SITALWeek #376

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: the battle of the bots has begun as AI morphs from a simple tool to a broad startup-enabling platform; fuel users at the head of the power law lack viable EV options; we are running out of time for the human brain to build up defenses against the Internet before technology leaps forward; and a look back at structural changes to the media industry in 2022.

Stuff about Innovation and Technology
Fossil Fuel Superusers

More than 30% of gasoline in the US is consumed by only 10% of drivers. Largely comprising rural residents, often behind the wheel of trucks and SUVs, this group may be tough for EV manufacturers to win over given that affordable EVs capable of repetitive, long-range driving under harsher conditions haven’t been prioritized. The early EV adopters, primarily affluent suburban dwellers with low mileage requirements, were low-hanging fruit for the EV industry; however, replacement of this cohort’s ICE vehicles has moved us only incrementally towards carbon reduction goals. Convincing the gasoline superusers to convert will likely require significant investments in charging infrastructure, longer life/range batteries, marked reductions in vehicle/maintenance costs, and more form factors (e.g., heavy duty vans, trucks, etc.).

BillBot Battle

Customer service technology is becoming sufficiently sophisticated that chatbots can often seamlessly replace human representatives. Now, AI startup DoNotPay offers a chatbot that consumers can use to negotiate the costs of their services with customer service agents. DoNotPay is built with GPT-3 from OpenAI (home of ChatGPT). It seems we are all set for an arms race between opposing AI chatbots negotiating whether we can save a few bucks on our cell phone bill. If we give these AI tools enough logical reasoning and resources, the bots might collude to form a true-life Skynet, ultimately waging war on humans! In all seriousness, this is a great example of how quickly chat engines (and their image- and video-generative AI cousins) are becoming platforms for many more companies to build on top of. One of the richest areas of investment will likely be using these engines to replace a broad spectrum of office-based jobs.

Butter Battle Book

Every time a new technology comes along, it takes a while for humans to adapt to it. This is especially true for various forms of media and communication, as we (or our ancestors) have had to adjust to the various ways our brain is manipulated by print, radio, and television (broadly, video is a particularly convincing medium to which we are still adapting). The Internet, of course, has challenged our senses more than any prior technology. Our propensity – indeed, our programming from natural selection – is to believe. We seem to want to believe every story we are told (unless another story told us not to believe it!). Of course, our brains are also wired for skepticism; however, flexing the skepticism muscle seems to take more energy than passive acceptance. This mental default has been hijacked by the Internet, social networking, apps, etc. And, because we are glued to our screens and constantly inundated with stories and soundbites, our brain is perpetually in reactionary mode, leaving little breathing room for the consideration and understanding that are key to adaptation. During this process of assimilation, we are most vulnerable to savvy and/or unscrupulous people who take advantage of the new technology-driven forms of communication. This happened perhaps most infamously with the amplified rallies and radio broadcasts of the German Reich, which initially might have carried more weight with listeners (like a voice from God) – until we eventually realized amplified sound transmitted over space has no special power. Sometimes, adaptation requires a generation or two growing up natively with a new technology. Unfortunately, we currently exist within a particularly challenging era where new forms of communication are evolving at a rate that far eclipses our generational timeframe. Not only is humanity struggling to comprehend that social media is no different than print, radio, or television – i.e., it’s all just stories with very little truth – but we also have to contend with AI manipulation of images, audio, and video obliterating the line between reality and fiction. If our skeptical muscles can’t reassert themselves and help us realize that, for example, some capricious billionaire leveraging the technology of a social media company might not be an instrument for truth and reason, we could hit a point of no return. This dire scenario will become fractionally more likely if we fail to dial down our credence in digital information before the world shifts to augmented reality, which will make what’s “real” even harder to discern. As I wrote in Meta-mess:

