SITALWeek #422
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: a day of reckoning dawns for the companies that mortgaged their futures to buy back shares over the last decade; 2024 is the year drones finally takeoff for ecommerce; the NFL has a broadcast problem; AI will multiply financial gains for artists; protecting humans from robots; IT jobs are no longer growing, and may shrink with AI; cool new flow batteries; Brett discusses Trane on Business Breakdowns; and a short lesson on applying complex adaptive systems in reverse.
Stuff about Innovation and Technology
SkyMart
Drone delivery company Zipline is ramping its Walmart trials 1,000x to serve 1.8 million homes in the Dallas-Fort Worth metro area. Zipline makes a drone delivery every ~70 seconds globally and is approaching one million cumulative deliveries. This expansion of service is a significant development, which could give companies like Walmart a leg up over Amazon, whose drone efforts continue to lag far behind others. I've previously contemplated Walmart acquiring the assets of UPS or FedEx, which are struggling to grow volumes, but perhaps they can skip road-based delivery altogether. I wrote in more detail about Zipline in #389.
Innovation Beats Buybacks
As I read recently about Walgreens Boots Alliance's efforts to conserve cash by cutting its dividend and looking to sell off UK pharmacy Boots, I couldn’t help but return to a 2018 oped and a 2019 SITALWeek highlighting the risk of prioritizing stock buybacks and short-term shareholder returns at the expense of forward thinking innovation and customer problem solving. Walgreens announced a $10B share repurchase in 2018 around the same time Amazon announced it was acquiring PillPack to enter the pharmacy space. Clearly, I was wrong about many things back in 2018, including how little success Amazon has had in healthcare, but it seems obvious in hindsight that Walgreens neglected an opportunity to prioritize customer experience and invest in digital innovation. Since Walgreens announced the big repo five years ago, the stock is down nearly 50% while the S&P 500 is up over 90%. When disruption is on the horizon, as it is for nearly every company in every industry, businesses that evolve to meet their customers’ changing needs nearly always do far better than those that instead choose to return capital and sit on their hands. This is a good example of why we emphasize adaptability and non-zero-sum-maximizing companies at NZS Capital.
Lonely Linear NFL
The NFL accounted for 93 of the top-100 broadcast network shows in 2023, up from 82 in 2022 and 61 five years ago. While the NFL continues to hold its popularity, these stats are far more indicative of the decline of all other broadcast viewing. The only two non-football related broadcasts in 2023 were the Academy Awards and the POTUS State of the Union (the other five slots were filled by pre/post football programming or college football). With significant challenges facing streaming platforms that rely on legacy cable and broadcast assets, it’s likely that it will be the NFL, more than any other force, that directs the future of these struggling companies (just as SITALWeek was going to press, the NY Post broke the news that the NFL is looking to take a stake in Disney’s ESPN). The rapid decline in linear-TV subscribers threatens networks' ability to make payments to the major sports leagues on a national basis like we’ve seen with regional sports rights (see Sporting Headwinds). The biggest threat to professional content still remains AI, with Hollywood becoming Vaudeville and holodeck-like technology just around the corner; however, a deteriorating backdrop for sports rights payments may be a larger, near-term threat.
AI’s Artistic Land of Opportunity
Musicians have, on occasion, been on the cutting edge of financial innovation. Bowie Bonds pioneered the concept of performers burdening future royalty streams with debt in order to support their current lifestyle. In another example, music labels (and, to a lesser extent, the live music performance industry) act as specialized banks for lending to artists. ABBA’s virtual show added $225M to the London economy, and virtual KISS appears poised to be a likewise lucrative leveraging of AI. Taylor Swift is more of a corporation than a musician, a statement that in no way diminishes her creative abilities – many artists are also great business operators. The creators of South Park (and hit musical The Book of Mormon) recently upsized a $600M loan to an $800M loan that would include a cash payment secured against the future earnings of their intellectual property. These deals have come a long way: $800M is nearly 15x the size of the original Bowie Bond! With the advent of AI-developed music and virtual performances, there will be a proliferation of opportunities for recording artists to increase their income and for music rights holders to expand their value, assuming artists agree to the use of their voice/content. For example, I’d love to be able to hear any artist cover a song by any other artist in their own unique style. Who wouldn’t want to hear Billie Holiday cover Billie Eilish? Such an engine could be a lucrative amplifier of the value of music rights. While criticism and cynicism around AI’s impact on art of all kinds is rampant, AI will no doubt create far more opportunities than existential threats for artists.
