SITALWeek #274

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, conversations with the unknown, 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 sign up form; if you have any issues or questions please email sitalweek@nzscapital.com)

In today’s post: AI teaching itself in robotics and flight; the opportunity for financial education as banking goes digital; silicon architectures proliferating in the cloud and on PCs; blockbusters; miles of rock paintings; illogical vaccine prioritization; algorithm middleware; our discomfort with the unknown future; and lots more below...

Stuff about Innovation and Technology
NZS Capital is hiring for an operations manager position; if you or someone you know is interested, check out the job description and apply here.

Hive-Mind Dog Bots
KODA is a robot dog built to learn from its tribe of other robot dogs around the world via distributed learning and secure blockchain technology. This humanoid’s best friend is filled with sensors, processors, and learning capabilities that even include “ephemeral memory loss”, allowing it to relearn the same tasks in different ways to optimize outcomes. The robot dogs use IPFS (InterPlanetary File System) peer-to-peer sharing so they can all share knowledge with each other. And, when it “sleeps” it dreams...er, mines bitcoin for you.

99 Autonomous Loon Balloons
Loon, Google’s fleet of Internet-beaming balloons, is now controlled by “a set of algorithms both written and executed by a deep reinforcement learning-based flight control system that is more efficient and adept than the older, human-made one.” In other words, the balloons decide for themselves how to fly. The achievement, the first of its kind in commercial aerospace, was done on simulated systems given the difficulty and expense of real-world training with high-altitude helium balloons. As described in Nature: “in a Loon superpressure balloon, vertical motion is achieved by pumping air ballast in and out of a fixed-volume envelope, and horizontal motion is dictated by the winds at the balloon’s location. To navigate, a flight controller must therefore ascend and descend to find and follow favourable wind currents.” The goal is to keep the balloons close to ground-based devices (with which they can connect via LTE wireless), and the autonomous, RL-driven AI proved far superior to human-devised algorithms in keeping track of the “high-dimensional, heterogeneous inputs” to plot a string of chess-like moves to achieve the endgame.

Peek into Future of Entertainment
Rival Peak is an interactive, live reality show on Facebook powered by AI characters instead of real people. The characters’ decisions can be influenced 24/7 over the course of 12 weeks by people watching the show on Facebook from anywhere in the world. The game/show/whatever was created by Genvid on the Unity engine and is yet another example of a shift from scripted, formulaic Hollywood content to the growing world of interactive engagement.

Roblox Universe Gains Ryan’s World
The star of Ryan’s World, the popular toy-unpackaging YouTube videos that spawned a $500M media empire around the 9-year-old, is opening up shop inside the virtual universe of Roblox. The WSJ reports: “‘Ryan’s World’ in Roblox will offer interactive areas and activities for players, including a racetrack, a school, a city center and a ‘fun zone,’ where players can challenge each other in obstacle courses. The world will also feature characters from Ryan’s TV shows and videos such as Red Titan, a superhero version of Ryan, and Combo Panda, a headphone-wearing cartoon animal that plays and reviews games. Ryan, whose real name is Ryan Guan, will occasionally participate, giving fans a chance to meet him virtually.” So, here’s yet another example of the shift from scripted TV and Video to interactive, immersive worlds.

Gamification of Digital Banking
TikTok phenom Charli D’Amelio made her first venture capital investment – in the teen-focused online bank Step. The bank is one of many financial startups aimed at a younger generation. It will be interesting to see if financial literacy is promoted with the sector’s newfound ability to insert more education via gamification into digital banking compared to the analog predecessors. Alas, so far, the gamification in new stock and cryptocurrency trading apps seems to put gambling and dopamine ahead of education.

Daimler’s Folly
Daimler will pay less money to parts suppliers and use that savings to fund software engineers to better compete with Tesla. I know I am a broken record on this topic (well, most topics), but there is no better example of the extreme dislocation of an analog-to-digital transition than the automotive industry. Traditional automakers need to gain expertise in software, data, AI, batteries, etc., and they have the rapidly moving target of Tesla to catch. If you’ll pardon the cliché, they need to change the wheels (and engine, body, sensors, processors, and just about everything else) while driving down the highway at 100mph. And I’m not just talking about the cars themselves – but the businesses as well. When Industrial Age businesses go digital, the winning characteristics are vertical integration, adaptability, platform network effects, and non-zero sum – the amount of win-win created by the company. Sacrificing your suppliers to hire a bunch of software engineers is likely to be a zero- or negative-sum game. The only option left for most legacy car companies will be to license a complete, modern car platform from a company like Tesla and then transition to focus solely on design, marketing, brand differentiation, and service.

New Cloud-Based AI Training
Amazon flexed their silicon prowess this week, announcing an internally developed processor for AI training at AWS re:Invent. Amazon's Trainium processor will complement Amazon's Inferentia processor for inference (which was also developed in-house), and an SDK will make it relatively seamless for current Inferentia users to use both solutions and transition workloads away from GPUs. Trainium will be offered as an instance on AWS in the back half of 2021, and, presumably, will eventually be used to train Amazon's internal AI models, similar to how the TPU has been deployed at Google for several years now. Habana, recently purchased by Intel, will also be offered as an instance on AWS. Thus, with the addition of Trainium and Habana, customers will now have multiple alternatives to Nvidia GPUs for training AI algorithms on AWS. Both offerings are promising better performance/$ compared to GPUs, but it remains to be seen whether the discount is large enough to overcome the power and familiarity of Nvidia’s programming language CUDA. The beneficiary of this explosion in processor architectures continues to be TSMC, where all leading AI-training solutions will be manufactured, including Intel's Habana processors.

Other re:Invent News
Other products from Amazon last week with equally unimaginative names were Monitron, for monitoring factory equipment via the IoT, and Panorama, which adds computer vision to camera surveillance for monitoring factory workers for safety violations. Amazon also changed Lambda so that it prices down to the single millisecond as more and more instances of software adopt the serverless architecture. Previously the service rounded up to the nearest 100ms, but many new apps run individual instructions in the cloud that are far shorter.

Arming of PCs Continues
Regarding use of Arm processors in laptops, Qualcomm’s Senior Vice President and General Manager of the Mobile Business Unit noted how committed Microsoft is to making the low-power chips successful and increasing the 64-bit emulation breadth and performance:
“We are 100% dedicated to this market. I think Microsoft is 100% dedicated to us, to make sure that this is going to happen. And I think that, you have a $2 trillion company coming into the market and saying, this is the way to go...And guess what, we're inundated with calls to make sure that this is going to happen. So we're 100% behind this stuff.”
Back in 2014 in Complexity Investing, buried in a footnote about how the Clayton Christensen style of innovation strategy had caused problems for Intel, we noted: “we’d argue that Intel’s business model garnered asymmetric profits relative to their customers – ignoring the principle of NZS. This oversight appears to have cost them dearly in the battle they now face with ARM who shares a win-win relationship with their customers. ARM dominates the mobile and embedded markets, and it appears only a matter of time before they will breach the PC and server markets as well.” (Complexity Investing 2014, p. 29). With the introduction of the Apple M1 and Microsoft’s focus on Arm processors, Intel’s profit-maximizing, zero-sum game with customers has perhaps become an insurmountable problem for the chip maker. I expect the world will need even more x86 processors in ten years than today, but the majority of the incremental growth in compute workloads will likely not be on Intel chips. Speaking of emulation, Microsoft is also reportedly working to bring Android apps to Windows 10. Microsoft has been more focused on merchant silicon from the chip market compared to Google, Apple, and others, and I can’t help but wonder if their future roadmap should include acquisition of one or more big silicon businesses covering both the portable market and the cloud?

Blockbuster Movies Go Direct to Streaming
With the announcement that Warner Bros. will be releasing its entire list of 2021 movie premieres on HBO Max (in conjunction with theatrical releases, pandemic permitting), the experiment could yield a new model for Hollywood. I for one am excited that I won’t have to don a hazmat suit to see Matrix 4 and Dune. Will the LTV/CAC (lifetime value to customer acquisition cost ratio) prove that ultimately foregoing the massive $10B+ box office revenues is worth it to secure long-term direct customer relationships in streaming? The CEO of theater chain AMC commented:
“Clearly, Warner Media intends to sacrifice a considerable portion of the profitability of its movie studio division, and that of its production partners and filmmakers, to subsidize its HBO Max start up. As for AMC, we will do all in our power to ensure that Warner does not do so at our expense. We will aggressively pursue economic terms that preserve our business.”
I am also hopeful we see some more experimentation for premium viewing experiences, such as watch parties with the cast, etc. If Disney (~2/3 of the pre-pandemic US box office) also decides to bypass the box office window, it would accelerate the theatrical existential crisis (I talked more about the collapsing theatrical window in #237). But, we will likely be itching to get out of the house and do something to replace some of that theater going – what will take its place? Escape rooms, bowling, live music or theater, comedy clubs, or immersive art like Meow Wolf?

Miscellaneous Stuff
Linking the Gut Microbiome to Vitamin D and Health
Insufficient vitamin D is suspected to be associated with a weaker immune system and higher risk for various chronic conditions, but new research indicates it may have much more to do with the bacteria in your gut than the typically-monitored D vitamins circulating in your blood. Tracking the active form of vitamin D (which is actually a hormone) rather than precursors revealed: “a link between active vitamin D and overall microbiome diversity; the researchers also noted that 12 particular types of bacteria appeared more often in the gut microbiomes of men with lots of active vitamin D. Most of those 12 bacteria produce butyrate, a beneficial fatty acid that helps maintain gut lining health.” Since having elevated precursor stores in the body (e.g., from more exposure to sunlight or supplementation) was found to have surprisingly little correlation with active vitamin D, researchers were able to conclude that it’s the body’s ability to metabolize precursors to obtain the active form of vitamin D that’s important for health – a finding which suggests supplements and diet changes focused on the gut – rather than D3 – could be the future direction of research.

Amazonian Ice Age Art
Eight miles of rock paintings from around 12,000 years ago have been discovered in the northern part of the Colombian Amazon. The scenes and depictions of now-extinct giant herbivores the size of small cars come from a period when the area was transitioning from Ice Age savannah, scrub and riparian forest to tropical rainforest. “The thousands of ice age paintings include both handprints, geometric designs and a wide array of animals, from the "small" — such as deer, tapirs, alligators, bats, monkeys, turtles, serpents and porcupines — to the "large," including camelids, horses and three-toed hoofed mammals with trunks. Other figures depict humans, hunting scenes and images of people interacting with plants, trees and savannah creatures.”

The Human Condition: Belief in Something is Better than Nothing
This prose from poet David Whyte – concerning the difficulty humans have with an unknown future – is applicable to everything in life, and is certainly useful for investing, where relying on the comfort of predictions is a fool’s game.
“The only thing we can be sure of, and this truth is now being crystalized by the crazily self-magnifying power of the internet, is that human beings have a foundational difficulty in having any real conversation with the unknown. With or without an internet they are always supplying easy answers too early in the process before they ever have the experience, the understanding or even the right to know what is actually happening. From a collective point of view this dynamic grants an evolutionary advantage of course, as a portion of any given population will at least have got the possibilities right ahead of time by mere chance, thus ensuring survival of the species as a whole, but it has disastrous consequences from the point of view of individual human happiness.
Our foundational difficulty is that we human beings find it difficult to live with what cannot be yet understood, with what we are powerless to understand or name. Therefore, we will believe in all kinds of wild notions and nonsense so long as we can proclaim that we believe in something or any-thing at all; especially if we can form a tribe around that fictitious something; most especially if we can advertise through those beliefs, turn the advertising into dogma and then coerce and defraud the other members of that newly gathered tribe out of their money or their integrity.”

Stuff about Geopolitics, Economics, and the Finance Industry
Vaccine Scheming
STAT reports on the efforts people will make to cut the line for the vaccine, noting regulations will be vague and vary by state. As I was skimming the article, this caught my attention:
“The California health department confirmed financial services employees, including those needed to ‘maintain orderly market operations’, will have early access to the vaccine as essential workers, as will people in the news media, such as reporters. State health departments in New York and Illinois did not respond to requests for comment about whether those in financial services would receive a vaccine early.” I’d like to go on record that I do not consider myself an essential worker even if the state thinks that I am...that’s insanity, and I hope better logic is applied.

“How to Save Democracy from Technology”
An article in Foreign Affairs suggests the idea of middleware between big tech platforms and users. This concept is similar to the “algorithm DJs” we suggested in SITALWeek #272. I continue to think this is an intriguing idea that should be explored by governments and proactively by tech platforms themselves. In some ways social media itself is middleware – if you follow certain folks, they are curating what you see as they share and post. While the current iteration of information curation and dissemination seems to have caused more problems than they have solved, surely there are better solutions out there – maybe we should ask AI to tackle the problem, then we could tell the future story of: “How Technology Saved Democracy from Technology”.

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Disclaimers:

The content of this newsletter is my personal opinion as of the date published and is subject to change without notice and may not reflect the opinion of NZS Capital, LLC.  This newsletter is 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. 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. 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, LLC has no control. In no event will NZS Capital, LLC 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 #273

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, ant wars, 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 sign up form; if you have any issues or questions please email sitalweek@nzscapital.com)

In today’s post: virtual scavenger hunts; robot dogs and their drone companions; won’t you be Amazon’s neighbor? GM’s new battery plant; horizontal vs. vertical collaboration software products; YouTube’s advantages in music; changes in real estate enabling more frequent moves; armored ants; and lots more below...

Stuff about Innovation and Technology
The YouTube video of NZS Capital discussing semiconductors with Shane Parrish's The Knowledge Project is now available for anyone to view. Semiconductors are at the heart of innovation and geopolitics, and you will learn a lot from Brinton and Jon's insights! You can also find our previous whitepaper and podcast on chips here.

Ready Player Roblox
Roblox, the soon-to-IPO kids’ world-building game, is hosting a Ready Player Two scavenger hunt inside its own virtual universe to celebrate the release of the sequel to Ernest Cline’s excellent Ready Player One. As a huge fan of RP1, I was not disappointed with RP2 (and had to chuckle at its takedown of social networks given how popular the first book was within certain social networking circles). “Cline hyped up the similarities to the Roblox event in a press release, saying, ‘Roblox is the closest thing to the Oasis in real life, and this contest is the closest thing to the treasure hunt in my book’.” Roblox founder David Baszucki’s July keynote at the company’s developer conference is a good, brief primer on the company; and this article in Modern Retail describes the unique attributes of Roblox enabling brands to build a presence and fan base inside the platform. (See also #256 for some stats on Roblox vs. Minecraft growth rates).

Robot Dogs Treading Lightly
Boston Dynamics’ robot dog, Spot, is being used to measure/map radiation at Chernobyl because walking robots kick up much less dust than wheeled ones – which is desirable when the inspection site is laden with radioactive dust. In related industrial drone news, Spot now has a drone companion named Sparrow. The drone, from Percepto (which recently raised money from Koch Disruptive Technologies), is focused on remote inspection, and Spot will work with it by carrying heavy payloads, like high-resolution thermal imagers. The long-term goal is to enable Spot (and/or other autonomous tools) to carry out repairs based on bot-collected data.

Rampant Ransomware Attacks
CrowdStrike reports that 56% of companies (out of 2200 survey respondents) experienced at least one ransomware attack in the last 12 months, and about half of those attacked paid ransoms, which averaged $1.1M. As the government has warned, many of those payments were illegal because they went to sanctioned organizations or countries.

