SITALWeek #258
Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, ash beds, 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: fear of the nonlinear; the AI Age and deflation; Apple and Google’s epic monopoly fail; delivery bottleneck handing share to Amazon; Hamilton helps Disney pass Netflix in July streaming minutes; bed burning; and lots more below...
Stuff about Innovation and Technology
Selene 9000
Nvidia has built a new supercomputer, Selene, its fourth-generation DGX SuperPOD, which is now the fastest machine learning system available in the US. Selene has 280 v100 chips, 494 Mellanox switches, and seven petabytes of flash memory. Selene is aware of its own status and sends Slack messages to the engineers if it’s having any trouble with any of its hardware.
Million-Mile EV Battery?
Tesla is expected to announce a battery breakthrough on September 22nd, possibly related to removing anodes. This design makes the batteries lighter but introduces potential safety and lifetime issues. In a recent Nature Energy paper, as highlighted by Teslerati, Tesla’s battery research team may be overcoming these issues by using a “dual-salt carbonate electrolyte”. The rumors have been pointing to an announcement of a battery capable of enough charge cycles to last one million miles.
[(Hulu)+(Disney+)]>Netflix
The Disney+ debut of Hamilton was estimated to have been viewed by 2.6x as many people as the most watched show on Netflix in July (which happened to be reruns of Unsolved Mysteries, perhaps further evidence of Netflix’s push to replicate basic cable drivel, while other studios focus on higher-quality content). The data comes from 3rd-party research firm 7Park, as reported in Variety, and excludes mobile viewing and is therefore somewhat incomplete. Since lockdown streaming hours peaked in April, Amazon Prime Video's streaming is down 31% while Netflix dropped 17%. Hulu rose 13% and Disney+ jumped 19% in the same period (measured using the same 7Park methodology). Notably, thanks to Hamilton Disney+ and Disney’s Hulu combined accounted for more streaming in July than Netflix, evidence that quality beats quantity. (Streaming is difficult to measure, and Nielsen reported slightly different numbers for Q2.)
Sweeney’s Epic Move to Take Down Establishment
Tim Sweeney continues to challenge the monopoly abuses of the Apple App Store. The founder of Epic, maker of Fortnite, recently allowed users to bypass the App Store’s payment mechanism and save 20%. Epic saves the 30% Apple fee, and (after additional processing, service, and fraud costs) they are likely breaking even themselves, while the customer pockets the savings on every transaction. The move was in violation of Apple’s unevenly applied rules, allowing, for example, Starbucks to bypass the 30% fee but not video game companies. Apple has made special allowances for others in the past – when it has benefited Apple – such as the side deal they cut with Amazon. The move by Sweeney was clearly intended to provoke a response, and he got one: Apple removed Fortnite from the App Store so new users can't download it. Epic was ready with a lawsuit against Apple, and, even better, this video, Nineteen Eighty-Fortnite, a parody of Steve Jobs’ famous 1984 commercial. Epic pursued a similar strategy (provoking a ban and filing a lawsuit) with the Google Play Store. I covered the moral downfall of Tim Cook’s Apple in more detail last week, quoting Tim Sweeney as saying: “Apple has outlawed the metaverse”; this battle is shaping up to be ‘James Halliday vs. Nolan Sorrento’, with Tim Cook leading the ‘Sixers’ to take over the metaverse world and corrupt it.
For Apple, the fight to kill the metaverse is existential. Effectively all of the value of having an iPhone comes from developers who create the apps. If Apple can't control the apps, it's just another commodity hardware company (much like the now defunct Compaq computer that Tim Cook came from). In China, where WeChat is the dominant force, the underlying value of iOS and Apple hardware is minimal. The same scenario is likely to play out in the West with a super app or metaverse providing much more value to users than the phone they run on.