The stakes are high in the transition from screen to spatial computing because every shift in technology – from print, radio, TV, Internet, and smartphones, to altered reality – brings with it a faster pace of disruption that, increasingly, far outpaces humanity's ability to co-evolve. We have not come close to adapting to living alongside the Internet, and yet we are hurtling toward an even more disruptive technology shift. If you spend much time learning about ancient Greece, you realize that while the color palette and mediums of discourse have changed, everything else with humans has pretty much been status quo for millennia. Whether it's Plato’s world, Shakespearean times, the Renaissance, the Enlightenment, or modern day, we worry about the same things. We dream, fight, love, hate, resent, envy, and argue the same ideological questions. The Enlightenment's scientific revolution marked one of the only material changes in the last 3,000 years in human thinking, when it became possible to say “I don’t know” and then investigate why things are the way they are. While this is a Euro-centric example, diverse cultures around the globe have followed sufficiently similar paths such that all humanity shares common, basic parameters for interacting with new technology – namely, a few early adopters tend to wield dominant control over a spellbound (or brainwashed) audience before reverence dissipates, diversity reasserts itself, and usage slowly evolves to benefit the masses. What has changed the most over history is how quickly the new medium (i.e., technology platform, from stone tablets to VR goggles) for communicating ideas and artistic expression can have a viral impact (especially while still in the hands of a few dubious autocrats). Globally, it's not how, but what, we choose to communicate that matters as we go from screens to glasses. If we aren’t careful, we will continue to amplify all the worst of humanity's past, both ancient and recent, instead of shining a light on the best of our traits.

The heart of the social media problem is the broad erosion of trust that has resulted in structural stupidity. The only way I see to disentangle this mess is for things to get so crazy, so unbelievable, and so outrageous that we have to confront the fact that none of it is real (hopefully without anyone getting hurt!). Once our culture has internalized the truth that the newest technologies are just more tools, we can hopefully slip back into something more resembling reality. However, with AI outpacing our biological adaptability, I am not sure whether we will gain the upper hand or crack apart. It’s a race between human cognition and AI. I feel like the little boy on the last page of Dr. Seuss’ Butter Battle Book as he hangs anxiously from a tree waiting to see which side will drop the Big-Boy Boomeroo, “a gadget that’s Newer than New. It is filled with mysterious Moo-Lacka-Moo”:

“Grandpa” [the boy] shouted, “Be careful! Oh Gee!

Who’s going to drop it?

Will you...? Or, will he...?”

“Be patient,” said Grandpa. “We’ll see.

We will see...”

Year-End Review, Part 1

Over the next couple of weeks, I’ll be pulling together some SITALWeek topics and themes from the past year. Today, I’ll kick off this trip down memory lane with excerpts from prior posts on the evolving media landscape along with a few related tidbits and some quotes that stuck with me. As I reflect on the evolution of my thoughts on the enormous trillion-dollar media industry, 2022 appears to have been a pivot point. I’ve only included a small portion below of what I wrote on the industry, but I can see myself confronting a prediction that was becoming increasingly tenuous. As a long-time media investor, I thought for decades that long-form, premium, scripted content would always be valuable; however, in the face of near ubiquitous content in all forms, I had to let go of the former safety of that prediction. The pandemic accelerated a transition from abundant time and scarce content to scarce time and near-infinite content. Near the end of 2020, I made the point that we needed digital DJs to curate content for us; however, I should have focused more on why we were in need of such master organizers. Back in 2021, I described why content was unlikely to follow a winner-takes-most power law. I started talking about YouTube’s glut of content, and how they were beginning to rival Hollywood in terms of content spend. Last year also saw TikTok’s meteoric rise. I can see the initial seeds of my growing skepticism – along with my reluctance to accept that surging content in all forms might be more than a passing fad. In 2022, the data became much more clear: we went from having ample time for media (of all forms) to a battle for attention. Consumer preferences have continued to evolve toward shorter, less professional content, and we are now adrift in a sea of infinite, low-value content with a legion of advertisers desperately seeking our attention. And, as I’ve covered in recent months, generative AI is set to exponentially add to the content clutter. As investors, we try to hold our beliefs as loosely as possible and, like good Bayesians, adapt our views as new data become available. My views on content have certainly evolved over the past 24 months, and I suspect they will continue to do so as we face an ever growing mountain of content. Here is a brief walk through some of the posts related to media, advertising, and our broader relationship with evolving technology.