GM Chasing Tesla’s Shadow
GM and LG Chem are building a $2.3B battery plant in Lordstown, Ohio, a town known for GM’s exit in 2019 after 50+ years of financial roller coaster for the car maker. The “Ultium” battery plant’s 30-gigawatt-hours/year capacity will be 50% bigger than Tesla’s Nevada Gigafactory. GM and Tesla are both introducing lower-cobalt batteries and targeting increased efficiency. GM is using a nickel cobalt manganese aluminum chemistry to extend the life of the cathode for more charges, as the industry strives to reach a 1M-mile battery according to this in-depth look from IEEE. GM announced last week they would go all electric by 2030 across the company’s fleet, but in the promo video they showed the old skateboard style of batteries under the car, whereas Tesla is likely to move to structural batteries integrated into the car frame itself. (GM’s battery cells appear much larger than Tesla’s from pictures I’ve seen, and I wonder if they could be efficiently used structurally.) GM will go from 550 drivetrain+engine combinations to just 19 with the EV shift. Legacy car makers continue to chase Tesla – aiming to catch where the EV leader currently is a few years from now – but a few years from now that moving target could be much further down the road. One of the many hurdles legacy car companies face is their equally outdated dealer networks – GM is reportedly offering dealers $500,000 buyouts to shut down if they elect to forego spending $200,000 in required upgrades to support EV sales and charging.

Shopify's Marketplace Conundrum
Ecommerce marketplaces always have a tension between serving the consumer and serving the merchant. Both constituents are customers of the company that runs the marketplace, but they have competing needs – the customer isn’t always right, but a marketplace has to assume they are at the expense of the seller. Meg Whitman buried eBay’s ecommerce lead in the mid-2000s by completely fumbling this delicate balance between consumer and merchant, which allowed Amazon to build a huge platform of 3rd-party sellers thanks to their obsessive focus on customer satisfaction. The rapidly growing ecommerce platform Shopify could face a similar tension in its business model in the next 5-10 years. The company has been successful in large part by focusing on the merchants, and it does not (yet) run a customer-focused marketplace.

If Shopify chose to run a full marketplace, it would face the same set of issues that stalled eBay’s growth rate. I used to count myself among the many investors who want Shopify to run a centralized marketplace, but I’ve since evolved my view. A marketplace would require a consumer focus at odds with Shopify’s maniacal focus on serving entrepreneurs. There are, however, products where you can solve for both the buyer and the seller. Shopify’s payment engine is one such example – Shop Pay is both a very good consumer experience and improves sales for merchants. Shopify’s fulfillment ambitions may be another dual-sided solution without the need of a full marketplace. Shopify is an enabler of direct relationships between buyer and seller without a marketplace in between, and it charges a toll on transactions that is far smaller than what Amazon or other retailers impose. In return for that lower toll, merchants often need to spend marketing dollars online if their product doesn’t sell itself. Merchants on Shopify’s platform are in a survival-of-the-fittest landscape – if they can meet the needs of their customers, they will thrive, and, if they cannot, there is no centralized platform to prop them up via ads and a large user base; likewise, there is no middleman to suppress them in marketplace search results or charge a large tax on sales. This long NYT profile on Shopify thoughtfully reviews some of these issues the company is facing.

Salesforce’s Collaboration Aspirations
Salesforce is rumored to be interested in acquiring collaboration tool Slack. Ever since Benioff lost the LinkedIn acquisition to Microsoft in 2016, rivalry has been intensifying between the two companies. At least that seems to be Salesforce’s perspective on it. Microsoft is the largest and fastest growing black hole for enterprise IT spend, and Salesforce is fast becoming a second major center of gravity after years of M&A and platform building, surpassing shrinking black holes of Oracle, SAP, IBM, etc. I don’t entirely understand Benioff’s instinct to compete more directly with Microsoft, and collaboration software would be a particularly difficult wall to scale given the success of Office 365 and usage growth of Teams.

From an analytical perspective, I find it helpful to separate the collaboration/workflow space into horizontal and vertical segments. Horizontal tools, like Microsoft's Office suite, meet the least common denominator of high-volume use cases. Vertical tools are customized for the industries they serve, e.g., Atlassian’s Confluence/Jira products for developers and Bloomberg's communication/workflow tools for investors. Competing with horizontal platforms requires a network effect inside a company and between companies, which is hard to build even if the product is superior. Often horizontal tools can't meet the varied, custom, and complex ways in which different industries operate. Several horizontal companies, such as Box, have built vertical-specific tools for sectors like healthcare. It's possible that a combination of collaboration, productivity, and workflow tools could create a rival to Microsoft if it also went deep on customizations to solve the needs of each end market. If Salesforce is planning to do that, they might need additional assets besides Slack to pull it off, making collaboration a higher-risk gambit for them. A lower-risk way to keep building their black hole in the IT enterprise market would be to own more systems of record for the enterprise – I’d suggest Workday would be a more tactical acquisition on that front, or perhaps something in the identity platform sector.

Real Estate Shakeup
The DoJ announced a simultaneous lawsuit and proposed settlement on November 19th against the National Association of Realtors (NAR) that, if approved, would grant discount brokerages better access to customers in the US. Currently, the NAR, which governs the 580 home-listing service (MLS) groups in the US, does not allow agents to disclose commissions to buyers and steers search results to homes that pay a higher broker commission ahead of those listed by discount brokers. Real estate disruptor Redfin’s Glenn Kelman explains: “When websites can tell the world how much money is being paid to an agent on every home her client sees, it’ll start a competitive free-for-all. Some agents will compete on price. Hopefully, everyone will do what we all should’ve done in the first place: explain to our customers how we get paid, and ask for more or less money depending on what the market will bear.” This industry-wide change would impact different segments of the market in different ways. Higher-end real estate transactions are likely to remain higher friction/touch and support weighty commissions (this is the segment of the market that drives a lot of Zillow’s core advertising business of lead generation for agents). At the lower end, these changes should enable a rapid decline in commissions and favor tech-centric brokers like Redfin. It should also make it easier to sell homes acquired by iBuyers. In the middle of the market, where many homes sit, I suspect we would see a bifurcation between standard and lower commissions, favoring the latter over time. The big question is what would the new rules mean for the real estate commission market overall, which encompasses some $60-80B+ of annual fees on home transactions? It would likely be deflationary in some segments, but we are also seeing a lot of friction removed from the real estate market, including iBuying, lower commissions, and easier access to title and mortgages through startups and disruptors. That lower friction could put the US back on a path to more frequent moves, which would greatly increase the size of the RE market. As I wrote in #218, the time between moves has stretched from six years to 13 years over the last two decades; if the trend were to fully reverse, it would effectively double the size of the market. Industry consultant Rob Hahn has some interesting analysis on what may or may not change as a result of this lawsuit, and this piece at Inman sums up many of the key issues.

Amazon’s Neighborhood Sidewalk
Amazon is rolling out a new wireless network, called Sidewalk, that will connect Alexa, Ring, and eventually other bits of Amazon hardware to each other. That means your house camera can use your neighbor’s Internet connection (up to 500 Mb/month) if, for example, your Internet goes down or has a weak connection. Although Amazon has assured users that there are no privacy risks, as Gizmodo explains, Amazon doesn’t have a pristine record when it comes to user privacy. Users must manually opt out if they don’t want to be part of Sidewalk, using either the Alexa mobile app or the Ring app (if your Ring account is not connected to your Amazon account). Ring outdoor cameras are Sidewalk ‘bridges’, while the Ring Alarm systems don’t appear to have Sidewalk yet. Amazon, which is guided by a libertarian, market-forces-based value system, has made it abundantly clear in the past that they don’t view it as their responsibility to police whether their technology is used for good or bad – that’s up to the market and the government. (In reference to abuse of Amazon’s Rekognition facial recognition software, the company’s CTO said: “That’s not my decision to make, it’s in society’s direction to actually decide which technology is applicable under which conditions”). A mesh network like Sidewalk is an interesting idea for a variety of reasons, but with advancements in 5G and the potential for private 5G networks (see #271), the latter seems like a better way to go. But, for all my Amazon bashing, I do still sort of want one of the new Ring Always Home drone cameras when they launch, and I wonder if it will be Sidewalk enabled.

YouTube's Pole Position in Music
Protocol had an in-depth look at YouTube’s efforts to win music streaming as they engage more with artists and provide ways to connect with fans through live events. Twitch has been on a similar path, but YouTube’s share in music video streaming may give it a leg up. The video angle also highlights rival Spotify's blind spot, as the company has largely focused on an audio-only experience. YouTube’s superior ability to monetize through its large-scale advertising and engaged, Gen-Z user base may give it an advantage in improving artists’ earnings. If YouTube succeeds, it will likely be due to the platform's appeal as a broader entertainment destination rather than their standalone YouTube Music app. YouTube Music is $9.99/mo, but the broader $11.99 YouTube Premium, which removes all ads across all YouTube videos, is a powerful bundle that seems undersubscribed. The value proposition of this bundle for consumers combined with the potential value for artists would be hard for Spotify to match.

Miscellaneous Stuff
Armored Ants
A species of Central American leaf-cutter ant has a calcite armor coating with high levels of strength-enhancing magnesium. It’s the first insect known to have such armor, which is more common in sea creatures, like corals, mollusks, and crustaceans (e.g., crabs and lobsters). Only a thin layer of the biomineralization (~2 microns, or 7% of the total thickness of the exoskeletal cuticle) confers more than a 2-fold increase in hardness. Lab researchers staged a series of ‘ant wars’ and exposure to fungal agents to confirm that the crystallized ants do indeed show improved survival vs. garden-variety unarmored ants.

NBA’s Groundhog Day
This GQ article reporting on what it was like inside the NBA Bubble was interesting. A combination of comradery nested inside of isolation during a particularly heated time for the world created somewhat of an impromptu psychological experiment.

Threats Hidden in the Big Thaw?
This overview on the risks of viruses emerging from the thawing Arctic didn't exactly leave me feeling like we have a good handle on the potential health threats from reawakening dormant infectious agents as northern latitudes become slushier every day.

mRNA Vaccine Race
STAT News had an interesting overview of Moderna and BioNTech’s mRNA history and technology.

Stuff about Geopolitics, Economics, and the Finance Industry
NZS Capital is hiring for an operations manager position; if you or someone you know is interested, check out the job description and apply here.

✌

Disclaimers:

The content of this newsletter is my personal opinion as of the date published and is subject to change without notice and may not reflect the opinion of NZS Capital, LLC.  This newsletter is 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. 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. 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, LLC has no control. In no event will NZS Capital, LLC 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 #272

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, free energy, 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 sign up form; if you have any issues or questions please email sitalweek@nzscapital.com)

In today’s post: building 3D maps of the world; Arm’s accelerating implementation for machine learning; Google Pay looking to become a super app; wearables predict sickness; digital DJs to curate algorithmic content; extreme land demand as suburbs sprawl again; inverting our view of how the brain works leads to insights about decision making; and lots more below...

Stuff about Innovation and Technology
Companies Mortgaging Their Future
It’s been over two years since we wrote in this MarketWatch post about the Walgreens Boots Alliance CEO (Stefano Pessina, at the time) saying he was “not particularly worried” about Amazon buying online pharmacy PillPack. Last week, Amazon finally announced prescriptions available for 2-day shipping to Prime members in 45 states. The point we made in the MarketWatch article was that legacy companies were overly focused on hoovering up their own stock instead of investing capital in building digital platforms to meet the evolving needs of modern, Information-Age customers. This practice of favoring financial engineering over innovation is a way to mortgage the future of a company. Since then, Walgreens has bought back ~$5B of its stock, which, incidentally, has declined ~40%, while the S&P500 is up ~23% and Amazon is up ~58%. The Walgreen’s CFO commented last week that the drop in the stock was “disappointing”. Today, it’s not much easier to get prescriptions from Walgreens, and, meanwhile, the digital platforms continue to invest in offering their customers more product and convenience for less money. Amazon doesn’t yet have local pharmacies for same-day prescription fulfillment, and there is a lot of anti-competitive collusion between insurance companies, pharmacies, and pharmacy benefit managers that will require time and creativity to break, but the writing is on the wall. There are a huge number of legacy, 1900’s Industrial-Age business models that have failed to integrate with or compete against information-based platforms, and their days are numbered.

Android and iOS Building a 3D Map of the World
This CNET interview with the AR team at Apple underscores the point of how well positioned Android and iOS are to build the 3D maps of structures and the outside world for developers to leverage in new applications. AR is a feature today in many phone-based apps and will steadily be more and more front and center and functional. Last week, I mentioned this article on Niantic building an AR map of the world as people play Pokémon.

Arm Enables Mac-Based ML
Google’s newly-released TensorFlow – optimized for Apple’s new M1 Arm processor – boasts up to a 7x performance increase over the Intel-powered Macs. This new fork of TensorFlow could significantly lower the cost to train machine learning models. According to this detailed Arstechnica interview with the team at Apple, the designers used a unified memory architecture (UMA) to drive the performance: “all the components—a central processor (CPU), a graphics processor (GPU), a neural processor (NPU), an image signal processor (ISP), and so on—share one pool of very fast memory, positioned very close to all of them. This is counter to a common desktop paradigm, of say, dedicating one pool of memory to the CPU and another to the GPU on the other side of the board.” Despite some good reviews, the new M1 has a lot of problems if you venture off Safari and try to run anything non-natively. Once the software adapts, there will be broad demand for a chip like this and other Arm processors in the data center in coming years, but TSMC is selling out for leading-edge manufacturing, so it may be awhile before we see a lot of machine learning done on Arm-based chips. If the Nvidia purchase of Arm is approved in around 18 months, the timing could be right for Arm to start taking data center workloads en masse.

Google Pay Upgrade
Google has a new version of Google Pay that’s looking to take a much broader role in peer-to-peer and business payments, as well as banking, rewards, food ordering, etc. I've been using the app for a few days, and I am surprised at how much gamification they have built into the interface to unlock cash back and offers. Google Pay currently has 150M users in 30 countries, which, frankly, I find surprisingly low given that it’s the primary channel for contactless payments on Android phones. With the new version, you can now centralize your credit cards and other financial accounts for a more comprehensive view of your spending and saving habits. Google also plans to launch Plex in 2021, which will integrate with 11 mobile-first bank account providers, which I think is an interesting example of the big tech platforms enabling new digital competition in the economy; however, we should be cautious about how Google uses or abuses this position of power and the data it enables them to collect. The new Google Pay is an ambitious effort, which could be met with regulatory scrutiny. But, it could also enable competition against the archaic legacy banks and financial institutions.

Investors Back “Challenger” Banks
Speaking of mobile-first banks targeting the next generation of financial services customers, online banks are on track in 2020 to raise even more than last year’s $5.3B in funding rounds, according to Conor Witt at CB Insights. One example is Chime, which recently raised $485M at a $14.5B valuation.

Research Supports Wearables
In a preprint (not yet peer reviewed) article, researchers from the TemPredict study showed that Oura Ring’s temperature monitoring could predict the onset of COVID-19. I’ve written about the promise of health monitoring devices in the past, and this latest research indicates that 76% of the first 50 study participants to be diagnosed with COVID had detectable fevers before reporting any symptoms of being sick. The authors conclude that corroborating temp data with other markers, such as increased heart rate and decreased heart rate variability, is an important method for using wearables to predict illness. A healthy heart has highly variable beating, but when the body enters any sort of fighting mode, the heart starts to beat in a more regular rhythm.

