SITALWeek #234

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, mammoth dung, and whatever else made me think last week. Please grab me on Twitter with any thoughts or feedback.

Click HERE to SIGN UP for SITALWeek’s Sunday EMAIL (please note some ad blocking software may disrupt the signup form; if you have any issues or questions please email sitalweek@nzscapital.com)

In today’s post: YouTube might breath life back into the toy market; Netflix + Roku would be a powerhouse – why the streaming giant should enter the hardware market; activist investors are boring; is Disney becoming Sleepy Dwarf? the black holes of cloud computing; the increasingly playful relationship between fiction and truth; and, lots more below...

Stuff about Innovation and Technology
It’s Official! NZS Begins Partnership with Jupiter Asset Management
We are very excited to announce the official start of our new partnership with Jupiter Asset Management. We are thrilled to be working alongside Jupiter as we build an enduring investment management company focused on maximizing non-zero-sum outcomes for our clients, employees, partners, and the world at large. Our initial focus will be in the global institutional investor market, with products built on the foundation of our Complexity Investing and Non-Zero-Sum frameworks.

Data Centers’ Encouraging Energy Efficiency 
Between 2010 and 2018, data centers grew compute capacity 6x and storage 25x while Internet traffic grew 10x. However, thanks to Moore’s law and the application of machine learning to improve data center efficiency, power consumption only grew 6% over that period. That’s 6%, not 6x! It now takes 1/9th as much energy to store 1 Tb of data and 75% less energy per server compared to 2010. Given that these numbers only go through 2018, I suspect they would look worse today with the explosion of power-heavy GPUs for machine learning, but this is a good sign for future growth in AI and cloud computing from an environmental-impact perspective. 

Tesla’s Battery Breakthrough Could Achieve Price Parity with Gas Cars
Tesla is reportedly leveraging their Maxwell acquisition and internal production to drive battery costs down to $100/kWh, a level that would put EVs on par with gas engines without subsidies. Electrek pieces the clues together of Project Roadrunner ahead of Tesla’s battery event in April. 

iBuying now 1% of US Home Sales
A new report from Redfin shows iBuyers purchased 1% of homes sold in the US in 2019, up from 0.6% in 2018. Some top markets did, however, see fewer homes sold to iBuyers in Q4 compared to Q3 of last year. Raleigh dropped from 8.5% to 7.9% while Phoenix fell from 6% to 5.7%. It’s not explained in the report what was behind the drop; but, one possible explanation might be local market attractiveness vs. other new growth markets for the big iBuying platforms like Zillow, Redfin, and Opendoor.

Gene Sequencing “Moat” Vulnerable
China’s BGI has announced an “extreme” gene sequencing machine that can sequence someone’s complete DNA for $100 compared to around $600 for rivals like Illumina. The room-sized custom setup uses robot arms and other process changes to achieve the price points for very large scale population sequencing. BGI has based the system off technology from Complete Genomics, acquired in 2012, a deal that Illumina at the time protested. The tension highlights potential monopoly pricing abuse by Illumina, who apparently has said they can also do $100 genome sequencing, but were apparently waiting until they had to, according to this MIT Technology Review article. In the future we will see many more examples of classic, pricing-power “moats” becoming vulnerabilities – a consequence of negative-sum behavior.

Frivolous Suits Foiled by MIDI Melodies
In order to stop frivolous, melody-infringement lawsuits, “Two programmer-musicians wrote every possible MIDI melody in existence to a hard drive, copyrighted the whole thing, and then released it all to the public in an attempt to stop musicians from getting sued.” – Vice

Which Came First – Toys or Cartoons?
If you’re a fan of the delightful Netflix docuseries “The Toys that Made Us” like I am, you will know that many popular kids television shows started as toys first. Essentially, such shows are just extended commercials created to sell merchandise, like Transformers, He-Man, Care Bears, and Paw Patrol. With kids migrating their video viewing to YouTube, it’s no surprise that we are seeing licensing deals for shows and characters on the streaming giant. Creators can earn 7-figure advances and see 10-20% royalties on merchandise sales. Toy sales declined in 2019, perhaps in part to waning TV viewing (or maybe just in anticipation of baby Yoda?). How long before we see a hit YouTube series created solely to sell a line of toys? Could toy sales grow again with this new, creative combination of streaming and merch?

Walmart Still Throwing to See What Sticks
Walmart has launched a fulfillment service for 3rd-party sellers to compete with FBA at Amazon. Walmart’s commitment to 3rd-party merchants for its ecommerce has been spotty, and this doesn’t seem like an obvious choice to me. Walmart has also been trialing various last-mile delivery options from multiple vendors for several years. They launched a competitive service to Amazon Prime in 2015, then shuttered it in 2017, and are now rumored to be launching Walmart+ to once again compete with Prime (yet they are also rumored to be selling their video service Vudu, leaving a need to bundle another video app). It’s good to experiment, but it’s also 2020; ecommerce has been around for a quarter of a century, and time may no longer be on Walmart’s side.

Could glass bottles make a comeback? 
While glass remains questionably economical to recycle, the rise of grocery home delivery could make it easier for refillable glass containers to enter into a new, efficient supply loop from producers to consumers. The WSJ reports on the glass bottle market.

Should Roku Go Home to Netflix?
As the power pendulum swings evermore to content owners from distributors (like cable and satellite), there remains a wide open opportunity to create a connected-TV device that has a great user interface, universal search, billing, and account management, which would create powerful upside for both consumers and apps/channels (via data) to drive a smaller number of higher ROI ads. As I’ve pointed out in the past, both Apple and Amazon have motivation and hardware to effectively subsidize this business to benefit their broader ecosystem of iPhone and Prime-membership users, respectively. Google also has the ecosystem to subsidize, but hasn’t yet infiltrated the living room TV hardware space to the degree others have. Roku has the hardware and market share, but doesn’t have a big ecosystem. Roku started out as a project by Anthony Wood inside of Netflix, and Netflix even provided the original funding for it in 2008 when it decided not to enter the hardware market itself. Today, I’d suggest the killer combination would be Netflix buying Roku and creating an open ecosystem for data, apps, and channels. There is an opportunity to create a high non-zero-sum outcome for consumers, streaming apps, content creators, and advertisers by using data combined with high revenue shares for all of the apps/channels involved. An open data exchange in particular would drive higher ROIs for advertisers, higher revenue shares for apps, and fewer commercials for consumers – a win-win all around. Unlike other Information Age transitions, video won’t be a winner-takes-all market because one studio shouldn’t make every movie and TV show in the world, and creative folks won’t all work for one boss. But, Netflix could continue to thrive and enable an even broader ecosystem by entering the connected hardware market with an open data platform and a great UI/universal search. Add this to my list of other crazy, Netflix-related ideas such as Netflixland.🎢

Disney Becomes Sleepy?
Much has been written about the early and surprise appointment of Disney Parks head Bob Chapek as CEO. Iger, who was already due to end his remarkable run as Disney CEO at the end of 2021, will stick around to run the creative side of the business as Exec Chairman for 22 more months. After Iger leaves, the company has said it would not have a chief creative/content officer as the studios can run independently. On the one hand, the decentralized model works very well for creative businesses; on the other hand, Iger has clearly been an important sounding board and key conductor of the company’s roadmaps and content acquisitions. When Tim Cook took over Apple, innovation turned from revolutionary to incremental, and risk taking subsided dramatically. It feels like Disney will be entering a similar era. My intention is not to pass judgement on Tim Apple or Bob Disney here, but it’s worth noting that we’re coming out of a period of disruption in media and entering a period of relative stability – where the big Hollywood studios can have their cake and eat it too. As long as Disney can keep the creative talent motivated across the organization, Chapek could be a successful leader. But, I admit, a little bit of my passion for Disney will leave with Iger. The Verge covered some of the backstory of the Disney CEO change. It will be a baptism by fire for Chapek as Disney grapples with what could end up being a global shut down of their parks and travel business amid COVID-19 fears. 

Cloud Computing Event Horizon
Over the last 20 years, we’ve seen a few giant black holes form in the consumer Internet/app space such as Facebook, Google, Amazon, and Apple. These mega platforms accrete all the adjacencies and value around them into a central core. There are a lot of reasons why this is a natural progression resulting from the evolutionary fitness functions operating in the Information Age. Mega platformization has had some negative consequences, but it’s also created a significant amount of win-win, progress, and productivity – enabling an enormous new part of the digital economy (see: How I Learned to Stop Worrying and Love the Monopoly). Will the same thing happen in enterprise, as businesses shift apps and processes to the cloud? While consumer apps have been largely monolithic (search, photo sharing, ecommerce), there have also been a large array of category winners in gaming, streaming video, and a very long tail of niche applications. The same trend could play out with enterprise IT, as Amazon, Microsoft, and Google (and Alibaba in China) become massive black holes absorbing the $3T+ global IT spending market. So far, the infrastructure layer has proven sufficiently horizontal, monolithic, and generic enough that these cloud platforms are absorbing much of that functionality. On the opposite end of the spectrum are the huge, specific vertical applications, which are likely to remain independent, but increasingly run on top of the big clouds. In between, however, is a grey area of horizontal building blocks that may or may not be sucked into the cloud black holes. Database is one example – will proprietary and open-source databases at the big cloud platforms take the market from startups? Or, will Kubernetes-enabled, multi-cloud, portable workloads make it easy to have technology layers like databases dominated by independent companies? What about horizontal collaboration platforms? Are Slack and Zoom ultimately just features that will migrate to Office 365 because of the Azure black hole? And, then there are the large applications that are becoming powerful black holes themselves like Salesforce or Adobe. In general, I’ve argued it’s going to be “and” not “or”; we are very early in this multi-trillion-dollar migration, and for the foreseeable future, everyone is winning.

Abundant Wet Cement in AI Chip Market  
While NVIDIA continues to dominate the market for running large, machine-learning workloads, once you have a model and want to run data against it (known as inferencing), the solutions are diverse and still forming. This article in Semi Engineering is a good overview of the state of inferencing today. 

Azure Sphere Finally Here
After announcing in 2018, Microsoft has launched its chip-based Azure Sphere solution for IoT. The Microsoft-certified MCUs, from companies like MediaTek, NXP, and Qualcomm, run a version of Linux developed by Microsoft to run Azure services embedded in connected devices. The solution is focused on security, and Microsoft has some videos and examples on the website for the new Azure Sphere devices. GOJO, maker of PURELL, is using the chips in hospital dispensers to identify missed opportunities for hand sanitizing.

Who Should Decide Who Runs Twitter?
In the most desperate ploy ever to wrangle a hard-to-get blue “verified” check mark from Twitter, activist “investor” Paul Singer of Elliott has demanded no less than the ousting of co-founder and CEO Jack Dorsey. Well, maybe Singer is not angling for the check mark, but as a long-term Twitter shareholder, I think Jack is the best person to steward the company – both for the sake of long-term returns and guiding Twitter’s important role in society (I wrote a bit more on that idea in this post from a year ago when I got back into the stock). That said, I am also open to alternatives if those solutions create the most value long term for all constituents (not just shareholders). There are some investors who have different views of how companies should be run, and they thoughtfully engage with boards, but then there are “activist investors” that are moochers in the Ayn Randian sense of the word (they remind me of Mena Suvari’s character in American Beauty – a desperation that can only be described as boring and ordinary). When I have interacted with some of these bully campaigns in the past, they have amounted to nothing more than name calling in an attempt to drive short-term gains at the expense of long-term employees, investors, and the world at large. As an advocate of companies being public, I acknowledge activists can be a real agitation. My advice to boards is to stand up for what’s right, focus on long-term value creation, and know that you have no fiduciary duty to short-term moochers aggravating your stock (if you can’t do that, you shouldn’t be serving on a public board). It’s important to listen and reach a reasonable truce as quickly as possible to avoid distraction. Like dealing with any playground bully, you just need to let them think they’ve won; bones to be thrown include cost cutting, share buybacks, exploring strategic options, shuffling management members to new areas, or bringing in some outsiders. You can also slow down attacks by choosing a middle ground on corporate governance (such as having a staggered board, like Twitter) that protects long-term investors while not completely entrenching management. The rising number of passive shareholders is a big complicating factor – when 25-30% of your shareholders vote passively (soon to be 50%), it clearly makes it harder to fend off attacks. You can, however, be clear about your long-term objectives and cultivate allies in long-term investors who understand your vision. But, most importantly, just make an exception and give this guy that blue check mark so we can all move on.

Miscellaneous Stuff
Supermassive Explosion Sets New Record
The explosion of a supermassive black hole at the center of the Ophiuchus galaxy cluster has been detected by scientists using the Chandra X-ray Observatory (with help from instruments made by Ball Aerospace). The cluster is 390M light years from earth, meaning this event happened over 390M years ago (the time it takes the light to reach us). The eruption out of the black hole was 5x bigger than any previous energy burst we’ve observed in the universe.

Gravity Distortions Offer Early Earthquake Detection
Earthquakes quickly displace chunks of earth locally, which results in minute changes in gravity (on the order of 1 billionth of the earth’s gravity!). These difficult-to-detect PEGS (prompt elasto-gravity signals) can now be more easily seen with algorithms and sensors. Because PEGS travel at the speed of light, the gravity changes are detectable far in advance of the seismic wave. Further testing could allow for critical information to be determined about earthquakes (like their likelihood of causing a Tsunami) in advance of damage.

Thank Mammoths for Pumpkin Pie
In SITALWeek’s ongoing coverage of mammoth dung (🐘💩...the new wooly mammoth emoji doesn’t launch until Emoji 13.0 later this year): last week we learned that the big beasts and their fertilicious poop were instrumental in spreading the seeds of various large squash species across continents, thus setting the stage for gourd domestication by humans.

Stuff about Geopolitics, Economics, and the Finance Industry
COVID-19 Illuminates Decoupling of Reality and Truth
There are two interesting topics to me regarding COVID-19. The first is the fascinating trend of the ever-blurring line between fact and fiction, and the increasingly small role that truth plays in the functioning of the global economy. The narrative reflexively dictates behavior, which influences the narrative. In that narrative, “objective” reality plays an increasingly small role (I am reminded of Kurt Andersen’s book Fantasyland, or how Adam Savage’s “I reject your reality and substitute my own” has gone from quip to canon within the last 15 years; of course, humans are fantastic storytellers, so it's not terribly surprising that our fickle relationship with truth is, historically, a frequently recurring theme). However, in the Information Age, the playful relationship between fiction and truth interacts on an entirely new 4D chess board. Proximally, as investors, we care about the money, which will, over the long-term, track the underlying truths. But, only to the extent that those truths themselves aren’t altered by the fiction of everyday life. Most of the move in the stock market last week was driven by fiction (or, at least speculation) rather than truth, and helped along by algorithms, which have their own special new role in our socioeconomic story. The biological truth of COVID-19 is not yet completely known; however, it is perhaps inline with the 1957 influenza, according to Bill Gates. The fictional accounts of the virus won’t instantaneously change it’s DNA, but fictions driving fear could slow its spread, which could actually meaningfully impact it’s evolutionary trajectory (e.g., to make it less virulent with longer incubation) and physically rewrite it’s DNA. That brings me to the 2nd, related COVID-19 topic of interest: will the narrative of the virus result in a long-term change in behavior, i.e., a change in the actual truths of how we operate as a society? The obvious changes would be an increase in video conferencing (and decrease in travel) and an increase in home delivery of goods and services, etc. I’m not convinced this virus will change actual behavior in the long term, but it bears watching and understanding. In the meantime, it’s worth remembering that volatility represents opportunity, not risk, so keep an eye on the long-term truths and how they are evolving based on short-term fictions.

Future of Chinese-Based Supply Chains?
The Economist reports on the potential decoupling of Western supply chains in China as a result of the virus. Long term, I think the supply chain will adapt irrespective of pandemics, and it was already moving away from China for reasons of competitiveness. Meanwhile, the FDA is monitoring 150 prescription drugs made in China that could face shortages, some of which have no alternatives.

Majority of PE-backed IPOs Underperform
Over 70% of IPOs by PE-backed buyouts from 2010-2014 underperformed their benchmarks by an average of 12 points. Often, PE shops will sell a portion of shares at the IPO and then sell in subsequent offerings, so the underperformance matters to the funds. No doubt the added leverage likely introduces volatility, and perhaps weighs on the IPO’d assets. Also, frequently this type of PE-backed company cuts costs and defocuses on R&D in order to boost numbers. In the meantime, PE deals may stay private longer or look for strategic buyers to avoid an IPO. Buyer beware.

Growing Awareness of Taiwan’s Lynchpin Status
Bernie Sanders told 60 Minutes he would intervene if China invaded Taiwan. I wrote more on Taiwan’s problem as the center of a tug of war between Trump and China last week in case you missed it. Semiwiki also covered the topic in more detail. 
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Disclaimers:

The content of this newsletter is my personal opinion as of the date published and are subject to change without notice and may not reflect the opinion of NZS Capital, LLC (“NZS”).  This newsletter is simply an informal gathering of topics I’ve recently read and thought about. It generally covers topics related to the digitization of the global economy, technology and innovation, macro and geopolitics, as well as scientific progress, especially in the fields of cosmology and the brain. I will frequently state things in the newsletter that contradict my own views in order to be provocative. I often I try to make jokes, and they aren’t very funny – sorry. 

I may include links to third-party websites as a convenience, and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by NZS Capital, LLC (“NZS”). If you choose to visit the linked sites, you do so at your own risk, and you will be subject to such sites' terms of use and privacy policies, over which NZS Capital has no control. In no event will NZS be responsible for any information or content within the linked sites or your use of the linked sites.

Nothing in this newsletter should be construed as investment advice. The information contained herein is only as current as of the date indicated and may be superseded by subsequent market events or for other reasons. There is no guarantee that the information supplied is accurate, complete, or timely. Past performance is not a guarantee of future results. 

Investing involves risk, including the possible loss of principal and fluctuation of value. Nothing contained in this newsletter is an offer to sell or solicit any investment services or securities. Initial Public Offerings (IPOs) are highly speculative investments and may be subject to lower liquidity and greater volatility. Special risks associated with IPOs include limited operating history, unseasoned trading, high turnover and non-repeatable performance.

SITALWeek #233

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, energy from thin air, and whatever else made me think last week. Please grab me on Twitter with any thoughts or feedback.

Click HERE to SIGN UP for SITALWeek’s Sunday EMAIL (please note some ad blocking software may disrupt the signup form; if you have any issues or questions please email sitalweek@nzscapital.com)

In today’s post: batteries making an impact on the electrical grid; using machine learning to make chips cheaper; alternative lending on the rise; value of ads on streaming video apps could vault higher; paint your walls and power your house at the same time with Geobacter; an update on US-China semiconductor tensions and, lots more below...

Stuff about Innovation and Technology
Game On for Chess!
Chess is seeing a resurgence thanks to live-streaming match play amongst younger fans of the game. According to Twitch’s VP of global esports: "Across all the different various competitive games on Twitch, chess has seen some of the most substantial growth in the same period of time than any other esport in the world.” NBC News reports on the new generation of players who are making the game popular again.

Solar+Batteries are Future of US Energy
Over the past decade, solar panels have declined 77% in cost while batteries have dropped 87%; this increased affordability is resulting in a surge in combined solar+battery storage projects at utilities. One example, according to this FT article, is the 200MW solar+50MW battery installation by the Tennessee Valley Authority. Battery capacity in the US is expected to grow from 4,800MW in 2020 to 32,000MW in 2025, or roughly equivalent to the power usage of 26M homes. Google and Berkshire Hathaway’s NV Energy are planning a 350MW solar array with 280MW of batteries. 

