due to its early handling of the Chinese pandemic, still refuses to recognize Taiwan as a sovereign state, a failing that obscured Taiwan’s early success containing the virus and arguably hampered global efforts.
Crisis Analysis, NZS Style
Rule #1 of investing at NZS Capital is: don’t try to predict the future; Rule #2 is: be skeptical but not cynical – in the long run, things always get better. (Only during a Zombie Apocalypse will these rules slip to #3 and #4 – behind Rule #1: Cardio and Rule #2: Double Tap 😁) When the market is moving all over the place, it tends to create two reactions in our brains: first, a feeling of helplessness – like we can’t find the earth under our feet – because we have a hard time processing the discordant flood of data; second, to regain the lost footing, our brains go into overdrive looking for patterns and extrapolations that, while they may make us feel more secure, yield a dangerously false sense of overconfidence in our knowledge of future events. But often, there is nothing to grip onto until time passes and more evidence becomes available. To help with this uncertainty, we did two team exercises this week, which you also might find useful as you think about the world and investing.
Exercise 1: we circulated an alphabetical list of stocks we own plus an additional 10 blank spots. Each team member independently created a portfolio from scratch from the list of existing holdings (with the ability to zero them out and add new ones). The goal was to do this as quickly as possible without referencing the current position sizes – we were looking for gut feelings to later intellectualize in a team discussion. I put everyone’s fresh alphabetical portfolio in a single spreadsheet highlighting discrepancies, and then we did a long video call to walk through it. This yielded some interesting results and excellent stock debate, which is the entire goal of our team function: respectfully challenge the ideas, not the person. The goal is to leverage the team to reduce cognitive bias as much as possible. We made a few adjustments around the edges, some of which were important, and outlined several future options depending on where the market goes from here.
Exercise 2: for nearly a decade, we’ve done an annual exercise of “What will change in 10 years? What won’t change in 10 years?” This is inspired by Bezos’ advice to focus on what won’t change in the long term, which for Amazon at the time (and still today) was: customers will want more selection, lower prices, and faster delivery. We weren’t due for this analysis until August, but we did an abbreviated exercise contemplating the accelerating pace of change as a result of the pandemic. We focused on the 2nd derivative – which growth rates will inflect higher and which decay rates will deteriorate further? The safest assumption emerging from the crisis is that trends already underway will be accelerated and compressed.
If the second exercise sounds like a violation of Rule #1 (don’t make predictions), you’re sort of right. But, the main point of the exercise is to explore the new fuzzy bounds of the (now significantly expanded) range of possible future scenarios. And, we do try to keep the discussion grounded in those predictions that we feel are fairly broad and safe, which we will continually reevaluate in a Bayesian manner as confirming and/or disconfirming evidence becomes available. An example of a broad and safe prediction: it appears the ongoing shift to cloud computing will rapidly accelerate. I imagine that most of our predictions, summarized below, will turn out to be wrong, which is part of the learning process of the exercise – a reminder to be humble and avoid immutable convictions.
The global economy and ecosystem of Earth are experiencing a punctuated equilibrium that is rivaling events not experienced since World War II, the Great Depression, or the Spanish Flu. That means, as we sit here today, the number of branching pathways into the future is multiplying much faster than normal. The initial branch we emerge onto from the economic shutdown is going to depend heavily on the length and severity of the recession, the effectiveness of government stimulus, enduring behavioral changes, etc. Time-dependent, highly-variable outcomes are a classic attribute of complex adaptive systems – which exhibit characteristics of chaotic systems in which tiny perturbations in the initial conditions create giant and unpredictable changes in the future state. There are 100 places the economy can be in a year, 1000 in two years, 10,000 in three years, etc. Evolutionary fitness functions will determine which companies, behaviors, and ideologies survive. Imagine the analogy of an Everettian interpretation of quantum mechanics: there are many worlds in the future we might find ourselves in – but which trends are likely to exist in the greatest number of those many thousands of branching pathways through time? The most common trends are likely to be the broader, safer predictions over time, but they are always subject to revision based on disconfirming evidence along the way. The key is to determine which characteristics will drive the survival of the fittest companies. We believe attributes of survival and growth are the same themes we outlined in our 2014 paper, Complexity Investing, with the most important concept being non-zero sum – NZS – the degree to which companies are maximizing value for all constituents.
What Won’t Change?
The two most important characteristics of winning companies in the 21st century will be adaptability and NZS – their ability to maximize non-zero-sum outcomes that create more value for all of their constituents, including customers, employees, society, the environment, and, lastly, shareholders. This will be more important than ever as a smaller economy tries to repair itself and consumers and businesses choose how they will spend their limited resources – companies giving the most without taking too much in return are likely to build virtuous network effects.
Humans are likely to remain social animals. So, we think group events and traditional sports will survive (and thrive), and esports could be a much bigger industry in five years than they would have been without the pandemic. The WSJ had a detailed article last week on the live-sports fallout including this comment from Mark Cuban: “[People] will be starving for new content, and [live sports] will be there to feed them.”
