SITALWeek #317
Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, weather, and whatever else made me think last week.
Click HERE to SIGN UP for SITALWeek’s Sunday EMAIL
In today’s post: the television set's overdue transition to the smartphone business model; Walmart's super app push in conflict with its cost-optimized business; semiconductor's complicated environmental problems; abstracting reality; ESG inequality; pointing technology in the right direction to solve the long-term sources of inflation and economic shocks; and much more below.
Stuff about Innovation and Technology
Microcasting
Hyperlocal weather forecasts are coming thanks to Google’s DeepMind and Microsoft. Last week, Microsoft announced DeepMC, a weather predictor that also uses local sensor data. The initial goal is to accurately predict overnight frosts to improve agricultural yields. Last Sunday, I joked that DeepMind was using so many chips to calculate the weather that it might cause more global warming...but perhaps it’s not such a joke after all, now that IBM’s Weather Company, Apple’s Dark Sky, and Microsoft are also using machine learning to predict weather alongside Google. I understand some of the reasons for this focus on knowing the weather minute-by-minute, but it also feels like an example of misguided resources; more on that at the end of today's newsletter.
Supersized Living Room Smartphones
Sky is bringing the smartphone model to TVs with the introduction of Sky Glass in the UK. The video service provider, acquired by Comcast in 2018, will sell the TVs with integrated video and streaming app access for a monthly subscription and no upfront fee. Future plans include adding fitness, gaming, and video conferencing features. The connected TV market is still wide open; early leaders in smart-TV dongles, like Roku and Amazon Fire, each have around 35% of the US market, and, from a user’s perspective, they leave a lot to be desired. Apple’s efforts have largely been a failure, garnering less than 15% share. Part of the problem is the hardware’s inability to reach into the increasingly fragmented streaming app smorgasbord to access last-watched data, maintain programming lists, and generate recommendations. Sky joins Roku, which announced a TV with TCL in June, and Amazon’s recent Omni TV launch, but neither Roku nor Amazon are taking Sky's tactic of selling the TVs like smartphones are marketed. Given the massive financial opportunity in the living room for apps, services, and ads, it’s quite odd that it has taken so long for the industry to shift to a phone-like strategy for TVs and even more odd that Apple, the inventor of the modern smartphone business model, is watching it all from the sidelines.
Walmart's Horizontal Challenges
Walmart’s Chief Product Officer, Meng Chee, describes the company’s super app ambitions in Google’s marketing research publication Think with Google: “...when the pandemic hit, it only accelerated our efforts to bring one app together. This acceleration has also helped us focus on our larger ambition to create a super app, meaning we want our app to be more than just a shopping transaction. Ultimately we want it to be a lifestyle app, because we’re growing our business, and adding health and wellness services, financial services, auto care, etc. All of this comes together and represents a lifestyle package that we can give our customers via a super app.” It’s fairly easy to be skeptical here since the number of legacy companies who have successfully transitioned to fully digital so far rounds to zero; but, the one advantage the existing big box retailers have is their scale, which increasingly matters as the middle of retail is hollowed out, leaving only giants and boutiques. The area that still falls short for Walmart seems to be logistics vs. Amazon, who has made massive investments on the ground since the pandemic started. Over the last six quarters, Amazon posted capex of $66B, which is about what they spent over the 13-quarter period from Q42016 to Q42019. Walmart seems to be sticking to their spaghetti strategy for digital transformation (discussed in #253)...they also announced last week they would begin delivering packages for Home Depot. Walmart's lack of focus seems to be emblematic of a company that has optimized for margins and costs that now cannot seem to innovate at the speed necessary to create as much value for customers as their digital competitors. Brinton posted some tweets on this dichotomy between horizontally-optimized legacy companies and vertically-integrated disruptors. A prime example of this today is the legacy auto makers, which have outsourced most of their key R&D rather than keep it in-house. Those businesses now find themselves short on chips and far removed from the layers of technology disruption, while Tesla posted a record delivery quarter. I covered the topic of vertical integration in more detail in #219.