Embodied Ethics
Google’s DeepMind is introducing an array of robotic platforms aimed at accelerating the development of general purpose robots leveraging AI. Over the course of seven months, Google ran 77,000 trials across 52 robots performing 6,650 tasks in its offices. Top of mind for Google is safety as robots increasingly interact with humans:
It features safety guardrails, one of which is providing its LLM-based decision-maker with a Robot Constitution - a set of safety-focused prompts to abide by when selecting tasks for the robots. These rules are in part inspired by Isaac Asimov’s Three Laws of Robotics – first and foremost that a robot “may not injure a human being”. Further safety rules require that no robot attempts tasks involving humans, animals, sharp objects or electrical appliances.
But even if large models are prompted correctly with self-critiquing, this alone cannot guarantee safety. So the AutoRT system comprises layers of practical safety measures from classical robotics. For example, the collaborative robots are programmed to stop automatically if the force on its joints exceed a given threshold, and all active robots were kept in line-of-sight of a human supervisor with a physical deactivation switch.
There is a series of illustrations in the blog post announcing the new platforms.
AI Layoffs
Language learning giant Duolingo announced it was cutting 10% of its contract workers due to leveraging AI. This move is part of a broader trend of doing more with fewer people thanks to the new technology (see Artificial Efficiency for more). The entire US IT industry, which was one of the earliest adopters of AI copilots, saw virtually no growth in jobs in 2023 after adding 267,000 jobs in 2022, and engineers are finding the job market much more competitive.
Finding Nano Flow
A DARPA project has made meaningful progress on flow batteries, which can be refueled – by swapping out spent electrolyte fuel with fresh solution – in the same amount of time it takes to refill a gas tank (and the fluids can be reused roughly the same number of times that a lithium-ion battery can be recharged). Further, they cannot catch fire (the fluid is a fire suppressant), so extra protective infrastructure around the batteries is not needed (saving weight in an EV). Until recently, however, flow batteries lacked sufficient energy density to compete with lithium-ion batteries (because you can only dissolve so much electrolyte in solution, requiring prohibitively large electrolytic reservoirs to achieve long-range capabilities). Researchers at DARPA have overcome this limitation by using nanofluids, a technology that relies on particle suspension rather than dissolution, dramatically increasing the energy density of the electrolyte solution to rival that of traditional lithium-ion batteries. Given they can also be recharged from any electricity source, nanoflow batteries could also be a safer way to build a distributed grid with in-home energy storage. DARPA has an obvious military interest in such battery technology for use in combat vehicles, and I imagine this would also make sense for fleets and long-haul trucking. Like other types of novel battery technology, nanoelectrofuel batteries are a few years away from commercialization and suffer from the chicken/egg scaling problem common to new technologies that require broad deployment of supporting infrastructure, in this case charging/refilling stations.
Miscellaneous Stuff
Doubling Drug Discovery
DeepMind’s drug discovery startup Isomorphic Labs aims to halve the time it takes to discover new drugs, whittling the process down from five years to two. Focused on partnerships with Lilly and Novartis, the AI firm is eyeing up to $3B in performance-based incentives if they achieve their objectives.
Stuff About Demographics, the Economy, and Investing
So Cool It’s Hot
Our very own Brett Larson joined the Business Breakdowns podcast to discuss HVAC giant Trane Technologies. At NZS, we like to alternate between jokes about HVAC being “hot” but also “cool”. Additional interviews with NZS investment team members can be found here.
Bidirectional Luck
We often write about how complex adaptive systems teach us to stop falling into the trap of attempting to predict the future. But, we tend to forget that the arrow of prediction goes backward as well, namely in the form of attribution. We often believe we can attribute causation to coincident circumstances. In our own decision making, especially when it comes to investing, it’s all too easy to over-attribute negative outcomes to bad luck and positive outcomes to our own skill. In reality, luck plays a profoundly larger role than we often realize, both for attribution and prediction. We recommend doing pre-mortem analysis to make better forward-looking decisions, but we should also spend just as much time on counterfactuals to examine how things could have gone differently in the past. If we devoted as much time to showing how lucky we have been, it might help to create better circumstances for good luck to find us in the future.
✌️-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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