Amazon’s in-Store Robot Grocery Fulfillment 
Amazon’s new grocery store in LA will dedicate 21% of its 33,500sf to a microfulfillment center powered by robots from Dematic, which should fulfill a 60-item order in five minutes, according to HNGRY. As designed, the robots will grab the room temp items while humanoids pick the cold stuff, produce, and front-of-house items. Prepared foods can also be added to an order from the store’s kitchen. 

Shopify Backs Payment Democratization 
Shopify has joined Facebook’s Libra consortium in an effort to make payments easier for underserved banking populations around the world. Shopify also signaled they would be supporting many options like Libra to open up transactions globally. 

Building a Better Semiconductor via ML
Neural networks are increasingly too large to run on a single chip or single memory store. This led Google to use AI to determine how best to route parallel workloads, which, in turn, led Google to look into whether machine learning could design better semiconductors. The problem is enormous: while a game of Go has 10^360 possible states, placing blocks of IP on a chip has 10^9000. Using ML, Google saw a 20% improvement in congestion and 27% improvement in wire lengths compared to human IP block placement. The ultimate goal is to reduce the software and engineering costs of developing chips. As we approach 5nm for leading-edge semis, the development cost of a single chip could run over $500M. On the one hand, these improvements could shrink the number of chip designers and the need for software tools; but, on the other hand, it could drive a large expansion in the number of leading-edge chips that get developed when cost becomes less of a gating factor. 

Ad-Supported Video on the Rise
Compared to 2018, ads on linear TV in 2022 are projected to be viewed about half as frequently by the under-24-year-old crowd; yet, until then, the effectiveness and ROI of the TV ad should remain relatively strong. Those younger folks are on YouTube, TikTok, etc., but the quality of attention is quite a bit lower (because of digital distractions...the quality of the people is just fine!). This Marketing Week article also suggests outdoor and radio stand to benefit as advertisers look for more mass exposure (recall last week I pointed to rising ad budgets across CPG companies to bolster brands against the two-pronged attack by private label and specialty niches). The heart of the advertising reach problem is one of scale for brands – as we saw last week, many direct-to-consumer brands relying solely on digital marketing are struggling to scale. Meanwhile, larger brands are losing relevance if they can’t reach mass audiences. If you need scale, you need mass advertising mediums to get in the heads of consumers. It would be great to live in the world where no advertising is needed, and every product/brand was built on quality and reputation; but, for the time being, marketing is playing an increasing role in the fight for consumer attention. Ad-supported streaming apps are likely to do quite well, including Hulu, Pluto, the soon-to-be expanded CBS All Access, as well as the imminent Peacock and HBO Max apps. The WSJ also reports that there is a rush to acquire other ad-supported apps such as Vudu and Tubi. Walmart’s sale of Vudu leaves them empty handed in their battle with Amazon, unless they do a significant distribution bundle with someone like Disney or Netflix. 

Bed Bath & Befuddled
Bed Bath & Beyond is struggling to handle the existential threat of e-commerce and the changing needs of the consumer. Like many other retailers (who have also known about this problem since the late 1900s), the company has decided now is the time to...buy back more stock! Because, you know, they went to business school, and shareholder value, etc. Of the $1B the company has to spend, 40% will go toward improving the experience for consumers while the remaining 60% will go toward debt reduction and share repurchase. The company will remodel only 25 locations, or less than 2.5% (!) of its store base this year, while both sitting on cash and evaporating the rest appeasing short-term shareholders.🤦‍♂️

Patreon Loans
Fan platform Patreon is experimenting with loans to podcasters via Patreon Capital – yet another example in the long list of platforms using internal data to source loans that would have been otherwise challenging to obtain, or just done on credit cards. The interest rate terms of a Patreon Capital advance weren’t available in the article; but, as we’ve seen, these new sources of capital aren’t always friendly and often skirt regulations on interest rate disclosures. It seems to be just a small leap in logic to think that Patreon could begin crowdsourcing loans for creators directly from their patrons.

Abundance Fosters Isolation, but Technology Could Bring us Closer
Abundance tends to drive humans (and other mammals) toward isolation and self reliance, while scarcity tends to have the opposite effect, increasing cooperation and collaboration to promote odds of survival and reproduction. We live in an age of abundance, which is rising every year, thus increasing isolation. Technology is often blamed for the isolation; but, in many instances, it might simply be correlated, as the availability of smartphones and other tech has risen with the general abundance in the economy. Modern agriculture and transportation combine with productivity-driven deflation to give most developed-nation citizens what they need when they need it and within their budget. It’s possible we are over attributing changes in family structures and personal interactions to shifting use of technologies, government incentives (tax breaks for having kids, etc.), and other factors, which may simply be circumstantial to the rising level of progress and quality of living associated with abundance. Viewing the world a different way, the Amish vote on every new technology to determine if it will “strengthen or weaken relationships within the community and within families”, according to this WaPo article. Such a system works when a small group can agree to simulate scarcity by artificially inhibiting progress. A more broadly applicable solution might be to instead leverage technology to eliminate isolation rather than feed it. As Kurt Vonnegut wrote: “What should young people do with their lives today? Many things, obviously. But the most daring thing is to create stable communities in which the terrible disease of loneliness can be cured.”

Miscellaneous Stuff
Conjuring Energy from Thin Air
A cross-disciplinary effort between an electrical engineer (Yao) and microbiologist (Lovely) at UMass Amherst has come up with a biogenically-based device that makes electricity using ambient moisture. This advance is thanks to the versatile Geobacter (which especially-attentive readers will recall from SITALWeek #200 last July). Geobacter are bacteria that have “living wires” (pilli) that transport electrons. As detailed in the new Nature paper, when sandwiched between two electrodes, a film composed of these nanowires, with one side partially exposed to ambient air, can power small electronic devices. The continuous nature of power generation (on the order of months, rather than seconds, as was true for other hydrovoltaic efforts) is what makes this a landmark study. While maintaining a stable moisture gradient appears key, the exact mechanism of the power generation is yet to be fleshed out. If the technology is scalable, one commercial use case could be wall paint that powers your home. Importantly, it appears that other, more tractable bacteria, such as E. coli, could be used as factories to produce the pilli to help scale production. 

Measuring Pre-Industrial Methane Production
Methane is responsible for around 25% of global warming, and a recent study published in Nature shows humans are a significantly bigger contributor than previously thought. Using radiocarbon dating of Greenland ice cores, which required “a large-diameter ice drill and a large-volume ice melting apparatus”, combined with other data from ancient air samples, researchers were able to calculate a baseline for pre-industrial methane production. The upside: "If more methane is created by humans, there’s an even bigger opportunity to rein in how much we release. Methane stays in the atmosphere for only a decade (compared with 200 years for carbon dioxide). So efforts to cut methane, which mostly comes from the production and transportation of gas and oil, could pay big dividends right away." Ball Aerospace is one of the leaders in detecting methane emissions with highly sensitive (2 parts per billion!) LIDAR technology, and the company recently announced progress on the advanced spectrometer instrument for the MethaneSAT project (for locating/measuring methane emissions from oil and gas operations) launching in 2022.

Stuff about Geopolitics, Economics, and the Finance Industry
Ditch the Wall, Build Welcome Centers
I am fond of paraphrasing Adam Smith when defining the two necessary requirements for capitalism: 1) productive reinvestment of profits, and 2) growing population. Both of these are necessary unless you want to shift out of capitalism to something new. “Something new” is certainly on the table as the Information Age has brought about less productive asset reinvestment (because the economy is increasingly less reliant on capital-driven businesses like manufacturing), and the developed-nation birth rates are below replacement rate. At this point, immigration is the only practical way to eke some more life out of our capitalist model – growing the population and the number of people consuming goods and services. According to this WaPo report, acting White House Chief of Staff Mick Mulvaney said at a recent gathering: “We are desperate — desperate — for more people...We are running out of people to fuel the economic growth that we’ve had in our nation over the last four years. We need more immigrants.” Duh. And, so does every other developed economy, which is why I suggested back in SITALWeek #206 that there will be competition to incentivize immigrants to come to developed economies. 

Trump’s Semi Scheming 
Trump is floating the “nuclear” option with regard to China’s use of Western technology by moving to limit the use of all equipment from US companies, like Lam Research and Applied Materials, by fabricators for making chips for Huawei. I’ve discussed China’s dependence on foreign chip tech many times over the last three years, and I call this the “nuclear” option because limiting chip supply in China could have as devastating an economic impact as a nuclear strike (Note: CLEARLY an actual nuclear strike would result in more human and environmental damage, I’m just talking economics here). For example, Huawei used to use Xilinx FPGAs (American company) for 5G infrastructure; but, with export bans, Huawei shifted to an internally-designed ASIC made by TSMC using American (and Dutch) fab equipment. So, Trump’s ban here would effectively cut Huawei out of the 5G market, and force China to rely on foreign suppliers for all of their wireless communications (which would obviously give the West complete ability to spy on China). Taiwan continues to be the ultimate chess piece in trade negotiations, and China fancies TSMC a Chinese company while the rest of the world (including TSMC and Taiwan) do not. This move by Trump would also put Samsung in South Korea in the hot seat. I can only continue to conclude this is yet another surprisingly savvy negotiating tactic with an ulterior motive by Trump, because it would appear to force China to play nice, or use their “nuclear” option and take military possession of Taiwan. 
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Disclaimers:

The content of this newsletter is my personal opinion as of the date published and are subject to change without notice and may not reflect the opinion of NZS Capital, LLC (“NZS”).  This newsletter is simply an informal gathering of topics I’ve recently read and thought about. It generally covers topics related to the digitization of the global economy, technology and innovation, macro and geopolitics, as well as scientific progress, especially in the fields of cosmology and the brain. I will frequently state things in the newsletter that contradict my own views in order to be provocative. I often I try to make jokes, and they aren’t very funny – sorry. 

I may include links to third-party websites as a convenience, and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by NZS Capital, LLC (“NZS”). If you choose to visit the linked sites, you do so at your own risk, and you will be subject to such sites' terms of use and privacy policies, over which NZS Capital has no control. In no event will NZS be responsible for any information or content within the linked sites or your use of the linked sites.

Nothing in this newsletter should be construed as investment advice. The information contained herein is only as current as of the date indicated and may be superseded by subsequent market events or for other reasons. There is no guarantee that the information supplied is accurate, complete, or timely. Past performance is not a guarantee of future results. 

Investing involves risk, including the possible loss of principal and fluctuation of value. Nothing contained in this newsletter is an offer to sell or solicit any investment services or securities. Initial Public Offerings (IPOs) are highly speculative investments and may be subject to lower liquidity and greater volatility. Special risks associated with IPOs include limited operating history, unseasoned trading, high turnover and non-repeatable performance.

SITALWeek #232

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, car-sized turtles, and whatever else made me think last week. Please grab me on Twitter with any thoughts or feedback.

Click HERE to SIGN UP for SITALWeek’s Sunday EMAIL (please note some ad blocking software may disrupt the signup form; if you have any issues or questions please email sitalweek@nzscapital.com)

In today’s post:  power grid growth; sports betting double win; the quirky antitrust head who is trying to impact all of tech and content; brand “moats” are transferring rapidly to consumers and new gatekeepers; Fortnite creator on the state of video gaming; saving ancient trees (and, how you can help!); the Hubble constant; cooperation, complex systems, and the economy; and, lots more below...

Stuff about Innovation and Technology
Evolving Power Grid
The demand for electricity will be increasing – perhaps at non-linear rates – as connected devices and AI proliferate while we simultaneously shift from fossil fuel cars to EVs. Further, the electric grid will steadily become more distributed, with locally-provided solar, wind, and battery storage. Climate change will also continue to impact the electrical grid and energy generation. As a result of these factors, the grid will need to get bigger and smarter, and that means it will need a lot of sensors and semiconductors. The WSJ reported on a few of these power grid trends last week. I’ve been researching all the complexities of this topic lately – if you have any research or companies I should check out, hit reply and let me know!

Cybugs
If you thought we lived in a world where humans hadn't yet hacked insect brains to turn them into remote-controlled cyborgs...think again! Funded by the US Navy, scientists at WashU St Louis have crossed that one off their bucket list. As Ian Malcolm put it so eloquently: "...scientists were so preoccupied with whether or not they could, they didn’t stop to think if they should." However, in this case, these cyborg locusts have some pretty cool use cases, like replacing bomb sniffing dogs.

Sports Betting Pays Off
The steady legalization of sports betting in the US is a double win for both leagues and sports broadcasters: not only will it bring in new ad revenue, such as the deal CBS announced this week with bookmaker William Hill, it will also increase ratings as more viewers watch live to participate in the spectacle. Thus, there should be new advertisers and higher rates for existing advertisers as audiences grow. As Rob Saperstein says in Amazon Prime’s Patriot, it will be “double great.”

Accelerating AI Language Skills
Microsoft’s Turing Natural Language Generator (T-LNG) has raised the bar in language processing with 17B parameters – doubling NVIDIA’s 8.3B and surpassing Google’s BERT model, released less than two years ago, by 50x. These models all use massive amounts of GPU processing from NVIDIA and, as they get better (and the movie “Her” comes closer to reality), there will be a lot of demand for chips.

Rap Battles on Caffeine 
Live-streaming startup Caffeine has signed a deal with Drake to produce a series of rap battles in combination with the Ultimate Rap League. Caffeine was started four years ago by Ben Keighran (formerly of the Apple TV hardware team) to democratize live streaming for video gamers in a challenge to Twitch. Here’s how Keighran describes it today: “Other platforms are very heavy in gaming, and Caffeine is really the first place that’s bringing together entertainment and sports...It’s a place where the next generation can go online and watch anything from X-Games to Coachella to Fortnight — all in one place where they can hang with friends, interact, and enjoy this whole new experience.”

Winner Not Taking All in Video Viewing
Netflix commands 31% of all hours streamed to TVs in the US, according to Nielsen. That sounds big until you realize that it’s 31% of the 19% of hours on TV that are streamed, or only 6% of total TV viewing, as 81% is still viewed via traditional TV (including DVR). Obviously, when you include other connected devices like tablets, that Netflix number is higher; but, Netflix has said around three quarters of viewing takes place on TVs. The glass is half full for everyone in the media landscape here – signs of a winner-takes-all platform in media is not emerging, and in the meantime, leverage is shifting to content owners away from distribution. 

Being Makan Delrahim 
As I worked on this edition of SITALWeek, I had a movie playing in the background on Prime Video called Trash Fire. It has around a 60% approval rating on IMDB and Rotten Tomatoes, but I think I am in the other 40%. What prompted me to pull up this 2016 Sundance premiere film? Trash Fire was executive produced by Makan Delrahim, who is currently the US Assistant Attorney General for the Antitrust Division of the DoJ. Delrahim convened a VC panel at Stanford last week to further probe whether big tech is suppressing innovation. Back in SITALWeek #197, I expressed some skepticism of Delrahim’s grasp of data-driven network effects, suggesting he may be coming at competition issues with an Industrial view instead of an Information Age lens (Our papers on this topic can be found here). Silicon Valley is on edge after Delrahim indicated that criminal charges will land against a tech company in the next few months (note: both Apple and Google are former clients of his from when he was in private practice). Delrahim, it seems, also has a keen understanding of how Hollywood operates, as you can see in this Hollywood Reporter profile (well worth the read if these topics are on your radar). Delrahim is a “radical” supporter of IP owners to “exploit” their rights, according to the article, which is potentially interesting as he oversees the ongoing negotiations regarding music licensing fees for Spotify and others; however, on the flip side, there are hints he favors new distribution models. Delrahim appears to be a shrewd, multifaceted individual, who perhaps has sights on his future Hollywood movie producing career, and he just happens to be the lynchpin to shaping the entwined futures of content and big tech. 

Brand Moats Erode Favoring Consumers and Gatekeepers
Edgewell Personal Care, maker of Schick razors, was denied permission this week by the FTC to acquire upstart direct-to-consumer shaving brand Harry’s. The FTC reckoned it would raise prices and harm competition in the barbaric market for face-scraping blades. P&G’s Gillette dominated the market for men’s shaving for years (and is of course the source of the often repeated mantra in Silicon Valley of the “razor / razor blade” business model, where you sell the initial product for cheap, and then make money on recurring purchases of products or services). Gillette is a classic example of a 1900s, Industrial Age business where its so-called brand and distribution “moats” became vulnerabilities when Dollar Shave Club (acquired by Unilever in 2016) and Harry’s disrupted the high-margin profit pool. Perhaps the circumstances here were unique, but this could also be an increasingly common roadblock that legacy companies face trying to acquire a disruptive challenger. Here are the FTC’s comments: “Harry’s is a uniquely disruptive competitor in the wet shave market, and it has forced its rivals to offer lower prices, and more options, to consumers across the country...The Harry’s and Flamingo brands represent a significant and growing competitive threat to the two firms that have dominated the wet shaving market for decades. Edgewell’s effort to short-circuit competition by buying up its newer rival promises serious harm to consumers.” 

But, there is another angle to this story, as explained in this thoughtful article on Retail Dive: direct-to-consumer businesses may not scale on their own, and going direct might ultimately be a passing phase in the evolution of consumer product distribution. The WSJ also reports on the brand malaise causing stuck-in-the-middle consumer product giants Kraft Heinz, Hershey, Kellogg, and Unilever to increase advertising spend as consumers choose cheaper private-label or high-end specialty alternatives. All of this seems to point to one conclusion: brand value and distribution are not the “moats” they used to be, and the Information Age is causing an ever-increasing value shift to consumers, advertising platforms, and the new gatekeepers of commerce. Consumers, Amazon, Google/YouTube, and Facebook, along with TV, radio, and other media businesses, should continue to benefit.

Porsche Trounces Tesla in Serial Track Test
Germany wants to achieve 30% share in batteries for EVs, a market currently dominated by Japanese and Chinese technology/companies, according to this FT article. One of the things I mentioned in my post on Tesla last week was the potential for nationalistic subsidies or regulation to protect legacy car makers; likewise, achieving the target Germany has put forth will likely require heavy government incentives. Germany would compete based on quality, according to the article, and if you look at the impressive results of this recent Tesla vs. Porsche Taycan track test, there may be some merit to that idea. Tesla and Porsche were relatively close to each other on the first run; however, repeated, subsequent tests showed a significant degradation in performance from Tesla’s batteries while the Porsche held to a much higher level. 

Spies Like US
Espionage was in the news this week as the WaPo revealed the CIA has been in control of the Swiss company Crypto AG since WWII. The company worked with governments in 100s of countries, all the while leaving a backdoor open so the CIA could unencrypt all the messages. It’s a long, interesting article if you like espionage and what not (which I don’t unless it involves Maxwell Smart). Meanwhile, the US government accuses Huawei of having a malicious backdoor in all of its telecom gear, which touches most traffic around the world, allowing the Chinese government to do the same. With the changing nature of communication, it’s fairly obvious why Crypto AG was becoming less relevant, and why governments are now dead set on Apple, Google, and Facebook allowing them backdoors to unencrypt anything and everything they want. I am still waiting for an entrepreneur to pitch a modern day Cone of Silence; in the meantime, checkout this article on the evolving Signal App in Wired.

