SITALWeek #256
Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, deepfake podcasting, 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 sign up form; if you have any issues or questions please email sitalweek@nzscapital.com)
In today’s post: Intel and the failure of Clayton Christensen’s innovation strategy; Roblox pulls ahead of Minecraft; deep audio fakes come to podcasting; monopolies are desirable in the Information Age; power laws hollow out the middle of retail and food; logistics bottlenecks and Shopify’s robots; permafrost problems; climate migration; and lots more below...
Stuff about Innovation and Technology
Roblox Outbuilds Minecraft
With over 150 million monthly active users, Roblox is now played by over half of kids under 16 in the US, according to The Verge. The online game is adding a feature called Party Place, which gives users the ability to create virtual hangouts and events like birthdays or viewing parties (similar to a feature in Fortnite, which is geared toward generally older youth and adult gamers). The company expects to pay developers on the gaming platform $250M this year, up from $110M in 2019. The platform is to a certain degree competitive with Microsoft’s Minecraft. Roblox’s 150 million MAUs increased by 35 million from February 2020 to now, while Minecraft, with 126 million MAUs, only increased 14 million from September 2019 to May 2020. Meanwhile, Microsoft’s interest in acquiring soon-to-be-banned Chinese teen short video app TikTok is likely going to intersect with Minecraft and Xbox. And, if that deal comes to pass, it would be analogous to Fox buying Myspace; and, indeed, Myspace is a good analogy for TikTok for a variety of reasons (both positive and negative). But, it’s worth noting the enterprise software giant’s attempts to crack the youth market have been a little mixed, notably exemplified by the recent shuttering of game streaming platform Mixer, which failed to launch despite the strong position of Xbox. One popular live streaming activity for TikTok creators is to play Minecraft, but Twitch and YouTube still dominate game streaming.
Effortless Audio Editing
The audio editing software, Descript, has a new feature called Overdub, which creates a deepfake of your own voice so you can simply edit the text of the auto-generated transcript and it automatically updates the audio recording. Descript is a startup from Andrew Mason (of Groupon fame), and I’ve been using it – and loving it – for the SITALWeek Podcast version (if you haven’t checked it out yet, rather than read the newsletter directly, I just riff on topics in it).
Speeding up Streaming
I’m excited to see Netflix take another swing at adjustable playback speeds. As I facetiously wrote last November: “I welcomed the news that Netflix was testing a 1.5x playback. But, the backlash from directors appears to have squashed it. Let’s call a spade a spade here: the righteous indignation from Hollywood directors over this news is because, deep down, they know that last 10-episode streaming series should have been somewhere between four and six episodes at most. This new concept of a 10-hour movie on streaming apps has created some seriously lax editing. Art exists within constraints (money, time, etc.), and streaming has taken too many constraints away.”
Monopolies in the Information Age are Desirable
Last year we wrote a short piece “How I Learned to Stop Worrying and Love the Monopoly” to accompany our other papers on regulation: “Tech regulation: trying to jam a power law back into a bell curve won’t work” and “Pace Layers: Tech Regulation” (all available here as a well prescribed cure for insomnia). This Information Age monopoly paradox seems to be the one people have the hardest time wrapping their heads around. With recent headline news of increased big tech regulation, it seemed a good time to summarize our viewpoint: as the economy goes from analog to digital, monopolies will form around data, network effects, and other common platform economies of scale. These platforms can produce the highest positive-sum outcomes for all constituents; but, they can also become problematic. Therefore, regulation should focus on open access to (and user control of) data (and the platforms themselves) that does not yield advantage to the monopoly, and, where necessary, capping the toll that these platforms charge. To be clear, there should be more regulation, but applying a 1900’s Standard Oil or ‘Ma Bell framework will competitively cripple the West.