For Google, their stubbornness on high app store fees is puzzling. While significant, the money they make on apps and in-app purchases is still small relative to search and YouTube, so why not cut fees to 10% now and draw developers over while putting significant pressure on Apple’s services business and stock multiple? The important question from my perspective is always: where will the developers focus their energy in the future? If you’re a fifteen year old kid with a great idea for an app that’s going to change the world, are you going to write it for iOS, or are you going to create it with Epic’s Unreal Engine to run inside of Fortnite? At NZS Capital, we’re always looking for the companies that maximize non-zero-sum (win-win) outcomes. Sometimes that means we miss great stocks, but we think it’s the most important factor, along with adaptability, for long-term success in the Information Age. Monopoly app stores with high fees are much lower NZS than ones that compound value for developers and users with lower fees.
It’s worth quoting the dramatic opening salvos of Epic’s lawsuits filed this week:
“1. In 1998, Google was founded as an exciting young company with a unique motto: “Don’t Be Evil”. Google’s Code of Conduct explained that this admonishment was about “how we serve our users” and “much more than that . . . it’s also about doing the right thing more generally”. Twenty-two years later, Google has relegated its motto to nearly an afterthought, and is using its size to do evil upon competitors, innovators, customers, and users in a slew of markets it has grown to monopolize. This case is about doing the right thing in one important area, the Android mobile ecosystem, where Google unlawfully maintains monopolies in multiple related markets, denying consumers the freedom to enjoy their mobile devices—freedom that Google always promised Android users would have.”
“1. In 1984, the fledgling Apple computer company released the Macintosh—the first mass-market, consumer-friendly home computer. The product launch was announced with a breathtaking advertisement evoking George Orwell’s 1984 that cast Apple as a beneficial, revolutionary force breaking IBM’s monopoly over the computing technology market. Apple’s founder Steve Jobs introduced the first showing of the 1984 advertisement by explaining, “it appears IBM wants it all. Apple is perceived to be the only hope to offer IBM a run for its money . . . . Will Big Blue dominate the entire computer industry? The entire information age? Was George Orwell right about 1984?”
2. Fast forward to 2020, and Apple has become what it once railed against: the behemoth seeking to control markets, block competition, and stifle innovation. Apple is bigger, more powerful, more entrenched, and more pernicious than the monopolists of yesteryear. At a market cap of nearly $2 trillion, Apple’s size and reach far exceeds that of any technology monopolist in history.”
Ecommerce Growth Set to Break Down in Real World
It’s not physically possible for ecommerce delivery and logistics to keep up with demand growth over the next 6-12 months. Every $1B of US ecommerce growth requires around 1.2M square feet of warehouse space, according to Prologis as reported in the FT. This growth is attracting wild amounts of capital to the industry, as CBRE forecasts that 333M square feet of new warehouse space will be needed in the US by 2022. The WSJ also reported last week that Amazon might be looking to take over empty department store locations at malls to serve as distribution hubs. But, how will all these packages get from warehouses to a residence or business? As I wrote last week in #257, we are seeing a major shipping crisis in the US as UPS and FedEx raise prices faster than capacity and the USPS is in disarray. It’s a huge mismatch of rocketing demand, lagging delivery capacity growth, and rising delivery costs. The situation could end up turning ecommerce into a bust for most retailers except Amazon.
Local package fulfillment via Instacart or other 3rd parties isn’t yet a profitable, sustainable strategy. But, for some reason, that’s not stopping Walmart from trialing a four-city delivery outsourcing partnership with Instacart. Thus continues Walmart’s decades-long spaghetti strategy for ecommerce (throw everything against the wall and see what sticks without ever committing). Walmart also delayed its Walmart+ delivery rival to Amazon Prime, perhaps because of the rising costs and growing delivery logistics problems?
Meanwhile, Amazon’s last-mile delivery network (now employing 400,000 drivers) just delivered its 10 billionth package. Amazon also gave an update on their Delivery Service Partner program, which now employs 85,000 people at 1,300 independent DSPs. If I make a few estimates, I think this implies Amazon is fast approaching the size of UPS’ US operations – in just ~five years of trying – and could exceed the size of Big Brown’s network next year, which is why I recently joked that perhaps UPS or FedEx might be outsourcing residential package delivery to Amazon soon. The next year is going to break many retailers completely if they can’t find a way to motivate people to come to stores to pick up their own items, or, alternatively, find a way to deliver orders efficiently at a profit. There needs to be a new last-mile carrier built with enough package density and routed deliveries to meet the demand at the right price point. Otherwise, our only choices will be Amazon or reverting back to driving to stores and shopping ourselves.