Future of Gaming 
Epic and Fortnite founder Tim Sweeney gave an impassioned talk at the DICE gaming summit this week about the problems facing the industry as mega platforms vie for game distribution dominance. In particular, he notes the monopoly app store abuse at Google and Apple, and how Epic can essentially build a 50% operating margin platform at 12% take rate vs 30%, which is the typical 5-6x markup for Apple and Google. He also explained that game publishers need to stop being customer adversarial as well with loot boxes and pay-to-win schemes in games. Further, he noted that Fornite players that connect with friends play twice as much and spend more, suggesting that we are on the way to a metaverse in 10 years that Sweeney invisions to be open, multi-platform, and social, where game developers are in control of their monetization (at least until the Sux0rz form IOI try to take over).

Redfin Rising
The Built in Seattle Podcast had a fantastic episode with Redfin CEO Glenn Kelman, one of our favorite CEOs and culture carriers. I’ve owned Redfin from the IPO and look forward to their future accomplishments. Redfin also reported their 4th-straight quarter of accelerating real estate service sales. The biggest challenges still facing the real estate industry are record-low inventory and high friction, which are causing people to stay put and not buy/sell houses. iBuying should add liquidity, but people have to want to move, and houses need to be affordable. Increased institutional home ownership (for rentals), driven by low rates, exacerbates these problems right as we are entering a 5-year expansion of household formation/demand (more on that in my 30-Something Sneaker Wave demographics post).

Miscellaneous Stuff

Saving the Planet One Ancient Tree at a Time
Last week, professional tree climbers for Archangel Ancient Tree Archive scaled the giant Monterey pine that lords over the SITALWeek compound on the central coast of California to take cuttings and pinecone samples. The tree is one of the largest, if not the largest, known living Monterey pines (native to coastal California and Mexico), which makes it a champion specimen. The folks at Archangel are working to catalog and clone examples of many types of champion trees, which, in many cases, have a genetic makeup that has conferred superior  tolerance to drought and/or other stressors. Recently, the Presidio in San Francisco planted 75 coast redwoods with the help of Archangel. It’s a great cause, which you can check out here. And, you can also donate: $100 will plant you a champion tree, and, for only $2.25M, you can plant an entire ancient tree forest (no pressure, but remember SITALWeek is free!). If you need more incentive to support trees, in this NYT article, Salesforce founder Marc Benioff talks about his trillion-tree initiative: “Trees are the ultimate bipartisan issue...Everyone is pro-tree.”

Stupendous Stupendemys 
The largest, complete, fossilized turtle shell, as well as parts of a jawbone, have been found in northern South America. Males of the car-sized species, which inhabited warm lakes and wetlands 7-13 million years ago, had what appear to be horn-like weapons on their shell. The giant turtles were preyed upon by other reptilian megafauna, as evinced by a shell found with an embedded croc tooth. 

New Value for the Hubble Constant
The Universe is expanding (or, at least the simulation of our Universe makes it appear to expand), but we can’t seem to figure out why it’s expanding as fast as it is. The ΛCDM standard model of expansion predicts a rate of 67.4 km/s/Mpc. A Mpc is a megaparsec or 3.3M light years (a light year is how far light travels in one Earth year, so a megaparsec is how far light would travel in 3.3 million Earth rotations around our Sun), so that means we predict that the Universe expands in every direction by 67.4 kilometers every second for every 3.3M light years away an object is. This is a little tricky, so here is an example in units that are slightly easier to get your head around. Let’s say a galaxy is 20 quintillion miles away (2x10^19), then it’s moving 42 miles further from us every second. And if a galaxy is 100 quintillion miles away (5 times farther), it’s moving away from us around 208 miles every second. Our little solar system is ~180B miles across, so it's experiencing an expansion of around .04” from everything around it every second. But, coming back to 67.4km/s/Mpc, new data using gravitational lensing (we can see around massive objects because their gravity bends the light from behind them!) puts the number closer to 73.8km/s/Mpc, or 5 standard deviations off the model. This higher measurement increasingly seems right, and it shows we still need to sharpen our models of the cosmos, especially as it relates to our understanding of dark matter and gravity. (Just in case you were wondering, the Universe that we can see is around 28,000 Mpc across edge to edge, so if you stood on one edge and looked all the way over to the other edge, it would be accelerating away at over 1 million miles a second! And, that is over 5x the speed of light, but Special Relativity only applies locally, not on Universe-scale distances.)

Stuff about Geopolitics, Economics, and the Finance Industry
Cooperation Revisited
Why do we cooperate in a competitive world? This week I re-read a paper (PDF) by Ole Peters and Alexander Adamou titled “An Evolutionary Advantage of Cooperation.” The paper explains the evolutionary advantage to cooperation as a result of noisy and multiplicative dynamics. To put it simply, compounding growth and benefits can take place in an unpredictable world at a greater rate if people cooperate, even if it means losing something in the short term. And, cooperation supports risk mitigation, as the paper shows. I think of this as the math behind reciprocal altruism, which is at the heart of non-zero-sum game theory, which is, in turn, at the heart of NZS Capital. A critical strategy for companies operating in the Information Age is creating non-zero-sum, or win-win outcomes for not just shareholders, but every constituent possible including employees, customers, society and the planet.

Understanding Complex Systems Key to Solving World’s Ills
Beinhocker and other SFI collaborators posted a long essay in Aeon this week discussing the state of the world through the lens of complex adaptive systems, addressing how physical, biological, and technological elements increasingly co-evolve in unpredictable ways. There are many echoes of topics discussed in our Pace Layers paper, but the Aeon essay is much better than our version and well worth reading. “If we are to create a socioeconomic-technological system that serves the broad interests of humanity and the other species we share our planet with, it will only be because we have sufficiently understood the complex system we live in to harness the power of evolution and shape it in that direction.”
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Disclaimers:

The content of this newsletter is my personal opinion as of the date published and are subject to change without notice and may not reflect the opinion of NZS Capital, LLC (“NZS”).  This newsletter is simply an informal gathering of topics I’ve recently read and thought about. It generally covers topics related to the digitization of the global economy, technology and innovation, macro and geopolitics, as well as scientific progress, especially in the fields of cosmology and the brain. I will frequently state things in the newsletter that contradict my own views in order to be provocative. I often I try to make jokes, and they aren’t very funny – sorry. 

I may include links to third-party websites as a convenience, and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by NZS Capital, LLC (“NZS”). If you choose to visit the linked sites, you do so at your own risk, and you will be subject to such sites' terms of use and privacy policies, over which NZS Capital has no control. In no event will NZS be responsible for any information or content within the linked sites or your use of the linked sites.

Nothing in this newsletter should be construed as investment advice. The information contained herein is only as current as of the date indicated and may be superseded by subsequent market events or for other reasons. There is no guarantee that the information supplied is accurate, complete, or timely. Past performance is not a guarantee of future results. 

Investing involves risk, including the possible loss of principal and fluctuation of value. Nothing contained in this newsletter is an offer to sell or solicit any investment services or securities. Initial Public Offerings (IPOs) are highly speculative investments and may be subject to lower liquidity and greater volatility. Special risks associated with IPOs include limited operating history, unseasoned trading, high turnover and non-repeatable performance.

SITALWeek #231

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, graphene amplifiers, and whatever else made me think last week. Please grab me on Twitter with any thoughts or feedback.

Click HERE to SIGN UP for SITALWeek’s Sunday EMAIL (please note some ad blocking software may disrupt the signup form; if you have any issues or questions please email sitalweek@nzscapital.com)

In today’s post: how we think about Tesla (and why we still own it); video game publishers are in the driver’s seat on cloud shift; AI and energy are driving changes and efficiencies as cloud growth continues; linear TV and radio ad dollars holding up; $5B in funding is driving virtual kitchens in obsolete retail, but the math looks challenging without vertical integration; and, lots more below...

Stuff about Innovation and Technology
The Art of Virtual Traffic Jamming
A performance artist created a virtual traffic jam by pulling a wagon full of 99 smartphones running Google Maps to trick the algorithm into thinking traffic was backed up. Google took it all in great spirits, responding: “Whether via car or cart or camel, we love seeing creative uses of Google Maps as it helps us make maps work better over time.”

Avoiding Autoplay Trailers
PSA: You can now turn off the autoplay trailers in Netflix as you scroll endlessly looking for something to watch. From a desktop browser, click on your profile picture, then edit profiles, and then uncheck autoplay for previews. I wish there were an easy in-app on/off toggle; or, an even better UI would be a longer hover/simple click for autoplay preview. (After making the change, you may need to sign out and back into your apps to get it to take effect – so far, I’ve struggled to get it to work on Roku). The obvious issue this highlights is that we still need a better universal search UI in the world of streaming.

Traditional TV and Radio Ad Revenues Holding Up
Despite the shift to streaming, linear TV advertising revenue was up 2% in 2019 when you include digital, according to a report from SMI on Mediapost. Viewer declines were more than offset by price increases as TV ads remain a scarce asset, particularly for live sports. Meanwhile, digital ad sales for terrestrial radio crossed $1B in 2019, accounting for 10% of total radio ad sales. The report, citing data from Borrell Associates, also showed local radio stations grew revenues 25% in 2019. (Note, I have seen diverging estimates on local radio, but the source here seems respectable.)

Profitless Ghost Kitchens Haunt Abandoned Retail Space
SBE Entertainment Group is partnering with mall-operator Simon Properties, hotel-owner Accor, Tavis Kalanick’s CloudKitchens, and others to open ghost kitchens for food delivery in obsolete real estate including mall retail, parking lots, etc. The group plans to have 185 kitchens opened by the end of 2021 at a cost of $60,000 upfront. According to the CEO of SBE in the WSJ, the kitchens will break even in six months if they can hit 125 orders a day of around $30 each ($3750/day in revenues, or over $1.3M/year). The WSJ article also states that $5B of VC money has gone into these virtual kitchen startups since 2018. This editorial in QSR Magazine by a VC focused on this emerging restaurant brands indicates a restaurant needs $650,000 in sales to break even in a ghost kitchen. Rent and labor are said to account for around 25% of sales at that breakeven, and figure another 25% commission to delivery platforms. I have to admit to being challenged by the math a bit here, and I still tend to think complete vertical integration only will win in food delivery (including grocery), and there may not be enough margin for marketplace models (similar to my views in The Evolution of the Meal last Fall). More color on local impact of ghost kitchens in this LA Magazine article.

Cloud AI Architectures and Semiconductors
Azure, AWS, and Alibaba clouds are all using SmartNICs (network interface cards) to offload AI processing to FPGAs or other accelerated computing chips. According to Paul Teich writing for The Next Platform, this is in part because neural nets and algorithms are constantly changing, and this offloading from X86 allows for adaptability. This trend is one reason behind GPU- and AI-giant NVIDIA’s purchase of Mellanox. Mellanox uses Xilinx FPGAs, but Paul suggests they may be likely to switch to a different solution under NVIDIA. NVIDIA’s march to add more custom and programmable features to GPUs and their CUDA programming language could keep them in the driver’s seat for a while. Intel, meanwhile, owns FPGA-maker Altera, but has several fits and starts ongoing in AI acceleration – the x86 giant weighed in on this topic in a blog post this week. Also don’t miss Jim Keller – currently at Intel, but formerly at Tesla designing their self driving car chip – discussing chip architectures, the state of semiconductors, and autonomous driving on Lex Fridman’s podcast this week. 

Speaking of the growing attempts to solve AI on silicon, the always insightful co-founder of chip design maker Synopsis had this to say in an interesting interview covering many topics: “We are supporting a radically large number of companies right now that all claim to have the best AI chip...the minute it looks like something is promising, is the next generation available from someone who watched this evolution and executed fast? We’re going to see this for quite awhile.” De Geus continued: “So if semiconductors are $500 billion, and electronics are $2 trillion, the worldwide GDP is $85 trillion. Even a small percentage of change is a huge opportunity. If you just improve crops by 5%, that’s an enormous gain. If you do medical diagnostics radically better, that is very big money. The push on more advanced chips or systems of chips will continue unabated, and regardless of whether a chip costs $1 or $2, if it has impact it doesn’t matter that much.”

Rounding out semi news, here is an insightful interview with the head of the RISC-V coalition, Calista Redmond, ranging across numerous topics, including the European Processor Initiative’s plan to have high-performance RISC-V chips in the data center by 2021 – with an aim to significantly lower the power needs in order to battle global warming.

Gas Company Buys ERP Software Business
Industrial commodities conglomerate Koch Industries has acquired legacy software rollup Infor for $13B. Infor is a hodgepodge rollup of legacy software business from decades past, but the deal surely proves the value of long-lived software FCFs. Koch was a customer, then an investor, and now owner of Infor. What’s next? Berkshire Hathaway acquires Oracle!?

Cloud Rankings
Google provided some new segment disclosures this week in a classic Three-card Monte trick of distracting investors from the metrics it stopped disclosing (like cost per clicks) with the new metrics (PDF quarterly release). YouTube posted $4.7B in Q42019 ad revenues, up 31% and $15B for the year (smaller than I thought it was at <10% of Alphabet revenues). Google Cloud was disclosed for the first time, but it includes G Suite, so the $2.6B headline number in Q4, when compared to AWS’ $10B, needs to be adjusted down to perhaps ~$2B (my semi-informed, but incomplete guess). Microsoft also does not disclose the relevant Azure number for comparison, but many estimates would put it ~$4B in Q4. That gives us a public cloud (ex Alibaba) share from the three US-based platforms of ~62% (AWS), 25% (Azure), and 13% (Google). By all accounts, Azure is growing the fastest, followed by Google, with Amazon bringing up the rear at only 34% y/y in Q419 (this is another example of de-powerlawing). Interestingly, Eric Jhonsa at TheStreet reports that capex efficiency is rising for all three cloud platforms, thus requiring fewer hardware purchases to fuel growth.

Game Publishers Will Drive Shift to Cloud Gaming
Video games remain one of the biggest, growing, global media businesses at $150B with 2.5B active players, according to this rundown on the big gaming platforms in Protocol. Around half of that $150B is on mobile phones, and there is a theory that the other half, largely on PCs and consoles, will transition to a streaming model. This streaming theory assumes games don’t become more locally data and processing intensive (with AR/VR and other immersive experiences), which in my mind makes it more of a guess at this point. However, clearly more and more elements of games will be cloud based, and the terms of this transition will be controlled by the game publishers, not the tech platforms. Microsoft has a lot of game content and obviously the cloud scale with Azure to have a go. Last year, Microsoft also announced an Azure partnership with Sony for gaming, but it’s not clear if it’s actually going to come to fruition. Microsoft’s Mixer social network pales in comparison to Amazon’s Twitch, YouTube, or Discord. Google launched Stadia game streaming and has the cloud and streaming video share, but it has no internal gaming IP (and, notably, Activision’s big cloud gaming deal with Google didn’t seem to include streaming on Stadia). Amazon has cloud and Twitch, which is losing some share of late, but no gaming IP, and no (as of yet) announced game streaming platform. NVIDIA, which dominates PC gaming, launched their own GPU cloud-based game streaming service GeForce Now. Taking a step back, no one has everything it would take – cloud+games+social – to win if game streaming becomes a big business; however, if Amazon or Google were to acquire a major game publisher, that could change things overnight. Regardless, with all the competition, I think publishers will get the revenue shares they want, far in excess of 70%, and in contrast to China, where Tencent, with their dominant position in gaming distribution, pays out far less to publishers.

Miscellaneous Stuff
AlphaFly Doesn't Fly with Sports Regulators
Nike’s Vaporfly uses energy-returning foam combined with a carbon fiber plate that resulted in ~4% faster running times for marathoners. Less fit runners see an even bigger percentage improvement. The current model has been deemed legal, but the upcoming AlphaFly appears to exceed regulations against >40mm soles. Maybe I’m in the minority, but I’m all for letting technology enhance human performance as long as the playing field can be level, which, in the case of shoes, seems possible. Maybe it’s a slippery slope when we have AI-enhanced robotic shoes connected directly to our neurons, or if and when someone finally invents Flubber.

Tapping into THz
A graphene-based amplifier may allow us to tap into the elusive Terahertz frequency of the electromagnetic spectrum for the first time. Terahertz waves are between microwaves and infrared waves down at the long end of the spectrum. Previously, sources of THz waves were too weak to be useful. Applications would include a safer version of X-rays and, potentially, communications.

Stuff about Geopolitics, Economics, and the Finance Industry
Securitizing SaaS Revenue
Alex Danco posited an interesting inversion of logic for startup investing this week, predicting that debt will supplant or supplement equity VC financing. I tend to agree that there is opportunity to use different financing structures, especially in light of the extreme abundance of capital in the world that is lowering the cost of money for everything. Danco suggests that startups with recurring revenues could securitize those streams to generate funding to go after more customers. The risk I see is the conscious and subconscious impact that leverage has on decision making and behavior. Many once-great tech companies have taken on debt to maximize short-term shareholder returns and failed to invest enough in innovation and risk taking to the point where they face an existential crisis (examples include Oracle, Cisco, IBM, and to a lesser extent Apple, which has simply missed opportunities to be much better than they are).

For Returns, PE on Par with Public Markets
Since 2006, private equity returns have been about the same as public markets, according to data in this FT article; yet, there remains a perception that PE's added leverage and illiquidity result in higher returns for pensions and other institutional investors – perhaps because being locked up saves us from the fear-induced decision to sell when things are down (and buy when things are up). Those inline results are not stopping passive-fund-giant Vanguard from moving into the PE game. Initially, Vanguard will partner to target institutional investors; but, with efforts underway to open the investment funds up to mom and pop investors, I suspect they might eventually have broader ambitions. 
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Tesla: Auto Industry Races/Crashes into the Information Age
I get a lot of questions about Tesla, and I’m afraid that short-term predictions are almost pure guesswork. However, I do think it’s worthwhile to look at what is happening over the next decade with autos. Cars are shifting from a 1900s Industrial Age business to an Information Age platform business. As we have seen in many other similar transitions, vertical integration and network effects are winning features of successful Information Age platforms. Also, NZS, or non-zero sumness – the degree to which a business provides the most win-win for all constituents including customers, employees, suppliers, shareholders, society, and the environment – is a key factor in success during this global economic transition. There are three main components of businesses in the Information Age to consider: hardware, software, and data (and, in some cases a fourth: services). Most car makers today are overly focused on the hardware engineering of internal combustion engine (ICE) vehicles, under focused on software, and outsourcing many of the more advanced components and sensors in the vehicle. 

There are two technological shifts, one potential business-model shift, and one distribution change happening in the car industry. The technological shifts are: 1) ICE to EV requiring significant battery knowhow, and 2) human driver to autonomous (including the interim steps of various driver-enhanced safety features like auto braking, lane keeping, etc.). The business model shift is a potentially-significant move from car ownership to fleet-based, on-demand car services. Lastly, the distribution shift involves a move towards direct-to-consumer sales, avoidance of the legacy dealer network, and decreased reliance on financing, service, and spare parts. One quick note on the distribution change before we address the other points: such a shift could significantly impact profit pools for legacy auto makers (who tend to make a lot of their money on financing and service/parts). There is one other business model shift that I won’t dive into here related to the union workforce of legacy automakers: EV drive trains require 40% less labor creating another wrinkle for legacy auto makers to grapple with. 

