SITALWeek #318
Welcome to Stuff I Thought About Last Week, a personal collection of topics on tech, innovation, science, the digital economic transition, the finance industry, piping, and whatever else made me think last week.
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In today’s post: where is the Fortnite or Xbox Phone?; autonomous trains; digital dubbing; Slack's cultural influence; love of laughter; quarterly letter; labor shortage is more from demographics than the pandemic; the ESG marketing fad; and much more below.
Stuff about Innovation and Technology
Riding the Robotic Rails
Trains account for a third of freight transport (per weight/distance; including moving around fossil fuels like coal), up from 22% in 1980. The WSJ argues that autonomous and robotic technology could make trains even more efficient at taking the burden of transport away from long-haul trucking, which is also looking to adopt autonomous technology. Importantly, autonomous trains could follow each other more closely, improving throughput and efficiency. Robotics would also accelerate loading, unloading, and sorting of containers/goods at rail stations. Whether or not we get relief from robotic choo-choos in the future, it seems the temporary supply chain crisis from snarled port traffic has peaked, according to the FT. Although the ripple effects of the backups will be felt for months still, container costs are falling and Biden stepped in to drive more throughput at ports. But, all that aside, supply chains are heavily seasonal, geared toward filling shelves and warehouses in preparation for the holidays, so it makes sense that the worst will be over soon.
Driver Safety Powers Real-Time Insurance
Tesla has started offering the first insurance service that uses real-time driving data to set prices. Unlike other auto insurance companies, Tesla will not use age, gender, or credit history to determine pricing. The tech uses the same safety score that gives Tesla users access to the self-driving beta that I mentioned a couple weeks ago. There are five factors: number of forward collision warnings, hard braking, aggressive turning, tailgating, and forced autopilot disengagements. Drivers with the safest score will save 30-60% compared to the standard policy. Premiums will change month to month depending on your driving mood. There is some irony here because advanced autonomous features should allow cars to drive more aggressively and be safer at the same time.
Digital Voice Fab
Back in #298, I noted the golden age of analog dubbing might be coming to an end for films and series, and it looks like it could happen even sooner than I expected. The WSJ reports that the first example, 2019’s Every Time I Die, will be released in South America entirely dubbed using an AI model of the original actors’ voices. The model only requires five minutes of recorded voices for each actor speaking English for training. And, it turns out that Mark Hamill wasn’t just anti-aged in The Mandalorian, his voice was artificial as well. Hamill’s voice was sent back in time forty years thanks to old recordings, including an audiobook. In the forthcoming Top Gun, Val Kilmer, who lost his voice to cancer, will appear with an AI-generated voice as well. I am still waiting for a full-length production film for which AI is used for both digital foreign language dubbing and alteration of the actors’ lip movements/facial expressions to match the voice. Seeing – and now hearing – is no longer believing.
The Slack Way of Life
The Atlantic writes that office communication platform Slack (now owned by Salesforce.com) has been a tool for democratization of workplaces, largely thanks to its utility in dismantling silos across organizations and building transparency. The pandemic accelerated Slack usage, which accelerated the trends. “Slack so thoroughly permeates companies’ culture that it changes them. It changes the language of the office and the texture of the workday. It enables a sui generis kind of communication, one that’s chatty, fast, stream-of-consciousness, and always on; one that often feels less like an email than a group text. It is work software that insinuated itself into our lives precisely by feeling unlike work software—and, in turn, it has made work feel less like work.”