Netflix’ Extreme Streaming Hardware
The Next Platform reports on the monster servers that Netflix puts together to maximize video throughput for their content delivery network (CDN). The servers run on an AMD Rome chip and have 18 2TB SSD drives, 256GB of DRAM, two Mellanox cards, and two 100 Gb/s Ethernet ports. The team at Netflix recently pushed the output to 400Gb/s, all while encrypting the video, and have a goal to get to 800Gb/s. Ampere’s Arm and Intel’s processors were reportedly trialed as options; however, AMD’s support of FreeBSD, a server OS, has so far given them the advantage. FreeBSD, which is also integral to iOS and MacOS, comes out of the Berkeley Software Distribution (BSD) and, in contrast to Linux, it’s a complete system (not just the kernel and drivers).
Dinosaur-Fueled Semi Fabs
A few months back, Bloomberg reported on the environmental costs of semiconductor manufacturing, citing a report that concluded: “Chip manufacturing, as opposed to hardware use and energy consumption, accounts for most of the carbon output” of information technology. We have been chip investors for a long time, but we also care about companies’ impact on the environment, so this presents something of a challenge if not addressed by the supply chain. I was recently disappointed to see TSMC not commit to becoming carbon neutral until 2050. For semis, environmental impact is a complex calculation because chips can go into many end markets that enable significantly lower emissions over time, including HVAC systems, EVs, alternative energy sources, and AI, that eliminate inefficiencies across the economy. The biggest chip power users, like Microsoft, Amazon, and Google, have committed to aggressive environmental goals. Perhaps the all-in environmental cost, including the positives, makes the chip fab carbon footprint worthwhile, but it would be great to see both an effort from the supply chain and the positive impact of chips. This complexity of supply chain energy costs exists in many other industries, e.g., aluminum – the infinitely recyclable green option for beverage cans – which relies heavily on coal for manufacturing.
Miscellaneous Stuff
Neural Pacemaker Cures Depression
A UCSF team of researchers identified a part of the amygdala, which governs threat response, involved with the onset of depression-inducing thoughts. Using a neural implant, the team was able to send an electrical pulse to interrupt the negative thought pattern whenever it emerged, effectively curing major depression in a patient who had struggled for five years to find a treatment. The research is detailed in Nature Medicine. Given the extreme nature of the implant, the team hopes to find a non-invasive alternative for identifying and re-routing the debilitating neural signals. Typically, emotions involve a vast constellation of neural areas, as well as internal and external feedback (Lisa Feldman Barrett’s How Emotions are Made is a good read on the topic), so it’s interesting that there is perhaps one spot in the brain that is involved with this particular vicious cycle. To evaluate to what extent depression pathways vary between individuals (and how they might change over time), the UCSF team hopes to enroll another 11 patients in the study.
Constructing Reality, An Artist’s Perspective
Painter David Hockney discussed the end of abstraction in The Art Newspaper. This is not a publication I frequent, but the idea of perception and abstraction caught my eye as it relates to AR/VR: what should our virtual world look like? Hockney says: “What does the world really look like? I know it doesn’t look like photographs. The camera sees geometrically, and we must see psychologically. So what does it really look like? I think you have to draw it. The world is very beautiful, but human beings are quite mad. I have always thought the world of humans mad, and there is little likelihood of this changing, no matter how much we try. Cézanne looked at the world, found it beautiful and knew photography was not very realistic, the same with Van Gogh.” Although Hockney was not addressing virtual reality with his comments, if we are going to portray a new version of reality, what should it emphasize or deemphasize? We know that our brains favor a certain fractal degree, but how much abstraction should be present in a constructed reality? Should we emulate The Matrix, making the virtual world exactly like the real world, or would there be an artistically more satisfying abstraction of reality to strive for?
Immigration Plea Broken Record
Population growth peaked globally in the 1960s at 2.1% and has declined ever since to 1% in 2020. With ongoing declines in birth rates, IEEE reports that “substantial population declines by 2050 are now inescapable in at least a quarter of the world's nations.” One of the problems of population decline is you have to spread the cost of infrastructure and running an economy (and taxes!) over fewer people, making life pricier for those still around. I continue to think developed countries, which are facing the biggest declines, should be paying immigrants to move in to help future economic stability.