These changes all require a significant integration of software, data, and AI that is daunting to say the least. The network effects as a car becomes a platform are typical of other industries, creating an ongoing gap of advantage for the initial leaders over the competition. In other words, the virtuous flywheel of innovation is constantly extending the lead of the leader in the Information Age. Novel technology development and vertical integration (including software and user interface) also mean that there is not an established supply chain to enable incumbents. 

I imagine you can sense where this narrative is heading: in today's auto market, it's Tesla who has created a lead that is widening every day. Tesla’s internally-developed neural network semiconductor – which powers autonomous features and is integrated with all of the vehicle's hardware and software – is just one example of the incredible level of innovation they've achieved on a short time scale. Tesla is soon to have 1M cars on the road, all feeding data into their AI platform, providing an informational advantage that will be difficult to catch. And, their pace of R&D is only increasing.

However, given the diversity of use cases for both consumer and commercial vehicles, it seems unlikely that Tesla will end up with winner-takes-all share. In the Information Age, we sometimes witness the 'Apple vs. Android' phenomenon, whereby you have one highly vertically-integrated platform (Apple), geared toward a certain segment of the market, in competition with a widely horizontal solution provider (Android) enabling the rest of the market. For example, compare the iPhone, which has a minority share of units but majority share of profits, to the Android phone, which is in near-ubiquitous use around the world (excluding China, which cultivates its own phone ecosystem). Today, the same enabler of Android (Alphabet) also owns the most likely 'Android of Autos' – Waymo. Waymo is ahead of Tesla on the autonomous elements, but is neither in the business of EV drive trains nor cars themselves. So, we could see Tesla becoming the Apple of cars, and Waymo, or some other technological enabler of competitors, playing the Android role (at least $16B has gone into autonomous development at startups and established companies!). And, as usual, China will likely have an independent ecosystem. 

There is an additional wrinkle in this particular Industrial-to-Information product transition that complicates things greatly: climate change. Society-wide cultural values can experience punctuated equilibrium, and it seems likely that environmental concerns could drive a relatively rapid adoption of EV technology. Legitimate economic savings from operating EVs over ICE cars (for example, OPEC could dramatically raise oil prices as demand drops) could potentially factor in as well. And, legacy ICE car makers could have an even more limited window for advancing their own EV technology, as governments around the world set their sights on banning ICE vehicle sales, in some cases by 2035, as was announced in the UK this week (however, note that regulation can cut both ways, as nationalism may lead to wide financial support for many car makers on their home turf). 

Putting this all together, legacy automakers need to become best in class in EV drive trains (including batteries, sensors, and software), figure out how to amass/acquire data for autonomous safety features, and provide comparable or better value and user experience – AND accomplish this all while potentially facing a business model transition from individual ownership to fleets, a direct-to-consumer distribution change, and a cultural values shift...all within the next 10-15 years. 

In most technological transitions, the legacy platform has a very long tail of profits as disruption looms. For example, IBM is still minting money on 40-year-old mainframe platforms despite the shift to client/server and then the rise of cloud computing. But, mainframes were never made illegal by governments, and they don’t have an environmental or cultural problem. So, this situation in cars appears unique in the history of tech paradigm shifts. However, none of this hands victory in perpetuity to Tesla. The car industry is regulated, it turns over slowly, there will be supply constraints for EVs (powerful negative feedback loops governing the pace of change); therefore, a complete transition to EVs in 10-15 years seems very difficult to achieve. But, given the high debt loads and inertia that are keeping legacy auto makers from investing in the dozens of complex technologies they need to in order to transition, a rapid meltdown could force a phase shift to occur. Ford, facing down this existential crisis, announced (after missing expectations this week) that its autonomous investments will be “modestly higher” this year. To borrow a quote from our Redefining Margin of Safety paper (in which we also discuss Tesla and the auto industry), "hoping the world will cycle back to a bygone era is not a productive business model". 

The auto industry is a classic, complex adaptive system with a wide range of unpredictable paths through time. As such, analysis requires an objective, Bayesian approach to each new data point that surfaces. The scenario I describe here may or may not continue, but for now the range of outcomes is slowly narrowing in favor of Tesla, which drives us to continue to own Tesla as an Optionality position.
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Disclaimers:

The content of this newsletter is my personal opinion as of the date published and are subject to change without notice and may not reflect the opinion of NZS Capital, LLC (“NZS”).  This newsletter is simply an informal gathering of topics I’ve recently read and thought about. It generally covers topics related to the digitization of the global economy, technology and innovation, macro and geopolitics, as well as scientific progress, especially in the fields of cosmology and the brain. I will frequently state things in the newsletter that contradict my own views in order to be provocative. I often I try to make jokes, and they aren’t very funny – sorry. 

I may include links to third-party websites as a convenience, and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by NZS Capital, LLC (“NZS”). If you choose to visit the linked sites, you do so at your own risk, and you will be subject to such sites' terms of use and privacy policies, over which NZS Capital has no control. In no event will NZS be responsible for any information or content within the linked sites or your use of the linked sites.

Nothing in this newsletter should be construed as investment advice. The information contained herein is only as current as of the date indicated and may be superseded by subsequent market events or for other reasons. There is no guarantee that the information supplied is accurate, complete, or timely. Past performance is not a guarantee of future results. 

Investing involves risk, including the possible loss of principal and fluctuation of value. Nothing contained in this newsletter is an offer to sell or solicit any investment services or securities. Initial Public Offerings (IPOs) are highly speculative investments and may be subject to lower liquidity and greater volatility. Special risks associated with IPOs include limited operating history, unseasoned trading, high turnover and non-repeatable performance.

SITALWeek #230

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, giant herds of giant sloths, and whatever else made me think last week. Please grab me on Twitter with any thoughts or feedback.

Click HERE to SIGN UP for SITALWeek’s Sunday EMAIL (please note some ad blocking software may disrupt the signup form; if you have any issues or questions please email sitalweek@nzscapital.com)

In today’s post: today is a special early edition of SITALWeek in honor of the 02022020 palindromic date and football – neither of which is a topic of today's newsletter – instead we have: power sharing power laws; Amazon’s Ring spyware; bringing depth back to digital audio; YouTube is winning with gamers; shifting power from connected TV makers like Roku and Amazon Fire to content owners highlights vulnerabilities; our Sun like we’ve never seen it before; DCF wrap up; and, lots more below...

Stuff about Innovation and Technology
Smart Toothbrushes
Wired brings us an article about toothbrushes that use RF waves to send charged molecules to teeth, optical sensors that measure film buildup, AI that identifies and grades your cleaning of 16 different zones in the mouth, and so much more. Connected apps show you your brushing time and percent tooth coverage. And, with oral disease connected to Alzheimer's, why not make brushing smarter?

MIDI 2.0
Musical Instrument Digital Interface (MIDI) was a standard introduced in 1983 to convert audio into digital and today “[MIDI] is now at the core of music making in the entire music industry, with the possible exception of classical music and acoustic based music which doesn’t interface with computers.” MIDI 2.0 has been a collaborative effort amongst the MIDI Manufacturers Association and all the major music streaming services to expand the original from 7 bit to 32 bit. That means we go from only 128 increments available to billions, and the new protocol allows instruments like strings to sound much closer to their original intended effect. If you’ve migrated to streaming for all your music listening, it’s quite interesting to go back to a high-quality original source (records, or even CDs) and hear how much more depth there is. That’s not directly related to the MIDI issue here, and I am by no means an audio snob, but we do lose nuance in streaming (don’t get me started on streaming video’s audio problems!), and it would be great to build that quality back in.

Cloud Software Stars
Okta’s 2020 Business @ Work report is out detailing the rising stars of cloud software. The report shows which companies are growing the most user logins at Okta’s customers, so it’s not direct usage growth, but fastest growing adoption amongst those adopting Okta’s identity platform (which has some other skews to the data). Companies that are accelerating away from the competition include Microsoft, Atlassian, and Zoom. In terms of opportunity to be a pervasive digital platform for companies, I thought it was interesting that ServiceNow inched ahead of Salesforce in total monthly active users in early 2019. The number of apps per customer rose 6% to 88 as cloud adoption shows no signs of slowing. Also, there are a lot of details on the security software market at the end of the report.

Content winning Tug of War with Distribution
Roku and Fox got into a carriage dispute this week in a manner akin to a traditional pay-TV blackout. Back in SITALWeek #218, I argued: “streaming apps like Netflix could/should demand higher “carriage fees” from video distributors like Amazon Fire TV, Roku, Apple, and even legacy bundlers like Comcast...The situation is due for a complete inversion of who pays who, or, at the very least, the distribution platforms' cut should be zero.” In the old world of pay TV on cable and satellite, it mattered where and how you watched video – there was value in the distribution because of the high switching costs to the user and the capital required to provide the service. But today, it's easy and cheap for consumers to access streaming apps on multiple platforms, including connected TVs, phones, etc. In some cases there is even nested access: I can watch CBS All Access on the Prime Video app on a Roku box. Connected-TV hardware platforms in the US – primarily Amazon Fire, Roku, and Apple – get a cut (generally 15-30%) of revenues when they sign up a new subscriber to streaming video app; and if it is AVOD (advertising video on demand), they can sell targeted ads as well. However, where and how I consume video content (i.e., distribution) today has materially declining value (with the exception of data the connected box makers have to target advertising). Cable has seen its video margins shrink over the years as content demands higher and higher fees, but with streaming, revenue should go 100%, or perhaps more than 100%, to the apps and content owners. The dispute between Roku and Fox (a long-time supporter that still owns 5% of Roku shares) shows that content is flexing their muscles in the tug of war with distribution; and, if the situation with cable/satellite is any indication, content will continue to gain ground. The more valuable a consumer is to a broader ecosystem, the more access fees the ecosystem could pay to apps like Disney+ or Netflix, subsidized by e-commerce at Amazon and iPhones at Apple. Standalone Roku does not have an ecosystem to leverage. Content is king more today than ever before, and it will continue to have its cake and eat it too (more on that in SITALWeek #217).

The New Eye of Sauron: One ‘Ring’ to Rule Them All
Bezos has accused Saudi Arabia of planting malware on his phone to spy on him; but, it turns out they could have just paid Bezos’ connected doorbell and security company Ring for the data. The EFF finds an egregious abuse of privacy from the app, which has been siphoning off and selling all sorts of personal information on users. In related news, several hundred Amazon employees contributed to this Medium post in an attempt to break Amazon’s stifling employee communication policies – one of them had this to say about Ring: “The deployment of connected home security cameras that allow footage to be queried centrally are simply not compatible with a free society. The privacy issues are not fixable with regulation and there is no balance that can be struck. Ring should be shut down immediately and not brought back.”

Major ESports Win for YouTube and Google Cloud
In a mega partnership, video game maker Activision has signed a deal with Google to make YouTube the exclusive home of their growing esports programming, and Google Cloud the preferred host for “Call of Duty”, “World of Warcraft” and more (curiously, Google’s new streaming game platform Stadia was not part of the announcement). Ryan Wyatt, the dynamic head of gaming at YouTube (and former esports commentator) has spearheaded a very successful campaign to grow YouTube into the premier place to watch game playing live. Notably, Activision currently hosts their games on their proprietary tech stack at a data center co-location company. So, this is a fairly big deal that such a huge, classic workload for co-located private cloud would be re-architected to GCP. It raises the broader question of whether it’s a matter of when, and not if, the large cloud platforms have 100% of computing workloads. 

2019 Phone Stats and Flattening Power Laws
In 2019, Samsung held top share in phones at 21.8% – thanks in part to the advantage of its strong supply chain in displays and semiconductors. Huawei gained 2.8% to beat Apple to the #2 spot at 17.6% (helped in part by nationalistic buying in response to US trade bans on Huawei) and Apple declined modestly to 14.5%. Interestingly, this is quite a flat distribution for smartphone market share compared to typical power laws we see with information platforms. However, if we look at these data from a software perspective, we have one large global Android winner, one large Chinese Android winner, and one large global iOS winner. In other words, we have three power-law winners in three different segments, which, in aggregate, makes for a fairly even distribution of hardware market share. This scenario reminds me a little bit of the flattening power law I mentioned in video games a couple weeks back – another market in which there are multiple, large, audience subsets that, combined, create a flatter hierarchy (several power law winners, each in their own large niche). Social networking feels like another area that has a flattened power law, with centers of gravity at Facebook, Instagram, Snapchat, TikTok/Bytedance, Tencent, Twitter, and WhatsApp (acknowledging FB owns several of these). Power sharing at the head end of a power law distribution seems like an interesting trend to watch evolve as billions of people are increasingly online and consuming digital apps and services. Notably, in streaming audio and video, it’s not clear whether we will see a power-law winner takes most or if we will again see these flattened centers of power. However, e-commerce clearly remains a classic power law in the West with Amazon running away with it. 

Mobile Spend is All Fun and Games
Gaming was the major driver behind the $120B mobile app spend last year, with subscription revenue from the top-100 non-game apps contributing a mere $4.6B (how is that so low?). Tinder was the top-grossing app, according to data from Sensor Tower. In related analysis by Mint for the NYT, Americans spent an average of $640 last year on digital subscriptions including video, music, and apps, up 7% from 2017. The fastest growing category was video apps, which rose to $170. 

Qualcomm’s First RISC-V Chip
One of the 12 embedded processors in Qualcomm’s Snapdragon 865 flagship mobile chip is based on open-source instruction set RISC-V, likely via SiFive, according to this report (link is in German, but I used Google translate).

Video Analysis a Tough AI Nut to Crack
In a Lex Fridman podcast interview with the head of YouTube’s search algorithm development, we learn that using machines to analyze video content is far harder than developing autonomous vehicles, and we are less than 25% of the way to accomplishing this goal. And, much of our progress is just in looking for predetermined triggers and patterns. It seems like a worthy goal to be able to interpret videos entirely, which means Google will need an enormous amount of computing power and/or a breakthrough in machine learning. (Spotify Link)

Miscellaneous Stuff
Stunning Solar Surface Images
From the DKI Solar Telescope in Maui comes the most mind-blowing moving image of the surface of the sun so far produced. I will never look at the sun the same again (also, don’t ever stare at the sun, that’s dangerous!). The 4-meter mirror isn’t the largest by any means, but it’s the largest scope specifically built to observe the sun. The shape of the mirror adjusts 2,000 times a second to overcome distortions in the Earth’s atmosphere. Thanks to its subject, the scope gets hot enough to melt metal, so it relies on 7.5 miles of piping and a swimming-pool-sized reservoir of ice as a heat sink to drop the Watts on the optics from ~12,000 to ~300. For telescope geeks (like me!) – DKIST is an Alt-Az, off-axis Gregorian reflector (which means there is nothing blocking the mirror).

Out of Africa, and Back Again, And Out Again
Neanderthal genes have been found in significant levels (0.3%) in African populations. It appears that humans left Africa around 200,000 years ago, migrated North, and began interbreeding with their cousins (modern European and East Asian populations have ~1% Neanderthal DNA). Anthropologists have also shown human/Neanderthal DNA mixing around 60,000 years ago. These data suggest more back and forth migrations and interbreeding than previously believed. Other recent finds, according to this detailed NYT review, suggest Neanderthals were not brutes, but in fact were more similar to humans than imagined in all of our childhood science books. 

Particle Accelerator on a Chip
Researchers at Stanford and SLAC have built a particle accelerator on a chip. The device uses infrared photons (which can pass through silicon) pulsing 100,000x/s to speed up electrons in a nanoscale channel. The team is working to get the chip up to 1000 cycles and accelerate electrons to 94% the speed of light, which would create 1MeV of energy that could be used for medical purposes (cancer irradiation) or other research. Or maybe we could make a modern-day Funken Ring? (That’s a magic gag you hold in your hand that shoots sparks several feet out from your fingers.)

Massive Gravity, not Dark Energy?
Do gravitons, the hypothetical, gravitational-force-creating particles that are assumed to be massless, actually have a mass? If so, it could explain the acceleration of the universe and solve the dark energy puzzle by not requiring it to begin with. Professor Claudia de Rham at Imperial College London believes this is the case, and she is getting some traction. While the math works, it’s a theory for now until it can be experimentally tested by gravitational wave astronomy. De Rham also has other intriguing theories, like gravity may move faster than the speed of light.

Savage PR for Spot 
Adam Savage unboxes his new Spot robot dog from Boston Dynamics on his Tested channel on YouTube. Adam will be working with the robot throughout 2020 as part of a marketing effort by the SoftBank-owned company to build a business selling the robots. The goal is to build an ecosystem of developers and sensor makers to create use cases for this amazing feat of engineering.

Stuff about Geopolitics, Economics, and the Finance Industry
PE Flippers
Median holding periods of companies by private equity, which peaked in 2014 at a little over 6 years, are now down to 4.9 years. Notably, the top quartile of holding periods (i.e., the top 25% of longest-held deals) has dropped the quickest – from almost 9 years in 2016 to 7.1 years in 2019. Most shortly-held deals have stayed pretty consistent at 2-3 years, and Pitchbook believes longer-held deals could grow in the mix as more and more long-dated funds are being raised. Brent Beshore also weighed in with some smart and balanced commentary on not vilifying private equity in this Twitter thread.

PE Goes to the Dogs
As the Economist reports that “Everyone now believes that private markets are better than public ones,” PE firm GF Sports is targeting the dog show industry in a new deal with the American Kennel Club.

ANTs
Active non-transparent ETFs, becoming known as ANTs, were a hot topic at the Inside ETFs conference this week according to Citywire. “A big topic was how significant of an impact open-end mutual fund conversions would have on the market. If asset managers convert mutual funds to active non-transparent ETFs, bringing its assets and track records into the new vehicle, the active non-transparent ETF’s popularity would skyrocket.” 

DCF Follow Up
Following up on last week’s much-shared post on the problems with DCFs (well over 50,000 engagements proves that Twitter's algorithm is truly great at surfacing silly content to the top!) I want to add some color that seemed to help people understand our points better. Many folks like to use DCFs for implied assumptions (the average market view), or alternatively they will set the discount rate to their own personal investment return hurdle rate. I understand that inclination; however, let’s say you use a discount rate of 10% today because you want all your investments to be “undervalued” today with a “margin of safety” using that return hurdle. But what if, three years from now, one or more of the following increases your hurdle rate: 1) your personal circumstances cause your risk appetite to decrease (maybe you get sick, or lose your job), 2) macroeconomic factors cause rates to rise dramatically, or 3) the company you invest in sees a significant widening of its range of outcomes due to technological, market, or other unpredictable forces. Any of these scenarios would imply that the 10% you use today should be perhaps 15%, or maybe 20%+ (or maybe 3% if these factors go in the other direction). Your margin of safety is just an arbitrary illusion, but the effort and brain cycles you put into a fancy spreadsheet with color-coded cells, etc., reinforces your own cognitive bias, and feeds a false sense of confidence. It’s about as useful as a visit from Tommy Callahan’s Guarantee Fairy. So, in a world governed by complex adaptive systems that exists in nonequilibrium, unless you are the all knowing LaPlace’s Demon, margin of safety must be redefined as a more useful tool for risk management. This is what we have tried to do with our papers Redefining Margin of Safety, in terms of adaptability and time, and Complexity Investing, applying complex adaptive systems to investing. But, we often get things wrong, and we are always learning and improving. If you’ve read our work and disagree, we would love nothing more than to debate in the spirit of intellectual honesty and truth seeking.