Spiraling Content Meets Maxed-Out Attention (#330 January 16th, 2022)

Last week, The Tonight Show Starring Jimmy Fallon did a comedy bit called “Tonight Show Polls” (where the answers are jokes), and one of the questions was: “What are you watching on Netflix?” The answer was: “10% Queer Eye, 10% Emily in Paris, and 80% My own reflection while I scroll through TikTok”. It’s funny because it’s true. I’ve been thinking lately about the ever-approaching zero-sum moment when we max out our consumption limit for the exploding menu of entertainment options. The pandemic pushed our nicotine-like phone addiction to even greater highs, to the point where I routinely see people on their phones in rather mind-boggling situations. Could we possibly spend more time watching all of the various screens around us? Until we have AR glasses that we look through every waking moment, it feels like we are getting to the point where growth in minutes spent staring at screens each day will slow. Thus, we are getting closer to that point where, in order to spend more time on social media, gaming, or streaming video, we’ll need to shift away from one to another. Multitasking has its limits.

As our attention to screens has grown, so too has the amount of money spent on streaming, gaming, and influencer/creator content that, like a siren smoking a cigarette, calls to us whenever we have a flicker of boredom. The Hollywood studios are projected to spend $115B in 2022 on video content, which becomes $140B when you add in sports broadcast rights. Disney’s spending is estimated to be up 32% y/y for 2022 and 65% from 2020. Netflix is anticipated to spend $17B this year, up 25% from last year and 57% from 2020. Video gaming is approaching a $200B/year industry, and, while I haven’t seen a good estimate of what fraction is spent on game production across mobile, desktop, and console, I would estimate a total somewhere in the $75B range. YouTube is likely paying out around $20B to content creators this year (see YouTube Rivals Studios). Then, there are payments to creators on Twitch and other social networks as well as a long tail of regional and specialty content around the world, which is easily in the tens of billions of dollars. I am sure someone with more data than me has a better guess, but I’d say that $250B in annual content costs is not a stretch by any means (and this even excludes much of the content spend in China)...

The TikTokification of Consumption Habits (#353 July 10th, 2022)

Professional content, like movies, series, music albums, etc., is generally created with some hope of monetizable longevity. If you spend $100M on a movie today, you want to maximize the duration of returns, as with any investment. The 1986 original Top Gun is still paying large backend dividends to its owners and creators, and that was even before the major success of the $1B-grossing sequel. If content has only short-tail relevance, however, it should be worth far less (i.e., demanding a steeper markdown when you discount future cash flows back to today’s value). The current problem with expected returns for content is the vast proliferation of all types of media – from TikTok to video games to you name it. When divvying up the finite time we have available to consume various content forms, the denominator has dramatically increased. And, because content is getting shorter, it no longer becomes embedded into our common cultural lexicon to the same degree as it used to (see Digital Tribalism for more on this theme). The faster we binge or scroll through content, the more forgettable it becomes – with little time to process or appreciate, it evaporates before it can enter our long-term memory. Yet, producers are largely continuing to follow the old forecasts for future windfalls, spending more and more on content despite its risk of diminished value over time. Following in the footsteps of Netflix, the other Hollywood studios are shifting business models to streaming and copying the strategy of more upfront payments and very little, if any, backend.