Stuff about Geopolitics, Economics, and the Finance Industry
ESG: A Luxury Fueling Inequality?
The increasing focus on ESG may slow progress in emerging markets. Since ESG reporting and governance is costly, the logic goes, it therefore favors monopoly producers of non-tradable goods in developing economies and disadvantages exporters and smaller producers. If access to capital continues to follow ESG scorecards, then progress – driven by exports and rising wages – could slow, causing the wealth gap between countries to widen. The concept comes from Ricardo Hausmann, a Harvard professor and former minister of planning of Venezuela, who concludes: “the motivation behind ESG comes from a good place. But the world needs a different scorecard, one that would favor specifically those export activities that allow for greater complexity, innovation, and higher wages.”
Hyperactive Butterflies Snarl Energy Supply
I opened the newsletter with the weather, and I think I’ll close on the same topic. The inherent unpredictability of interconnected things is one of the most important lessons of complex adaptive systems. It's also one of the hardest lessons to truly internalize because our brains are excellent at convincing us that we're good at making predictions. In complex adaptive systems, outcomes can be nonlinear, go through phase transitions, and are chaotic, which means small changes in the initial conditions can create massive changes over time. The concept is represented simplistically as the butterfly effect. When it comes to the weather, the most concerning elements of climate change are not the linear predictions about a steadily rising mercury, but the unexpected, nonlinear events. And, extended drought, fires, altered wind/rain patterns, etc. are all causing changes in the ecosystem, economy, and human behavior, which all feed back into the system in unpredictable ways. This past year, droughts across the Northern Hemisphere left many reservoirs low, which in turn impacted the availability of hydroelectric power. Hydroelectric energy usage varies widely around the globe, constituting 7% for the US, 17% for China, over 60% for Brazil, and 95% for Norway. In the Nordic region, power prices are up fivefold from last year, and, in Sweden, an old oil-burning power plant is proving indispensable. In China, the lack of hydro power seems to be contributing to an increased demand for coal as well as blackouts and global competition for fossil fuel inputs – natural gas prices in Europe hit a record 100 euros per megawatt-hour. China is also struggling with the negative implications of a price-controlled economy that impaired coal plants, a strategy failure that comes as no surprise to anyone in the free market. This past year, the wind also seemed to slow down a bit, which was no help to renewable wind energy producers. It’s possible the shift to green energy sources with low storage capacity, and the concomitant shuttering of fossil fuel plants and coal mines, has not adequately taken into account potential areas of fragility related to climate change and swings in global supply. To further complicate matters, the post-pandemic reboot of the global economy is causing higher energy demand as plants get back up to full speed. And, the Northern Hemisphere is heading into winter, so we can expect further energy demand spikes. Climatic turbulence has created a veritable conflagration that has, with astounding ease, wreaked havoc on short-term global energy supply (and caused actual conflagrations with record forest fires!). It’s an ironic situation when you might not have enough coal to burn in order to manufacture solar panels. And, that’s just the weather. The tail impacts to food supplies, logistics, population migrations etc. are likely to all increase volatility in both directions – for all we know, the wind will blow again (though perhaps not if the "global stilling" phenomenon continues on its current trajectory) and it will rain like crazy next year. But, in some cases, the volatility will lead to short-term inflation shocks in sectors where technology is increasingly providing disinflationary ballast. When we speak of the long-term deflationary impacts of technology (a topic I discussed, among other things, on CNBC last week – the first part is here and the second part here), we also know it cannot create short-term immunity to volatile inflationary shocks, like those coming from climate change. And yet, we also know that the more serious the shock, the more smart engineers and entrepreneurs will come together to create the technology to fight back. Perhaps we need fewer resources trying to forecast the weather ten minutes from now, and more focus on the bigger challenges of the coming decades. Technology-driven deflation is a powerful – yet largely unacknowledged – weapon that needs to be increasingly pointed at these emerging sources of chaos-driven inflation.🦋
✌
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 an informal gathering of topics I’ve recently read and thought about. I will sometimes state things in the newsletter that contradict my own views in order to provoke debate. 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.