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Disclaimers:

The content of this newsletter is my personal opinion as of the date published and are subject to change without notice and may not reflect the opinion of NZS Capital, LLC (“NZS”).  This newsletter is simply an informal gathering of topics I’ve recently read and thought about. It generally covers topics related to the digitization of the global economy, technology and innovation, macro and geopolitics, as well as scientific progress, especially in the fields of cosmology and the brain. I will frequently state things in the newsletter that contradict my own views in order to be provocative. I often I try to make jokes, and they aren’t very funny – sorry. 

I may include links to third-party websites as a convenience, and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by NZS Capital, LLC (“NZS”). If you choose to visit the linked sites, you do so at your own risk, and you will be subject to such sites' terms of use and privacy policies, over which NZS Capital has no control. In no event will NZS be responsible for any information or content within the linked sites or your use of the linked sites.

Nothing in this newsletter should be construed as investment advice. The information contained herein is only as current as of the date indicated and may be superseded by subsequent market events or for other reasons. There is no guarantee that the information supplied is accurate, complete, or timely. Past performance is not a guarantee of future results. 

Investing involves risk, including the possible loss of principal and fluctuation of value. Nothing contained in this newsletter is an offer to sell or solicit any investment services or securities. Initial Public Offerings (IPOs) are highly speculative investments and may be subject to lower liquidity and greater volatility. Special risks associated with IPOs include limited operating history, unseasoned trading, high turnover and non-repeatable performance.

SITALWeek #229

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, giant herds of giant sloths, and whatever else made me think last week. Please grab me on Twitter with any thoughts or feedback.

Click HERE to SIGN UP for SITALWeek’s Sunday EMAIL (please note some ad blocking software may disrupt the signup form; if you have any issues or questions please email sitalweek@nzscapital.com)

In today’s post: TikTok dances become Fortnite emotes; co-presence video conferencing with AR glasses; 5G sports betting; the consumer IoT is becoming dumber; the risk of dust bowls; the slow pace of cultural change; how and why to kill and bury the DCF; I promise NOT a single mention of the stomach turning, woke-washing news from Davos! And, lots more below...

Stuff about Innovation and Technology
NZS Welcomes Adam Schor
We’re very excited to welcome Adam Schor as president of NZS Capital. We worked with Adam for a decade at Janus where he was Director of Global Equity Strategies. We are thrilled to have Adam on board to help us serve our clients and fulfill the mission of NZS Capital.

Fortnite to Emote Hip TikTocker's Dance Move
In a Gen-Z mashup, the social app TikTok has partnered with Fortnite for the Emote Royale competition. Users post an original dance on TikTok, and Fortnite will select a winner to power an in-game emote based on the dance. (According to the youths, an emote is a short, animated movement made by a character in a video game.) In other TikTok news: the company’s Chinese parent ByteDance has built a team of 1,000 people to enter the more sophisticated video game market (as opposed to mobile/casual games) in a challenge to Tencent’s dominance. 

Can Byte Take a Bite out of ByteDance?
From the creator of Vine comes Byte: a new, looping video app to take on TikTok. Topping the download charts out of the gate, here is a little more info from The Verge on the Byte app (no relation to TikTok’s parent company ByteDance).

Video Conferencing via AR ‘Teleportation’
Here is an interesting look into the near future of augmented-reality video conferencing, or co-presence, which allows you to put the person you are talking to in the room with you. This demo (minute 4:20 in this YT video) uses currently-available tech from Magic Leap and Google Hangouts. For me, it’s much more compelling than prior VR versions of co-presence I’ve seen. Between flight shaming and the new coronavirus, this can't arrive soon enough!

From Several Billion to 50 Billion
Satya Nadella discussed the next 50B connected devices – dwarfing the current stature of Android, iOS, and Windows by an order of magnitude. Microsoft is focused on serving this explosion of connected devices with its cloud platform Azure. Nadella referred to Windows as “Azure Edge” highlighting the extensive integration between internally-developed hardware and software creating the “world’s computer.” 

This vision of the world plays right into the recent activity at edge data center provider Vapor IO. The company raised $90M in VC funding from tower operator (and existing partner) Crown Castle amongst other backers. Vapor IO puts co-located data center facilities at the cell tower, thus providing an edge-based data exchange service, which can connect users to apps (and those apps to other apps and data) without necessarily needing to leave the tower. Vapor IO also has a partnership with Cloudflare, the CDN and workload-balancer provider, to run serverless workloads at the edge. 

Will 5G be a WiFi Protocol Replacement and Sports-Betting Enabler?
The ability to create private 5G networks using small slices of spectrum could spell the beginning of the end for the often-maligned WiFi protocol. Because 5G is a better protocol for many connected devices, it could slowly take over as the dominant connective fabric. I think I just heard the sound of Qualcomm’s royalty tabulator explode! 

Speaking of 5G, Mark Cuban made a great point in a Variety interview at CES (Spotify Podcast link) that 5G’s zero latency will be crucial for enabling legalized sports betting in the US. In the same interview, Cuban also discussed his TikTok skills and how sports rights are likely to stay on pay TV for a while. But, that won’t stop Amazon and others from driving the bids higher when they come up for renewal. As I mentioned last week, legalized sports betting is one of several trends that will continue to boost the value of live sports – and thus the value of cable TV packages – in the majority of households. 

The Not-So-Smart IoT
One view of the consumer IoT is hundreds of billions of ultra-smart devices with sensors, human interaction (microphones/screens), AI processors, and of course connectivity to the cloud and other devices. Even your toaster would have a microphone and a screen, an array of bread-monitoring AI sensors, a processor with sophisticated toasting algorithms, and wireless connectivity to the all-knowing cloud (which could change the algorithms on the fly depending on real-time atmospheric conditions). Likewise, a smart speaker would have a microphone array, a screen, and cloud or on-board access to Google Assistant and Alexa. But, there is an alternative, emergent topography of the IoT that seems more likely: those consumer devices will all be dumb or unnecessary. The main driver of this alternate evolutionary path is wearables, starting today with hearables like AirPods and continuing to the commercialization of augmented-reality glasses in the next 2-3 years. This world envisions your smartphone as an increasingly intelligent edge server, in constant connection to the cloud, with input/output directly to you via wearables and other connected endpoints around you. Why would you need smart speakers or screens around your house if everyone has AR glasses and hearables to customize their environment while simultaneously augmenting conversations and relevant environmental sounds while filtering out noise? This view favors the ever-increasing power of vertically-integrated hardware, software, and services platforms, such as Google, Apple, Microsoft, and Amazon. It also implies constant ambient media experiences, or always-on audio, video, or games (this doesn’t have to be dystopian, it could actually improve well being). It’s why we are seeing existential struggles at companies like Sonos, whose CEO testified this week about anti-competitive tactics from the big-4 tech platforms at the same time the company fumbled a product obsolescence. We have argued that this vertical integration is actually non-zero sum, but only if it comes with open access to and control of data/services, which is not the case today. It is worth contrasting this view of the evolving consumer IoT with the industrial IoT, which is more likely to have sensor-rich, processor-heavy connected devices.

More Evidence that Technology isn’t Inherently Evil
There's now even more evidence that there’s no evidence of negative associations between screen time and kids' well being. A large review of 40 studies “generated a mix of often conflicting small positive, negative and null associations. The most recent and rigorous large‐scale preregistered studies report small associations between the amount of daily digital technology usage and adolescents’ well‐being that do not offer a way of distinguishing cause from effect and, as estimated, are unlikely to be of clinical or practical significance.” Further, the review has some practical advice: “Digital technologies are here to stay, and have become pervasive in the lives and relationships of young people...Policies restricting adolescents’ access to new technologies are advocated, but may be ill advised if new technologies are being used as a valuable source of social support or are required in order to build digital and interpersonal (digitally mediated) skills for economies of the future.”

Imagination’s Back as (RISC-V-Based?) Apple Supplier
Imagination Technologies – who supplied graphics chips for iPhones until 2017, was acquired by quasi-Chinese PE shop Canyon Bridge the same year, and recently signed a new, expanded license with Apple – is switching to RISC-V open-source cores for their graphics chips. One could speculate that future Apple phones will contain RISC-V architectures, which would be a huge blow to Softbank’s ARM. (Note: RISC-V is for general processing workloads on the GPU, not the actual graphics processing.) Imagination’s CEO commented on RISC-V: “We see a lot of momentum. A tremendous number of customers are interested in it...It’s an increasingly believable true alternative to Arm. This is not just our opinion, but it’s what customers are telling us.” We’ve been talking about RISC-V for almost a year, but it’s only recently hit the mainstream, with Bloomberg reporting on the looming threat to Intel, ARM, and others. You heard it here first in SITALWeek! 😉

Miscellaneous Stuff
China Trendsetting Single-Use Plastic Elimination, Big Oil Not On Board
China set a new high bar in the elimination of single-use plastics. Plastic bags and straws will be illegal in all major cities by the end of this year and all other cities and towns by 2022. Restaurants' single-use plastics are targeted for 30% reduction by 2025. This follows prior bans on imports of plastic waste, which sent the rest of the world into a recycling quandary; now, most plastic that's “recycled” is just landfill fodder. I expect the entire single-use plastic supply chain to largely disappear over the next two decades (with the exception of sterile, medical use cases). And yet, faced with a disappearing gas market, big oil is preparing to ramp up plastic production. They see plastics growing to 50% of oil usage, which would put them at over 10% of total global carbon emissions by 2050. 🤦 In related news, Ball Corp’s aluminum cup will be making a big debut at this year’s Super Bowl. 

Dust Bowl Downunder
One of the interesting parts of the movie "Interstellar" is the interviews with survivors of the American Dust Bowl of the 1930s, which were taken from a Ken Burns 2012 documentary. I am reminded of how quickly our agricultural ecosystem can turn to dust when I see drought conditions in Australia producing these stunning images and videos of dust storms. For more context I recommend a great book on the Dust Bowl titled “The Worst Hard Time”.

Pilot Production Facility for Lab-Grown Memphis Meats
Memphis Meats has raised a fresh round of $161M in VC to build a manufacturing facility for its lab-grown “meat.” Unlike the plant-based, highly-processed ‘junk-food’ burgers made by companies like Impossible and Beyond, Memphis Meats cultures real animals cells – and, importantly, they do it without animal-derived fetal bovine serum. Notably, Cargill and Tyson Foods participated in the latest funding.

New TCR with Potential for Universal Cancer Detection
Researchers have found a specific type of human T Cell receptor (TCR) that could potentially scan the body looking for all types of cancerous threats. This TCR interacts with the protein MR1, ubiquitously expressed on the surface of all cell types, which can signal distorted cellular metabolism indicative of cancer. If advanced from mouse models to the therapeutic stage, it would be similar to other immune-based cancer treatments – a patient’s blood would be extracted, the T Cells “upgraded” with the specific receptor, replicated, and then reinserted.

Pleistocene Traffic Jam
A fossil find in Ecuador reveals a mass death of giant sloths from around 20,000 years ago, indicating for the first time these creatures might have been herd animals. Just imagine, for a moment, the comedic value of a herd of slow-moving sloths the size of elephants.🤣

Cultural Change as Slow as Biological Change? 
Our intuition is that culture undergoes an ever-rising pace of change and disruption. However, a new analysis shows that certain indicators, like the prevalence of guitars as the dominant instrument in songs, change at the same pace as, e.g., moth coloration in response to rising soot in the Industrial Age. In essence, cultural shifts either survive or die off just like evolutionary fitness functions in natural selection. And, just like in biology, culture can experience punctuated equilibrium, such as the introduction of smart phones. With the ever-increasing technological change brought about by the Information Age, perhaps we’ll see the pace of cultural evolution remain constant, but an acceleration in the number of punctuated equilibria.

Outsized Learning from a Fruit Fly’s Mini Mind
The fruit fly has 100,000 neurons (vs. a human’s 86B), so it's a good model organism for studying the neural net. Researchers have found patterns in fly brains that can improve search algorithms, so perhaps it's no coincidence that Google has mapped the connectome (the pathways interconnecting neurons) of ~1/3 of a fruit fly’s poppy-seed-sized brain.

Stuff about Geopolitics, Economics, and the Finance Industry
Non-Ergodic Systems Bury the DCF
When you grow to understand the role of non-ergodicity in complex adaptive systems, one of the investing tools you will want to throw in the garbage is discounted cash flows (DCFs). The problem with DCFs is that they assume ergodicity and, thus, don’t account for the unpredictable path through time. As such, they are anachronistic tools based on the flawed math of 1700s-1900s economic theory. Briefly, DCFs use the concept of a constant discount rate that typically derives from weighted average cost of capital (WACC, or just sticking a finger in the air). WACC, in turn, relies heavily on the contentious concept of equity risk premium and beta, which is equally as useless and manipulatable. All these concepts go back to the Capital Asset Pricing Model (CAPM), which derives from Expected Utility Theory (EUT), which derives from a paper by Daniel Bernoulli in 1738, which contained a math error (see Ole Peter’s Nature Physics article). 

Many Nobel Prizes have been given (and should be rescinded) based on EUT. The heart of the problem is that traditional economic theories and financial models assume ergodicity – effectively removing time from their equations. However, as we have learned from Brian Arthur, in complex adaptive systems like the global economy, nonequilibrium is the normal state, and things can change drastically and unpredictably over time in ways that don’t adhere to simplistic methods of averaging and bell curve probabilities; So, the path through time matters...a lot. Consequently, EUT and all of its children – all the way down to the DCF – are simply not useful.

Ergodicity assumes that the expected value equals the average outcome of a specific action (e.g., coin toss) repeated multiple times. However, in the real, non-ergodic world of investing, all that matters to an individual is their path through time. There is no averaging (since we have no interaction with our other selves in parallel worlds), there is only a single series of events over time. As a result, in non-ergodic systems, multiplicative effects overwhelm additive effects, and power laws and inequalities thrive. The biggest factor in most outcomes is therefore luck. Learning to identify and attribute success (and failure) to luck is very important as an investor, and (perhaps even more so) as a human being. DCFs will not account for random chance that compounds dramatically in negative or positive ways. Here’s another excellent primer on ergodicity economics from economist Jason Collins for anyone wanting to understand this critical reframing of modern economics (I also covered the fallacy of loss aversion last week). 

At NZS Capital, we are aware that others use DCFs, so we occasionally (when extremely bored, and if the weather outside is particularly bad) look at what a DCF might imply, but it stops there. Instead, we think about valuation using our framework of Quality, Growth, and Context, as we describe in Complexity Investing. Does the business have the attributes that will allow it to adapt and evolve to the changing circumstances within the complex adaptive system in which it operates? If it does, then how many predictions do we have to make to forecast future success? Are they narrow or broad predictions? The fewer the predictions, and the more broad they are, the more Resilient the business. (See also our paper on Redefining Margin of Safety). 

Here is a better way to think about valuation: Expected Return = (Current FCF Yield) + (10 year Growth Rate of FCF/Share). For example, a stock at a 3% FCF yield that’s growing FCF/share at 12% per year would have an expected annual return of 15% over 10 years. That doesn’t mean the stock goes up 15% a year – that’s unknowable. What it does mean is that, based on Quality, Growth, and Context, the company has the attributes that allow it to navigate its business in a way that might support that level of growth over the long term even with large fluctuations. Of course a FCF yield in the short term can go from 1% to 5% to 2% to 4% to 3% to 6% for any number of reasons – that just means there is a lot of volatility in the stock. But, volatility does not equal risk; rather, volatility translates to opportunity for long-term investors. We combine this with an intuitive interpretation of the Kelly Criterion to think about position sizing within either the Optionality or Resilient portion of our portfolios. We think the sooner you can shift your investment frameworks from ergodic to non-ergodic, the clearer the world becomes.

DCF-aholics Anonymous
While I am on the topic, I cannot resist poking fun at DCF-aholic Aswath Damodaran (last mentioned in SITALWeek #211, when this weakly-argued FT article reported his skepticism of Netflix’s business model; Netflix stock is up 21% since then). Damodaran could be a poster child for the multitude of investors doing everything wrong. For example, he has an obsession with precisely calculating that supernatural artifact known as the equity risk premium. In this recent The Economics Times interview, Damodaran remains true to character: 
Interviewer: Do you think active investing is going to be dead...?
Damodaran: Absolutely, and the reason is it was long overdue. Active investing for the most part is lazy and inefficient. It’s always been lazy and inefficient. Most portfolio managers were charging you one-and-a-half to two percent of your money to manage it by buying low PE stocks blindly and hoping that they would go up. Guess what, I can create a ETF of low PE stocks and charge you nothing. I think active investing is getting exactly what it deserves. I will shed no tears for active portfolio managers who get wiped out by ETFs and index funds because many of them deserve to be wiped out.”
Well, to borrow the perfect quip from @nongaap, we should probably apply a "heavy discount rate" to opinions from Damodaran! 🤡 We’ll shed no tears when legacy economics, with its snake oil, indolence, and ineptitude, gets wiped out by non-ergodicity. Until that happens, there is plenty of inefficiencies to exploit once you come to understand non-ergodic, complex adaptive systems.
✌

Disclaimers:

The content of this newsletter is my personal opinion as of the date published and are subject to change without notice and may not reflect the opinion of NZS Capital, LLC (“NZS”).  This newsletter is simply an informal gathering of topics I’ve recently read and thought about. It generally covers topics related to the digitization of the global economy, technology and innovation, macro and geopolitics, as well as scientific progress, especially in the fields of cosmology and the brain. I will frequently state things in the newsletter that contradict my own views in order to be provocative. I often I try to make jokes, and they aren’t very funny – sorry. 

I may include links to third-party websites as a convenience, and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by NZS Capital, LLC (“NZS”). If you choose to visit the linked sites, you do so at your own risk, and you will be subject to such sites' terms of use and privacy policies, over which NZS Capital has no control. In no event will NZS be responsible for any information or content within the linked sites or your use of the linked sites.

Nothing in this newsletter should be construed as investment advice. The information contained herein is only as current as of the date indicated and may be superseded by subsequent market events or for other reasons. There is no guarantee that the information supplied is accurate, complete, or timely. Past performance is not a guarantee of future results. 

Investing involves risk, including the possible loss of principal and fluctuation of value. Nothing contained in this newsletter is an offer to sell or solicit any investment services or securities. Initial Public Offerings (IPOs) are highly speculative investments and may be subject to lower liquidity and greater volatility. Special risks associated with IPOs include limited operating history, unseasoned trading, high turnover and non-repeatable performance.

SITALWeek #228

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, frogbots, and whatever else made me think last week. Please grab me on Twitter with any thoughts or feedback.

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In today’s post: vertical integration by tech giants is increasingly impacting adjacent markets; battle for podcasts; Microsoft to go carbon negative; facial recognition use isn’t black and white; the fallacy of loss aversion and economists’ resistance to accepting the truth; feathered drones; frog-cell robots; and lots more below...

Stuff about Innovation and Technology
Feathered Flight isn't Just for the Birds
Researchers at Stanford have used actual pigeon feathers and variable feather overlap (employed by many birds) in a prototype drone to improve maneuverability in turbulent conditions: “Using a feathered biohybrid aerial robot, we demonstrate how both passive mechanisms make morphing wings robust to turbulence. We found that the hooked microstructures fasten feathers across bird species except silent fliers, whose feathers also lack the associated Velcro-like noise. These findings could inspire innovative directional fasteners and morphing aircraft.”