With respect to the world going green and consumers placing an increasing value on products and services that are better for the environment, we are guessing that holds constant, but the economic consequences of these decisions may slow the trend down for a period of time.
What Might Inflect?
Based on past crises during 21st century capitalism, three trends are apparent: 1) accelerating pace of change and technological progress; 2) rising inequality; and 3) rising nationalism. As I wrote in more detail in SITALWeek #237, the current crisis will likely cause these trends to continue or accelerate unless, as a society, we come together to intervene and reverse the problem of inequality.
The hyper-accelerated pace of change will compress 10-20 years of digital economic transformation into a period of 3-5 years (or perhaps even less time than that). This means zombie companies that have been riding their 1900’s Porter’s 5 Forces “moats” while they buy back stock and pay dividends – literally mortgaging their future – will die faster than they otherwise would have. And, this accelerated pace of transformation will come to sectors that were largely untouched so far by the Information Age due to regulatory capture and lobbying – namely financials and healthcare. Capital-based moats at losing companies will increasingly fall to network effects and data-driven growth at winning companies.
Power laws will keep growing across more industries, with share concentrated amongst a few large platforms, plus a long tail of specialty, niche-focused companies. The middle will continue to hollow out, perhaps at a faster rate.
The accelerated shift to the cloud seems almost too obvious to mention; but, there are many branches to think about in that trend, as Aaron Levie tweeted. New Jersey has put out a plea for COBOL programmers to fix their 40-year-old-unemployment software.🤦♂️ And, working from home might be here to stay as a Gartner survey of CFOs revealed 74% of companies plan to keep at least 5% of their workforce remote with 23% planning for at least 20% of workers to be remote.
Accelerated shift to ecommerce and digital commerce is another blatantly obvious trend – Publicis’ retail geek Jason Goldberg had a comprehensive post on that this week. Related, the food industry will also see compressed transformation, with outcomes that likely resemble some of what I discussed last fall in The Evolution of the Meal. Or, as we learned in “Demolition Man”, will Taco Bell be the only restaurant to survive?
Innovation in the finance sector also seems too obvious to mention. Certainly we will see a huge acceleration in digital payments for consumers and B2B. Perhaps this crisis will finally break the monopoly control of the US banking industry that has put the US decades behind in fintech innovation, but I am not holding my breath. I was excited to see that millennial-focused Chime Bank will be spotting customers on their $1200 government checks – it’s a great example of how a more modern, customer-friendly approach is needed.
Given the success and relative affordability of video conferencing, business travel might not bounce back. The CEO of online travel giant Booking was also skeptical of the return of business travel to pre-crisis levels in this CNBC appearance, and I would add that a collapse in business travel would make consumer travel much more expensive and challenging if the airlines lose steady, profitable revenues that support seasonal leisure travel. Could this force airlines to all become nationalized by countries around the world? Likely, domestic tourism will rise, but international tourism will be slower to return, and perhaps more people will own RVs.
The higher-than-normal turnover in small- and medium-sized businesses (typically 10-15% of SMB go out of business every year) could mean that 30-50% of SMBs are new in the next few years. Who will become the winner-takes-most platform for the SMB operating system – could it be Square or Shopify? Someone else?
Will my 30-something demographic sneaker wave get a boost from the quarantine, or will the economic hardship continue to delay household and family formation? If people don’t get back to dating in real life soon, that’s going to greatly change social dynamics.
Automation and robotics may finally arrive in a big way to replace our fleshy fragility – by the time jobs come back, the robots might be ready to take our place. Amazon is hiring tons of people right now, but wouldn’t they rather have zero people and 100% robots? In China, autonomous grocery delivery vehicles have already made 2500 trips in three cities. Protocol has a deep dive into how automation and robotics could impact retail, healthcare, and other sectors. What’s the best way to play robotics and automation? Reply back and let me know your thoughts!
Will universal basic income take hold as we emerge from the crisis and be here to stay, resolving a 30-year escalating problem of inequality that has fueled nationalism and fear amidst accelerating technological progress? If the economy settles 20% lower after the pandemic is over, and then slowly starts growing from there, it will be a near certainty that UBI will arrive and stick.
Will the world be less interconnected as a result of fear, rising nationalism, rising inequality, and the disorienting pace of change? Will supply chains and capital flows decouple, especially from China? This is a hard one to have a solid view on, so it’s safest, we think, to think through the consequences of decoupling; although, over a longer time horizon, I personally foresee a cautious re-coupling at some point.
Or, perhaps nothing significant will change (seems unlikely now, but it’s still a strong possibility to consider). We may develop great near-term treatments and (eventually) a vaccine for the virus, and government stimulus might bridge everything until society starts moving again – the gears of society may simply turn too slowly to be greatly impacted, despite the magnitude of a (relatively) short-term disruption. So, we will keep watching for evidence to support or dismantle any/all of these ideas. The most important behaviors today are to stay optimistic and hold your convictions very loosely. I was thrilled to read that Bill Gates is spending billions of dollars to produce vaccine candidates for COVID-19. He is a beacon of reason and hope that stands out amongst the world’s wealthiest people, who have much more they can all do to help society now and in the future.
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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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