Phonic Tollbooth
Reading this WaPo piece about Epic and their view of the metaverse crystallized just how stuck we are right now with closed platforms. Around a decade ago, I developed a theory that information-based networks like the Internet oscillate between open and closed ecosystems – when things get too open, walls are helpful, and then when the walls get too high, you knock a few down. The concept was an overly convenient shorthand, and probably not that useful in practice. But, we did see a shift from Prodigy/AOL in the US to the wide-open Internet enabled by directories like Yahoo and, ultimately, search engines. Then, social networks started to rebuild walls but remained interconnected with the web to varying degrees. More recently, however, iOS and Android have been fortressing more and more territory, especially with respect to data. And, while our phones connect us to countless apps and websites, the phone itself increasingly mediates those interactions – charging a toll, tracking the data, etc. The phone is becoming such a powerful stronghold, it’s now hard to imagine how we could once again have a wide open, level playing field. There are a lot of people thinking about token-based economies, blockchain, and open versions of today’s products, but what hope do they have when our primary devices are controlled centrally? What surprises me the most is that we don’t have several companies trying to enter the phone market by leveraging an open-source version of Android that links to their own world of services and products. For example, where is the Epic phone? The game maker is challenging Apple and Google in court, but why not just target their hundreds of millions of users with a bundled, high-end, gaming-focused Android device with an Epic app store? Is it too late to gather enough users to get past the chicken and egg problem? Granted, there is a graveyard of failed attempts, and even Amazon’s Fire phone failed despite their huge user base and distribution. However, perhaps shifting sentiment could now support such an effort. Microsoft is running a version of Android on their Surface Duo phone – why not create an Xbox phone as well? For the moment, I’ll keep hoping for a breakthrough device that isn’t shackled by Apple/Google or perhaps some helpful legislation that knocks a few walls down.
Thinking Outside the Analog Box
One of the biggest challenges for us humans in navigating the current economic transition – from our analog past to our digital future – is a distinct lack of prior experience. The brain is a prediction machine, and it largely depends on knowledge of past events to predict future ones (see: Outsmarting Your Brain in #272). We have a very hard time reacting to what we’ve never seen before, which is perhaps why sci-fi has predicted so much future technology – as we consume sci-fi, it becomes a prior set of knowledge. But, digital, information-based progress is often nonlinear and thus even more unpredictable than the analog pace we’ve been accustomed to throughout millions of years of human evolution. One of the biggest mistakes we can make as investors is to use an analog analogy to predict a digital outcome. In the late 1990s, a lot of retailers compartmentalized Amazon as an online version of a mail-order book catalog. Even Bezos used an analog-influenced analogy for AWS, saying computing would be like electricity: companies who used to run their own power plants ultimately switched to centralized providers. Of course, there is always some truth to these analogies, but they fail to capture just how big the digital opportunity is. Last week on their earnings call, the CFO of JP Morgan Chase commented on the rapid growth in buy now, pay later (BNPL) platform growth: “everyone is talking about it. It is funny how layaway is back in the e-commerce checkout lane...And it's a moment for us as a company where even though for any given thing that's emerging, you can easily convince yourself that it's kind of not a threat. We're in a moment of taking all types of potential disruptions, especially fintech-y type disruptions quite seriously. And in the case of BNPL, it's obviously particularly high profile because of the growth that we've seen, although, it's a relatively small portion of the overall market.” Clearly, JP Morgan Chase understands that BNPL has the potential to be much more than analog layaway (which was never a major part of overall retail sales); however, just making the analogy is a dangerous mental trap. Further, CEO Jamie Dimon followed up by saying: “we will spend whatever we have to spend to compete with all these folks in our space.” This is another mistaken mental trap. When an industry goes from analog to digital (assuming overregulation doesn’t get in the way), you have to reinvent the way products are created and consumers are served. Just throwing more money at the problem, without any fundamental shift in approach, is often the wrong strategy. The customer has to be much more at the center, the pain points need to be solved in novel ways, and you need to be thinking: platform-not-product, vertical integration, data, network effects, etc. In other words, you have to go far beyond the confines of ‘your space’. Often, the digital way to do something is a higher non-zero-sum proposition, creating more value for customers than for the companies that solve the problem. That usually means that the old way of doing things was extracting too much value or relying on information that is no longer proprietary. This seems to be precisely the case with BNPL compared to the traditional predatory credit card and banking industry practices.