Shopify Fosters Healthy Ecosystem
VC firm Base10 posted an interesting look at the vibrant Shopify platform with 4600 apps, many of which have raised significant venture funding as they grow with Shopify’s expanding merchant base. Currently, apps and ‘themes’ are ~$100M per quarter (14% of total revenue) for Shopify, which has a 20% take rate on apps. This sort of developer ecosystem health is always the true north for a growing platform. If Shopify were to continue to grow GMV at 2-3x the rate of Amazon (which is unlikely, but possible), then they would be enabling more ecommerce sales than Amazon in 3-4 years. Of course, with the shipping issues noted above, Shopify needs to significantly accelerate their efforts to solve logistics bottlenecks and costs for its merchants, or their growth is at risk. Save us Shopify!
Microsoft and Google: BFFs
Microsoft continues to become a closer partner of Google’s Android operating system, notably this week with the announcement of the Surface Duo, a $1399 foldable, dual-screen phone. The phablet (are we bringing that term back into style?) has two 5.6” screens that make a combined 8.1” display when opened. The device will run on Android with a tight integration to Office 365 apps. Microsoft, in the past, has been frustrated by the lack of flexibility with iOS/Apple’s policies, which hinder Microsoft’s ability to serve its hundreds of millions of enterprise users. As such, they have been getting closer to Android since the failure of Windows Mobile. One thing is for sure – cargo shorts and fanny packs could be in high demand soon.
Arm SoC Startup with Promise(s)
Nuvia, an Arm processor startup that includes many people formerly on Apple’s internal processor team, is blowing the doors off performance-per-watt standards with their new Arm processor with a single core boasting twice the performance for a fraction of the power – only 3 watts(!). Take this with a grain of salt because it’s a self-reported number, and is not apples to apples, but the trend of Arm having arrived in the data center and laptops/PC market is clear. One big question I have regarding the results is the amount of extra memory the Nuvia design may or may not need compared to the alternatives, and how that impacts overall power consumption.
Kilar’s Customer-Centric World View
Jason Kilar, new head of WarnerMedia, nails the problem with Jeff Bezos’ anti-customer strategy (see #207) in streaming video in this great Bloomberg interview. I continue to think Roku and Amazon are well overplaying their hand as content is increasingly more available and important than the place from which you get that content. If both companies were offering a common search and UI that worked, that would be value add, but neither comes close to a good user experience. Kilar: "I think you nailed it when you said that some companies are conflating their interests with statements about consumer focus. What you see is a lot of decision-making in the interest of the company as opposed to taking a breath and being focused on the consumer.”...“If Amazon were truly focused just on the consumers with Fire devices, HBO Max would be on Fire devices. The consumer wants it.”
Miscellaneous Stuff
Bug-Free Bedding
200,000 years ago, early Homo sapiens were making bedding out of layers of ash and grass. The ash, quite cleverly, would have kept the insects away. The bedding was found in a cave high up in the Lebombo mountains of South Africa. The bedding could have been burned to create the ash and then new grass layered on top, which seems to me like an efficient way of “changing the sheets” every week. I can picture the ads for a new direct-to-consumer online mattress company now.
Stuff about Geopolitics, Economics, and the Finance Industry
Can We Harness Technology’s Deflationary Pressure?
I studied prior disinflationary/deflationary periods in the Industrial Age this past week (thanks to a suggestion from a reader!). Historically, significant advancements in technology seem to be coupled with: 1) investment cycles (funded by debt), 2) a digestion of overinvestment, and 3) disinflation or outright deflation (majority of cases). One theory put forth by Irving Fisher in the 1930’s paper The Debt-Deflation Theory of Great Depressions would suggest that any borrowing-driven inflation would likely be overwhelmed by disinflationary/deflationary forces wrought by the unserviceable debt burden following the (largely inevitable) bust. A more common market view is that low rates drive increased borrowing, which in turn drives inflation, putting less emphasis on the risk of deflation (on a longer time scale, however, increased borrowing causes low rates rather than the other way around; see our mid-year update, as well as the end of SITALWeek #257, for more details).