Unleashing Game Developer Creativity
Embark, a game studio owned by Nexon, is working on leveraging the Unreal Engine with new layers of AI and tools to transform the way games are developed. The old way still involves a lot of manual processes (like coloring leaves by hand) and does not scale to meet the design needs of today’s always-updating virtual worlds. A couple of interesting blog posts (here and here) highlight the opportunity to shift game developers from repetitive tasks to more creative ones.

High on Social Media
In the ongoing political theater hearings last week, Dorsey and Zuckerberg were asked about whether or not social media is addictive. While Zuck said the research was not conclusive, Dorsey more thoughtfully responded: "I do think, like anything else, these tools can be addictive, and we should be aware of that, acknowledge it, and make sure that we are making our customers aware of better patterns of usage. The more information the better here." When the two CEOs were asked if they had seen the Netflix docudrama, The Social Dilemma, which explored the intentionally addictive nature of social networks, Zuck said: “I’m familiar with it” while Dorsey said he had not seen it.

Reinventing the DJ for the Information Age
It seems a poor assumption that the big tech platforms have devised the best algorithms to serve their customers. Many of their searches/feeds are optimized for ads, clickbait, or addictive hooks (just don’t tell Zuckerberg that), or to reward a set of user behaviors that a platform’s machine learning routines have deemed useful. In the Liberty’s Highlights newsletter a couple of weeks ago, the author posited that Netflix should allow third parties to program channels for viewers. Expanded broadly to all types of information/media consumption, perhaps folks would prefer to have human curators – content jockeys – whose selections they prefer over those of a purely computational algorithm (with questionable and/or oblique intentions). I am reminded of the music genome project at Pandora (I still remember watching musicians sit and categorize stacks of CDs at the Pandora headquarters), which, in my opinion, created a richer, more enjoyable music streaming service. Jack Dorsey expressed excitement over the possibility of third-party Twitter feed algorithms (first suggested by Stephen Wolfram), and seemed to indicate that the best algorithms might come from outside the company. All this dialog makes me thoroughly intrigued by the idea of having a smorgasbord of algorithms guided by a diversity of human views for myriad use cases and consumers. As Liberty suggested, an entire economy of influencers and corporations could emerge. I can also foresee all sorts of echo chamber risks and potential abuses (although we seem to have that situation now, albeit with less consumer upside). In an ever-changing landscape of disruptive innovation, no company should have the hubris to believe they have a monopoly on the best algorithm for anything.

Miscellaneous Stuff
Hollywood’s Hollywood Obsession
One of Hollywood’s biggest obsessions continues to be Hollywood itself. Variety covers David Fincher’s new Netflix movie, Mank, a behind-the-scenes look at the making of Citizen Kane that’s centered on the writer of the classic film. Other projects are in the works for movies about making the movies Chinatown and The Godfather. Perhaps the curious habit exists because the creative forces of movie making make for good drama, as Fincher explains: “I believe filmmaking owes a lot more to demolition derby than it does to neurosurgery. It’s a miracle when it goes off the way you had it in your head. For the most part it doesn’t.” Fincher, for his part, was happy to partner with Netflix on a big-budget, somewhat obscure, black-and-white film, and he thinks the picture quality of in-home TVs should continue to make streaming a good venue for big films. Maybe Hollywood could go even more meta and make movies about the making of movies about Hollywood – perhaps a behind-the-scenes movie about the making of the meta-Hollywood movie The Player.

The Lamentable Rise of “Ambient TV” (aka Netflix)
Fincher’s project stands in contrast to what the New Yorker recently called “ambient TV” - borrowing from Brian Eno’s description of ambient music: “as ignorable as it is interesting”. The author Kyle Chayka went into more detail in his newsletter: "Streaming wasn’t supposed to be a passive viewer experience: we pick what we want to watch, when we want to watch it. But the profusion of ambient shows turn streaming into a passive experience like cable, where we just leave it on and pay attention to it or not. Netflix produces ambient content intentionally, because that’s how some people use its service." This idea is something I was getting at in SITALWeek #269 when I talked about the increasingly formulaic Hollywood content that Netflix is amplifying. Meanwhile, a world of creative expression is exploding on Twitch, YouTube, social networks, video gaming, etc. and is increasingly gaining traction with viewers.

Stuff about Geopolitics, Economics, and the Finance Industry
Extreme Land Demand
Land for new houses in the US is becoming increasingly hard to find with the pandemic activating latent demand from the 30-something sneaker wave (the bolus of ~1M extra people entering their 30s looking to homestead) and accelerating the burgeoning urban-to-suburban migration. John Burns Real Estate Consulting reports: “96% of top land brokers rated their markets as Hot or On Fire during 3Q20”. Given the time it takes to buy, provision, and permit land, the problem of land scarcity isn’t likely to be solved anytime soon. Meanwhile, Redfin reports a record gain for home sales of 24% and a 100% increase in demand for second homes (y/y for October). At the opposite end of the Millennial and Gen Z demand surge are the Boomers, who are largely remaining in their homes longer than prior generations. Once Boomers do decide to downsize (or hit the road in RVs) over the coming decades, it should create a steady stream of available housing in established suburban neighborhoods. It will be interesting to see if retailers can shift to accommodate the flood of younger, more dispersed homeowners, who are likely accustomed to the amenities and conveniences they had in cities, like same-day delivery.

Outsmarting Your Brain: Substituting Pattern Recognition with Adaptability
Last week I discussed Karl Friston’s free energy minimization theory of how the brain operates:
This can be viewed as minimizing free energy, which is simply the difference between what you expect to happen and what your bodily senses are telling you is actually happening. For example, if I expect that I will warm up by stepping from shade into sunlight, and then proceed to do so, odds are the temperature receptors in my skin will confirm that prediction – no surprise and minimized free energy. Underlying the free energy principle is the idea that the brain is a Bayesian probability machine. We talk a lot about Bayesian logic – the constant, objective adjustment of prior credences based on new information – when it comes to picking stocks. If the brain acts as a Bayesian machine, it will constantly adjust predictions based on new sensory inputs.
The better the predictions, the better the metabolic efficiency.

As I reflected more on this topic – and listened to Lisa Feldman Barrett discuss her insightful new collection of essays, 7 and a Half Lessons about the Brain, on Sean Carroll’s podcast last week – I decided it would be helpful to connect a few more concepts. There are multiple lines of reasoning from various fields of study that all seem to point to this idea that our brain makes a prediction about the world and then tests that model against sensory input, adjusting the model as necessary. In other words, our brain has preconceptions about what we are experiencing before our current senses have a chance to exert an influence. Feldman Barrett characterizes the hypothesis-then-test neural algorithm as allostasis, or “automatically predicting and preparing to meet the body’s needs before they arise” (p. 8). Whatever we call it, there is a clear process by which our brain is constantly making predictions about the state of the world before checking against internal and external inputs. This is an inversion from the way we like to think the brain works, i.e., it seems to take in inputs, and then make a decision, which yields a false sense of agency over the entire process of thinking.

My first exposure to this idea was in Damasio’s book, Descartes’ Error, many years ago. Damasio teaches us that the concept of the mind as a separate intellect – a blank slate that objectively parses the body's sensory input with logic and an appropriate dose of emotion to decide upon a course of action – is completely upside down compared to how we really operate (falsifying “I think therefore I am” as a philosophy). Rather, the mind and body are deeply interconnected, with the body constantly directing the brain – often without us consciously knowing. Which brings us to interoception, a concept I discussed briefly in #268: “Your heart doesn’t race because you are scared, you are scared because your heart is racing”. When we learn to hone our interoception and read the signals from the body – looking at the ‘raw data’ instead of relying solely on our brain’s ‘digest’ version – we can minimize the often counterproductive mental states engaged by our brain’s response to external stimuli, which tend to rely heavily on historical and evolutionarily-ingrained pattern recognition.

It’s not just our instinctual, flight-or-fight responses that may be out of sync with modern life, but also what we might consider our more intellectual world-building models and decisions, which tend to go awry simply because we are (sub)consciously using the same historical and ingrained data sets to make predictions. We know from complex adaptive systems that making predictions is largely a fool’s game – it’s much better to have a ‘beginner’s mind’ blank-slate approach to what might come next rather than to artificially narrow the boundaries of possibility through formalized prediction. Additionally, trying to frame future hypotheticals based on historical pattern recognition is highly susceptible to false positives/negatives (from a basic probability standpoint) just given the sheer volume of information we now deal with on a daily basis and the difficulty of distinguishing signal from noise.

So, if the human brain has been honed to navigate the world by ensuring that our experiences match up to our predictions (i.e., reducing free energy or maintaining allostasis/homeostasis as Friston, Feldman Barrett, and Damasio would respectively say) by relying on a narrow historical lens, then navigating through our current era of mushrooming uncertainty (thanks to ever-accelerating technological progress, disruptive creation, and informational deluge) makes for an unnerving, uphill battle. Indeed, it’s profoundly uncomfortable to face an unknown future armed only with narrow predictions (like an investor relying on DCFs and earnings estimates or a CEO running a company based on a five-year strategic plan).

Luckily, it’s entirely possible to retune your way of thinking to accord less weight to prior models/experiences and focus instead on adaptability and learning to take advantage of whatever happens, good or bad. Just understanding the brain’s limitations is a first step towards overcoming the inherent biases built into the way it operates. From a Bayesian perspective, the typical decision maker might accord significant credence to prior convictions; however, the best way to approach our world’s complex systems (such as the economy) is to view those priors with a hint of suspicion. I can have high credence in certain things I understand that repeat with high fidelity; for example, past experience has led me to believe my desk is solid, and if I place my coffee cup on its surface, it won’t pass through the wood. Unfortunately, it turns out that there are very few predictions that can safely rely on such solid prior evidence. By becoming mindful of the idea that decisions you are making are overly reliant on past models, you provide yourself an opportunity to consciously step in and downweigh those assumptions. Also, remind yourself that there are alternate methods for dealing with an unpredictable future such as our prioritization of adaptability as the new margin of safety when we analyze companies.

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Disclaimers:

The content of this newsletter is my personal opinion as of the date published and is subject to change without notice and may not reflect the opinion of NZS Capital, LLC.  This newsletter is 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. 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. 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, LLC has no control. In no event will NZS Capital, LLC 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 #271

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, free energy, 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: structural batteries; health-monitoring apps and tracking vaccines; NZS discusses semis on The Knowledge Project podcast; virtual theme parks; cloud-based PCs may eliminate need for local processing; pros and cons of layering AI onto real-time conversations; history of indoor air quality and how to fix it; what humans and AI can learn from the free energy principle; rising fear in China; and lots more below...

Stuff about Innovation and Technology
“Semiconductors: The Ultimate Bargaining Chip”
Jon and Brinton joined Shane Parrish for a wide-ranging discussion of the semiconductor industry’s history, status, and future prospects on The Knowledge Project podcast, and it’s a must listen! The podcast and transcript are available to TKP members here, and there will be a free version available soon on YouTube (as of today’s newsletter, it had not yet been posted). Many thanks to Shane for the engaging conversation.

Help Me Obi-Wan
Researchers at Samsung have used a special backlight with a beam deflector to tilt the angle of laser beams to create a realistic 3D holographic display with improved viewing angle. They haven’t quite reached Star-Wars-grade tech yet, but the 10-inch device only requires a depth of about 1cm to fit the optics. The team detailed their new system in Nature Communications.

Animatronic Humanoid with “Illusion of Life”
Disney researchers have taken their animatronic tech to a whole new level with vastly improved human characteristics. The new robot heads have much more fluid movements and better gazing functionality to hold eye contact or mimic actions such as reading. (Gazing, in particular, plays an important role in non-verbal communication.) Other mimicry aspects – including blinking, respiration, and head tilt – also contribute to the life-like result. There is a short video showing off some of the new features. With AR coming over the next few years, it will be easy to overlay these types of realistic humanoid expressions onto a plain robotic face using software and sensors, but these mechanistic hardware achievements from Disney are nonetheless cool even if they are just for The Hall of Presidents.

Refocusing on Indoor Air Quality
Before modern air conditioning was developed in the mid-20th century, preserving/dissipating heat (depending on local climate) and exchanging stale air (once we understood the dangers of airborne diseases) were important elements of building design, according to this Wired article. With the onset of air conditioning, however, architects started focusing their attention elsewhere, leading to, in many cases, a near-total reliance on HVAC to heat, cool, filter, and ventilate indoor air. Unfortunately, the filtration and ventilation functionalities of HVAC systems have long-been ignored and neglected, and now residential and commercial buildings need a big refresh to deal with their stale, germ-laden air. However, revamping HVAC is likely to require systems that use more energy as they run more often and/or push more air through filters. Better ventilation could have several health benefits – from reduced asthma to improved cognition – besides just limiting viral spread. As part of this refocus on indoor air quality, I expect we will also see an investment in data collection/analysis, with air quality sensors that feed into algorithms and connect across buildings and homes to improve air quality and health. The HVAC upgrade cycle is an example of what Jon describes as “the next big thing is there’s no next big thing” for the semiconductor industry; instead, there are a lot of new use cases popping up all over the economy enabled by chips, sensors, data, and the cloud.

Structural Batteries/Battery Packs and Energy Scavengers
Housing batteries inside structural elements in mechanical devices is a practice that’s been around a while, and recently Musk discussed Tesla’s ambition to transition the EV’s “skateboard” battery pack into structural elements. Some researchers believe you could go a step further in commercial production and make the structural elements themselves store energy rather than just house batteries, e.g., a car’s frame would be made from thin layers of composite materials capable of storing electrical charge. This Wired article explores a number of different efforts underway to incorporate energy storage and discharge into the physical elements of cars, planes, and smaller devices.

And, if the device is small enough, it may not need batteries in the future. Arm’s Project Triffid aims to create chips and sensors called CRFIDs that can scavenge power from wireless signals and forgo the need for batteries. This breakthrough would enable a wide range of new use cases, e.g., light/temperature monitoring for stored goods, remote sensors for hard-to-reach locations, and fitness tracking shoes that never need to be plugged in to recharge.

Vaccine Tracking and Logistics
It’s possible that some public events and places will require proof of vaccination to enter, particularly for large indoor gatherings. There was a rumor in Billboard magazine that Ticketmaster would be requiring live-event attendees to verify that they have either been vaccinated for COVID-19 or show evidence of a recent negative test result (Ticketmaster subsequently said such enforcement would be up to the event organizer, and that Ticketmaster was working through how they could help accommodate verification). Monitoring proof of vaccination and test results would likely happen via third-party apps, like CLEAR, which could automatically control ticket validation for concert goers. Verifying health status will obviously be a complex orchestration, but one that may ultimately be required more generally for all types of access – from eating out to air travel.

I still believe wearables will play a significant role for ongoing health monitoring and access to public/shared space beyond COVID to mitigate spread of whichever virus manifests next. Wearables can provide real-time temperature, heart rate variability, respiratory rate, etc. to health-pass applications on an ongoing basis, providing a general assessment of health as opposed to a narrow analysis of one specific infection. And, I remain hopeful that the data from widespread health wearables will help shift the healthcare industry’s focus from treatment to prevention.