Laughter Is the Best Medicine
There is a long history of leveraging comedy and satire of all types to highlight problems in the world. Standup comedy is a unique form of this social commentary. For a long time, standup was a series of one liners – non sequiturs. Mark Twain is credited as the first standup routine to go on tour, which he did mostly because he needed the money later in life. Lenny Bruce is regarded as the first standup to walk out on stage and make comedy personal. Thus, comedy started to lose its innocence and become more about seeking the truth through observation. Then, Pryor, Carlin, and a host of other comics started doing this new type of routine that shined a light on what was hidden right in front of our faces that we were just too busy to notice. Laughing at the worst of the human condition is how we beat the worst of the human condition. When you can turn what seems like the most horrible tragedy into a smart and funny commentary on the challenge of just getting up every morning and trying to make it through the day, then you’ve beat that absurdity for at least another 24 hours. It’s possible that comedy is the only reason to try to actually make it through that next rotation of the planet – to laugh at how absurd it is that we even try, knowing how badly it could go. To find uplifting humor in the darkness is to overflow with empathy. Sometimes jokes lack empathy (i.e., that critical aspect of putting yourself in the shoes of the target of your joke) and/or spotlight one absurdity while ignoring another greater darkness. Often, that type of comedy comes from a place of fear or lacks context. Good comedy always comes from the perspective of love and a desire to make everyone better through seeing the truth. Comedy is an art. The point of art is to see into someone else’s heart – to really understand them. Humans need these glimpses of insight because it’s hard to look into our own hearts. Art exists to influence the audience, and, in turn, the artist. The best description I’ve heard of art came from Penn Jillette: art is the collision of the intellectual and the visceral – a one-two punch to the mind and the gut. Of course, not all creations have to influence people or culture. Sometimes entertainment is just a mindless distraction from the absurdity of life – a vehicle to help the world spin a little faster. However, my favorite comedy makes me laugh and it makes me uncomfortable. By examining that discomfort, I hope I can make a little progress on this short journey we're on. I see art, and nurturing artistic talent, as absolutely critical to our progress as a society. Thus, I worry whenever the large technology platforms, or, more specifically, whatever drives their algorithms, start deciding what is or is not art. Platforms and algorithms prefer things that are sticky and popular. But, the algorithms are a reflection of us, and we don’t know ourselves well. So, whatever they spit out is limited at best and dangerous at worst. No art should ever be censored, but some of it might not be worthy of algorithmic promotion. I think comedy especially should never be censored, no matter how unfunny it might be. I would hope that the people in charge of those platforms understand that they have power to influence real life – real people and our real future. I am puzzled, and admittedly fairly disheartened, when one of these mega entertainment platforms takes the view that art doesn’t have real-world value or influence. If that’s true, why bother with art? Maybe just to make a buck, I guess? I hope that’s not true. But when I read in the NYT that the CEO of Netflix said “the core strategy is to please our members,” I worry they aren’t focused on making real art. A lot of pleasing things are not necessarily good for you. I hope that art can be filled with heart, and that it can be a vehicle for progress. I hope that it makes people think, laugh, and feel. I hope it helps people make it through one more day. Penn’s partner Teller says: “art is what we do when the chores are done.” Anything can be art if you care enough about it – that’s what Pirsig teaches us in Zen and the Art of Motorcycle Maintenance: art is Quality. Kurt Vonnegut wrote in A Man Without a Country: “Practicing an art, no matter how well or badly, is a way to make your soul grow, for heaven's sake. Sing in the shower. Dance to the radio. Tell stories. Write a poem to a friend, even a lousy poem. Do it as well as you possibly can. You will get an enormous reward. You will have created something.” If I were funny, I’d be a standup comedian instead of an investor; and, I would hope that, by telling jokes, I would shine a light on life with love and compassion.
Miscellaneous Stuff
The Structural Dynamics of Flow
For fans of Amazon’s series The Patriot, I recently discovered that creator Steven Conrad did a five-part audio series exploring more of the backstory of character Leslie Claret, with actor Kurtwood Smith reading a mock audiobook version of The Structural Dynamics of Flow. The Patriot follows the complicated exploits of a secret government agent forced to make a series of escalating greater-good decisions; he also plays folk music, and his dad is his handler. It’s a near-perfect two-season show on the existential meaning of John Prine’s song “Pretty Good”. The series might be one of the best examples of the paradoxical use of comedy that I wrote about above, juxtaposing the unthinkable with the absurd. If you like the show, you should really enjoy this audiocast addendum.
Stuff about Geopolitics, Economics, and the Finance Industry
NZS Capital Q3 2021 Letter
You can find our Q3 2021 letter on our website here or in PDF.
Labor Shortage More Demographic than Pandemic?