Fisher was perhaps on the right track; but, I wonder if it’s the technological advancement itself that causes the subsequent long term disinflation/deflation pressure, while the debt-fueled bust/recession is a smaller, secondary factor? For example, putting your delivery on a canal or train (anteceding technological advancements) was much cheaper than the horse/person-powered alternative. Canals and rails were heavy, physical, capital-intensive advances. But, what about technological investments in today’s Information Age? Forging leading-edge technology is capital intensive for a handful of large cloud infrastructure providers, but the resulting productivity increases and technological advancements far exceed the capital invested. Think of the productivity output of a single Nvidia A100 system: a $100,000 investment could produce a breakthrough that creates billions of dollars of value...every day! So, although (at present) we are in a period of significant debt expansion in the economy, we are in a much more significant, overarching phase of ever-accelerating technological advancement. If I were to attempt a first principles analysis on this topic, I would start with the following question: does accelerating deflationary pressure – from nonlinear advances in technology – enable the expansion of the money supply without the corresponding risk of inflation?
This question is perhaps even more critical now that we are on the cusp of unprecedentedly rapid change/disruption as we move from the Information Age to the AI Age. Around 40 years ago, the pace of technological advancement went from analog speed to digital speed, and with AI it’s about to go to ludicrous speed. Technology was always jumping ahead with nonlinear improvements, but the pace of change accelerated even more with the introduction of the PC and the software revolution. Many activities and ways of doing business in the year 2000 would have been unrecognizable in the year 1980. Indeed, I have a difficult time remembering what it was like a decade ago without a smartphone and ubiquitous high-speed connections; so, in many ways, 2010 is unrecognizable to me today (and vice versa). I expect 2025 will look unrecognizable to us from today’s viewpoint. And, to follow this acceleration, 2028 may look unrecognizable from 2025. 2030 from 2028, 2031 from 2030, etc.
The late-1970s/early-1980s pivotal shift from analog to digital likely played into other society-changing forces that began around the same time, including increased globalization (enabled in many ways by digital technology and communication) and the beginning of real earnings stagnation for a large part of the population. The accelerated pace of change and the shift from an assets- to an information-based economy helped accrue wealth for the wealthy, and steadily declining rates over the last four decades enabled wealth concentration as well (again, for more detail on this see our mid-year update as well as the end of last week’s SITALWeek #257). For the last four decades, the pace of change has become much more nonlinear and exponential.
For millions of years, we experienced progress as iterative analog changes. Our evolutionary heritage hasn’t really prepared us for exponential, ongoing advances. So, in some ways, the onset of accelerated, nonlinear change is breaking down our ability to cope. Most of us are struggling to adapt and react as the ground shifts faster and faster underneath our feet. As we wrote in Pace Layers: Tech Platforms, Regulation, and Finite Time Singularities: “Historically, we would expect fashion or technology to have slow and small impacts on the thousand-year-old institutions of Culture, but recently the increased velocity and transparency of information flow is causing rapid behavioral shifts in humans.” I suspect much of the turmoil and rising problems of society we have now, including inequality, nationalism, racism, fake news, etc., stem from humans’ inability to process rapid, nonlinear change (our fallback coping mechanism for uncertainty/misfortune is: if you can’t identify the real motive force or enemy, invent a story and create one). Fear of the increasingly unknown has been subconsciously motivating human behavior.
That said, we humans are remarkably intelligent, resilient creatures. And, a younger generation – whose adaptable neural networks were established during the increasingly nonlinear world of the last 40 years – may have enough of an edge over us older folks in coping with rapid change. With any luck, they will engineer solutions to the difficult socio-economic problems we now face. In any case, let us hope we can figure out a way to harness the power of our technological wild ride before its spawned problems become totally overwhelming. Returning to the point above, it seems quite plausible that our current era of unprecedented technological growth offers its own solution – providing sufficient disinflationary/deflationary pressure that we might be able to buy our way out of our current, untenable societal problems, but time will tell.
✌
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.