Xenobots
Researchers at the University of Vermont and Tufts have assembled first-of-their-kind living robots from embryonic cells of African clawed frogs. The <1mm robots were first designed in silico by an evolutionary algorithm that integrates 500-1000 skin and heart cells and iteratively tests the designs in a virtual environment. The best performing virtual bots were then "sculpted" from Xenopus embryos and turned loose in a petri dish, where – propelled by their heart-cell engines – "some crept along in straight lines, while others looped around in circles or teamed up with others as they moved around...It’s impossible to know what the applications will be for any new technology, so we can really only guess.”🤔 

Augmented Reality Contact Lens 
Mojo is a startup, backed by $100M+ from Google and others, focused on making AR contact lenses. Mojo’s display, which is 0.5mm across and lays directly on the pupil, has 70,000 pixels. The contact lens also contains an ARM processor, image sensor, and communications chip – all powered by a thin-film, solid-state battery. Even if it gets commercialized, the lens use case is unclear to me; it falls far short of the rich user experience of AR glasses like Magic Leap, and they don't match the promise of direct neural connections that are in the works. No word yet on whether the AR game from Star Trek TNG S5:E6 will be available. 

Biosynthetic Bricks
Researchers at CU Boulder gave calcium-carbonate-producing photosynthetic bacteria a soup of raw materials (nutrients and sand) and a scaffold (gelatin), and, within a ~day, the bacteria had produced solid bricks. The bricks, with still-living bacteria, can absorb more carbon than they emit, unlike concrete. This concept reminds me of the fungus from SITALWeek #211 that could heal cracks in concrete (also by precipitating calcium carbonate); maybe we are on the cusp of more broadly creating living structures?

Microsoft's Carbon Abolition
Microsoft is massively upping the bar in their efforts to combat global warming: the company will go carbon negative by 2030, allowing them to wipe out all the carbon they’ve produced – since the company was formed in 1975 – by the year 2050. This declaration makes other pledges by tech giants look like the lip service they are, and it’s a great example of why we think Microsoft is a company with high NZS, or non-zero-sum goals (and it’s a good excuse to repost Beinhocker’s editorial on the morality of being a carbon abolitist). Microsoft’s CEO Satya Nadella posted this article today describing the company’s approach to “empower every person and every organization on the planet to achieve more,” which is in direct contrast to the myriad CEOs focused on shareholder value above all else. Speaking of which, the Economist looked at the spotty track records of Jack Welch disciples who have suffered under the pursuit of earnings per share above common sense.

Hollywood’s Video Pentafecta Brings Us Full Circle
News this week that ViacomCBS reached a new, broad carriage deal with Comcast (including the CBS All Access app) is one more bit of evidence that everyone – studios, distributors, and consumers – is winning, and that nothing has changed from 10 years ago, except we have more amazing content than ever before. There are five significant owners/creators of premium video content in Hollywood, and they have all launched streaming apps (or are slated to do so imminently). AND, each is an important part of the cable bundle. Those studios are: Disney, Warner, ViacomCBS, NBC Universal, and Netflix. Yep, Netflix benefits from the bundle – as a Comcast subscriber, I get Netflix for free in my cable package. And, by the end of this year, I will get Warner’s HBO Max, ViacomCBS’ CBS All Access, and NBC’s Peacock apps all included in the bundle. And, if Brian Roberts and Bob Iger can bury the hatchet over the Fox deal (which they will because the economic benefits far outweigh their corporate rivalry), I expect Disney+ to be part of my bundle too. So, in the future, I speculate people can either pay for high speed Internet and pay for all of those apps (plus Amazon Prime etc.), or they can just get a cable package with their Internet service and likely end up with more for less. There is no such thing as streaming vs. cable – every major streaming app is aligned to maintain or grow the amount of money households spend on video every month, regardless of how it’s spent. Now that video is settled right back where it started, a much more interesting debate is long form video vs. everything else - TikTok, Fortnite, Twitch, YouTube, etc.

Google Tosses 3rd-Party Cookies
Over the next two years, Google will be phasing out Chrome’s 3rd-party tracking cookies, which are currently responsible for massive amounts of ads and privacy risks. There are certain Information-Age services – like data collection/access – that work better when provided by a monopoly or oligopoly. I’d much rather there be a small number of trusted repositories for my data (perhaps just Google and Amazon, because Apple doesn’t use data and who would trust Facebook!?). However, I also want complete access to/control over what data are collected and who subsequently has access to them. To that effect, I’d like to see the government step in to regulate and democratize the data. Given the rising monopoly power over data, the best way to achieve user control and transparency might be a new decentralized/tokenized Internet, but I don’t see that on the horizon yet.

Bose Backtracks as Vertical Integration Attacks Headphone Market
The hot trend for the new breed of direct-to-consumer retail brands is to diversify their online presence by opening stores or ‘experience centers’. One of the pioneers of this strategy was headphone and speaker company Bose; however, they are now pivoting the other way – announcing the closure of all 119 stores in developed markets (while keeping 130 stores open in emerging markets such as China and India). This is a puzzling move explained away by the company as simply a shift to e-commerce. It would seem more likely that the private company is seeing a significant competitive shift with the rise of the Apple AirPods. AirPods are a perfect example of how Information-Age platforms thrive off of vertical integration, eating adjacent markets one by one. In another example of vertical integration harming competition, Brad Stone discusses the recent lawsuit against Google by Sonos, which alleges patent infringement by the search giant to gain share in the smart speaker market. And, we’ve seen something similar with smart watches – Google’s recent proposal to buy the struggling Fitbit and Apple’s alleged theft of trade secrets from Masimo. There is also a lot of innovation coming in hearables, such as these NuraLoops from Australia with customizable noise canceling and audio transparency, but will the big tech platforms kill or steal it all? The stakes are rising as hardware is increasingly tied to software platforms. As we shift to augmented reality this decade, will Apple and Google shut out the competing technologies, including anything put forth by other tech giants like Amazon and Facebook?

Value of Local Talk Radio?
It’s an open question as to whether there is value in local talk radio, including news, sports, drivetime, etc. Podcasting is on the rise with an anticipated $1B in global revenues in 2021, but that’s less than 10% of the $15B+ talk-programming-heavy radio ad market in the US alone. I addressed the question of how streaming could take ad share in SITALWeek #220, suggesting that a streaming platform could buy iHeartMedia for the local talk content to accelerate the shift of radio ad dollars to digital streaming. Apparently, iHeartMedia doesn’t agree with my views as the company quietly laid off a lot of on-air talent around the US this week according to Rolling Stone. From a Bayesian perspective, this is an objective penalty against my thesis that local talk radio is valuable, and thus lowers my credence. On the other hand, the WSJ reported that Spotify is in talks to buy the Ringer – the podcasting and media business of former ESPN talent Bill Simmons. This move would appear to support my view that increasing the amount of talk (and especially sports) content is crucial for the creation of a winner-takes-most audio platform. While podcast content isn’t currently exclusive to Spotify, these deals increase their access to data and would support their attempts to create an advertising business that would drive higher revenues for podcasters (and a potentially better listener experience). In other streaming news, the WSJ reports that the Assistant Attorney General “expects to announce a decision in the next few months on whether to modify or terminate decades-old antitrust settlements dictating how music is licensed for play on radio, television, streaming services or in venues like restaurants. Changes to the rules could help artists and shake up how businesses, broadcasters and streaming services secure rights from songwriters and publishers.”

Flying Car News of the Week
Toyota will make a $400M investment in Joby, the electric vertical takeoff and landing (eVTOL) company that has a contract with Uber. According to my local paper, Joby will be building production facilities this year at a small airfield in Marina, CA.

Way to Consumers’ $$$ is through Mobile
App Annie reports that, globally, consumers spent $120B on apps in 2019 (up 20% from 2018), including $86B on mobile gaming (the latter is expected to top $100B in 2020). Time spent on phones averaged 3.7 hours, up 10% from 2018 and up 35% from 2017. Total app downloads slowed to 6% growth.

Google’s Advanced Protection now Available to the Masses
Google is making it easier for users to enroll in their highest level of Advanced Protection, which requires use of a qualified phone (now including the iPhone) and/or a physical USB key when accessing your account. It’s a really great, easy layer of security now that bluetooth-activatable security keys are built into Android/iPhone. 

Rising Semi Demand for Autonomous Vehicles
Increasingly, automakers are relying on local processing (instead of the cloud over 5G) for autonomous and safety features. This move is unsurprising, but will create meaningful growth for semis over the next decade – particularly since these chips will need to operate in hardened environments, often with redundancy. The arrival of multiple HD camera feeds processed in real-time, in-vehicle will also require high-bandwidth connectivity throughout the car. Semi Engineering has a more detailed post on the topic. 

Big Business of Sports Betting
Redef has an in-depth post on the increasingly legal market of sports betting in the US – estimated to be $150-400B (with less than one tenth of that legal so far) – and its potential for making live sports even more valuable. 

Big Brother has a Clearview 
Clearview AI is a startup that created a facial recognition database by scraping images available from social media and YouTube videos without permission. According to the NYT, the company sells the software to US law enforcement agencies and corporations, enabling them to identify people simply by uploading a photo. While some facial recognition has been banned at the local level by cities around the US – and the EU is considering a 5-year ban on its use in public places – largely, anyone is free to identify anyone else for any reason using tools that are often flawed and biased. This new tech in use today is an example of the dangerous gap between the accelerating pace of innovation and government’s inability to keep up with regulation (more on that trend in our Pace Layers paper).  As I’ve written in the past, some companies like Microsoft and Taser-maker Axon have been forward thinking and thoughtful about facial recognition use, while others like Amazon continue to recklessly leave use cases up to the free market. Clearview received seed funding that helped it illegally scrape Facebook’s website to build the database from a Facebook board member! The company, whose policies and security precautions are unknown, has free access to not only the database, but potentially-sensitive photos run through their search algorithm. While perhaps unsettling, the use of facial recognition tech is not a black and white issue. In many cases, the rise of anonymity has fueled many of the problems in modern society because it has caused a breakdown in traditional human interaction game theory (which works much better when everyone knows everyone else – think of a tribe of 100 people) that maximizes for progress and socially acceptable outcomes. On the other hand, being able to protest injustice without risk of identification and retribution is immensely important, and tragic consequences (e.g., the current situation in Hong Kong) result when that liberty is removed. The concerning issue today is that the folks with the technology and their investors seem to be entirely thoughtless, as evinced by this quote from a Clearview backer: “I’ve come to the conclusion that because information constantly increases, there’s never going to be privacy...Laws have to determine what’s legal, but you can’t ban technology. Sure, that might lead to a dystopian future or something, but you can’t ban it.”🤦‍♂️

Miscellaneous Stuff
Another Reason to be Thankful for the End-Cretaceous Asteroid
A massive, 700,000-year-long volcanic eruption in India around 66 million years ago had a warming effect that was fortuitously softened by the giant asteroid that left a 110-mile-wide crater in Mexico’s Yucatan Peninsula. In short, the asteroid resulted in the mass death of plankton, which allowed the oceans to absorb more carbon dioxide from the Deccan Volcanoes, lessening the greenhouse effect. This was good news for evolving mammals at the time, but did nothing to save the majority of dinosaurs (only avian dinosaurs – a.k.a. birds – survived).

The Truth is Out There...but Would Compromise National Security
Every week, several paragraphs are cut from SITALWeek to spare you readers from suffering an even longer email, but sometimes I wish I had rescued something from the chopping block. Back on Sept. 19th, 2019 I cut the following: “The Navy confirms that punk rockers Blink-182 did in fact release footage of UFOs last year. They probably weren't alien technology, but who knows?” Well this week, in response to a FOIA request, we got an intriguing update on that UFO phenomenon from the Office of Naval Intelligence: yes, they did have “SECRET” and “TOP SECRET” documents and video pertaining to the UFO encounter in question but “...sharing the information with the public ‘would cause exceptionally grave damage to the National Security of the United States.’” 🛸👽😱

#7DeadlySins
Stephen Fry’s latest podcast series “The 7 Deadly Sins” kicked off this week with a fantastic 30-minute soliloquy on the existential state of humanity as we stand today. Here are the Apple and Spotify links for season 2, episode 1.

All Aboard!
Germany will invest EUR 86B to modernize its rail network in part a response to climate-related flygskam (flight shaming), according to the FT.

Stuff about Geopolitics, Economics, and the Finance Industry
The Fallacy of Loss Aversion Explained by Non-Ergodicity
Almost every investor still believes that loss aversion is a real cognitive bias that people hold. The idea of loss aversion bias – that financial decisions are skewed by us experiencing a more severe emotional impact from a loss than an equivalent gain – was conceived by Tversky and Kahneman, and has become an entrenched tenet of behavioral economics supported by neither data nor real life. In the words of David Gal: “To be sure it is true that big financial losses can be more impactful than big financial gains, but this is not a cognitive bias that requires a loss aversion explanation, but perfectly rational behavior.” Khaneman was wrong, but the belief persists – his disciple Richard Thaler was just awarded a Nobel prize (largely) for loss aversion in 2017! Our economic hero Ole Peters has a great Twitter thread expanding upon Gal’s 2018 article on the fallacy of loss aversion referenced above. As Peters explains, there’s no need to invoke loss aversion bias if you treat financial decision making as non-ergodic. The mistake behavioral economists make is using the expected outcome averaged across a number of hypotheticals, but people don’t exist across a number of hypotheticals – people exist over the passage of time. When you take the path through time into account, people act rationally by sometimes paying to avoid losses, and other times not. The difference is as simple as swapping addition for multiplication – it’s that multiplicative dynamic that changes everything (see the Farmer’s Fable for a visual). For more discussion, see the Nature Physics article on non-ergodicity that I circulated a couple weeks back. In a real example of humans behaving irrationally, many economists are attacking or refusing to acknowledge the weight of this new research because it threatens their life’s work!

New Low for China’s Birth Rate
As the global depopulation crisis looms, China’s 2019 birth rate has sunk to the lowest level since at least 1949 at 10.48 births per 1,000 people (2019’s births were down 580k to 14.65M). More on China’s Silver Tsunami in SITALWeek #221.

Democratizing PE (Public Markets – Who Needs ’Em?!)
PE giants are urging the SEC to allow mom and pop investors to go in on private equity. And, here is a great Twitter thread from Gavin Baker summarizing the recent Bain report on PE.

China Unhappy with Lithography Embargo 
A Chinese trade ambassador is threatening the Netherlands over blocking ASM Lithography’s  shipment of advanced semi manufacturing machines to Chinese semi hopefuls. As I mentioned last week, US intervention to encourage this litho embargo completely stops China from building their own advanced semi industry. ASM Litho has a monopoly and no one is within a decade of catching them because the technology requires such close collaboration with customers to create and run; there are only a few customers in the world, and they are all outside of China.
✌-Brad

Disclaimers:

The content of this newsletter is my personal opinion as of the date published and are subject to change without notice and may not reflect the opinion of NZS Capital, LLC (“NZS”).  This newsletter is simply an informal gathering of topics I’ve recently read and thought about. It generally covers topics related to the digitization of the global economy, technology and innovation, macro and geopolitics, as well as scientific progress, especially in the fields of cosmology and the brain. I will frequently state things in the newsletter that contradict my own views in order to be provocative. I often I try to make jokes, and they aren’t very funny – sorry. 

I may include links to third-party websites as a convenience, and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by NZS Capital, LLC (“NZS”). If you choose to visit the linked sites, you do so at your own risk, and you will be subject to such sites' terms of use and privacy policies, over which NZS Capital has no control. In no event will NZS be responsible for any information or content within the linked sites or your use of the linked sites.

Nothing in this newsletter should be construed as investment advice. The information contained herein is only as current as of the date indicated and may be superseded by subsequent market events or for other reasons. There is no guarantee that the information supplied is accurate, complete, or timely. Past performance is not a guarantee of future results. 

Investing involves risk, including the possible loss of principal and fluctuation of value. Nothing contained in this newsletter is an offer to sell or solicit any investment services or securities. Initial Public Offerings (IPOs) are highly speculative investments and may be subject to lower liquidity and greater volatility. Special risks associated with IPOs include limited operating history, unseasoned trading, high turnover and non-repeatable performance.

SITALWeek #227

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, robot chefs, and whatever else made me think last week. Please grab me on Twitter with any thoughts or feedback.

Click HERE to SIGN UP for SITALWeek’s Sunday EMAIL (please note some ad blocking software may disrupt the signup form; if you have any issues or questions please email sitalweek@nzscapital.com)

In today’s post: drones, AR, robots, flying cars, and more drones – the 2020s will finally bring us “The Jetsons” lifestyle; semi cycle bottoms; cloud shift to Microsoft from Amazon; looking for other Earths; democracy wins in Taiwan; flight shaming materially impacts behavior in Germany and Sweden; passive investing hits $1T in Europe as research shows index funds hurt competition in the economy; air pollution impact on cognitive function; and lots more below...

Stuff about Innovation and Technology
Drony Appleseed
A Canadian company called Flash Forest uses drones, aerial mapping, and ecological science to increase the tree planting rate by 10x at 1/5th the cost (vs. human planters). The pods fired off by the drones contain nutrients to support the seeds, and they have plans to plant one billion trees by 2028. Here’s a video from a similar company that shows a planting drone in action. (Scientists estimate we need one trillion new trees to offset a decade of carbon.)

Samsung 9000
Samsung showed off its growing robotic ambitions this week at CES. Ballie is a rolling, BB8-like robot with built-in AI and sensors. The video of this Ballie concept in action is endearing. And, if that wasn’t compelling enough, how about these robot kitchen arms from Samsung that will make you dinner? Bot Chef is a ‘cobot’ (collaborative robot) designed to work alongside humans. It feels gimmicky today, but, for someone who cooks every night, the idea of having an extra hand in the kitchen to flip a skillet, monitor a boil, or chop some broccoli is quite appealing (the video in that Engadget story is worth watching to see the arms’ culinary skills in action). Unfortunately, it’s unlikely that we see this type of aspirational robot chef hit the market anytime soon, as Fast Company reports on the implosion of robotic cooking startups in Silicon Valley. 

Security Patrol Goes to the Bees
Back in a March 2018 SITALWeek, I wished for a home security drone that would autonomously patrol the yard to scare off raccoons, etc. I envisioned something that would use info from a motion sensor array to take off, fire a squirt gun at four-legged intruders, and then dock and recharge. If you had two, they could fly in rotation and you could have 24/7 surveillance. Well, my wish has been granted: Sunflower Labs announced a $10,000 system called The Bee drone that will patrol your property guided by ground-based motion sensors. The drone docks itself in a mini garage (named the Hive, naturally) to recharge (no word yet on squirt gun attachment).

Here Comes the Flying Cars
Hyundai announced it will make electrical vertical takeoff and landing (EVTOL) crafts for Uber. Hyundai joins seven other companies with which Uber has contracted for EVTOLs – including Joby, which we discussed recently. Uber asks partners to be able to meet volumes of tens of thousands of units by 2023. In 1940, Henry Ford said: "Mark my word: a combination airplane and motorcar is coming. You may smile, but it will come.” Eighty years later, it looks like the 2020s will finally be the decade of the flying car!

Out with the Phone, in with the AR
Zuckerberg said this week that this will be the decade we transition from phones to augmented reality (FB may be planning for a 2023 launch of their own AR glasses). “Augmented and virtual reality are about delivering a sense of presence...I think these will be the most human and social technology platforms anyone has built yet.” Related: here is a blog post explaining how Magic Leap used the game engine Unity to build their spatial Spotify app (which I really like on my ML1). Of note is the ease of development of non-game apps for AR using Unity.