Hospitality workers quit at more than twice the rate of other US workers in August. The 6.8% quit rate coincided with the fastest wage growth for the sector since the early 1980s, with average pay climbing to over $15/hr for the first time earlier this year (often, quitting is the way to unlock higher wages if your current employer isn't keeping pace). Overall, quits across all sectors in the US were at a record high since the data were first collected twenty years ago. The NYT reported on the disappearing services as a result of the labor shortages – the hotel room that costs the same but doesn’t have daily cleaning, restaurants closing dining rooms and offering takeout only, etc. Headlines and CEOs are largely blaming the labor shortages on the pandemic, especially the spending shift from last year to this year, and a change in worker preferences and expectations, but I wonder if the explanation is far simpler: there aren't enough 20-somethings. Back in the 30-Something Sneaker Wave in December of 2019, I noted that after the bolus of Millennial births in the late 1980s and early 1990s, there was a long decline in the birth rate in the US. Further, this trend would normally be offset by immigration, but is coinciding with a decline in immigrants. Therefore, if you want to understand the supply chain and hospitality labor shortage, you need to look back to the declining birth rate from 1991 to 1996 of several hundred thousand kids and missing immigrants. Now, on top of this demographic and immigration headwind, add in: 1) the excess loss of lives from the pandemic, 2) the approximately 1% of the labor force that retired early due to COVID, as we approach peak Boomer retirement, 3) the shifts from dual- to single-income households as people had to stay home to take care of kids, 4) the shift to gig workers and new work-from-home jobs, etc. You can see that this labor problem won't completely resolve by itself. There are two options: accelerate the use of technology and automation or pay people to immigrate to the US. My recommendation is to do both.
When ESG Fad Fades, Non-Zero Sum Will Persist
Bloomberg reports on the wave of greenwashing rules coming at fund managers. I suspect the ESG marketing bonanza is entering its later years, as the term appears to be losing much of its meaning. Anything that can be measured will be gamed, especially when it’s difficult to calculate or frequently intangible. At NZS Capital, we are highly sympathetic to the original philosophical thrust behind ESG investing. Long before we first heard the term, we wrote a paper entitled Complexity Investing (published in 2014) that discussed, among other things, the important concept of non-zero sumness (NZS). It’s a geeky term from game theory, but it means win-win. We elaborated on the idea in a 2019 paper (PDF) when we launched NZS Capital, eponymously. In that paper, we noted that companies have a fiduciary duty not just to investors, but customers, employees, society, and the environment. In a while, perhaps soon, ESG won’t be the marketing fad of the day, but non-zero outcomes will still matter. Why? Because all of human evolution has relied on positive-sum games – the desire to win is instinctual. Companies whose core business model is to create the most winners (e.g., by offering a better deal than the establishment), stand a much better chance of surviving and thriving. It’s counter intuitive, but even war can be positive sum (albeit the worst example of such an outcome!). When two or more parties come together to transact, the most optimal outcome is when everyone leaves better off than if they had never met. The companies we strive to invest in are, in large part, creating more value than they take. It’s not always black and white, and it never comes down to a score, a grade, or a checklist. It’s hard. Sometimes you take some bad with the good, because, longer term, you believe the good outweighs the bad. I mentioned this last week in reference to semiconductors: their fabrication creates a huge carbon footprint, but they can enable efficiencies in the global economy that greatly save on energy. Is the semiconductor industry overall a good “ESG” steward? Well, maybe not if considered in isolation. But, we think electric vehicles, variable speed HVAC motors, LED lighting, AI to more efficiently route transportation, etc. are important benefits that would not exist without the sometimes dirty chips. Another example is energy, where underinvestment, perhaps due to ESG focus, has helped fuel today’s rising prices. Having enough natural gas for the decades-long green transition seems important, as current green energy shortages are causing more dirty coal and oil to be burned (see #317 for more on this complex situation). Obviously, there is some balance between maintaining the fossil-fuel energy economy while aggressively investing in alternative energy and technology to upgrade the power infrastructure. Every company we invest in could do better. We could all do better – and should. In positive-sum interactions, both the Golden Rule and economics align. Creating more value than you take is the blueprint for companies that will gain share of the increasingly transparent global economy as opaque analog barriers crumble, and that is good for the world – and ultimately investors – regardless of what we call it.
✌-Brad
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.
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