SITALWeek #320
Welcome to Stuff I Thought About Last Week, a personal collection of topics on tech, innovation, science, the digital economic transition, the finance industry, ghosts, and whatever else made me think last week.
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In today’s post: the algorithmic paranoia of suburbia; the rising scarcity value of first-party data for advertising; the missed opportunities for Industrial Age companies that don't see technology as a core competency, raise prices, and build moats instead of nurturing non-zero-sum platforms; a 🐐 goes viral; the missing people in the labor force aren't going to magically reappear; the VC Ponzi scheme; and much more below.
Stuff about Innovation and Technology
Codifying Copilot Coding
After introducing Copilot, the AI code writing assistant, GitHub claims it now generates up to one-third of all code on the platform. Built on OpenAI (Microsoft owns GitHub and has a partnership with OpenAI), the tool is like an autocomplete for programmers. Axios reports that demand for software programmers grew 25% in 2020, so tools like this will be in high demand as the world goes digital without enough programmers to suffice.
Digitized vs. Dinosaur
There is a division across many industries between companies that see themselves as digital vs. those that do not. As a great example, Chipotle, which heavily embraces technology to their advantage, just hosted a virtual Halloween party on game platform Roblox, while McDonalds announced it’s selling its technology division to IBM (I guess they are still around) because they don’t see it as a core competency. No matter what your business is, if you don’t see technology as a core competency, you’re going to be in trouble at some point.
In Business Strategy, Prepositions Matter
While we’re on the topic of legacy business mentalities, I was reading about UPS’ “Better not Bigger” strategy around their earnings release last week. The backdrop for UPS and other shippers is an accelerating transition of commerce from analog to digital. Logistics – moving objects from point A to point B in the most efficient way possible – is the enabling fabric of this transition. UPS missed a major opportunity to build a digital-economy-transforming logistics platform, one that could have offered customers lower prices and better, faster service (e.g., Sunday and same-day delivery). Now, they face the ongoing challenge of larger customers like Amazon vertically integrating their own delivery. Amazon passed FedEx in volume in 2020, and, if you extrapolate the data, it’s likely they are approaching the size of UPS. UPS’ prices are rising dramatically, both from deliberate increases and a shift to small business customers, who pay higher prices than larger retailers like Amazon. Consequently, UPS reported a 2.7% y/y drop in volume as revenues rose 9.2%. This price ratcheting incentivizes customers to find cheaper alternatives, like handing off fulfillment to Amazon or building out their own logistics, especially for local delivery. Passing on higher shipping fees to customers will likely only increase traffic for large ecommerce platforms. UPS’ strategy creates an umbrella for competition in national parcel delivery as well, as evidenced by the recent merger of OnTrac and LaserShip. Taken to its logical conclusion, UPS’ current zero-sum tactics could ultimately divest the company of many of its customers. My point is not that UPS is a bad business today (time will tell if they mortgaged their future too much), but that it could have been a much better one. In the digital age, bigger and better tend to go hand in hand and are rarely mutually exclusive. Imagine if Amazon had viewed logistics as something beyond its core competency, like what McDonalds is doing with technology.
Pursuit of Pivotal First-Party Data
As I ponder the puzzling possible pairing of PayPal and Pinterest – a deal that PayPal proclaimed it’s not pursuing – the paucity of first-party data is in the public eye. With changes afoot at Apple and Google to make it even harder to fingerprint people/devices for targeted ads and various types of tracking, there remains a relatively small number of companies with large amounts of data on their own users (aka first-party data). Obviously, Amazon, Google (including YouTube), Meta (a new name that an algorithm determined was better for the algorithms formerly known as Facebook), and Apple probably collect the most demographic and intent data. Then there is a host of other media properties, such as the video streamers and various other social media entities, that contain some level of data, but perhaps don’t have the tools to attract and support advertisers at scale, at least not yet. I am not certain how online data collection/sharing will play out, but I suspect the value of first-party data is rising and the value of combining sources together will continue to increase. I’ve covered this topic a lot in the past (going back to early 2019 in this iteration of SITALWeek), and it seems to be more important than ever.