Another tech challenge related to the Pfizer vaccine is transport and storage – the extreme temperatures (−70℃/−94℉!) required to preserve the genetic material in the new mRNA vaccine create a host of logistical issues. It will be important to orchestrate a transport/distribution network that can monitor and maintain the temperature from manufacture to injection to ensure the vaccine remains viable. The tracking and monitoring of vaccines is another great use case for distributed low-power chips and sensors that feed into data analysis in the cloud. Recall in SITALWeek #266 I mentioned the collaboration between Amazon’s AWS and Carrier for tracking and monitoring the movement of food, medicine, and vaccines. Efficient vaccine transport seems likely to be remedied, but the ultra-cold, −80℃ freezers needed for storage beyond a few days are so expensive (not to mention finicky and difficult to maintain, according to SITALWeek’s Editor: innumerable research lab managers have no doubt been woken in the wee hours of the morning to respond to high-temperature alarms and frantically redistribute freezer contents from seizing to functioning units) that many rural hospitals won’t have the budget to store the vaccines for local distribution.

PokéMap
Niantic, the Google spinout and maker of popular AR game Pokémon Go, has been working on dramatically improving 3D mapping of the real world. Game players are contributing to the effort by submitting videos of public spaces. Niantic wants to eventually create a continuously updating 3D map of the world with the capability of identifying all objects and surfaces. Pokémon Go has raked in $1B+ in revenues in 2020, the game’s best year so far.

"Virtual Theme Parks" Future of Entertainment?
Owen Mahoney, CEO of desktop and mobile gaming company Nexon, discussed the addition of Disney veteran Kevin Mayer to the company’s Board of Directors on last week’s earnings call, characterizing the appointment as a recognition of the burgeoning transition of entertainment from passive to interactive. It’s much more likely that we will be active, embedded participants in the next generation of entertainment – “virtual theme parks” as Mahoney says – rather than consume it passively:
"But we also are of the belief that the media companies, the big entertainment companies in the next 50 years are going to be much different than the media companies and big entertainment companies in the last 50 years. And you've heard us talk about this before. We think that there's a massive secular shift going on in the entertainment business right now. It's not well understood. And to make a long story short, it's about the shift from off-line to online, from linear to interactive, from the physical to the virtual. And we think this is a very, very important secular shift that's going on...So as we work through these strategies, there's going to be a new set of linkages and a new flywheel that develops. And we think that virtual theme parks are going to be the center of the next 50 years, the way that physical theme parks were at the center of Disney's strategy last 50 -- the last 10 and 50 years. So we're very, very happy to leverage his advice and counsel on the Board of Directors."

Private 5G May Replace Wi-Fi
The WSJ reported on the rise of private 5G networks bringing high-speed Internet to rural areas using open-source software and unlicensed/lightly-regulated spectrum. 5G has benefits over Wi-Fi in latency and throughput, and it’s not impossible that we could see the new technology ultimately replace Wi-Fi at some point. Back in SITALWeek #229, we explored this article from IEEE that covers the possibilities afforded by private 5G.

Encouraging Inter-Monopoly Competition
We may have a lot of monopolies, but we also have a lot of monopolies competing with each other. While the DoJ is concerned about Visa’s acquisition of fintech startup Plaid, Facebook has proposed an entirely new payments network, FastPay, that is reportedly seven times faster than Visa’s. Yet, thanks to government fear, Facebook’s prior attempt to enter the payments market with Libra – and offer Visa some healthy competition – struggled to get off the ground with Facebook’s involvement. Going forward, it will be increasingly important to let monopolies try to enter each other’s competitive turf, but the government doesn’t seem to see it that way. Facebook engineers even used a cloud service from another “monopoly”, Amazon, to test the new transaction network using 48 Intel processors and 384Gb of memory to handle 160,000 transactions per second on computers that cost less than $4,000/month to run. The implementation of FastPay has been open sourced by Facebook.

Layering AI onto Zoom
In SITALWeek #267, I wrote about Otter.ai, which will record and real-time transcribe your video meetings for live or later analysis. Last week, I read about Macro.io, which adds a real-time visual overlay to Zoom meetings to keep tabs on each participant’s relative contribution to the conversation. The tool also lets you customize the Zoom interface, take notes, and work with various collaboration suites during a call. I’m somewhat apprehensive that layering on AI will change the conversation in bad and counterproductive ways, yet I also see the value in removing all types of internal and external bias while improving productivity. Take for example a team of investors trying to decide whether or not to buy a stock. If you had long-term data on who said what during meetings, including who talked the most/least, tone, disagreements, etc., and correlated that to the investment outcome in the portfolio, maybe it would help eliminate common cognitive biases and improve stock picking. I’ve not used any of these new tools, and, yes, I am afraid to know how much I talk during NZS team meetings!

Cloud-Based PC
Windows cloud desktops appear to finally be around the corner. Microsoft will be offering Azure-based remote Windows machines accessible on any local OS including Mac, iOS, or Android. I’ve used Amazon’s Windows desktop service before and found it to be sort of ok and quite expensive, but still better than Citrix. Hopefully, this new cloud-native offering from Microsoft is better, as there is little reason for most office workers to be running OSs/apps locally. Apple's Arm processor announcement last week was curious because we've been writing about and hoping for Arm to finally work on a local PC or Mac for so long I can't even remember when we first started talking about it. And yet, the argument for having that kind of local processing power – given cloud computing’s low latency and high bandwidth capacity – is increasingly diminutive. Outside of high-end gaming rigs, it's sort of becoming an anachronism to have beefy local processing.

Improving Performance with ASICs
Amazon has transitioned Alexa voice AI responses from Nvidia chips to the cloud giant’s own custom silicon, called Inferentia. The shift has resulted in 25% lower latency with a 30% cost reduction. More broadly, I expect there will be a significant trend going forward of ASICs (application-specific integrated circuits) replacing general-purpose chips for the highest volume workloads at the big clouds. Google’s TPU is another successful example. The high cost and lengthy timeline for ASIC development (starting around $50M and typically 18-24 months) will continue to limit the number of practical applications. Amazon’s chip was first announced two years ago and is used exclusively for the inference part of AI. (Inference is basically answering questions after a machine learning model has already been trained, with training largely still taking place on Nvidia chips.) According to AWS CEO Andy Jassy, other companies are using Inferentia on AWS, including social app Snap, which implies the new chip has broader applicability for inferencing against machine learning models.

Miscellaneous Stuff
Rare Earths in Space
A popular topic from SITALWeek #255 was a protein that binds selectively to the crucial rare earth elements (REE) necessary for just about everything that enables modern electronics. The protein-capture method would make it easier to extract REEs in a cheaper, more environmentally friendly way while also countering China’s stranglehold on the industry. In recent REE news, experiments on the International Space Station in zero and simulated-Mars gravity showed that it might be possible to extract REEs on asteroids or other planets using bacteria to speed up the process.

AI and The Free Energy Principle
Renowned neuroscientist Karl Friston believes that what defines life is a tendency to minimize the “gulf between expectations and sensory inputs”. This can be viewed as minimizing free energy, which is simply the difference between what you expect to happen and what your bodily senses are telling you is actually happening. For example, if I expect that I will warm up by stepping from shade into sunlight, and then proceed to do so, odds are the temperature receptors in my skin will confirm that prediction – no surprise and minimized free energy. Underlying the free energy principle is the idea that the brain is a Bayesian probability machine. We talk a lot about Bayesian logic – the constant, objective adjustment of prior credences based on new information – when it comes to investing. If the brain acts as a Bayesian machine, it will constantly adjust predictions based on new sensory inputs (interesting aside: when it comes to processing news and stories, however, our Bayesian machinery has apparently been largely hijacked by social networking to the profound detriment of our objective reasoning skills – an idea I’ll return to momentarily). Friston expanded the idea of the brain as an inference machine only capable of evaluating information to also encompass action. According to his free energy principle, if the brain makes a prediction that appears incorrect, it can respond in one of two ways: accepting the surprise and modifying its version of the world (Bayesian inference) or by acting to make the prediction true (what Friston calls active inference). Returning to the example above: if I step into the sunlight and do NOT feel warmer, I might then realize it is because I am standing behind a nearly invisible piece of insulating glass. If I take the action of circumventing the barrier to feel the warmth of direct sunlight on my skin, I will have resolved the perception gulf.

But what happens if we are overwhelmed by prediction errors and can’t immediately correct them through thought or action? Indeed, “The free energy principle, it turns out, isn’t just a unified theory of action, perception, and planning; it’s also a theory of mental illness. When the brain assigns too little or too much weight to evidence pouring in from the senses, trouble occurs. Someone with schizophrenia, for example, may fail to update their model of the world to account for sensory input from the eyes…‘If you think about psychiatric conditions, and indeed most neurological conditions, they are just broken beliefs or false inference—hallucinations and delusions,’ Friston says.” So, concerning my point above, perhaps the social-network-amplified deluge of (mis)information we are continuously exposed to has overloaded our brain’s modus operandi, leaving many of us in a veritable fugue state, unable to correctly assign value to information who’s veracity we can’t confirm (or no longer have the capacity to question). It’s an interesting possibility to contemplate. And, not only can the free energy principle potentially explain the apparent collective human delusion of the post-truth era, it may also offer a better path toward creating smarter AI systems. The reward for machine learning using free energy minimization is reduced surprise – a readily adaptable internal goal – in contrast to the external input required in both pattern recognition and reinforcement learning, which have both proven fallible as training models. This article in Wired attempts to explain the free energy principle, and Friston was also on Lex Fridman’s podcast earlier this year.

Stuff about Geopolitics, Economics, and the Finance Industry
Innovation in the Shadow of Fear
The halting of the Ant IPO and the new antitrust guidelines aimed at China’s largest Internet platforms are sending a clear message that the government’s objectives take precedence over disruptive technology’s progress. Can China’s innovation trend survive the latest crackdowns? To put it more bluntly, can innovation survive in a climate of rising fear and declining freedom? Now that the rewards of money and status are diminished in China compared to the last two decades, will there still be sufficient individual motivation to move their tech sector forward? Importantly, what are the implications for the China's domestic chip development efforts, which have so far floundered? Force and authority have historically been the enemy of reason and creativity, and only time will tell if China can continue to innovate. See also: How I Learned to Stop Worrying About China in SITALWeek #226.

✌

Disclaimers:

The content of this newsletter is my personal opinion as of the date published and is subject to change without notice and may not reflect the opinion of NZS Capital, LLC.  This newsletter is 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. 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. 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, LLC has no control. In no event will NZS Capital, LLC 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 #270

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, truth, 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 sign up form; if you have any issues or questions please email sitalweek@nzscapital.com)

In today’s post: Restaurant robots; equitizing hard assets; linear Netflix; how to think about inflation, rates, valuations, and volatility following the US presidential election; and more below...

Stuff about Innovation and Technology
Cyborg Roach Swarm
Researchers at the University of Tsukuba in Japan are working on turning cockroaches into cyborg armies.
“By stimulating the left or right antenna nerves of the cockroach, you can make it think that it’s running into something, and get it to turn in the opposite direction. Add wireless connectivity, some fiducial markers, an overhead camera system, and a bunch of cyborg cockroaches, and you have a resilient swarm that can collaborate on tasks. The researchers suggest that the swarm could be used as a display (by making each cockroach into a pixel), to transport objects, or to draw things.”
Rumor has it that similar research was carried out over a decade ago by the architects of social networking apps.

Fry & Flip Bots
Food service robots are expected to become a $300M+ industry by 2028 according to a report in this Restaurant Dive article. Given the need to accelerate order prep as fast-food chains gain share in the pandemic, that estimate is likely too conservative. One chef-bot example is Flippy from Miso Robotics, which can safely handle 360 batches of french fries per day or endlessly flip burgers (reportedly cooking them to the perfect temperature every time). White Castle is trialing both applications. The increased use of robots is one of the many tailwinds for the semiconductor, sensor, connectivity, AI, cloud, and design sectors of tech.

Discord’s Casual Communication
Discord, which started as an audio chat feature in 2014 for video gamers in different locations, now has over 100M monthly users. Rather than organizing calls in advance, different channels on Discord are always open and running, so it’s more like “walking into a room and plopping down on the sofa: You're simply saying, I'm here, what's up?”. The popularity of the service has caused a significant uptick in the number of Discord communities on a variety of topics and interests outside of video gaming. The company’s $120M in estimated revenue for 2020 came from premium features sold to its users, and the founders do not plan to sell ads or user data, which is perhaps the biggest differentiator vs. other casual communication platforms.

Equitizing All Things
As interest rates stay low (which is now even more likely without the potential inflationary impact of fiscal stimulus that could have taken place following a blue sweep of D.C.; see below for more) the race is on to find new and creative ways to slice up and equitize everything as people look for places to put money. I discussed the new startups creating exchange platforms for classic cars, art, and vacation homes in SITALWeek #265. Dot.LA reports on a VC looking to achieve a similar market for baseball cards, an asset class reported to have outperformed even the equity markets over the last ten years. Anything with any sort of scarcity becomes more valuable in a world of abundant capital, but speculation is sure to create some spectacular bubbles here and there.

Netflix Goes Linear
Netflix is testing its first programmed linear channel, called Direct, in France. Variety reports the new channel will show a diversity of shows and movies; but, so far, the service is only available on the browser and not connected TVs. Cynically, I would argue that this is more evidence of the abundance of formulaic content, decision fatigue, and apathy that is leading streamers to just want to watch something, no matter what that something is. But, I hate being cynical, so I’ll contend that there is real value in programmed channels. Indeed, the popularity of programmed, ad-supported services, like Pluto TV, supports this idea. According to Netflix’s website in France: “many viewers like the idea of programming that doesn’t require them to choose what they are going to watch...Whether you are lacking inspiration or whether you are discovering Netflix for the first time, you could let yourself be guided for the first time without having to choose a particular title and let yourself be surprised by the diversity of Netflix’s library.”
I imagine that this will become the preferred way to consume Netflix, and they end up with multiple channels and ultimately need less library content to feed personal algorithms. That's basically what HBO was (and still is for folks with cable). Such a development would also be consistent with my "less is more" hypothesis given the current abundance of mediocre scripted content.

Miscellaneous Stuff
Oregon OK’s Magic Mushrooms
Following previous decriminalization of the psychedelic drug psilocybin in Denver, Santa Cruz, and Oakland, last week voters in Oregon “approved a measure that will ultimately lead to the legalization of psilocybin, the hallucinogenic aspect of mushrooms, for medical purposes in the state”. Meanwhile, Washington D.C. also voted to decriminalize psilocybin, and research across various medical institutes continues to uncover its therapeutic benefits (see also the “Misc. Stuff” section of SITALWeek #209).

Stuff about Geopolitics, Economics, and the Finance Industry
CCP Squashes Ant IPO
Xi Jinping canceled the highly anticipated IPO of Alibaba’s fintech powerhouse Ant. The move came following critical comments from founder Jack Ma (although those comments were likely in response to foreknowledge of the pending cancelation). As Bloomberg reports:
“The timing of the decision showed once again that for Xi and the party, financial and political stability take precedence over ceding control of the economy -- especially to a private company. In Beijing’s view, allowing the IPO to go forward could effectively give Ant too much sway over the financial system, posing broader risks that could ultimately undermine the party’s grip on power.”
It’s a reminder that all businesses in China are effectively state-controlled entities serving the state's mandate.

Gridlock is Good for Markets
The US equity markets last week began to price in another four years of governmental gridlock (with a small chance that the Senate will work with the Biden administration on some issues, depending on how those races finish out). Predictability can aid stock market valuations, so markets like political logjams because – predictably – very little gets done. Given this seeming post-election clarity, I want to revisit a couple of posts from the summer where I discussed rates, inflation, and valuations. In our mid-year update, we raised the point that the market could be overpricing risk given the likely scenario of persistent low rates and long-term deflationary pressures (that’s not intended as a victory lap, we just tried to explain how that might be one of many possible outcomes). Now, with gridlock in D.C., the chances of having inflation from sweeping fiscal stimulus is lowered, and a future of existentially low rates with little risk of inflation becomes even more likely. And, maybe we can now even enter the post-post-truth era where reliance on facts and evidence might temper market volatility as well.

