SITALWeek

Stuff I Thought About Last Week Newsletter

SITALWeek #362

Welcome to Stuff I Thought About Last Week, a personal collection of topics on tech, innovation, science, the digital economic transition, the finance industry, and whatever else made me think last week.

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In today’s post: CEOs are overreacting to the negative news cycle and letting the Fed dictate their long term strategy, cutting off their Optionality; chip companies need to secure access to their products; Mercedes' Rivian partnership echoes a failed Tesla deal twelve years ago, as legacy auto makers continue flailing in EVs; the multiverse as a metaphor is appealing to human psyche and helps us make complex decisions; the population half-life; and, much more below...

Stuff about Innovation and Technology
Daimler's Lost EV Decade
Mercedes announced a MOU for manufacturing large electric vans with Rivian. If the JV comes to fruition, it could be good news for the RV industry, which has many models built on Mercedes’ popular Sprinter van. Coupled with ongoing build outs of rapid charger networks, the RV lifestyle may be able to go all electric in a few years, which could greatly improve the living cabin, especially for off-grid trips. If history is any guide, however, we should be skeptical of legacy auto makers partnering with EV companies – does anyone remember the 2010 JV announcement from Toyota and Tesla? Or how about when Mercedes themselves bought 10% of Tesla in a broad partnership back then. These examples of how little early Tesla partners were able to accomplish with EVs gives us a good indication of just how hard it is for legacy companies to successfully navigate innovative disruptions and be competitive against more nimble startups. As time passes and legacy auto makers fail to gain ground in the EV market, I think we can conclude the innovator's dilemma is too strong, and there is no particular reason why a company in the gasoline car business has any more advantage in the EV car market than a maker of bubble gum (i.e., the two types of vehicles are far more different from each other than they appear). In other EV news, researchers have used machine learning to develop new charging algorithms that demonstrate 90% charge rates in 10 minutes for standard batteries. The algorithms should create a feedback loop that informs battery design to enable even better outcomes.

Content Cull
Tech company austerity is eating into the funding for the creator economy, with Axios noting spending cuts for YouTube originals, Snap originals, Facebook’s publisher payments, and Substack. This move isn’t terribly surprising given that we’ve been awash in content, much of which is not worth the effort or money that was put into creating it. The vast supply of content has heavily diluted its value, as I noted in The TikTokification of Consumption Habits. We likely have a long way to go with many further content budget cuts across tech and media. The creator economy may turn out to have been a creator charity that fades away. The platforms with the highest non-zero-sumness, i.e., creating the most value for creators, consumers, and advertisers, will find ways to enable vibrant creator ecosystems, but only a small fraction seem to evince such possibility today.

Miscellaneous Stuff
Multiversal Mentality
Sean Carroll – cosmologist, philosopher, and frequent SITALWeek quotee – penned an essay for Big Think on why the multiverse is such an appealing narrative on the big screen of movies and TV, as well as the little screen playing in our heads all the time:
This idea is less grandiose than it sounds. We all invoke possible worlds in everyday speech, even if we don’t always realize it. Any statement about cause-and-effect relations implicitly refers to what could have happened in other worlds. When you explain, “I was late because of traffic,” you really mean, “In possible worlds that are similar to ours except for the traffic being bad, I would have been on time.”
The ability to reason counterfactually — to ask not just what has happened, what will happen, and what should happen, but also to contemplate all the things that might have happened — is quintessentially human. It lies at the heart of our capacity to imagine possible futures and work to bring them about, as well as our propensity for bargaining: If you do this, I promise to do that. And it opens up the possibility of regret and dwelling on what might have been.

We are known at NZS to invoke a multiverse analogy when we think about the breadth or narrowness of predictions by asking: in how many possible futures is this view likely to be true? The goal of the exercise, part of a broader pre-mortem, is to understand how much of an outcome seems obvious vs. how much depends on luck. Carroll’s focus on the regret angle of the philosophical multiverse also dovetails with what I wrote in Time Travel to Make Better Decisions regarding time travel movies that focus on regret:
Every time we contemplate a decision, whether big or small, we are attempting to see into the future. In other words, the act of scrutinizing options and possible outcomes is a form of mental time travel. Can we see how this decision will play out? What are the odds we make the right decision? And, the single most important (and emotional) question: will I regret this decision!? If I could somehow communicate with my future (and ostensibly more knowledgeable) self, what would I want to know now to make the right decision today?

Stuff about Geopolitics, Economics, and the Finance Industry
Chip-Fueled War
Politico reports on the struggles Russia is going through to get their hands on semiconductors needed to power their war against Ukraine. Topping the list of Russia's most sought after chip suppliers are Marvell, Intel, Holt, ISSI, Microchip, Micron, Broadcom and Texas Instruments. Many of these are basic chips found across numerous consumer and industrial devices, but some are more sophisticated, like FPGAs from Intel. While efforts by governments have helped limit supply of chips to Russia, it’s still potentially easy for Russia to source them via other avenues like China (where none of these types of chips are restricted). I wrote about the tech industry’s shirking responsibility for Tech’s Increasing Role in Global Conflict:
From the wheel to the computer, technology has done more to improve quality of life over the course of human evolution than anything else. Our ability to innovate defines our species. But, that same technology can also supercharge the destruction wrought by our primal, tribalistic instincts. If we want to prevent/minimize such future tragedies, it is imperative that technology executives, governments, and investors do much more to understand how technology enables war and oppression. We don’t need to keep relearning the unbearable lessons of war firsthand – we have archive and real-time footage of wars, historical records, and survivors attesting to its loathsome nature. Yet, despite this knowledge, not enough has been done to keep technology from enriching and enabling countries that want to wage war against others.
Technology underpins today’s military, from tanks to fighter jets to satellites to communication. While it’s important for technology leaders to work with democratic governments and their defense organizations to safeguard humanity’s future and prevent war and oppression, it’s equally important to keep technology out of the hands of those that would use it proactively to threaten or cause harm to people and the environment on a more pernicious level.