Surveillance Troubles Paradise
WaPo reports on the rise of private license-plate reader technology. The surveillance tech’s marketing scheme is based on creating a false sense of fear (and security), and it’s causing a lot of disharmony in suburban communities, like Paradise Hills, CO. For most of human society, it was not possible to remain anonymous. In tribes of a couple hundred (and usually far fewer) people, if you failed to take responsibility for your actions, you had little chance of surviving. Mass anonymity is a very recent phenomenon. It seems to inherently raise everyone’s suspicions and lower their trust of others’ intentions. Mass surveillance is now sufficiently cost effective (e.g., $2500/year per license-plate reader camera) that it’s taking over every corner of the planet. While one might expect the decreased anonymity to boost accountability and trust, Big Brother’s recording eye seems to be accomplishing the very opposite. Tribes are tribes because they share a common culture, and it seems that you cannot have culture without tribalism. And, thanks to algorithmic ad engines (aka social media, or Meta as it wants us to call it), humans are increasingly aligning along a plethora of new, troubling, tribal attributes. In short, the algorithms act like a giant array of mirrors focusing and amplifying back the worst – much more so than the best – of us, thanks to our evolutionarily-fueled pursuit of survival-oriented data (did you hear about the cave bear in the next valley over that ate Doug?!?). Thanks to this neural wiring, we are perfect targets for clickbait, with the overinflated fear of being targeted by a criminal a prime example. The algorithms are therefore very effective at serving surveillance technology ads to people who might be irrationally fearful of crime because of false stories the same algorithm fed them, helping to sell $2500/yr license-plate surveillance systems, and thus padding the pockets of the algorithms’ owners.
Homeownership Increasingly Out of Reach
Redfin CEO Glen Kelman reflects on the blunders of 2020 and the challenging state of the increasingly exclusive housing market: “The original premise of my stint at Redfin was that we’re selling the American Dream and the idea that everyone can afford a house sooner or later if they work hard and play by the rules. Recently, I’ve had this feeling that there are so many people who are never going to become Redfin customers — that maybe the product we’ve been selling just isn’t a middle-class product anymore but an affluent product.”
Miscellaneous Stuff
All Hail The Mountain Goats
The Mountain Goats are (were?) a relatively obscure group helmed by singer-songwriter John Darnielle, one of the greatest songwriters and performers around. Darnielle describes the group as a “boutique concern...not for everybody.” I’ve linked to them on more than one occasion here in SITALWeek, in particular, This Year, which is my anthem every year that goes by. One of their cult classics, No Children, always a pinnacle of their live performances for the decades I've attended them, is a dark tale of a divorcing couple in Tallahassee who, well, probably shouldn’t have children. To everyone’s surprise, the twenty-year-old tune became a viral sensation on TikTok, featuring people’s cats mimicking some of the darker lyrics. Darnielle has great perspective on it: “They’re hearing a brief portion of a song that already has a specific meaning in our catalog and to our fan base and among a lot of people. And I’ve been doing this for 20 years, and our existence suddenly is being gazed upon by a whole bunch of new people through this very narrow lens. But at the same time, you have to admit that they sort of get it. They latched onto a 15 seconds that’s a key moment in both the song and the catalog and sort of identified it as that. It tells you a lot about how good the critical eye of the public can be — that people are good at reading stuff, if [they] get a chance to hear it.” The Mountain Goats are a tricky band to introduce to someone because Darnielle has penned so many albums (and some great novels) that it’s hard to know where to start, but Tallahassee is as good a spot as any. As Darnielle puts it so perfectly: “the artist does not dictate the terms in which his art is understood.”
Zero-G City Center
Blue Origin plans to build a space station, Orbital Reef, as a business park and tourist destination. I’ve made the comparison in the past to space flight and theme parks, and I think this concept bears that out. I love the idea of space flight and a civil space station. Philosophically (not financially), I don’t think that you can legitimately argue that Disneyworld is ok, but Orbital Reef or space tourism is not. Walt Disney was always focused on the dreamers as well as creating a vision for the future, and an attraction like this should inspire a lot of dreamers.
Stuff about Geopolitics, Economics, and the Finance Industry
Where is Everyone?