Why rates are likely to stay low (from our mid-year update):
Did low rates increase debt, or did debt demand low rates? As an economy grows and debt increases, the borrowers – those people who need to make the interest payments and eventually return the principle – tend to be disproportionately less wealthy, while the people who lend money out and make a return on it tend to be wealthier. As time goes on, the wealth of the wealthier is more and more tied to the interest payments from the less wealthy – one person’s indebtedness is another person’s asset. And, as inequality marches higher, the less wealthy have an ever-rising debt burden that can only be maintained by perpetually lowering interest rates. It’s in the best interest of the lenders to lend at lower and lower rates to preserve their assets. This explanation is somewhat at odds with the general narrative – that lower rates are the driving force behind rising debt. Certainly lower rates allow rising debt; however, the common view misses the crucial point that increasing debt necessitates lower rates – which actually has mathematical support.

Why deflationary trends are likely to outpace inflationary pressures, and how we might leverage deflation to improve social and economic equality (from SITALWeek #258):
Consider technological investments in today’s Information Age. Forging leading-edge technology is capital intensive for a handful of large cloud infrastructure providers, but the resulting productivity increases and technological advancements far exceed the capital invested. Think of the productivity output of a single Nvidia A100 system: a $100,000 investment could produce a breakthrough that creates billions of dollars of value...every day! So, although (at present) we are in a period of significant debt expansion in the economy, we are in a much more significant, overarching phase of ever-accelerating technological advancement.

Does accelerating deflationary pressure – from nonlinear advances in technology – enable the expansion of the money supply without the corresponding risk of inflation? This question is perhaps even more critical now that we are on the cusp of unprecedentedly rapid change/disruption as we move from the Information Age to the AI Age. Around 40 years ago, the pace of technological advancement went from analog speed to digital speed, and with AI it’s about to go to ludicrous speed. Technology was always jumping ahead with nonlinear improvements, but the pace of change accelerated even more with the introduction of the PC and the software revolution. Many activities and ways of doing business in the year 2000 would have been unrecognizable in the year 1980. Indeed, I have a difficult time remembering what it was like a decade ago without a smartphone and ubiquitous high-speed connections; so, in many ways, 2010 is unrecognizable to me today (and vice versa). I expect 2025 will look unrecognizable to us from today’s viewpoint. And, to follow this acceleration, 2028 may look unrecognizable from 2025. 2030 from 2028, 2031 from 2030, etc.

The late-1970s/early-1980s pivotal shift from analog to digital likely played into other society-changing forces that began around the same time, including increased globalization (enabled in many ways by digital technology and communication) and the beginning of real earnings stagnation for a large part of the population. The accelerated pace of change and the shift from an assets- to an information-based economy helped accrue wealth for the wealthy, and steadily declining rates over the last four decades enabled wealth concentration as well...For the last four decades, the pace of change has become much more nonlinear and exponential…Accordingly, it seems quite plausible that our current era of unprecedented technological growth offers its own solution – providing sufficient disinflationary/deflationary pressure that we might be able to buy our way out of our current, untenable societal problems, but time will tell.

If the low-rate and low-risk of inflation scenario continues to persist, then where does that leave the market and valuations? (Again, from our mid-year update in July):
There is much speculation in the markets that the markets have too much speculation. However, the current positive impacts from fiscal and monetary stimulus, combined with the negative impact of the short- and long-term effects of COVID-19, make it hard to know if the market is underpricing or overpricing risk. Before the global meltdown, “risk-free” long-term US government bond rates had around 2%-3% yields, corporate bond yields were a bit higher, and the market multiple was ~20x forward earnings. Absent the drop in interest rates and the fiscal stimulus, which has so far guaranteed almost all assets are “risk free” (as the central banks continue to purchase nearly anything to provide liquidity and stabilization), the shallow correction in equities seems to underprice the risk of multiple years of rolling shut downs and the fat-tail fallout from the pandemic. However, the penalty of holding cash at zero (or in some countries negative) rates is strong motivation to bid up riskier assets with higher return potential. Therefore, with zero rates and fiscal stimulus, the market might be unexpectedly overpricing the risk of the pandemic...which brings us to valuations.

The starting point when you buy or own a stock matters. A high starting point forces you to try to peer further into the future, requiring very narrow predictions about how the far future will unfold in order to be correct in the present. Conversely, a low starting point allows for broader predictions, and does not require that crystal ball to be nearly as accurate. We know from complex systems that attempting to precisely and accurately predict the future is of little use. Therefore, there are two responses to a high starting point: 1) the more narrow your prediction(s), the smaller the position size should be (and vice versa); and 2) keep an eye on the totality of those small position sizes, such that you aren't making a portfolio-level narrow prediction about valuations. It’s fairly easy when you simplify it: match the breadth of prediction to position size and monitor the total exposure of narrow predictions across the portfolio. None of this argues for selling a position entirely if the outcome asymmetry is still high; instead, it argues for thoughtful position sizing and portfolio construction – a good idea no matter what the starting point is.

To recap, if we take a Bayesian approach – constantly adjusting our prior credence up or down as new evidence comes in – then, we treat the outlook for gridlock in D.C. as supportive of a sustained period of lower inflation, lower interest rates, and higher valuations. If I revisit the topic above regarding 40 years of declining rates and increasing inequality, it's hard not to see this election framed as a vote to try and redress that issue. Or perhaps, the election outcome was simply a vote for the importance of honesty and compassion. Regardless of why it happened they way it did, we remember the world is a complex adaptive system, and any type of narrow prediction is a fool’s game...expect the unexpected.

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Disclaimers:

The content of this newsletter is my personal opinion as of the date published and is subject to change without notice and may not reflect the opinion of NZS Capital, LLC.  This newsletter is 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. 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. 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, LLC has no control. In no event will NZS Capital, LLC 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 #269

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, moon water, 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 sign up form; if you have any issues or questions please email sitalweek@nzscapital.com)

In today’s post: The digital unshackling of creativity; third party algorithms; semiconductor consolidation could match 2015’s record year; moon water; Mister Rogers; and more below...

Stuff about Innovation and Technology
Telehealth for Pets
Ecommerce pet supply leader Chewy announced last week that it will enter the televet market to connect animal owners with vets over video. Imagine trying to get your dog, cat, guinea pig, mouse, snake, lizard, etc. to stare into the Zoom, stick out their tongue, and say “ahhhhhh”!? Video vet visits are free to Autoship members; but, in an apparent acknowledgement of televet limitations, Chewy says they won’t diagnose conditions or prescribe medications.

Digital Invites Unbridled Creativity
As long-suffering SITALWeek readers know, I think a lot about how video content is evolving from a scripted Hollywood-style toward live, social, gaming, and/or unscripted for digital venues like YouTube, etc. Indeed, there’s even a growing trend of professionally-produced made-for-digital content. As I’ve watched network television shows resurface from the pandemic and various creative artists choose the media by which they wish to reach fans, I have a new lens on the trend: video is experiencing a freeing of the creative process via removal of the cumbersome layers and filters between the creation and consumption of art. The pandemic-accelerated vector of the Internet Age is providing bigger digital audiences for creative expression and collapsing the space between creation and enjoyment. Formulas are less useful, and the creative process has become more iterative. Video and music are even being made in real time in front of fans in some cases, and the fans are part of the process.

In contrast, the reboot of the satirical “Jon Stewart” news anchor character on Apple TV will no doubt be great, but multiple bureaucratic layers might filter the art into a predictable, formulaic box designed to drive the Apple ecosystem (I’m sure it will be entertaining, but it won't necessarily be art). Artists want to create art, and now they can for a much larger audience – independent of Hollywood. Netflix is probably the epitome of the current, boring formalism: they plug data into a formula to give their zombiesque viewers what they want, which overwhelmingly leads to the absence of art. There have been a ton of exceptional and brilliant shows/movies produced over the last decades, but they are a shrinking percentage compared to mechanically-mass-produced video content. With the big streaming platforms recently passing on MGM’s $600M bill to stream the new Bond movie, I can’t help but think that maybe formulaic Hollywood content is worth a bit less today than it used to be. The playing field has expanded, and not everything fits neatly into the traditional categories anymore; for example, the new satire show, Sassy Justice, from the South Park creators (which cleverly uses deepfake face-swapping AI for its interviews) is professionally produced but appears on YouTube for free. To be clear, in no way do I think Hollywood content is going away or even shrinking; but, if creativity continues to rise faster on live, social, interactive, and gaming media, then it seems unlikely that Hollywood will gain viewing share going forward.

Zen Dorsey’s Pragmatic Approach to Section 230
I thought Jack Dorsey’s opening statement on Section 230 last week was well put. In particular, I was glad he emphasized that increased regulation will only serve to entrench the biggest companies at the expense of smaller companies and new ideas. I also thought his suggestion to allow 3rd-party algorithms to curate social media content was smart and intriguing. (I wrote more about Section 230 in SITALWeek #267; since then, it has become more clear that the law is sufficiently vague that people can interpret it to support a whole spectrum of preconceived notions depending on the weight and orientation of their particular partisan lens; I tend to agree with Jack and favor a more unfettered approach, as increased regulation is sure to create regulatory capture and kill innovation.) Speaking of Twitter, I had to laugh at Rupert running a negative article on Dorsey in the WSJ to seemingly pressure Twitter to reinstate the NY Post's Twitter account!

Semiconductors Headed for Record Consolidation in 2020
Jon Bathgate weighs in on Semi M&A: Consolidation in fabless semiconductors continues, with AMD announcing their intention last week to acquire Xilinx for $35B. Not surprisingly, the focus of the deal is on the data center, where Xilinx will bring some incremental tools to AMD's presence – Xilinx's leading edge FPGAs are being used as accelerators in growing applications like video encoding, image processing, and gene sequencing. Xilinx also has a small SmartNIC portfolio (also called data processing units, or DPUs these days) that AMD can leverage similarly to Nvidia's approach with their Mellanox acquisition. The challenge for AMD will be software and ecosystem – FPGAs have always been difficult to program, and Xilinx's efforts to democratize FPGAs through updated software platforms have seen mixed results. Continuing to drive Xilinx's ecosystem – and stitching it into AMD's software ecosystem – will likely be Lisa Su's largest challenge over the next 5-10 years. Overall, the deal reinforces some key trends we're seeing in compute and in fabless semis: the data center is getting more heterogeneous – with CPUs, GPUs, DPUs, FPGAs, and custom accelerators all playing crucial roles in various applications; and, despite AMD's success in CPUs, the reality remains that CPUs are likely to play a smaller role in the data center over the next decade; also, scale continues to be key as the costs of designing leading-edge silicon are ballooning, and companies need to match that hardware spend with software investment. 2020 is shaping up to match 2015 as a record year of consolidation in the semi industry, with transaction values for the year likely crossing $100B for the second time in history. Of course, all of this assumes that acquirers like Nvidia and AMD can get through what is going to be a long and painful regulatory process.

Miscellaneous Stuff
Aqua Luna
It’s long been known that there are likely 600M+ metric tons of water buried on the moon, but last week NASA announced that there is water accessible on the surface of the moon. I can’t wait for the new Lunar-Spiked Seltzer made with moon water – could be a good way to fund NASA.

Modeling Viral Aerosol Spread
Here’s an animated mathematical model of infection odds via aerosolized virus particles in various indoor scenarios, published in El Pais, that account for talking quietly or loudly, duration, and ventilation. Students, it is theorized, are low vectors of transmission, because while in school they do little talking in the classroom, whereas teachers could be high vectors given they are speaking most of the class time. (More details on the model can be found in this Google Doc from Professor Jimenez of The University of Colorado.)

Garden of Your Mind
I had Mister Rogers on my mind this week; so, from SITALWeek #219 almost a year ago:
Here is a moving story by Tom Junod about Mister Rogers, and what he might say today, were he alive.
“...because we all long to know that there’s a graciousness at the heart of creation.”
“He wanted us to remember what it was like to be a child so that he could talk to us; he wanted to talk to us so that we could remember what it was like to be a child. And he could talk to anyone, believing that if you remembered what it was like to be a child, you would remember that you were a child of God.”
This bit is heartbreaking to me:
“[Mister Rogers] lost because the great conceit of the internet is that it has unveiled and unmasked us, that it shows us as we really are and our neighbors as they really are, and that hate is more viral than love.”
But, to end on an upbeat note, here is the delightful PBS remix of Mister Rogers’ memorable moments on YouTube.

Stuff about Geopolitics, Economics, and the Finance Industry
FAAAT Earnings
I was on CNBC’s Squawk Alley Friday talking about FAAAT (Facebook, Alphabet, Amazon, Apple, and Twitter) earnings results, and the potential for a 2021 hangover. The video is available on CNBC’s Pro (paywall) site.

The NZS Philosophy...and Vampires
SITALWeek is abbreviated (and sporting a few extra typos and ill-advised sentence constructs) this week as we spent Halloween slaying vampires (we emerged victorious, but it was a close one).

For anyone new to NZS Capital and our process, we post all of our whitepapers online for anyone to read – so if you’re searching for more content this week, please check out our website. Partnering with our clients to realize their investment goals is our top priority, and we believe that we can achieve a better outcome by improving the ecosystem as a whole. As such, a big part of our mission is to help all investors build their individual frameworks for picking stocks in the increasingly disruptive and unpredictable world that we find ourselves in. Sharing our process and research openly is a core part of our non-zero-sum philosophy. Indeed, transparency helps us receive feedback from insightful and fascinating people all around the globe, which allows us to refine our thinking, connect new dots, and, in turn, share our new knowledge with you in a compounding, virtuous cycle. As such, feel free to read, borrow, cite, improve upon, and argue with anything we’ve written; and, if you disagree let us know, because we continue to learn everyday. We don’t have a patent on investing, and every investor builds on and learns from others inside and outside of the investing field. We are grateful for all the people – from biologists to mathematicians to investors – who have influenced our process, and we know that we’d all be much worse off without folks generously sharing their knowledge – so thank you!

Popular NZS Capital Whitepapers:
Complexity Investing
Redefining Margin of Safety
Non-zero Outcomes in the Information Age

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Disclaimers:

The content of this newsletter is my personal opinion as of the date published and is subject to change without notice and may not reflect the opinion of NZS Capital, LLC.  This newsletter is 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. 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. 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, LLC has no control. In no event will NZS Capital, LLC 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 #268

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, jetpacks, 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 sign up form; if you have any issues or questions please email sitalweek@nzscapital.com)

In today’s post: Natural digital monopolies; encrypted messaging; video editing AI; omnichannel winners; food delivery losers; short- vs. long-form video; honest liars; interoception; jetpacks; and lots more below...

Stuff about Innovation and Technology
Nanoparticle Thermometer
NIST is developing nanoscale temperature sensors using cobalt-doped ferrites. The devices could measure temperature to several decimal points in a tenth of a second. The ideal use is inside of any object that requires precise temperature monitoring, but it could also be used in medical implants and to monitor human temps. I am admittedly baffled by the inconsistencies between my Fitbit Sense and Oura Ring daily temperature indications, so maybe they could add in some cobalt-doped ferrites down the road.

🦣(Mammoth Emoji)
The woolly mammoth finally has its own emoji. The mammoth is part of Emoji Release 13, which also includes the dodo (as well as some actually useful emojis). Depending on your operating system version, these may or may not be available on your emoji keyboard yet; if the mammoth shows up at the top of this paragraph, then you have it!