I called on tech execs, especially chip makers, to do more to control where their chips are sold and how they are used, suggesting that it should be possible to enable chips to only be used if authenticated. Many, if not most, of these chips in military use cases are programmable, so it should be straightforward to require encrypted keys to enable them. Most chips are programmed with software made by the chipmaker themselves, so if Microsoft can make it so that I have to authenticate to use Office 365, then I don't see why Microchip couldn't do the same to program their chips. We can't solve for the chips already out there, but we can make it much harder in the future. The vector of war will continue to be increasingly tech-driven, and manufacturers need to do much more to secure their chips, hardware, and software against unsanctioned weaponization.

Hope Begets Growth
China’s economy is no longer expected to overtake the US despite having more than three times the population, according to the WSJ. After decades of relatively faster growth, the country’s current anti-growth policies and low birth rates are likely to hinder their ability to outpace their democratic, capitalist rivals. As I noted in How I Learned to Stop Worrying About China in January of 2020, when fear takes over, innovation and hope die, which inevitably hampers growth. China was briefly a leader in innovation last decade, so I hope they find a way back onto that path.

Population Half-Life
Speaking of low birth rates, South Korea was recently in the headlines for their birth rate dropping to 0.8. The simple math is that when a country’s birth rate drops to ~1.0, after a few generations the half-life of the population is equivalent to the life expectancy. We can apply this to the global population and see where our trajectory might be headed based on current declining birth rates. If the global birth rate dropped to 1.0 today and we assume a life expectancy of 75 years, the global population would drop from a little under 8B to around 100M by ~2600. By the turn of the next millennium, there would be fewer than 5M humans left on Earth, a figure similar to the world population around 10,000 BCE. In thinking about population decline, I wonder if it’s tied, at least in part, to the fragmentation and digitalization of tribalism. As society continues to splinter into smaller and smaller groups, we’ve lost that unifying sense of hope and drive to preserve our culture for the future – it’s hard to want to preserve something you don’t have. A low-birth-rate counterexample that may support this theory is Israel, which maintains the highest birth rate in the world at just under 3.0. The Economist further points out that birth rates for secular Jewish women are around 2.0 but over 4.0 for religious Jewish women.

Too Much Resilience is a Bad Thing
There have been numerous examples over the last few months of companies announcing significant layoffs, cost cuts, project cancellations, and other forms of austerity as the economy’s range of outcomes widens, largely due to inflation, rates, and the war in Ukraine. A certain amount of belt tightening makes sense after a decade of economic growth propelled by frenzied governmental over-stimulus during the pandemic. The economic cure the world is now having to take will be worse than the self-inflicted disease of over-stimulus, particularly if rates were to rise high enough to force an economic crisis (see #350). Many CEOs are trying to cut off the negative tail of risk, e.g., further upheaval or economic contraction that exhausts cash reserves or forces a sale of their business. Of course, the time to prepare for a rainy day is when the sun is shining, and those companies that failed to do so over the last few years have, to some degree, earned their reckoning. However, there is a balance to be struck when engineering resiliency. If you overly fortify your business against shocks to the system, you may end up hardening the edges so much that the company becomes brittle or fragile. Frequently, playing it too safe removes an organization’s ability to adapt and evolve because there isn’t enough slack in operations to react to changing circumstances. In other words, in solving for negative-tail risks, companies tend to also eliminate positive-tail events – becoming overly resilient eliminates optionality. Humans tend to have much more vivid imaginations about what can go wrong than what can go right. We have a hard time seeing the blue sky scenarios of nonlinear, positive outcomes. However, history teaches us that things can go very right sometimes. Indeed, we know from history that optimism always wins in the long term. The only way to capture that upside is to make sure your company, like any biological organism, has plenty of food, oxygen, and room to grow. No one can predict where the economy will be next quarter, next year, or at any point in the future. The people who are the worst at predicting the future in approximate order from terrible to very bad are: Federal Reserve and government employees, economists, investors (private and public), CEOs, and then all of the other ~8B people on planet Earth. Perhaps one of the worst things a CEO can do is believe a VC or a Fed employee knows enough about the future that it influences their own corporate strategy. Once you truly embrace that you cannot predict the future, the best path forward is running an organization (or a portfolio) with the right balance of Resilience and Optionality. In part of your business try not to lose, but in the other parts make sure you can still win. Many companies are overreacting to the negative news cycle and cutting off their ability to react to a world that, perhaps, is not falling apart.

✌️-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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jason slingerlend