Is our Jetson’s Future Almost Here?
Flying cars, robot companions, kitchen robots, drone security, tree planting drones, augmented reality? I, for one, am going to go long the arms providers to this technological boom by buying stock in Spacely Sprockets and Cogswell Cogs.

The Real World: Influencer Edition
Collab houses collect social media influencer A-listers so they can, um, better influence things. This trend started ~five years ago with YouTube stars; now there’s a host of properties catering to Instagram influencers and the latest stampede of TikTok-famous clout carriers. One such pad, as the NYT reports, is Hype House in LA, started by 17-year-old TikToker Lilhuddy, who has 8M followers. “You either have to be talented at something, or a weird funny mix, or extremely good looking...If you have all three, you’re a TikTok god.” More on the influencer economy here.

Startup Coverage Comes to LA
The rise of LA as the center of social media success might be a good story for the new dot.LA news and events company to cover. Congrats to Spencer Rascoff on the launch of this new publisher focused on covering the expanding LA startup scene. The site is poised to capitalize on all the talented journalists available in the wake of the news media turmoil.

Tesla: Dancing Away from the Competition
I was on CNBC this week to discuss Tesla: not only do the legacy car makers’ CEOs have to catch the autonomous moving target of Tesla in all facets of new technologies, now they also have to learn how to dance! This week, I also tweeted out a stream of thoughts on how we think about the unpredictability of cycles, both economic and technological.

Y2K20?
20 years ago, the world was on edge over the Y2K bug – would planes fall out of the sky? Would the global economy grind to a halt? Well, it turns out – 20 years later – a cheap fix used back then to update 80% of the programs is now actually bricking a lot of devices like parking meters, cash registers, and even a video game. The programmers and companies at the time thought the software would all be obsolete by the time 2020 came around...oops! The next problem will arise in 2038 when the clock used for Unix runs out of time. For all the talk of the short lifetime of tech, it’s remarkable how long many technologies stick with us.

Semi Industry Heating Up
As Lip-Bu Tan, CEO of design-software maker Cadence, recently explained to Semi Engineering: “Design teams are so busy right now that everyone is feeling stretched. There’s 5G, IIoT, AI, machine learning, and cloud data centers. Automotive is moving a little slower, but it’s still growing.” And Naveed Sherwani, CEO of RISC-V-startup SiFive, discussed the double duty as China tries to recreate their own semi industry: “Now, for every tape-out you may have two tape-outs, one for each market. So there will be a chip that adheres to U.S. standards, and another one for Chinese standards.” And speaking of heightened semi demand, AMD CEO Lisa Su said in an interview regarding their ramping of 7nm chips (which are eating Intel’s lunch): TSMC’s wafer supply is tight. Lastly, Microchip’s semi Nostradamus Steve Sanghi noted at the JP Morgan tech conf: “So all this points to multiple inflection points. And therefore, I called bottom for Microchip for this business cycle with the obvious caveat of really any negative developments on the U.S.-China trade front or any unexpected fallout from geopolitical events.”

Healthy Competition in the Cloud
Benchmark VC Chetan Puttagunta suggested he’s seeing startups select Microsoft Azure and Google Cloud about 2:1 over AWS on his Twitter. Many others chimed in supporting the idea of Microsoft taking cloud share from Amazon. I see six reasons behind the apparent share shift: 1) fear of Amazon competing with software companies using AWS; 2) fear of Amazon competing with customers of AWS in retail (Microsoft has a big push to help retailers), banking, etc.; 3) the rise of Kubernetes (originally a Google project) making it easier to be multi-cloud without lockin; 4) Microsoft becoming an obvious cloud choice for startups due to its deep enterprise roots (Goldman Sachs just published research to that effect); 5) Microsoft executing well and GitHub’s importance to programmers; 6) free credits to try before your buy and Microsoft’s deep history of sales support for customers. All that said, we still have over $1T of annual spend to migrate to the cloud, so there is plenty to go around, and competition is very healthy for customers.

Miscellaneous Stuff
Exit the Warrior
Neil Peart – the brains and brawn songwriter and drummer of Rush – passed away this week from brain cancer. If you haven't read it, I recommend his 2002 biography Ghost Rider (and, he has a couple follow-up books that are on my reading list).

Penn Meets Tim
I really enjoyed the conversation between Penn Jillette and Tim Ferriss on Tim’s podcast this week, and not just because both of them have an excess of unnecessary consonants in their names. Penn is known as a magician, but he should be more well known as a philosopher (he’s played a big role in my philosophy of life). Back in Oct. 2014, I was a guest on Penn’s Sunday School podcast talking optimistically about the future of tech; if you listen to it, keep in mind my motto on predicting the future: “I may not always be right, but I am always early” 🤷. (Here’s a link for that episode 141; note: it’s a 50Mb MP3 file hosted on Google drive, no login required.)

Big Game to Farming: Ag Revolution Explained
Agriculture takes more time than hunting and gathering, and it’s an inferior nutrition source with military disadvantages (lost skills and less mobility). So why did we go all-in on ag 10,000 years ago and thus create “civilization” around 6500 years ago? Turns out, we apparently got so good at killing big game prey (herding with fire, forcing off cliffs, etc.) that we plain ran out of them and had no choice but to grab a hoe and start cultivating. Big animals have longer gestation and growth periods, so we overwhelmed their ability to reproduce and keep up. This article explains that we could have pursued farming far earlier than 10,000 years ago, but we didn’t need to.

Searching for Earth 2.0
The new James Webb Space Telescope launching in 2021 will be able to detect Earth-like oxygen concentrations and other atmospheric elements around planets within 16 light years of our solar system. You can read more about the JWST’s ability to look 13.5B years back in time, and the cool tech in it made by Ball Aerospace here.

Please Don’t “Make it So”
Growing up with Star Trek TNG, I am eagerly awaiting the new CBS All Access show “Star Trek: Picard," but I don’t think I’m emotionally prepared to see the Federation as Patrick Stewart describes in this Vanity Fair interview: “‘In a way, the world of “Next Generation” had been too perfect and too protected,’ he says. ‘It was the Enterprise. It was a safe world of respect and communication and care and, sometimes, fun.’ In “Picard,” the Federation — a union of planets bonded by shared democratic values — has taken an isolationist turn. The new show, Stewart says, ‘was me responding to the world of Brexit and Trump and feeling, “Why hasn’t the Federation changed? Why hasn’t Starfleet changed?” Maybe they’re not as reliable and trustworthy as we all thought.”’

Indoor Air Quality has Startling Cognitive Impact 
A number of schools in California installed air filters in classrooms due to a nearby long-term gas leak issue, and the result was that test scores went up a lot! It turned out the gas leak was not reaching the schools, so the air filters were simply cleaning the normal indoor air pollution. The improvement in scores was nearly equivalent to when you reduce class sizes by ⅓ (a ~0.22 standard deviation improvement). And, the filters were only in place for part of the school year.

Flygskam (Flight Shaming) Leads to 12% Drop in German Flights, 9% in Sweden
JetBlue will be the 2nd airline to offset domestic carbon emissions (although it appears they aren’t accounting for the magnified impact of high-altitude emissions). Two weeks ago, Bloomberg discussed the 12% drop in domestic flights in Germany as a result of Greta Thunberg’s flight-shaming campaign (international flights remained steady and European-Germany flights dropped a couple percent). And last week, the BBC reported on a 9% drop in domestic flights in Sweden (where flight shaming originated as flygskam) and a 4% drop in all Swedish airport traffic for 2019. Should investors’ base case for air traffic be a 10% drop along with the fat tail event of a complete, climate-driven grounding of non-essential travel? The behavior shift should accelerate R&D in planes with increased fuel efficiency and alternative fuel sources. There would be far-reaching economic consequences of environmental taxes on flights and/or a continued shift away from flying, particularly for the tourism industry (but, maybe great for RV sales!). We’re making a concerted effort at NZS Capital to push Zoom video meetings as much as we can. As an avid fan of Magic Leap and AR (just like Zuckerberg!), I believe the shift from phones to AR will finally lead to a big impact in business travel and virtual “in person” meetings become nearly as good as the real thing.

Stuff about Geopolitics, Economics, and the Finance Industry
Women Dominating Information-Age Workforce
Women outnumber men in the US paid workforce for only the second time, and, given that “women are dominating sectors that are growing the fastest” (WP), this shift may be the beginning of an enduring trend. Now, if only women would take the helm of companies like Boeing and Google, maybe we could start to make some real progress.

PE Takes a Breather
Following a decade of growth, private equity fundraising dipped 5% in 2019 to $595B. The industry continues to concentrate, with the number of funds raised down 400 from 2018 (and down 1100 from 2017) to 1316 in 2019, according to the WSJ.

Potential Moral Hazard of Passive Investing
Vanguard, BlackRock, and State Street own 22% of all S&P 500 companies, up from 13.5% 12 years ago, and they have even more ownership of smaller market cap companies. We’ve highlighted this trend before (active-ESG investor Al Gore saying that passive investing is “[financing] the destruction of human civilization”). Bloomberg discussed the moral hazard of passive investing this week, highlighting research that “high levels of common ownership can lead to higher prices and lower levels of investment, innovation, and output.” An example: “A 2018 study found that, when the same institutional investors are the largest shareholders in branded drug companies and generic drugmakers, the generic companies are less likely to offer cheaper versions of the brand-name drug.” The power law in passive investing has been a natural trend that will likely continue until unintended consequences break the entire market. 

European Passives Cross $1T
The passive investing disruption that has dominated the US for over a decade is hitting critical mass in Europe. The FT reports that assets in ETFs in Europe have passed $1T for the first time. The pace of ETF investing doubled from $57B in 2018 to $125B in 2019, and total investment is up from $500B just four years ago. Notably, regulations are in part responsible for the shift: “The UK, the Netherlands and Switzerland have all banned financial advisers from taking commissions for recommending actively managed funds, creating a more level playing field."

Like US Homeowners, Renters are Gathering Moss
I previously discussed how US homeowners are staying put an average of 13 years, more than double the six-year average from two decades ago. It turns out, as reported by Axios, renters are staying put longer as well. Extrapolating from their data, it looks like renters are moving every ~five years vs. every ~three years in 2005-2006; in aggregate, homeowners and renters are staying put for a ~decade. I continue to believe that the iBuyer phenomenon will reverse the 70-year decline in US household mobility, but it remains to be seen. 

West Keeps Trumping China’s Semi Ambitions
The US government apparently successfully lobbied to block Dutch semi equipment company ASM Lithography from shipping an EUV order to the Chinese chip foundry SMIC – highlighting the West’s position of power over China for trade negotiations, intellectual property rights, and human rights violations. Without EUV, China has zero chance of creating their own semi industry, leaving their entire surveillance economy beholden to US/European tech. 

China's Future: Global Supremacy or Struggle?
VC Fred Wilson has some appropriately optimistic predictions for the 2020. I agree, with the exception of his 3rd prediction – Fred believes China will be a superpower and exhibit adaptability. Taking an objective, Bayesian approach to analyzing the situation over the last year, the amount of adaptation required for China to overcome its significant challenges is daunting, if not insurmountable, without existential policy overhaul. It’s a very wide range of outcomes, and the safe assumption is to act as though Fred is right – and I would certainly much rather see the business/equality circumstances improve dramatically in China and a continuing healthy East-West competition. I captured part of my view last week in “How I Stopped Worrying About China”. There is an overwhelming amount of evidence that China needs significant – potentially destabilizing – change to become an innovation leader. As I said in SITALWeek #214: “Throughout human history, there has been a spectrum of freedom and equality: if you have 100% freedom, you tend to end up with extreme inequalities; if you have 100% equality, you tend to end up with very little freedom. Capitalism has tended toward freedom, thus causing ever-rising inequality, while Communism strives for equality by suppressing freedom. There is some threading of the needle of equality and freedom that we still need to do as a global society, but for now the path isn’t yet clear. I’d suggest the ultimate tact to take for companies and investors struggling to make sense of the China situation is to support rising freedom over the long term.” The resounding win for freedom and democracy in yesterday's Taiwan presidential election feels like a direct reaction to the problems China is facing today both in Hong Kong and on the mainland. 
✌-Brad

Disclaimers:

The content of this newsletter is my personal opinion as of the date published and are subject to change without notice and may not reflect the opinion of NZS Capital, LLC (“NZS”).  This newsletter is simply an informal gathering of topics I’ve recently read and thought about. It generally covers topics related to the digitization of the global economy, technology and innovation, macro and geopolitics, as well as scientific progress, especially in the fields of cosmology and the brain. I will frequently state things in the newsletter that contradict my own views in order to be provocative. I often I try to make jokes, and they aren’t very funny – sorry. 

I may include links to third-party websites as a convenience, and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by NZS Capital, LLC (“NZS”). If you choose to visit the linked sites, you do so at your own risk, and you will be subject to such sites' terms of use and privacy policies, over which NZS Capital has no control. In no event will NZS be responsible for any information or content within the linked sites or your use of the linked sites.

Nothing in this newsletter should be construed as investment advice. The information contained herein is only as current as of the date indicated and may be superseded by subsequent market events or for other reasons. There is no guarantee that the information supplied is accurate, complete, or timely. Past performance is not a guarantee of future results. 

Investing involves risk, including the possible loss of principal and fluctuation of value. Nothing contained in this newsletter is an offer to sell or solicit any investment services or securities. Initial Public Offerings (IPOs) are highly speculative investments and may be subject to lower liquidity and greater volatility. Special risks associated with IPOs include limited operating history, unseasoned trading, high turnover and non-repeatable performance.

SITALWeek #226

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, quantum teleportation, and whatever else made me think last week. Please grab me on Twitter with any thoughts or feedback.

Click HERE to SIGN UP for SITALWeek’s Sunday EMAIL (please note some ad blocking software may disrupt the signup form; if you have any issues or questions please email sitalweek@nzscapital.com)

In today’s post: why China will keep losing the trade war; online lending for consumers and small businesses is on the rise; fuel cell electric vehicles are ready for the mass market; military AI creates moral hazards; is Apple building the ultimate space-based walled garden?; fear of money-losing startups creates opportunities for long-term investors; Vanguard will lose a key mutual fund patent in three years as their innovation slows; paleoburrows; solar winds; and lots more below…

Stuff about Innovation and Technology
How I Learned to Stop Worrying About China
China’s been trying to catch the West in semiconductors for decades and has little to show for it despite $100B’s in targeted spending. Why? Because monopoly platforms and profits can’t thrive in China. This is why China lost the trade war with the US – they rely on foundational technology and creativity that could only be created under Western incentives (see the Macro section of SITALWeek #214 for more thoughts on the delicate but important balance between equality and freedom). Innovation requires free expression of creativity without fear. For a period of time, China did allow Alibaba and Tencent to create monopolies and monopoly-like profit pools, which caused them to pull ahead of the Western Internet platforms in terms of innovation. But, then they reversed course as Jack Ma relinquished his control of Alibaba and the government took increased control of the sector through board seats, censorship, etc. The West can maintain the innovation that will continue to create more progress and solve more problems for the entire planet by taking a smart approach to balancing monopoly formation with regulation – more on that in last week’s newsletter (in case you missed it): “How I Learned to Stop Worrying and Love the Monopoly.”

Combat AI a Looming Reality
Militaries around the world are investing in AI to work alongside humans in combat situations. The head of AI for the Pentagon, with an estimated $4B annual research budget, envisions systems that determine what weapons to deploy and when – analyzing and making decisions faster than humans. Meanwhile, the Royal Australian Air Force is testing autonomous drones that make their own AI-based decisions; the craft are self piloted and could fly in large numbers alongside a human-piloted drone or aircraft. This military AI investment is ratcheting up the controversy amongst AI leaders, like Amazon and Google, and their employees: should technology leaders work alongside governments to more safely develop military AI, or are the stakes too high? Can tech companies afford not to be involved? A lot of this technology is increasingly cheap and built on open-source projects, which makes it feel very much like Cold War 2.0 – where we hope to rely on mutually assured destruction to save ourselves from ourselves.

AI’s the New Teacher’s Assistant
“Bakpax is a computer vision system that converts handwriting to text and interprets what the student meant to say. The system’s auto-grader teaches itself how to score...” and immediately gives students results after they snap a photo of their homework with their phone. The software saves teachers time and provides feedback on which students need help on which subjects. The NYT reports on this and other AI tools making their way into classrooms. 

POS Lending Still Small, but Trending
Affirm is running away with the market for online point-of-sale lending. One big customer is the connected fitness company Peloton – Affirm enables customers to buy a bike for $58/mo instead of $2300 up front (over 40 months, with a zero-interest-rate loan). Their competitor Afterpay is the fastest growing POS lending tool targeted at smaller-ticket items with faster payback. Despite significant growth, only 2% of consumers have used online point-of-sale loans. While POS lending is nothing new, and not terribly different than the branded store credit cards of the past, it’s quite easy to see how disruptive this could be to the traditional credit card lending establishment – if and when it combines with digital wallets and becomes more mainstream. As long-time readers know, I am all for anything that chips away at the negative-sum, innovation-destroying card/banking oligopoly!

Online SMB Loans Up in 2019
Small business loans granted by the top-5 lending platforms (PayPal, Square, OnDeck, Kabbage, and Credibly) grew 39% y/y in 2019. SMBs grew their portion of loans from online sources from 19% in 2016 to 32% in 2018 (this data comes from this WSJ article, but note that the article is filled with errors and mistakes – I guess the editors were out on holiday!). Some of the bigger lenders, such as Amazon, PayPal and Square, have significant advantage given their transaction data on the merchants that use their platforms. These loans are essentially working capital lines that can be paid back out of revenues, which gives many of the big lenders a big data and risk advantage as they actually collect the revenue on behalf of SMBs. One online lender, OnDeck Capital, charges average rates of 45%! As a Gen X’er, I’m in no position to stand on a soap box here, but a lot of these suspect loans are likely going to the same Millennials that fell prey to student loan ploys. While I think there are a lot of predatory and misleading tactics taking place, some common sense on the part of borrowers seems in order. In total, SMB loans in the US are far below their $329B 2007 peak, with $254B lent out in 2018. This seems to be another example of online loans that might have otherwise gone on credit cards.

Virtual Kitchen Explosion
The NYT reports on the rapid rise of virtual kitchens (restaurants in shared spaces with no consumer-facing infrastructure that are designed to prepare orders for delivery only). With more and more evidence that vertical integration of delivery and centralized food prep is exploding, how many existing restaurants will be shut down over the next decade? As I wrote in the Evolution of the Meal, I would guess we see a huge churn away from traditional grocery stores and restaurants toward bundled, subscription, vertically-integrated food services. Perhaps the vast majority of restaurants as we know them today will cease to exist. As food turns into an information-platform business, the rules of the Internet will apply: network effects, high NZS (non-zero sum), vertical integration (all the way down to the farm!), speed, selection, and price will dominate in the creation of a winner-takes-most platform.