Lunar 4G
As part of NASA’s “boots on the moon” project Artemis, Nokia is planning to build a cellular network on the moon. Unfortunately, the network will only be 4G, so video-game streaming will be a little challenging.

First Responder Jetpack
Gravity Industries is working on a jetpack for rescuers that can reduce a 25-minute hike over difficult terrain to just 90 seconds. 

The Value of Natural Monopolies
Natural selection in the Information Age, and into the impending AI Age, would seem to favor monopolies. For products and services driven by data network effects, these natural monopolies are the highest value solution for users. To regulate them as you would an Industrial-Age business would make everyone worse off. A better way forward – to both monitor/prevent abuse and create more value for society and the ecosystem – would be to foster competition by granting others access to some of the data the monopoly platforms collect and/or generate. In the coming decades, every part of the economy will see natural monopolies form, and many of these will be vertically integrated with a significant data – and thus AI – advantage. (Tesla is a good example of this trend in the automobile market.) In many cases, competition will still be a click away; however, in select industries, the high cost to generate and maintain a natural monopoly would be effectively insurmountable for challengers. The new natural monopolies that will form across the economy will in many cases be built on the current big Internet platforms – monopolies enabling monopolies. In general, government regulation will increase the cost of maintaining a natural monopoly (known as regulatory capture), and therefore make competition even harder. Due to the transparency of the Information Age, natural monopolies tend to form because they are better products. For example, Yelp, which has spent a decade complaining that Google is a monopoly, lost to Google because Yelp was an inferior product – it was bad for businesses, gave very little useful information to consumers, and never created a positive-sum business for its constituents. Google didn’t win local search because they suppressed Yelp; Yelp lost because it wasn’t creating sufficient value.

The recent DoJ accusations center around the apparent inequity of Google buying their way into being the default search engine on phones/browsers by paying TAC (traffic acquisition) fees to cell phone manufacturers/carriers and browser companies. Search is an example of a natural monopoly: the more people use it, the better it is, the more people use it, etc., thus expanding in flywheel fashion. It costs billions, if not tens of billions of dollars, to create and maintain the world’s best search engine. If Google were to stop paying TAC fees, which amounted to $6.6B in the most recent quarter, it would save them $26B/yr! Moreover, as I discussed back in SITALWeek #262, if Google stopped paying the $10B+/year in TAC to Apple, it would probably take several hundred billion dollars of value away from Apple (using its current earnings multiple), and add that to Google’s market cap! The effect of the DoJ’s complaints about TAC would essentially amount to a value transfer from Apple (and others) to Google with no evident offset. Indeed, search behavior seems unlikely to hinge upon whether or not Google is the default search engine (e.g., if search defaulted to Bing or DuckDuckGo instead, most people would probably switch back to Google) because Google offers a profoundly better user experience. So, prohibiting Google from paying TAC fees would be a veritable gift to Google from the government. If rumors of Apple launching a competing search engine are true, however, then the situation could get more interesting. Apple could launch a search engine that would be eventually competitive with Google given how many searches are done on iPhones (e.g., Apple might take the tact of forcing iOS users to use an Apple search product to get enough queries to make the engine better).

The reality is, consumers do have a choice for most services related to the big tech platforms. Google Search, YouTube, Amazon, and Facebook all have competitors, which, in some cases, are doing very well – TikTok and Walmart are growing faster than (respectively) Facebook in social networking and Amazon in ecommerce this year. When Apple Maps was bad, people just downloaded Google Maps – that’s competition. The one standout area lacking fair competition I see is the app store ecosystem. As I’ve discussed in several prior newsletters, Google has now resolved that issue with a one-year grace period in fees and forthcoming redesign of the Android 12 to launch next year, while Apple continues to act like a monopoly abuser banning any third party app stores or payment mechanisms. 

Spotlight on Signal
The New Yorker published a profile of Moxie Marlinspike, the hacker-turned silicon valley engineer-turned encryption proponent and CEO of end-to-end-encrypted messaging app Signal. If you don’t use Signal, you should.

Enabling PoS
Visa has enabled tap to pay, thus turning any NFC-enabled Android device into a contactless payment terminal. Ultimately, billions of Android devices could be used as point-of-sale systems around the globe. The service has opened in 15 markets and is set to launch in the US in 2021.

Descript’s Advanced Video Editing
Audio editing tool Descript announced a slew of new features for video recording and editing. Descript is an example of a new company taking an AI/collaboration-first approach to an existing workflow. These new businesses will increasingly represent threats to existing software and tools whose developers attempt to tack on AI and/or collaboration capability. Further, Descript is an example of a customer- and service-focused business, e.g., allowing people to connect with them on the chat app Discord. Having used Descript’s audio AI editing – including the “deep fake” voice model that allows you to dub in your lines without re-recording – I can say that it works like magic.

Missing out on Max
All told, 70% of HBO subscribers eligible to get the HBO Max streaming service for free have not signed up for it. I’ve been using HBO Max on the new Google Chromecast (which, so far, does the best job amongst all the hardware platforms of making suggestions and keeping track of what you were watching in which app). I think HBO did a good job with the app, and, obviously, being HBO, the content quality is superior to other streaming platforms. However, with the app unavailable on Roku and Amazon Fire, its US distribution remains low. HBO is part of WarnerMedia, whose parent company, AT&T, also indicated last week that they won’t continue to bid on sports rights, likely due to the weakness of their own business (rather than a poor outlook on the value of sports content). It’s certainly true that, with the exception of the NFL, pandemic ratings for all sports have been down dramatically; but, for now, a lot of that weakness appears to be due to off-peak scheduling and overlapping seasons. AT&T currently has the NFL Sunday Ticket for DirecTV as well as basketball on Turner networks. 

Quibi Calls it Quits
My friend Jason Hirschhorn, CEO of REDEF, talked to Dan Primack about the demise of short-form video streaming app Quibi and shared his insightful take on the situation. Personally, I think a lot of talented people created a lot of great content, and it was likely a complex situation that caused the failure. I would hypothesize one contributing factor was that consumers today are increasingly interested in more live, unscripted content (social, gaming, twitch, YouTube, etc.). So, it seems possible that fatigue of scripted content – in an era where fiction can’t match the craziness of the real world – contributed to a lack of interest in Quibi. Jason believes there is a legit market for short-form premium video, and I can’t argue with that; so, perhaps fewer 8-part miniseries and more premium short form is the right mix going forward to satisfy consumers. Related, Rolling Stone reports that scripted TV production is down 15% in 2020, and the added cost of several hundred thousand dollars per episode due to COVID may keep production suppressed for a while; these factors could open the window for more short-form premium video, which should be a little less complex to produce.

Who Will Win Omnichannel Retail?
Gavin Baker has an excellent essay on the strategic value of omnichannel retail leaders and its potential ability to favor large, incumbent retailers. I share his instincts, so, rather than just concur with him, I thought it would be useful to offer the “yeah, but...” devil’s advocate arguments in the spirit of moving the debate forward and avoiding my own confirmation bias. So here are five nuanced points (some of which Gavin has already addressed) that I think are worth watching over the next few years: 1) Physical retail – local convenience clearly matters, but Amazon will open thousands of stores with the right combination of space, location, micro-fulfillment, curbside, etc., while traditional retail will have to sacrifice margin or rationalize their existing square footage (which is an unoptimized combination of retail and fulfillment); 2) Prime – it’s a massive flywheel that gets heavier and harder to stop every year in terms of the value it offers, and it’s a meaningful top-line driver; how many additional memberships are people willing to pay for? 3) Logistics – Amazon will likely be delivering well over 80% of their own packages soon, and the crunch for last-mile capacity is causing prices to go up dramatically, which is another potential margin compressor for retailers; 4) Ads – Amazon is an ad machine, and, although traditional retail has captured trade promotion dollars for years, a sophisticated, algorithmic ad engine with inventory data across apps and the web is a big advantage for Amazon (and subsidizes their overall business); 5) Information-Age selection – network effects, non-zero sum, innovation, vertical integration, data, and AI have created winner-takes-most platforms in a diversity of industries. Is the retail sector going to be any different? Also, it's possible the share gains for physical retailers in 2020 have been driven by what Amazon calls CRAP (bulky, low-margin, AKA Can't Realize A Profit) items, rather than higher value sustaining merchandise (though, as Gavin points out, margins for large, offline retailers have been up in 2020). To reiterate, I tend to agree with Gavin’s conclusions (and, he has some great counterpoints to my counterpoints!), and I’ll be eager to watch the retail landscape evolve rapidly over the next few years. 

Elusive Margins of Point-to-Point Food Delivery
Chipotle reported same-store sales growth of 8%, despite the pandemic; however, a ~15% shift from in-store dining/pickup to delivery during that period has caused costs to rise and margins to fall. As I discussed in more detail in the Evolution of the Meal, delivery – in its current incarnation – is unlikely to see profits. I suspect the only way for delivery to work as a mainstream service would be via recreation of the ‘milkman model’ – centralized kitchens, subscriptions, and preset delivery routes. If people want low-quality ingredients and processed food, pizza is still deliverable at a profit; but, for anything else, the current point-to-point system will only be for the wealthy once it stops being subsidized by investors.

[Dys]functional Organization 
There’s an interesting read in HBR on Apple’s anomalous functional organization structure. Typically, large companies are organized by product or service rather than function (for example, Apple has hardware and software functions that report to Tim Cook, but not a “head of iPhone” product leader). I wonder if this functional organization is the reason Apple has sustained its lead in screen-based portable devices but, at the same time, hasn’t innovated outside of those products and related services in over a decade. In other words, did a functional organization keep them from developing an automobile? Does it explain their underwhelming lack of success in video, advertising, etc.? It seems like “functional” could lead to an unhealthy degree of risk aversion when it comes to innovation.

Miscellaneous Stuff
One Fewer Honest Liars 
Farewell to the Amazing Randi, who passed away last week. “Magicians are the most honest people in the world: They tell you they’re going to fool you, and then they do it.” And, The Onion had a perfect farewell article to Randi.

The Remarkable Adaptability of Ball Corp
Ball Corp is a company I’ve known for a long time – ever since I first covered the packaging industry nearly two decades ago. The company recently held an investor day, and I was struck by the following: in its 140-year history, Ball has been in 50 different businesses, and, when asked about the future, the CEO remarked: “What does Ball look like 10 years from now? And the truth is I don't know. But what I do know is this, we have more opportunities in what we are doing right here, right now than I've ever seen in my career.” This type of ideology is a hallmark of the all-important culture of adaptability that we’re always seeking out for long-term investments. Ball has an interesting decade ahead as the container market shifts from plastic to aluminum and they attempt to convert the single-use plastic cup market to aluminum as well (you can order the beta cup design from Ball on Amazon; beer pong is socially distanced, right?). I wrote more about Ball in SITALWeek #182 as well as #204, #208, #215...well, it seems that I talk about them a lot!

Importance of Interoception
Your heart doesn’t race because you are scared, you are scared because your heart is racing. Depending on the stimulus, often the body responds first and relays that reaction to the brain for processing. Interoception training – learning to monitor and understand the feedback loop between physical sensations and your brain – shows promise for helping people with anxiety and various other mental issues as well as improving physical health. (For more information – as well as a practical approach to improving interoception – see chapter three of Body Mind Movement.)

Stuff about Geopolitics, Economics, and the Finance Industry
China Policy: Red Tech vs. Blue Human Rights
While both Republicans and Democrats in the US are antagonistic towards China, the Republicans have pushed harder on the trade and technology issues. Biden’s op-ed last week – in America’s largest Chinese-language newspaper – continued to emphasize the importance of shared values in the US' support of the Asia-Pacific region. Reading into this and other statements Biden has penned in the past, his focus is primarily on democracy and human rights abuses. I would speculate that these are more sensitive issues for China than trade and technology scuffles.
“Biden said he will ‘stand with friends and allies to advance our shared prosperity and values in the Asia-Pacific region. That includes deepening our ties with Taiwan, a leading democracy, major economy, technology powerhouse -- and a shining example of how an open society can effectively contain COVID-19.’”

Corporate Communications Cater to AI?
As AI analysis of corporate communications increasingly drives investing algorithms, corporations have apparently changed their language to emphasize more positive words with fewer negative sentiments. It’s not clear to me that researchers have provided a causal link here though; perhaps management and the lawyers that pen SEC filings are just more optimistic when stock prices are rising?

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Disclaimers:

The content of this newsletter is my personal opinion as of the date published and is subject to change without notice and may not reflect the opinion of NZS Capital, LLC.  This newsletter is 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. 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. 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, LLC has no control. In no event will NZS Capital, LLC 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 #267

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, entertainment islands, 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 sign up form; if you have any issues or questions please email sitalweek@nzscapital.com)

In today’s post: The shift to zero-trust security; big platforms are taking a stand on content that's likely to cement their monopolies even further; Apple charging into the future; what sells on TikTok; WFH productivity problems; boiling the ocean; Entertainment Island is happening (though more like an archipelago); NZS Capital Q3 Update Letter; and lots more below...

Stuff about Innovation and Technology
Song stuck in your head? There’s a Google App for That
Now you can hum a tune to Google Search and the engine’s neural net will convert it to a string of numbers and then match the melody. The tech builds on the low-power, on-device AI that Google developed for song recognition.

Among Us Super Spreading
Mobile game sensation Among Us (see top of SITALWeek #265) drove 4B+ video views on YouTube in September. For context, Minecraft had 100B related video views in 2019; so, if they maintain their growth rate, Among Us could potentially annualize at nearly half the Minecraft number from essentially zero this past summer. (In case you're not yet tired of me saying it, this is another example of non-Hollywood content taking share of people's streaming time.)

Section 230 Back in Spotlight
The Section 230 law, as it’s currently interpreted, protects online social media giants like Facebook and YouTube from being responsible for content posted to their platforms by users. However, if platforms start expressing views as to what can or cannot be posted, then they become publishers instead and must assume responsibility for what is posted – a liability they do not want. That’s why the social media giants have been hiding behind the excuse of “it’s too hard for us to moderate all this content” (see SITALWeek #247 for more of my views on Section 230). But, they are beginning to step away from their passive neutrality. For example, Facebook will no longer allow posts that deny the holocaust and, along with YouTube, will start removing content related to conspiracy theories that could be used to justify violence. Twitter continues to take a more neutral approach by labeling content as problematic, but not taking it down (their banning of a NY Post article last week seems to have been due to policy violation owing to inclusion of hacked personal information; Twitter has since revised their policy, and future violations will be flagged – but sharable – unless the content is posted by the hackers/agents themselves). 

If the social media platforms are classified as publishers, the likely outcome will be the same as what we would see with proposed big-tech platform regulation: regulatory capture. It costs tens of billions of dollars a year in CapEx and OpEx to monitor all the user-generated content being uploaded, and it’s growing every year. So, by putting restrictions on big platforms, the government significantly raises the costs and barriers for newer entrants, therefore cementing the monopoly status of incumbents (see also: How I Learned to Stop Worrying and Love the Monopoly). Thus, from a competitive standpoint, it’s actually in big tech’s best interests to assume responsibility for what's posted and, in the process, express a view about what is ok and not ok to post. As I have said in the past, I think big tech platforms have two options: 1) remain completely neutral unless content contains a specific call to action for real-world violence (this still seems to be Twitter’s approach); or, 2) declare what is/isn’t acceptable and act like a publisher by editing content being posted; users can then decide whether or not they agree with the specified ideology and either use the platform or go elsewhere. The worst-case scenario is the direction Facebook is going toward private, encrypted, small group sharing, which drives all the crazy and hate underground. I favor Twitter’s stance for now because I want everything posted. I want to know who is crazy – and how crazy they are – so I can run the other direction!