Power Law Bifurcation of Retail and Restaurants
It’s no surprise that ecommerce is gaining a ton of share right now, and the worst is far from over for physical retail, which is poised to suffer even more setbacks in the coming months. The current problem is a dearth of back-to-school shopping, since there’s not yet a path forward for safely returning to brick and mortar schools. Next up, the famously important Black Friday Christmas kickoff (the day after US Thanksgiving) will be much diminished in the physical world with COVID crowd restrictions. And, although more fiscal stimulus is hopefully on the way, how many people are really up for a big holiday spending spree this year? With minimal holiday sales to float them through the ensuing year, the future of analog retail looks murky. Retailers attempting to transition to the digital world also face an uncertain future. Near term, efforts to shift to online sales are hampered by rapidly rising shipping prices and delays from shippers’ lagging capacity. Ultimately, however, will interstate, and even city-to-city, shipping remain a clogged, expensive system and end up favoring hyper-locally fulfilled retail distribution?
For retailers, relying on 3rd party carriers like UPS and FedEx is increasingly tenuous, as they raise prices but cannot add capacity fast enough to meet growing demand. Maybe this latest round of price increases can transform UPS and FedEx into better businesses, but evidence suggests otherwise. Both companies should be more profitable given they often collude on pricing (well ok, technically one of them changes prices, and then the other changes the following week), and the soon to be insolvent US Postal Service offers little competition. Oftentimes, outsized returns in the shipping business are balanced by employees, who have strong unions to fight for higher pay and benefits. Staging inventory closer and closer to customers was an ongoing, pre-COVID ecommerce trend, which should continue to decrease demand for moving packages quickly across the country, a mainstay of UPS and FedEx. Amazon has been working for years to take back control of their last-mile delivery, and, in the most recent quarter, the company fulfilled over half of its deliveries internally.
The likely outcome of the push-pull in shipping costs/demand, retailers’ varying degrees of digital aptitude, and the prolonged battle with COVID will be a power law bifurcation of retail. The small number of already large, vertically-integrated retail platforms in the ‘head’ will get even bigger, and the number of popular niche businesses in the ‘long tail’ will extend, enabled by a horizontal tech platform. Everyone in the middle will be increasingly filing for bankruptcy. We see this pattern repeat over and over as different sectors of the economy shift from analog to digital. Retailers who are big chains – but not big enough to invest heavily in technology and customer experience – will bleed share to Amazon and Walmart. But, these Buy-n-Large retailers won’t offer the diversity and personalization of small mom & pop retailers, who can increasingly turn to digital platforms like Shopify to keep the cash register ringing.
This same power law bifurcation will happen in the restaurant industry as well, with chains stuck in the middle squeezed out. The big restaurant chains can lean heavily on their own technology, brand, and cash flow to transform to meet shifting customer needs, not just in a COVID world, but in our increasingly digital world. We’ve seen this transition with Chipotlanes for burrito pickup. Starbucks, McDonalds, and others are investing more in their drive throughs as well as technology. In the US, the Pizza chains are in an interesting position given their existing ability to deliver hot ‘za. Papa Johns is hiring an additional 10,000 workers – on top of the 20,000 they’ve already hired to accommodate COVID demand surge. I’ve suggested in the past that Domino’s should focus on its strength in delivery to become a platform enabler for other types of foods (with its cardboard, err, I mean pizza, becoming only a small percentage of the food delivered). The winners and losers are piling up as California Pizza Kitchen has filed for bankruptcy while Wingstop has enjoyed record sales (even during a period of no live sports on TV!).