Over the last few weeks I’ve been writing about the various demographic and work shifts in the economy. To briefly recap: 1) as each year ticks by, there are fewer 20-somethings entering the US labor force due to 20 years of declining birth rates (i.e., we are slowly rolling off the 1M+ Millennial birth peak of 1989-1993); 2) we are missing ~600k immigrants due to a decline in net immigration from 2017 through 2020; 3) COVID resulted in 3 million early retirements from the labor force; 4) COVID created a new class of work-from-home job alternatives for people who might have been in different jobs pre-COVID; and, lastly, 5) COVID caused lifestyle changes in the number of workers per household and prompted many households to shift locations. Most of these impacts to the labor force are structural changes that will not reverse even if COVID were to become a thing of the past. The only long term solutions are immigration and/or automation – the replacement of jobs with technology, both software and robotics. It could be a structural loss of well more than 5M people in the US labor force, and it could grow a little each year due to dwindling birth rates from two decades past and a restrictive immigration policy. And, the economy is still growing, so demand pressure, on a per-unit-labor basis, is getting worse as time goes by. The demand driver of inflation is much harder to predict than the supply of labor. An aging population also acts as a natural consumption governor to demand over time. Further, demand is still temporarily elevated from the pandemic due to deferred spending and government stimulus. When I’ve talked about the potential for a Goldilocks threading of the needle on inflationary pressure and the disinflationary forces of technology, this concerted shock from COVID, immigration, and demographics may be enough to derail that ideal scenario for a while until technology can catch up to offset the lost labor, or until demand returns to a pre-COVID level (or even lower perhaps over time). In the meantime, the dearth of skilled (and unskilled) workers training to enter the workforce means that existing assets with embedded labor will become even more valuable. This is perhaps why Lennar is focused on 3D printing houses in Austin as their CEO commented: “skilled tradesmen are a dying breed, so there have to be alternative building solutions to help with this labor deficit”. The 15.5-foot-tall printers from Icon can create a 2,000-square-foot house in a week. While the process doesn’t entail a large cost savings, it does require 50-75% fewer workers. If some countries have a more pro-immigration stance or increased birth rates, it could create a divergence in inflation rates, and, ultimately, in interest rates, in order to prop up currencies in countries with higher relative inflation due to the missing people.
Bubble, Bubble Toil and Trouble
One of the quirks of venture investing is that a very small number of agents work to set the valuation of a funding round. Given the wide range of outcomes for high-growth, early-stage companies, it’s anybody’s guess, but, generally, more guesses are probably better than fewer. A problem you want to look out for in venture investing in times like this – when there is way too much money chasing way too few opportunities – is funds that make repeat investments, each round at an increasingly higher valuation as they are raising new, bigger funds. This lack of good price discovery can compound when a company goes public, as some of those same private market investors (typically crossover funds, but potentially evolving traditional VCs as well) hold onto, and maybe even buy more of, the floating shares of a company. This limited investor pool creates a value (due to scarcity of shares) that is perhaps not as accurate as you might have with a greater number of participants working to create a consensus value for a company. Companies are also waiting much longer to go public, which allows more time for inflated markups along the way. The real losers in the process are the company and its employees (and, ultimately, the investors who end up taking losses on their inflated investments). Valuing a company far too high vs. its long-term addressable market and raising too much capital create an impossibly high set of expectations for the vast majority of companies. Under mounting performance pressure with disappointment inevitably looming, employees may end up permanently underwater on equity and the company may lose discipline and focus. Because the economy has yet to adjust return expectations to a low- (or even negative-) rate environment, this pseudo Ponzi scheme will continue to offer an artificial source of performance as long as the low-rate music keeps playing. What I describe here is clearly not true for all companies or all VC investors, but it seems to be happening in various instances with increasing frequency. I remain skeptical, but not cynical, by never assuming the worst. To end on a lighter note, in case you are looking for signs of excess in the economy (which are not hard to find), in California you can now sell your vanity license plates. Two-letter plates are apparently coveted, and “MM” is for sale for $24.3M. It comes with an NFT as well, of course.
✌-Brad
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