Apple Charging into the Future
The noted charger and adapter company, Apple, continues to bring its risk-averse innovation to a new set of chargers, adapters, and magnetic accessories announced last week. The company also announced an innovative, smaller box for the new iPhone 12 (because it doesn't come with a charger), which will save Apple on freight costs when they palletize phones coming over from China. Apple is making some truly remarkable breakthroughs, which experts agree may mark a technological acceleration from snail to turtle pace.

Amazon Has Self to Blame for Dearth of Truckers
After years of taking business away from large trucking companies in the US, Amazon is finding itself in a big capacity crunch and hard pressed to find truck drivers. Amazon has around 13,000 truckers contracted to move packages between distribution centers and inject them into last-mile delivery networks. For comparison, Walmart has around 9,000. Trucking supply has shifted away from Amazon during the current ecommerce boom because the company was paying truckers about 18% less than competing brokers. 

Adapt or Get Hacked: Forget Firewalls, Invest in Zero Trust
Cloudflare, a platform for making the Internet run faster and more securely, announced a new set of partnerships last week with identity platforms such as Okta. Cloudflare Access is designed to match user credentials with cloud applications to decrease hacking risk, and Cloudflare One is an end-to-end platform that replaces your existing business network, and you can also run your browser remotely on Cloudflare’s cloud. Every company should be moving as quickly as they can to zero-trust security architecture – where you assume the bad guys can hack into any  system. Zero trust, which emphasizes identity, access, and encryption, was first described by Google in their BeyondCorp whitepaper in 2014. One example of creating a zero-trust security architecture would be leveraging API-enabled partnerships between access (Okta), governance (SailPoint), privileged access (CyberArk), endpoint security (CrowdStrike), email security (Proofpoint), and Cloudflare. These connected apps are in stark contrast to the outdated firewalls – or other “moats” around servers – which have turned out to be easily breached. If you are building a security architecture and think your Check Point or Palo Alto firewalls or VPNs are keeping you safe, you might want to take another look at the copious headlines of breaches and ransomware attacks this year.

Aesthetics of TikTok Merchandising
Product review site Thingtesting talks about TikTok-based merchandising designed to appeal to Gen Z. Bright colors and packaging that can serve as a prop for TikTok videos help, along with a sincere brand message. Founder of skincare company Starface explains: “We don’t categorise ourselves as skin positive, because [Starface] is about having the freedom to have the full spectrum of emotions. It’s not about putting on this front of impenetrable confidence, because everyone fluctuates. It’s about having something that’s fun, distracting, efficacious and optimistic.” This post lists eleven beauty products successfully leveraging TikTok to build direct-to-consumer brands, and there is a palpable difference between videobyte aesthetics vs. what you would see on typical store shelves.

New Hires Struggle in WFH Setting
The Information reports on internal surveys at Google showing a recent decline in productivity among engineers – particularly newer hires, who may be finding it harder to learn the ropes and get basic pointers from colleagues outside a shared office space. In related news, GitLab posted a comprehensive tutorial on how to embrace asynchronous workflows instead of live meetings and video calls.

AI-Optimized Sales Pitch
I was reading last week about Otter.ai, which uses AI to transcribe meetings (including Zoom calls) and create searchable text. Wired magazine also discusses new AI tools used to transcribe and analyze sales calls. Part of me says this type of analysis could do amazing things for eliminating cognitive (and other types of) bias that leads to mistakes and social conflict. And, another part of me sees the endless opportunities for misuse and wants to run away screaming as fast as I can.

Miscellaneous Stuff
QuaranTeens Fair Better than Expected
According to a survey in The Atlantic, teens have experienced slightly better mental health during quarantine – perhaps because they are getting more sleep (I wonder if adults are getting more sleep as well with reduced commuting?), spending more time with family and less time on social networks (offset by more video chatting and streaming), and, I might add, not physically immersed in the modern pressure cooker that is high school? One of the more sobering statistics reported: 25% of teens were worried about their families not having enough to eat. 

Deep Ocean Mercury Rising
Deep ocean temps are rising faster than previously thought. Oceans absorb about 90% of the heat on Earth, and warmer temps expand water volume, contributing to sea level rise. Although the temp increases are minute – only 0.02-0.04 ℃ – over the last decade, the rise is meaningful given the sheer volume of water that’s being heated up. I think I’ll stop using the “boil the ocean” analogy to describe impossible things.

Asteroid Diversion
DART is a satellite that will be launched with the goal of crashing into an asteroid the size of a small stadium to shift its course 1mm per second. The asteroid is orbiting a larger asteroid, which will allow scientists to measure the impact of the collision remotely without having to send a second satellite into space. It’s a small-scale test, you know, just in case. 

Entertainment Archipelago
Back in the beginning of COVID, I had fun creating a fictional tale about turning Las Vegas into a giant media and sports bubble; so, I’ve been delighted to see that several TV shows have recorded (or are just beginning to record) new seasons in Vegas casino bubbles.

Stuff about Geopolitics, Economics, and the Finance Industry
NZS Quarterly Update
NZS Capital’s Third Quarter Update Letter is available on our website.

✌

Disclaimers:

The content of this newsletter is my personal opinion as of the date published and is subject to change without notice and may not reflect the opinion of NZS Capital, LLC.  This newsletter is 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. 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. 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, LLC has no control. In no event will NZS Capital, LLC 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 #266

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, the Wu-Tang Clan, 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 sign up form; if you have any issues or questions please email sitalweek@nzscapital.com)

In today’s post: graphene-powered electronics; Jen-Hsun’s kitchen; digitizing accounts payable; the IoT of cold transport; Vonnegut on tribalism; Star Trek transporters; ancient footprints; cracks in Xi’s dictatorship; and lots more below...

Stuff about Innovation and Technology
Free Energy
Physicists at the University of Arkansas have built a circuit that harvests energy from graphene, a sheet formed by a single layer of carbon atoms. Suspended atoms in thermal equilibrium follow what’s called Brownian motion, which describes their movements probabilistically; the Brownian motion of freestanding graphene can be described as random “ripples and buckles”. It’s long been thought that atoms cannot do work as they move in this manner. However, the team found that graphene could induce a DC current in their two-diode circuit at room temperature. Theoretically, if enough of these graphene circuits could be deposited on a silicon wafer, they could serve as an energy source for low-power electronics. 

Unreal EV
Gaming development engine Unreal from Epic Games will be the in-dash platform for the new electric Hummer vehicle made by GM. Unreal will also be bringing its embedded interface to QNX, the popular platform owned by Blackberry that is used in well over half of new vehicles. And, Epic is working on other integrations such as mapping with Mapbox. This outreach is part of a broader trend of gaming engines like Unreal and Unity expanding their utility and user interfaces.

Twitch Dominates Live Streaming
When Microsoft shut down its live game streaming platform, Mixer, in June, Twitch picked up almost 100% of Microsoft’s 15% market share. That puts Twitch at 91% share of live hours watched in Q3. When you include total hours viewed (i.e., live plus previously recorded), Twitch had 64% share compared to their next closest rival – YouTube Gaming at 23%; however, market share for Twitch was relatively flat, up only 3% from the end of 2019. Twitch’s streaming strength comes as the overall live-stream gaming market grew 70% y/y – well ahead of other forms of video entertainment. The growth in live-streaming share could portend a growth in overall viewing share ahead for Twitch. And, Twitch continues to thrive on fast-growing niche content. Back in SITALWeek #233, we talked about the popularity of live chess streaming on Twitch; and, this weekend Wu-Tang Clan legends GZA and RZA faced off against Twitch stars and chess grandmaster Maurice Ashley in a live chess tournament sponsored by Chess.com and Hennessy; “The adage goes that ‘Wu-Tang is for the children’ and GZA tells us that children can learn important life lessons in chess, things that can be applied to our predicament today.”

Browser-Based Game Pass for iOS
Microsoft will follow Amazon’s lead by introducing Xbox Game Pass in the browser for iOS, likely using a progressive web app. As I wrote in SITALWeek #264, “It’s like [Apple and Google] are demanding developers abandon the app store for the web browser, which will ultimately cause Apple and Google to forgo a lot of lucrative app store ad revenue and make it much easier for users to switch platforms.” Since I wrote that a couple weeks ago, Google announced it would work to allow 3rd-party app stores to function better in their next iteration of Android (set to launch next year), which would allow Microsoft and others to launch their game stores on Android. That solution will give users a much better experience than being relegated to browsers on the iPhone.

Jen-Hsun’s Kitchen
I’ve spent more time in Jen-Hsun Huang’s kitchen than any other kitchen this year besides my own. That’s thanks to the high cadence of new product and deal announcements broadcast from the Nvidia co-founder’s spatula-filled, culinary command center. Recently, the Next Platform interviewed him about an array of topics, including FPGAs. In an answer seemingly prescient to the rumor last week that AMD is looking to buy Xilinx, Jen-Hsun explained his view that developers shouldn’t be programming chips, or, for that matter, software; instead, AI should be increasingly taking over the task of programming (in other words, Nvidia doesn’t think FPGAs, like Xilinx, will feature prominently in the future of accelerated computing). Next Platform also weighed in on why the DPU is more important for Nvidia than the CPU. In other news, Nvidia announced Jetson Nano, a $59 GPU-accelerated development kit (which resembles a spiritual successor to the very popular Raspberry Pi board), Omniverse (a metaverse for engineers to virtually collaborate), and a new video conferencing AI compression that could significantly improve quality and enable competition. The latter tool changes your image to make it look like you are looking directly at the camera, creating the illusion of eye contact. Rounding out Nvidia news, this Semiwiki article suggests Nvidia and Arm could have a compelling solution for Open-RAN as cellular networks increasingly move into the datacenter. 

Accounts Payable Going Digital
Not surprisingly, the $125T annual commercial payment market hit bumps in the road during the pandemic, as 98%+ of payments between companies are still analog. Tipalti raised $150M last week and Sapphire recently invested $35M into AvidXchange. Both platforms use virtual card numbers on top of the existing credit card systems from companies such as Mastercard and Visa.

Vertically-Integrated Ecommerce Winning
A big theme for SITALWeek is the importance of vertical integration as industries go from the Industrial Age to the Information Age – and now into the AI Age. Amazon’s new electric delivery van, developed with Rivian, is one such example. The specialized van features Alexa integration for live routing and weather, a suite of sensors and driver-assist technology, and several safety improvements. Amazon is now delivering well over half of its own packages – a vertical integration that is increasingly the key to their market-dominating ecommerce operations, especially with shipageddon coming this holiday season. 

Improving Transport of Perishable Goods
Last week, I wrote about online-grocer Picnic’s extensive use of sensors and cloud analytics to track and ensure food safety from warehouse to customer. In a similar vein, Amazon announced last week a collaboration with Carrier, a global cooling supplier, to co-develop Lynx – a “suite of tools...with enhanced visibility, increased connectivity, and actionable intelligence across their cold chain operations to improve outcomes for temperature-sensitive cargo, including food, medicine, and vaccines” – by leveraging AWS’ machine learning and Carrier’s monitoring solutions. This is a great example of connected devices that throw off a lot of data creating long-term demand for semiconductors, sensors, connectivity, and AI in the cloud.

Miscellaneous Stuff
Fossil Tracks Record Prehistoric Journey
Around 12,000 years ago, in what is now White Sands National Park in New Mexico, a person carrying a child made their way hastily across a muddy flat in a straight, 1.5km+ journey, and then, several hours later, retraced their steps back, seemingly without the child (who was perhaps dropped off at another camp?). On the outward journey, sometimes the child walked for small stretches, and, at other times, the main tracks show evidence of a toddler-sized encumbrance. Perhaps they were in a hurry due to the area’s active megafauna, which included saber-toothed cats, dire wolves, bison, camels, mammoths, and giant sloths, some of which left tracks that crossed the trail of human footprints in between the outbound and return journeys. This remarkable record tells a story, but it mostly raises more questions about what life was like for these ancient humans. Another set of prints records children playing in the puddles formed by giant sloth tracks and jumping between mammoth tracks. Those images will be with me next time I see a kid splashing in a rain puddle.

Radiative Cooling
The Earth’s atmosphere has a transmission window between wavelengths of 8 and 13 microns. In this infrared (IR) part of the electromagnetic spectrum, radiation escapes the Earth without being bounced back by the atmosphere. Ancient desert dwellers leveraged this radiation escape hole thousands of years ago to make ice at night, even with temperatures above freezing (up to 41℉ / 5℃). The trick works because terrestrial surfaces, including water, radiate heat via IR waves largely within the transmission window, thus losing more heat to the freezing cosmos than what is returned via the atmosphere. Indeed, greenhouse gasses, including ozone and water vapor, can absorb thermal radiation within the transmission window, thus trapping the energy within the bounds of Earth’s atmosphere (which is why you can make ice in an arid desert on a clear night, but not in places with much higher humidity/cloud cover). Aaswath Raman at UCLA is working on a specialized film to take advantage of this asymmetry, possibly even during the day. Radiative cooling would work on the same principle as solar thermal heating, just in the opposite direction. Instead of using a solar concentrator to capture the sun’s rays to heat a transfer fluid (e.g., water), a radiative cooling system would block absorption of solar/other energy while optimizing the release of thermal radiation, thus cooling the transfer fluid below ambient temperatures. Subsequently, that liquid could be circulated for cooling with less overall electricity usage than conventional air conditioning.

Social Media Subverts Shared Cultural Identity
There is a Vonnegut quote I have been thinking a lot about lately from a 2004 essay:
“Thanks to TV and for the convenience of TV, you can only be one of two kinds of human beings, either a liberal or a conservative.”
Like TV – and, indeed, every other information transfer medium that has arisen since the printing press – social media amplifies tribalism, just on a much grander and more rapid scale than ever before. I am also reminded of this Vonnegut interview (discussed in SITALWeek #255) where he talks about us lacking a common culture in the US:
“What I say didactically in the introduction to Breakfast of Champions is that I can’t live without a culture anymore, that I realize I don’t have one. What passes for a culture in my head is really a bunch of commercials, and this is intolerable. It may be impossible to live without a culture.”
I think Vonnegut was right – it’s not possible to live without a culture, and the US is currently searching for a common culture that it never seems to have found in its short history. Social networking has taken the torch from TV and fragmented culture into two big cohorts and a million different little slices. From the perspective of fostering community and a sense of belonging, it’s great to unite like-minded folks; however, in the process, social media seems to have left the country bereft of any common ground or shared identity, sending our natural-selection-derived programming for tribalism into overdrive.

Thar's Too Much Gold in Them Thar Hills 
The element gold is formed by binding together 79 protons and 118 neutrons in a major nuclear fusion reaction. Previously, scientists thought collisions between neutron stars were sufficient to explain the gold present in our solar system; but, a new paper suggests those relatively rare celestial events come up short of being able to generate the amount of gold we observe. Physicists theorize the gold could have come from supernova star explosions, but that still doesn’t seem to account for it all (because if a star is massive enough to fuse gold, it's overwhelmingly likely to end up as a black hole, which would, well, eat the gold). And, then there are magneto-rotational supernovae, which turn themselves inside out and jet off matter into space, but, again, there aren’t enough of those events to account for the gold either. So, we're left wondering, why is all this gold lying around, and where in the history of the universe was it forged?