Now, some of this is just typical creative destruction in the restaurant industry as customers tire of some brands, but I think there is a clear pattern emerging of a power law that will benefit, on one end, a small number of large, tech-savvy restaurant chains. On the long-tail side of the power law, however, a horizontal click-n-collect/delivery platform has yet to reach profitable escape velocity. There is no successful Shopify for restaurants (and Shopify said on their earnings call last week that they don’t intend to serve restaurants, but I can’t imagine why they wouldn’t want to?). The early horizontal platform contenders exist only thanks to the generosity of the investors who are subsidizing meal deliveries in the US and across Europe and the UK. Local eateries don’t have enough margin to absorb delivery fees and cover high rents for half-empty dining rooms; even McDonalds and Chick-fil-A are raising prices for delivery items. Cloud kitchens – or at least more efficient restaurants and a profitable way of delivering food (including groceries) – will need to be conceived and implemented. I don’t know if it will be Taco Bell that indeed wins the franchise wars, but we should expect to see stuck-in-the-middle chains in retail and food continue to fold.
Shopify Adding Fulfillment by Chuck
Six River Systems and their warehouse robot, Chuck, were acquired by Shopify last year to help the ecommerce platform build out its merchant fulfillment capabilities. The company has big ambitions, according to this Venture Beat profile: “over the next few months, we’ll be making more announcements around more of a wall-to-wall capability, and that’s really where the advancements are coming from. It’s really expanding the use of not just the hardware automation but the software within the warehouses.” Chuck is also being adapted to help with in-store activities for retailers looking to fulfill online orders from existing retail locations. As noted above, fulfillment is Amazon’s key strength and advantage, and, with Shopify now focused on this side of ecommerce – while also striking partnerships with Facebook and Google to expand where its merchants can sell – this relative newcomer could grow into a bigger challenger for the ecommerce behemoth. Currently, Shopify charges a few percent of the transaction value, whereas Amazon is trending toward 30%(!) thanks to growing use of its fulfillment services for third-party sellers. Shopify's Achilles heel in delivery is its reliance on the increasingly struggling package carriers, as noted above. More aggressively building their own end-to-end network may be the solution.
Intel’s Existential Crisis: Innovate or Die
When a company reaches the point where they think calling in a consulting firm will help them with corporate strategy, there is a very good chance that company’s culture is beyond repair. And, when I say “very good chance” I mean that I am not aware of a single counter example, although it’s possible they exist. What’s interesting about Intel and its years of mis-execution is that it’s a prime example of the failure of the late Clayton Christensen’s philosophy of innovation. We addressed the shortcomings of Christensen’s method in Chapter 4 of our 2014 paper, Complexity Investing, primarily arguing that the idea of isolating innovation from the core of a company, and separating it into sustaining innovation and disruptive innovation, is a recipe for not innovating. Instead, innovation needs to be at the core of an organization’s DNA; then, there is no innovator’s “dilemma,” and the “solution” is quite different from the Christensen prescription. Over the years, Intel has made several mistakes – most notably completely losing the mobile market to Arm, which has relegated them to a minority share of processors worldwide as PCs and servers are now dwarfed in units by low-power devices. Intel, at one point, owned one of the leading Arm processor designers, XScale, but sold it to Marvell (XScale was a Christensen-like example of isolating innovation from the core business while failing to see the disruption to processing overall). There have been many notable failed acquisitions and investments of significant size, including Cloudera, McAfee, and Level One. They have lagged in GPUs to Nvidia and AMD, and they have underperformed expectations from their Altera acquisition in FPGAs compared to Xilinx. The cultural problems at Intel likely run much deeper than what we can see on the surface, but the stakes for the company to innovate or die have never been higher.
And, now, it’s not just Intel that’s at risk but the broader US competitiveness in semiconductors. A lot of folks are trying to get up to speed on semiconductors, but it’s a hard industry to get your head around. We published this explainer (and accompanying podcast) a month ago, and I discussed the geopolitics more in the macro section at the end of SITALWeek #245.
AI Benchmark Sweep for Nvidia and Google
Nvidia swept the latest MLPerf AI benchmarking, with its latest A100 platform outperforming its previous V100 by 50-250% (depending on application). Google’s yet-to-be-released TPU-v4 also did well in several categories of testing, with six new records.