Video Games a Spectator Sport with Growing Fan Base
Twitch continues to dominate the market for watching other people play video games, with 20% growth (maintaining around 72% of hours viewed). Normally with information-based platforms, we would see a power law phenomenon – whereby the most popular things gains more and more share; but, notably, there has been a de-power lawing of game watching as 2018’s leader Fortnite dropped 28% in 2019, enabling a half dozen games to gain share and flatten the distribution. There was even a brand-new game, Apex Legends, which cracked the top 10. Perhaps it was a one off, or perhaps it speaks to the diversity of gamer choice – implying there may be many mega winners in the future of video games. Watching game personalities chat (or live vlog on Twitch) is also growing rapidly this year – and would be #2 in hours watched if it were a category in gaming. This report from Stream Elements has many interesting stats.

SaaS Founder Favors SaaS Investing
One of the founders of Atlassian, maker of collaboration software, diversifies his multi-billion dollar holdings by investing in...other software companies! It’s hard to disagree with the logic, as explained by Armina Rosenberg, the head of Mike Cannon-Brookes’ Grok Ventures: “One of the main ways we play listed equities, and we are talking our own book here, we believe enterprise software-as-a-service companies are driving innovation globally, they are making processes cheaper better and faster...A lot of people observe that we are going from Atlassian to another SAAS stock but diversifying away from technology actually doesn’t make any sense because technology actually touches on every sector.” Here at NZS Capital we couldn't agree more with that sentiment!

Spotlight on Semis
After finishing the decade as the best performing sector in US equities, semiconductors have been in the spotlight lately. Recent articles by mainstream journalists trying to writeup the industry have made us realize just how few folks around the world these days seem to actually understand the semi supply chain and the complexity of manufacturing (for example, here are a couple of somewhat naive articles: Bloomberg on Samsung and the Economist on TSMC). The sector has gone through two decades of virtually no venture capital investment and a decade of consolidation, all of which has bolstered several pockets of compounding advantage, notably in manufacturing tools, design software, leading-edge manufacturers, and select areas of microcontrollers, FPGAs, GPUs, etc. With 1) EUV (mind-bogglingly complex leading-edge tech) manufacturing finally in production, 2) an explosion of new end markets with connected devices and cloud-based AI, and 3) better-than-ever economics, the industry appears poised for long-term growth (albeit with cyclicality tied to the global economy). That said, problems remain to be solved, and their complexity is skyrocketing – this article from Semi Engineering touches on some of these challenges, including interconnects, 3D structures, power, and packaging (chiplets).

FCEV (Fuel Cell Electric Vehicle) Chicken and Egg Problems
Toyota and BMW reckon that hydrogen fuel cells are ready for the mass market, but they need to make 500,000 units to cross the point of good economic returns. And, unlike the case with today’s battery-powered EVs – which already have ubiquitous access to electricity – support infrastructure for FCEVs would need to be put in place. Given that EVs are already at scale for consumer autos (which can often afford the down time associated with re-charging), FCEV tech would be more likely to find traction in the commercial and factory vehicle industries – as filling up an FCEV takes about as long as gassing up. Platinum is a big price driver today, with FCEVs using 3-4x (~30g) as much as internal combustion vehicles.

Music Streaming Stuck (for now) as Fixed-Margin Middlemen
Music executive and Beats co-founder Jimmy Iovine believes that the streaming music industry won’t scale because of the power law of listening: streaming is concentrated amongst a handful of artists while the long tail is tiny – according to Iovine, an artist like Drake has more streams than every song from the 1980s! This distribution further fuels the power of the labels. This analysis tracks with the piece I wrote earlier: Music as a Loss Leader. More recently, I’ve  suggested that an accelerated move into “talk radio” – otherwise known as podcasts, but including local sports, news, and drive-time DJs – is warranted and that perhaps Liberty is trying to do just that with its increased ownership in SiriusXM, Pandora, and iHeartMedia. It’s not clear that it’s a dead end for streaming platforms or that Apple or Amazon will win because they can subsidize the business. The labels' power is only growing stronger, but there are still several hours a day of listening that could end up being original content with meaningful cost leverage. At some point, someone like Spotify could get big enough to drive a record-label “blackout” (like we’ve seen in the carriage wars between broadcasters, networks, and cable companies), and the tide will turn for the streaming industry, but it could be a long time from now. 

iSat?
As SpaceX, Amazon, and others race to launch global Internet satellite platforms, Apple is reportedly working on their own satellite technology. While it’s not yet clear what they would use it for, given Apple’s propensity for privacy, a global, vertically-integrated Internet platform exclusively for iPhone users could create the ultimate walled garden. It’s also possible Apple would leverage the commercially-deployed SpaceX network of satellites to work with its products – it would be interesting if they made an exclusive deal for the capacity of one of the Internet satellite arrays.

Cashless Economy Vulnerable to Natural Disasters
Buried in the coverage of the tragic wildfires in Australia is this tidbit about the near-cashless economy seizing up as the telecom infrastructure went down: “With even landlines down, and banks closed and ATMs empty, the cashless economy in some areas seized up, according to fire brigade officials.”

Miscellaneous Stuff
Best Decade Ever!
The author of The Rational Optimist explains that the last 10 years have been the best on record: “...bad things happen while the world still gets better. Yet get better it does, and it has done so over the course of this decade at a rate that has astonished even starry-eyed me.” It’s a clear message of hope for the long-term collective well-being of humanity (at least until the Universe fully cools...but even then hopefully someone reboots the simulation!). Constants of humanity: things are always getting better over the long term, but over the short term people believe things are always getting worse. Pessimism sounds smart, but ALWAYS bet on optimism.

Chip-to-Chip Quantum Teleportation
By manipulating single particles of light inside programmable semiconductors, scientists were able to use quantum phenomena to teleport the state of entangled photons between chips that are separated from each other across space. Effectively, the two chips are entangled in the quantum wave function (along with the researchers doing the measurement). The process has primary application in quantum communication, which allows for information transmission across space without any physical connection (and therefore could never be intercepted or remotely hacked). China currently leads the world in quantum communication, and one of the lead researchers on this paper, published in Nature Physics, has notably returned to Peking University to continue work in the field. 

Vagus Nerve is Endogenous Chill Pill
Your vagus nerve connects your enteric nervous system to your brain. In other words, it connects your “gut feelings” to your higher-order cognition. The connection is particularly important for maintaining homeostasis, mood, and the relationship between bacteria and our digestive system (“The Strange Order of Things” Damasio p. 133-136). This article on the vagus nerve discusses its ubiquitous importance, including in mood regulation (perhaps because 95% of the body’s serotonin is produced in the enteric nervous system and connected to the brain via the vagus). You can take care of your vagus with stretching, deep breathing, yoga, massage, and other forms of movement.

Implausible Physics in Kids’ TV Induces Cognitive Overload
Thanks to the variable nature of UHF TV signal availability in the 1970s, differential access to the kids' show Sesame Street set up a perfect variable-exposure test. It turns out that kids who watched the show did better academically, with an even stronger positive impact for kids from lower-income households. SpongeBob, on the other hand, impairs the performance of 4-year olds on various tests of focus. But, it’s not the fast pace or annoying characters from SpongeBob that causes the problem; rather, it’s the number of physics-defying acts in the show (like when a car winds up in outer space) that causes some sort of overload to kids' brains. It seems to have just a short-term impact though, with no evidence of long-term damage. This article covers more on the long history of collaboration between kids' TV and research science.

Geologic Legacy of Prehistoric Earth Movers
Paleoburrows are tunnels 4-5 feet in diameter and up to thousands of feet in length dug by (presumably) giant sloths 10,000’s of years ago throughout South America. The creatures, some of which were the size of modern elephants, lived in both South and North America, but most of the caves (which, curiously, are much larger than would seem necessary for shelter) have been found almost exclusively in southern Brazil.

Antibiotic Manufacturers are an Endangered Species
Antibiotic makers are all going bankrupt and big drug companies have abandoned the industry due to lack of profits. In a bit of a Catch-22, in an effort to combat the rise of antibiotic-resistance, doctors are prescribing fewer antibiotics, which makes the profit pool for design of new antibiotics even smaller! Development of a new antibiotic is reported to cost north of $2B. This may be an industry that requires government intervention for national security reasons.

Magnetic Reversals Send Solar Wind Soaring
The stream of charged particles emitted by our sun’s corona (i.e., solar wind) is caused by reversals in the sun’s magnetic lines in the “cool” coronal holes, which reach temps of only 2M degrees Fahrenheit. This insight comes from the NASA craft that traveled to within 27M miles of the sun (marking the closest approach to date by an artificial object). By 2025, the craft will be within 4M miles of the giant hydrogen-to-helium fusion reactor.

Stuff about Geopolitics, Economics, and the Finance Industry
VC Flight Clears Way for Real Long Term Investors
VCs and investors are running scared from companies that aren’t profitable according to this WSJ article. This fear bubble and funding pullback might create an opportunity for late-stage investors to run against the herd and look for opportunities to invest in startups that have a clear path to profits, even if it's far in the future. Analysis comes down to customer acquisition cost vs. lifetime value. If enough data are given, most investors can be thoughtful about estimating the probability of successful platform creation. As is always the case with new disruptive ideas, they take much longer, but are much bigger than anyone can foresee.

Vanguard Lends Name to Chinese Robo Advisor
Vanguard has partnered with Alibaba’s Ant Financial to roll out a mutual-fund-picking robo advisor in China. The new platform allows people with more than $100 to invest in 5700 local mutual funds, representing 80% of Chinese-run funds. It sounds like Vanguard is really only bringing their brand name to the table at this point. China’s current mutual-fund market is around $2T, or about 1/3 of Vanguard’s $6T in global assets under management. Following new regulation 2017, several Western investment companies are working to JV their way into China. 

Double Taxation of Mutual Funds Sunsets in 2023
Meanwhile, Vanguard is no longer the price leader in their core business, and this Barron’s article criticizes the company for a lack of innovation. Mainly, advisors believe the company has not invested in technology like its rivals have in recent years – despite the company likely raking in $2-3B in operating profits on $10B of estimated revenue. There’s a very interesting detail about Vanguard which isn’t well known: they’ve sat on a patent for decades that allows only them to avoid the plague of mutual fund double taxation via annual distributions. If they had open sourced that technology, I’d wager that Vanguard would have created multiples more value for investors than the have by offering low-cost index funds. But that patent expires in 2023, which should allow the $10T mutual fund industry to get the same tax advantaged treatment as ETFs in the US.

Millennials’ Low Trajectory of Economic Success 
This report from the New America Institute outlines Millennial’s wealth-accumulation gap. Specifically, they point to the Great Recession, higher debt, and less home ownership as having compounded the problem of economic stagnation compared to prior generations. In case you missed it, I talked about the pending 5 year bump in household formation and other trends from the Millennial Sneaker Wave, which is just getting underway.
✌-Brad

Disclaimers:

The content of this newsletter is my personal opinion as of the date published and are subject to change without notice and may not reflect the opinion of NZS Capital, LLC (“NZS”).  This newsletter is simply an informal gathering of topics I’ve recently read and thought about. It generally covers topics related to the digitization of the global economy, technology and innovation, macro and geopolitics, as well as scientific progress, especially in the fields of cosmology and the brain. I will frequently state things in the newsletter that contradict my own views in order to be provocative. I often I try to make jokes, and they aren’t very funny – sorry. 

I may include links to third-party websites as a convenience, and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by NZS Capital, LLC (“NZS”). If you choose to visit the linked sites, you do so at your own risk, and you will be subject to such sites' terms of use and privacy policies, over which NZS Capital has no control. In no event will NZS be responsible for any information or content within the linked sites or your use of the linked sites.

Nothing in this newsletter should be construed as investment advice. The information contained herein is only as current as of the date indicated and may be superseded by subsequent market events or for other reasons. There is no guarantee that the information supplied is accurate, complete, or timely. Past performance is not a guarantee of future results. 

Investing involves risk, including the possible loss of principal and fluctuation of value. Nothing contained in this newsletter is an offer to sell or solicit any investment services or securities. Initial Public Offerings (IPOs) are highly speculative investments and may be subject to lower liquidity and greater volatility. Special risks associated with IPOs include limited operating history, unseasoned trading, high turnover and non-repeatable performance.

SITALWeek #225

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, Dr. Stangelove, and whatever else made me think last week. Please grab me on Twitter with any thoughts or feedback.

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In today’s post: Happy New Year! Today’s post explains why monopolies are great for humans! You read that right. The zeitgeist of disillusionment with the so-called myths of capitalism and fear of technology risks creating more problems than solutions for society. This short essay is an intentional provocation to break us out of the consensus of despair - let me know what you think. If you missed the last couple of SITALWeeks during your holiday travel you can find them here and here.

How I Learned to Stop Worrying and Love the Monopoly
Successfully building a business with potential to extract monopoly-like profits is a prize that, so far, has moved civilization forward faster than any other pot of gold at the end of any rainbow. It’s the carrot of capitalism that has pulled more people out of poverty and improved more lives than any other system in the dozen millennia since we settled down from our hunter/gatherer lifestyle.

Monopolies are awesome. Well, at least for a while, but then they get a little too big, a little too powerful, and sometimes a little too greedy. Maybe it’s intentionally bad behavior, maybe it’s just the system they operate under, or maybe it’s just a law of nature. Then society and the government catches up and restricts monopolies either by placing guardrails on them or breaking them up. In doing so, we often see the phenomenon of regulatory capture: new regulation cements current monopolies by raising the barriers to new entrants. Monopolies are kept in their lanes and they can’t enter new vertical or horizontal businesses. Sometimes, this regulation turns into a quagmire of unintended consequences with devastating impacts, where big business and big government create significant damage and inequality – it's a tale as old as capitalism. 

Certain gears of civilization, like technology, turn faster than others, like government. Eventually the government gear spins fast enough to catch up...and then technology races ahead again. We’ve seen this phenomenon over and over in multiple industries over the last 200 years – it's at the heart of our paper Pace Layers: Tech Platforms, Regulation, and Finite Time Singularities.

As monopolies amass more power, they eventually slow down under their own weight. They reach the top of their classic S-curves, providing welcome governors or brakes, on the pace of progress. In this sense, monopolies are an effective mechanism to slow down time (we talked in more detail about the importance of slowing down time in our paper Redefining Margin of Safety). If they propelled us forward at an unstoppable pace, innovation and progress would run too fast for the slower layers of society to catch up. On the flipside, if we had perfect textbook competition, we would probably either end up with 1) severely attenuated innovation (as there would be little chance of gaining majority market share and amassing a pot of gold, and thus there would be reduced motivation to try), or 2) creative destruction would move society forward at an unstable pace in a state of ongoing punctuated equilibrium.

Monopolies can be good for humans because they allow innovation to push us forward as fast as possible without completely breaking the machine. They allow more people to live better lives in total over time. And, when the government catches up and cements their position while keeping them from expanding their territory, they can often enable brand new businesses and innovation to thrive. AT&T birthed the semiconductor. Standard Oil enabled cars. Microsoft built the monopoly operating system of the PC, and then, through government action, enabled Google, Amazon, Facebook, etc. who in turn enabled Uber, Lyft, AirBnB, and countless new and innovative businesses. If Microsoft had controlled the Internet, we’d be much worse off, but if Microsoft didn’t exist at all, or was created decades later, we wouldn’t have seen the massive waves of innovation that have positively impacted lives around the world.

There are, however, many instances of destructive government involvement enabling destructive monopolies – such as the case with the entire US healthcare industry. The banking and agriculture sectors are also examples of monopoly-government relations gone bad. But, even then, the outcomes are not entirely black and white. Monsanto has a near monopoly in seeds and pesticides, but their mission was to feed the world. The complexities here require us to be very thoughtful about the interplay of innovation, monopolies, lobbying, and regulation. In particular, the political lobbying machine in the US has murdered innovation in industries like healthcare and finance, and there’s a good chance the ramping political engine of Silicon Valley could do the same damage in the tech sector as well. 

In the Information Age, monopolies will form faster and accumulate more data and network effects than in the Industrial Age, which is a problem because they can do more damage at a faster pace. There are victims along the way, and it’s a philosophical question as to whether the harm justifies the lifting of countless others out of poverty (oversight and a case-by-case analysis is warranted here). Clearly, the progress of capitalism has harmed the environment and stretched inequality to a breaking point; however, we can’t go back to living in caves. These are issues humans need to solve as the first round of Information-Age giants are regulated to enable the next round of AI, augmented reality, IoT, and other innovations we can’t even yet imagine. 

We cannot approach regulating Information-Age monopolies the same way we tackled Industrial-Age giants, which brings us to our paper Tech Regulation: Jamming a Power Law Back into a Bell Curve Won’t Work. Rather than over regulate, break up, or punish Information-Age monopolies, we should instead free the data. Consumers and companies should have 100% control of who collects what data when, and which companies can use that data. We should have complete control of our data and we should be able to allow new, innovative companies access to that data to build new products to improve more lives – to build the next generation of monopolies that, 20 years from now, will require regulatory action. I look forward to reading about that situation on my augmented-reality glasses while I am flying in my autonomous, electric copter eating sustainable, lab-grown meat while free of all the medical conditions for which I am genetically at risk. 

I’ll bet it’s monopoly-like businesses that create the innovation that solves the environmental crisis, the healthcare crisis, inequality, and other challenges facing humans in the 21st century. At NZS Capital, we believe it’s those companies creating maximum non-zero-sum, or win-win outcomes, that will be the preeminent businesses of the future: rendering themselves irreplaceable to their customers, insulating themselves from competition, and creating more value for their customers, employees, and the world than they create for themselves. The principle of NZS is a logical way for Information Age platforms, and even monopolies, to secure their own success and propel the world forward.

So, we would do well to stop overly worrying about monopolies because they will enable the most progress for society. That's not to say we shouldn't keep a watchful eye, and step in with a heavy hand when necessary, but we should not attack large companies or billionaire entrepreneurs as an evil to be eradicated from the planet. Eventually, monopolies will either collapse under their own weight, or they will be limited by regulation. However, negative feedback loops of government regulation, regulatory capture, and lobbying can cripple innovation and progress. We should be especially sensitive to this potential risk today with tech platforms and push for regulation via data democratization and personal control. 
✌

-Brad

Disclaimers:

The content of this newsletter is my personal opinion as of the date published and are subject to change without notice and may not reflect the opinion of NZS Capital, LLC (“NZS”).  This newsletter is simply an informal gathering of topics I’ve recently read and thought about. It generally covers topics related to the digitization of the global economy, technology and innovation, macro and geopolitics, as well as scientific progress, especially in the fields of cosmology and the brain. I will frequently state things in the newsletter that contradict my own views in order to be provocative. I often I try to make jokes, and they aren’t very funny – sorry. 

I may include links to third-party websites as a convenience, and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by NZS Capital, LLC (“NZS”). If you choose to visit the linked sites, you do so at your own risk, and you will be subject to such sites' terms of use and privacy policies, over which NZS Capital has no control. In no event will NZS be responsible for any information or content within the linked sites or your use of the linked sites.

Nothing in this newsletter should be construed as investment advice. The information contained herein is only as current as of the date indicated and may be superseded by subsequent market events or for other reasons. There is no guarantee that the information supplied is accurate, complete, or timely. Past performance is not a guarantee of future results. 

Investing involves risk, including the possible loss of principal and fluctuation of value. Nothing contained in this newsletter is an offer to sell or solicit any investment services or securities. Initial Public Offerings (IPOs) are highly speculative investments and may be subject to lower liquidity and greater volatility. Special risks associated with IPOs include limited operating history, unseasoned trading, high turnover and non-repeatable performance.