There were two recent interviews of media execs that got me thinking again about content’s discount rate: Jason Blum from Blumhouse (a successful next-generation Hollywood production company) appeared on a Puck podcast, and producer/investor Jeff Sagansky was interviewed for Deadline. They both argued that talent is losing out on lucrative backends as a result of streaming’s new upfront-weighted business model. But, that view seems increasingly anachronistic as it becomes clearer that the backend might be worth far less in a world of exploding media and entertainment choices. Indeed, it’s entirely possible that even the upfront is significantly overpriced. The heart of the question is: how much is the value of content being diluted by the infinite proliferation of options? Sure, someone could make another Seinfeld or Friends today that becomes a culture carrier for a generation, but those odds seem to be getting exponentially longer...

In Disney+Ads (#338 March 13th, 2022), I explored the likely outcome that Netflix would launch ads (before it was announced), the importance of first-party data for advertisers, and the likely rise in preference for ad-supported services given their overall win-win nature. Further, in Bundling is King (#359 August 20th, 2022), I noted that YouTube is in a pole position to bundle: In a world where both content and its distribution are ubiquitous, neither side of the scale can be the proverbial “king”. Content is being overvalued by the creators and producers, and distributors are equally overvaluing their role in mediating the relationship between creators and consumers. The value in media now lies with the company that can create the highest non-zero-sum bundle of content (likely with both ad-supported and premium options as well as music and perhaps even gaming) and cheaply distribute it to the widest audience globally... Further, in Gaming Weakness (#356 July 31st, 2022), I looked at declines in console and mobile gaming as consumers parsed more and more choices for entertainment.

In Dylan on TikTok (#370 November 6th, 2022), I gave two of his quotes to help us think about this time of disruption in media and technology:

To the question: “Are you worried that in 2020 we’re past the point of no return? That technology and hyper-industrialization are going to work against human life on Earth?” Dylan replied: “Sure, there’s a lot of reasons to be apprehensive about that. There’s definitely a lot more anxiety and nervousness around now than there used to be. But that only applies to people of a certain age like me and you, Doug. We have a tendency to live in the past, but that’s only us. Youngsters don’t have that tendency. They have no past, so all they know is what they see and hear, and they’ll believe anything. In 20 or 30 years from now, they’ll be at the forefront. When you see somebody that is 10 years old, he’s going to be in control in 20 or 30 years, and he won’t have a clue about the world we knew. Young people who are in their teens now have no memory lane to remember. So it’s probably best to get into that mind-set as soon as we can, because that’s going to be the reality. As far as technology goes, it makes everybody vulnerable. But young people don’t think like that. They could care less. Telecommunications and advanced technology is the world they were born into. Our world is already obsolete.”

And, Dylan said: “Today it is commonplace to stream a movie directly to your phone. So, when you are watching Gloria Swanson as faded movie star Norma Desmond proclaim from the palm of your hand ‘I am big, it’s the pictures that got small’, it contains layers of irony that writer/director Billy Wilder could never have imagined. Of course someone streaming something to their phone is most likely watching something shorter and faster-paced on TikTok. Certainly not anything in black and white with a running time of 110 minutes. Every generation gets to pick and choose what they want from the generation that came before with the same arrogance and ego-driven self importance that the previous generations had when they picked the bones of the ones before them.”

Lastly, in “We Stay for the Replay” (#371 November 13th, 2022), I quoted Tom Junod’s take on our current relationship with media, and the world at large:

“We invest endless faith in the power of technology to deliver clarity. But what it delivers is uncertainty, along with the prayer that better technology might yet yield better results...We watch football because the questions it requires us to answer are much easier than the questions required by politics and religion and law and science, not to mention real life. But the questions are increasingly becoming the same. How do we know what we know? How can we believe what we see? In football as in politics and in politics as in football, we come for the game; we stay for the replay. We watch the replay over and over, in the hope of resolution, but resolution is as hard to come by now as it was in the first instant replay, the one filmed by Abraham Zapruder in 1963. And that's why we have no choice but to keep on watching.”

✌️-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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