PPQ Precision
As semiconductors advance and become more critical in industries like automotive and aerospace, precision in manufacturing and materials will be measured by defects in parts per quadrillion, which is a 1 with 15 zeros after it.
Tesla to License Autonomous Tech?
Elon Musk’s Twitter admission that he’s open to Tesla licensing their EV and autonomous tech to other car makers would represent a shift in my current model for the evolution of cars. My main view has been that, like most other industries that go from analog to digital, cars will have a vertically-integrated ‘Apple’ winner (Tesla) and then an ‘Android’ tech platform will emerge to power the rest of the crowd. Currently, Waymo is the leading contender for the ‘Android’ role (as previously discussed), but Amazon is trying to put the puzzle pieces together as well. If Tesla were to license their tech stack, and if (a big IF) other automakers were willing to give up their future margin potential by licensing it, that would be an interesting development.
Real Estate King Tide
Home ownership rates in the US surged to levels not seen since 2008. This rise in ownership was already underway – in part thanks to the 30-something sneaker wave of Millennials, born around 1989-1993, who will continue to drive a delayed household formation surge over the next few years. Spurred by COVID, the move from renting in cities to owning in the burbs could be an even more enduring trend. As the housing market heats up, Redfin is seeing almost 50% of bids come in for homes sight-unseen, and Zillow is ramping up efforts to facilitate those types of transactions with 3D home tours (perhaps an advanced version could eventually include all-important olfactory data of homes for sale).
Miscellaneous Stuff
Melting Permafrost Spells Trouble for North
Melting permafrost is posing increasing risks around the world. In Northern Canada, the shifting ground is literally splitting trees from the bottom up. Russia is grappling with all types of infrastructure failures in the oil and mining industries. Temperatures are rising faster in the North than anywhere else; for example, Norway’s Svalbard archipelago – which is well within the arctic circle – recently set a record high of 71 ℉ (21.7 ℃), and the region’s only state-operated coal mine is flooding from glacial melt; since the 1970’s, this northern outpost has seen winter temperatures climb more than 13 ℉ (7 ℃). I first discussed permafrost and the runaway tipping point for arctic melting back in #184, and the warnings grow more disturbing by the day.
Stuff about Geopolitics, Economics, and the Finance Industry
Great Climate Migration
The NYT reports on the projected “great climate migration” as the percentage of the world with inhospitably hot temperatures is forecast to increase from 1% today to 19% by 2070. There are billions of people that could be looking to vacate the at-risk regions. Food supply will likely need to increase dramatically in areas that are still arable. Even inside of developed countries, shifting climates may spell large risks to the food supply chain – mostly from either lack of water or deluge/flooding. Food inflation is probably one of the biggest identifiable threats to our low interest rate backdrop in the coming decades.
As I’ve suggested in the past, the biggest long-term threat to economic growth in developed countries is declining populations. In more developed nations, the birth rate is below what’s necessary to grow the population without immigration, and this problem is likely to accelerate as cultural values shift and technology increasingly replaces the need for more humans. One possible solution is for wealthy countries to compete with each other to pay immigrants to move in. This could come in the form of subsidized education, housing, or the like. The complicating factors are the rise of AI (and the associated job losses) as well as the possible job-creating trend from the multi-decade decoupling from China and repatriation of manufacturing set to unfold. There are scenarios where developed countries will want to vie for climate refugees to sustain growth, and other scenarios where fear and increased protectionism slam the door shut. The trend of the 21st century has been – clearly and disturbingly – toward the latter. So, while there’s no good way to make accurate future predictions given this wide range of outcomes – thanks to the complex adaptive systems of nature, populations, economies, and politics in which we are immersed – having a flexible view toward immigration in the coming decades will put countries in a far better position than those with rigid stances.
✌
Disclaimers:
The content of this newsletter is my personal opinion as of the date published and is subject to change without notice and may not reflect the opinion of NZS Capital, LLC. 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. 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. 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, LLC has no control. In no event will NZS Capital, LLC 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.