“Spooky Action at a Distance”
We can “entangle” two or more disparate objects by using our understanding of quantum mechanics to tie their properties together, even though they may be separated by a great distance. For example, if two electrons on opposite sides of a room (or a continent) were entangled (i.e., described by the same quantum wave function), you could change the state of one, and the other would change instantaneously. Intuitively, this is a hard concept to understand because it seems to violate the idea that information cannot travel faster than the speed of light. It’s tricky. However, you can think about entanglement in terms of a simple math equation: if you have an equation (which is all a “wave function” is) with two variables, like a = 7b, and you set the value of b, then the value of a is instantly set too. Entangled objects are just variables in a single (albeit more complex) equation, and when you define one it automatically defines the other. See? Easy (heh heh).  Here is a long video from Caltech and SFI professor Sean Carroll explaining entanglement. We generally think of quantum mechanics as something that operates on the atomic (or sub-atomic) level; but, recently, physicists at the Niels Bohr Institute successfully entangled a millimeter-sized drum with a disparate cloud of atoms. That’s a big deal because the macro-sized drum is the largest object that’s been entangled so far. Quantum communication networks leverage entanglement as well. And, entanglement at the macroscopic level is a very good candidate for powering the Star Trek transporter!

Stuff about Geopolitics, Economics, and the Finance Industry
Squawking Robots
I was on CNBC’s Squawk Alley last week talking about tech, robotics, and security software. The video is available for CNBC Pro subscribers. And, if you missed it, I got to use one of my favorite lines: “Pessimists and cynics always sound smart, but the optimists are always right in the long term”.

CCP Showing Signs of Dissension? 
I don’t think anyone has particular insight into the inner workings of the Chinese Communist Party, (which, of course, is by design), but this article in The Diplomat makes some interesting points about a potential crisis of faith percolating for Xi: 
“It is not entirely uncommon for waves of internal criticism or factional fighting to peek through the cracks of the CCP’s opaque armor, but the thoughtful nature of the recent critiques and the profile of those voicing them should give pause to anyone inside or outside China who is attempting to assess the country’s direction. The fact that professors from top academic institutions — including the party’s own national training center — are calling Xi’s leadership a failure, urging his removal from power, and explicitly envisioning a transition to a more democratic and federally structured political system is simply incredible. It indicates that Xi is facing a serious crisis of faith within the party, even if no one has the power to act on it at present. It also underscores the reality that Xi and his enforcers do not speak for all Chinese. There are many, many people who would like to see China change course.”

The article also reminds me of this May 11, 2020 interview with George Soros by Gregor Peter Schmitz where they discuss the CCP's handling of the COVID-19 crisis:
Schmitz: “Could Xi’s grip on power weaken as Chinese come to recognize that the handling of the crisis was sub-optimal?”

Soros: “Very much so. When Xi abolished term limits and named himself, in essence, President for life, he destroyed the political future of the most important and ambitious men in a very narrow and competitive elite. It was a big mistake on his part. So, yes, he is very strong in a way, but at the same time extremely weak, and now perhaps vulnerable.
The struggle within the Chinese leadership is something that I follow very closely because I am on the side of those who believe in an open society. And there are many people in China who are very much in favor of an open society, too.”

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Disclaimers:

The content of this newsletter is my personal opinion as of the date published and is subject to change without notice and may not reflect the opinion of NZS Capital, LLC.  This newsletter is 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. 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. 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, LLC has no control. In no event will NZS Capital, LLC 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 #265

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, drones, 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: Accelerating app store revenue; frontline robots; new ways to invest in physical assets – like vacation homes and art – as cash idles; a slew of positive news and maneuvers from Google last week, with some confusion remaining; nuclear fusion; supernovae and pale blue dots; and lots more below...

Stuff about Innovation and Technology
Bluffing is Popular
A relatively unknown mobile game called Among Us has soared to the top of the charts with 100M downloads and 60M+ daily players. The game, which was built by InnerSloth on the Unity platform, is available on iOS or Android for $5, and an additional $2 will remove the ads. In-game purchases to customize avatars and unlock new maps are also available. Among Us is a social game, with one team of crewmates trying to run the spaceship, and a second team of imposters trying to bluff their way through the game, killing off the crew members and sabotaging the spaceship. Players can vote out suspected imposters. If you haven’t heard about it, ask your teenagers! The relative ease by which these games can quickly grab attention underscores the ongoing fragmentation of entertainment options toward interactive, unscripted content.

Hacking the IoT
A researcher was able to hack a smart home coffee maker to dispense water, beep, and grind beans, as well as display a ransom message. While unplugging the unit would stop the madness, it underscores the array of connected device vulnerabilities we are likely to encounter in the coming years. 

App Revenue Up
Globally, mobile app revenue was up 32% y/y in the third quarter of 2020, a significant acceleration from the 23% growth achieved in the first half of 2020, despite being well into the pandemic. Google’s Play Store grew slightly faster than Apple’s App Store, a reversal from the first half of the year. Total app revenue growth in the 3rd quarter exceeded game revenue growth, implying that streaming video, social networks, and perhaps work-from-home-related apps are driving the acceleration. Zoom and TikTok were amongst the top-three global app downloads (for both Apple and Google stores) for the quarter. 

Frontline Automaton Assistants
IEEE Spectrum reports on the slew of frontline robots developed and deployed this year to aid with COVID-19. Bots are assisting with myriad tasks, such as sterilization, temperature taking, and running errands. As I’ve mentioned recently, the age of robots is finally upon us. Some of the aesthetics, however, leave a bit to be desired; for example, the fully-automated throat-swabbing robot has a slight Clockwork Orange vibe to it.

Zero-Emission Prop Plane
ZeroAvia retrofitted a Piper M-class, 6-seater prop plane with a hydrogen fuel cell, potentially leading the way toward zero-emission passenger flights in the future. 

Amazon's Testing Prowess
Amazon reported it will have 650 sites performing 50,000 COVID-19 tests per day by November for its employees. With that kind of significant capability, I wonder how easily Amazon could evolve those sites into its broader healthcare initiatives.

Solving Cash Conundrum with Alternative Investments
Cash continues to burn holes in investors' pockets thanks to zero interest rates and some possibility of near-term inflation from fiscal stimulus and monetary policy (don’t worry, I still think long-term deflation is a more likely scenario!). How about taking part of that money and buying into a 2nd home? In the US and Europe, 30 million 2nd homes go unoccupied nearly 11 out of 12 months. To tap into that unused potential, Pacaso, a new startup from Austin Allison (founder of real-estate software company dotloop, acquired by Zillow) and Spencer Rascoff (former CEO of Zillow), aims to make 2nd homes more affordable using a concierge approach to fractional home ownership. Pacaso also invests its own capital into homes and has raised $250M in debt financing to do so. Tools for managing the LLC structure, scheduling stays, performing maintenance, and refurbishing are all part of the platform. The homes are for the exclusive use of the owners, and you can own as little as one eighth or as much as one half. Pacaso charges 10% of the purchase price (of the ownership fraction) at the time of purchase, plus an annual management fee of 1% (of the fractional purchase price). They will also buy part of your current 2nd home and sell to other buyers using traditional real estate channels.

Or, if you’re not ready to buy part of a vacation home, why not own part of a classic car, work of art, or sports memorabilia/wine collection? Rally is a platform designed to enable just that. As far as I can tell, the original merch owner keeps permanent and exclusive possession, but you can buy and sell a share in it like a stock on an exchange. On Otis, you can own a share of a Banksy original for as little as $20. There is obviously a broader pattern developing as people look for places to put money rather than watch it sit idle – or even slowly evaporate – in the bank. I’m not familiar with any of these alternate asset platforms, so this is not an endorsement, but I am pleased to see democratization coming to a previously difficult-to-reach set of physical assets.

Google Clarifies App Store Strategy
Google’s latest maneuver in the app store war is a smart one. The company will facilitate the install and use of competing app stores in Android 12, which should enable 3rd-party stores to use their own payment engines. The company is also granting a one-year grace period before more strictly enforcing rules around payments/policies in the current Google Play Store. Currently, you can download alternate app stores – but with few security assurances – and, as I mentioned last week, even Amazon was unable to successfully compete and shuttered their Android store in 2017. I am not sure what Google is planning for Android 12, but ensuring user security with a firewall and only allowing 3rd-party app stores from vetted sources – such as Epic, Microsoft, or others (maybe Apple should launch the iOS app store on Android!🤣) – would be a great way to increase competition and grow the pie for all. Epic has seen revenue on Android drop from $58M in June to less than $20M in August, according to Sensor Tower data cited in the WSJ; but, if they were to launch a competing app store, I think players would flock back to the game on Android. In #258 I wrote the following: 
“For Google, their stubbornness on high app store fees is puzzling. While significant, the money they make on apps and in-app purchases is still small relative to search and YouTube, so why not cut fees to 10% now and draw developers over while putting significant pressure on Apple’s services business and stock multiple? The important question from my perspective is always: where will the developers focus their energy in the future? If you’re a fifteen year old kid with a great idea for an app that’s going to change the world, are you going to write it for iOS, or are you going to create it with Epic’s Unreal Engine to run inside of Fortnite? At NZS Capital, we’re always looking for the companies that maximize non-zero-sum (win-win) outcomes. Sometimes that means we miss great stocks, but we think it’s the most important factor, along with adaptability, for long-term success in the Information Age. Monopoly app stores with high fees are much lower NZS than ones that compound value for developers and users with lower fees.”
I like this move from Google, and I am willing to view it as sincere, but will reserve judgement until we get a better look at Android 12.

EU Set to Approve Google’s Acquisition of Fitbit
Google also notched a win last week with EU approval for the proposed Fitbit acquisition. The concessions Google offered included making Fitbit’s data accessible (with user permission) to other connected fitness apps and a commitment to not use the data for advertising for a period of time. I think this is a smart outcome, and it’s in alignment with our previously detailed philosophy on tech regulation: allow adjacent innovation, but democratize access to the data.

Google’s New Hardware and Software
In other Google hardware news, the company released a new Chromecast with a remote control (yay!) and a revamp of Google Play Movies as Google TV. I got my new Chromecast this weekend, and the user interface and search are so far as good, or better in some cases, compared to all the competition. It has all the top apps (even HBOMax and Peacock), but is still missing some apps I frequently use like Peloton and the Criterion Channel. New Pixel 5G phones were announced as well, but Nikkei reports that Google is only planning on making three million of the new Pixel models, which seems to cast increasing doubt on Google’s ability to sustain its high-end hardware efforts against Apple. I’ve had every Pixel from the very first model – they are the only phones I have used since 2016, and I’ve loved them all. The low Pixel count puts the spotlight on Samsung as a de facto Android winner outside of China (Google and Samsung were rumored to be getting closer this summer). A couple of new features on Android are notable – the new Hold for Me assistant will notify you when a person picks up so you don’t have to listen to elevator music on repeat; and, the photo app will have face retouching off by default and will avoid ascribing value terms – like beauty – to filters. 

Grocery Delivery Succeeds with Verticalization and Automation
Picnic, the Dutch online grocer creating the “Milkman 2.0” makes heavy use of automation, robotics, and data in its operations – from specially-built warehouses to electric delivery vehicles. This blog post dives into the complicated task of end-to-end temperature tracking, including incorporation of variables like real-time weather, which is all done via a data warehouse on AWS.

Crypto-Friendly Visa
Forbes interviewed the crypto leaders at Visa, which increasingly sees itself as a “network of networks”, including interfacing with blockchain networks in the same way they would handle a credit card transaction with a 3rd-party platform. One such example is the Coinbase Visa card, which links to the crypto exchange’s customer balances. 

Significant Streaming Shift
In a new audience report, NBCUniversal claimed 76% of viewing by adults 18-34 years old is now via streaming and on-demand (i.e., not live); and, even more remarkably, 50% of viewing by folks over 50 is also streaming/on-demand. NBCU is owned by US cable giant Comcast, whose CEO, Brian Roberts, recently said at the Goldman Sachs Communacopia Conference: “I think we would like to get to a place where we're indifferent, that to me -- and I think we're almost -- frankly we're there. That way, we can think as a consumer thinks.” The barriers are clearing completely to create the new consumer digital bundle of all types of content – video, music, games, phone, and Internet service, etc.

Miscellaneous Stuff
Fusion with “Extremophile” Semi Tech
Nuclear fusion involves combining two or more nuclei from lighter-mass atoms (like hydrogen) into a single, heavier nucleus, while throwing off excess energy (note: current nuclear power plants use nuclear fission – a.k.a. dissociation – of nuclei from much heavier atoms, like uranium-235, which also generates excess energy). Commonwealth Fusion Systems, a spinoff from MIT, is aiming to commercialize a small fusion reactor within a decade. A working model could potentially be ready within four years, well ahead of the timetable for other efforts. Unlike the competition, the Commonwealth researchers aim to use high-temperature semiconductors to generate and maintain a higher-powered magnetic field, enabling a smaller footprint for containing the plasma – the superheated, fusion-capable soup of dissociated nuclei and electrons, which can reach upwards of a toasty ~100 million degrees (i.e., significantly hotter than the inside of the sun). Indeed, main-sequence stars, like our sun, generate energy by fusing four protons of hydrogen into helium, which is a self-sustaining process once it gets going. Eventually, once enough helium is created, our sun will begin helium fusion as it transitions to a “red giant” star and expands to engulf the inner planets. Luckily for us, we won’t be around when that happens in about five billion years. 

Telltale Cosmic Dust
Speaking of dying stars, the presence of iron-60 and manganese-53 in an undersea rock layer formed 2.5 million years ago can be traced to a “nearby” star that went supernova. This type of super-energetic explosion is one of only two known sources of iron-60 and is unique in its ability to produce manganese-53. These radioisotopes subsequently rained down on Earth along with our regular “background” precipitation of cosmic dust, creating an unequivocal supernova signature. The explosion also produced cosmic rays that could have increased cloud cover and contributed to the Pleistocene Ice Ages, which began around the same timeframe. In contrast, The Earth’s sun doesn’t have enough mass to explode (expanding, rather, as a red giant, as mentioned above). Type I supernovae come from white dwarfs (~1.4x the mass of our sun), and Type II supernovae originate from stars with at least 10x the mass of our sun. Based on the radioisotope abundance detected, it’s believed the Pleistocene supernova originated from a star that was 11-25x as massive as our sun. 

Pale Blue Dot
And, while we are on the subject of astronomy, there is no better time than now to put forth my periodic link to Carl Sagan’s Pale Blue Dot. 

Stuff about Geopolitics, Economics, and the Finance Industry
Corporate Fraudsters Beware
Since 2012, the SEC has paid $562M in rewards to whistleblowers, $175M of which came in just the last year, according to Bloomberg.

Illegal Ransomware Payments
The US treasury is warning victims of ransomware that paying off hackers from sanctioned groups or countries is illegal. It raises a provocative question: if it’s illegal to pay ransomware, and a company’s only option is to walk away from the impacted systems and restart, then either: 1) companies will keep ransomware secret, 2) hacks will stop (which seems unlikely as the data can still have value to hackers even without ransom), or 3) companies could get their act together and modernize their IT much faster.

✌

Disclaimers:

The content of this newsletter is my personal opinion as of the date published and is subject to change without notice and may not reflect the opinion of NZS Capital, LLC.  This newsletter is 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. 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. 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, LLC has no control. In no event will NZS Capital, LLC 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.