SITALWeek #294

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, vibes, 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

In today’s post: wearable microgrids; AI for detecting heart conditions; vibes; the renaissance of channel surfing; making mRNA; the fallacy of reading human emotions; tricking our brains with color; labor shortages; income taxes should not exist; innovation vs. autocracies; and lots more below...

Stuff about Innovation and Technology
Deep Brew
Starbucks is attributing a portion of its digital sales growth to the use of Deep Brew, the company’s AI engine that leverages their app to make personalized offers and performs other tasks, like automating inventory management for their stores. The AI-assisted app may have helped boost average order size by 22% y/y with mobile orders representing 26% of the total in the quarter. The digital growth also increased rewards members by 18% to 23M. The software is even using a predictive model of vaccination rates around the globe to help anticipate demand changes by region as the economy reopens.

Laser-Slinging Weed Exterminators
Carbon Robotics' Autonomous Weeder uses 12 cameras and carbon dioxide lasers to kill 100,000 weeds per hour and can cover around 15-20 acres per day. The multi-hundred-thousand dollar robo-weeder has a 2-3 year payback period.

Sweat- and Motion-Powered Microgrid
I’m no fashion critic, but I could see an entire genre of fashion based on this wearable microgrid technology for powering small electronics: “Nanoengineers at the University of California San Diego have developed a ‘wearable microgrid’ that harvests and stores energy from the human body to power small electronics. It consists of three main parts: sweat-powered biofuel cells, motion-powered devices called triboelectric generators, and energy-storing supercapacitors. All parts are flexible, washable and can be screen printed onto clothing...The biofuel cells are equipped with enzymes that trigger a swapping of electrons between lactate and oxygen molecules in human sweat to generate electricity.” The research was published in Nature Communications.

AI Early Detects Atrial Fibrillation
Mayo is developing algorithms to detect A-fib, weak heart pump, pulmonary hypertension, and hypertrophic cardiomyopathy. Over the next decade, around 12.1M (one out of every 27) Americans could be affected by A-fib, an arrhythmia that can lead to heart attack/stroke. The Mayo algorithm is reportedly effective at finding 80% of people with A-fib, but scientists don’t yet know what the AI is detecting that indicates the elevated risk, as STAT reports. There is some controversy regarding increased diagnosis because not everyone with the condition needs to be treated, so the end result could be a lot of unnecessary medical interventions. I’d guess that there is also a risk of a worry-induced feedback loop, where increased monitoring of health conditions causes anxiety that causes health conditions (which has been seen in sleep tracking studies).

Immersive Zoom
Zoom launched Immersive View, a copycat of Microsoft Teams’ Together Mode, which allows you to see other meeting participants in a shared space (e.g., seated around a table or in an auditorium). These products are designed to reduce the dreaded video conference fatigue, but I am still looking forward to full AR/VR apps instead, which Microsoft is working on with their Mesh app for HoloLens (see #286).

“Chill Gen-Z Good Taste” Vibe
I enjoy Kyle Chayka’s essays, and the latest on vibes and TikTok in the New Yorker does not disappoint. “The word ‘vibe’ is short for vibration—something that resonates and echoes, suffusing a space.... What a haiku is to language, a vibe is to sensory perception: a concise assemblage of image, sound, and movement.” In the world of social media “‘vibe’ has come to mean something more like a moment of audiovisual eloquence, a ‘sympathetic resonance’ between a person and her environment” according to Robin James from U.N.C. Charlotte. Chayka’s view seems to point toward social media as a vibe engine, creating/feeding a mood we are seeking, which rubs off on our perception of the real world.

Play Anything
Netflix is launching Play Something, its latest effort to end the endless scroll of content, content everywhere, without a thing to watch. If you opt-in, the app will immediately choose something and start playing it, bypassing the decision fatigue and paradox of choice. You can “change the channel” by skipping ahead to the next suggestion, or you can go back. Netflix has wanted to add this feature for a decade, according to Cameron Johnson who oversees Netflix’s TV interface product innovation. So...it took them ten years to reinvent channel surfing? In #272, I covered Kyle Chayka’s excellent New Yorker piece on the rise of ambient TV: “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.” Netflix’s tagline for Play Something is: “Sometimes the best choice is not to choose”. I first wrote about this Netflix feature back in November (#270), and I still believe we will end up with many programmed channels of streaming shows, all curated by apps and by super curators (or digital DJs as we call them):
“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.”
The problem is multiplying as all video is going streaming, so there is a real need for a layer of influencer VJs to program channels across the various apps. In the meantime, I will continue my practice of deleting my profiles in all the streaming apps every few months and creating new ones because I find all of the recommendation algorithms to be utter garbage.

Miscellaneous Stuff
Making mRNA
The NYT has a nice step-by-step walkthrough of the complicated process of making a mRNA vaccine. A lot of research went into figuring out and optimizing the mRNA design – both the sequence and lipid coating – such that cells would uptake the molecules and start producing the viral protein antigens, but the rest of the process is basically Molecular Biology 101, which is why scale-up has been so effective. (SITALWeek's editor fondly remembers the pungent smell of plasmid-producing E. coli cultures incubating in the warm-room shaker from her grad school days). That's not to say that all viruses will now fall before the mighty mRNA. We just so happened to know a lot about the structure and biology of SARS-CoV-2-like coronaviruses before the pandemic, and the viral spike protein encoded in the mRNA vaccine has proven (so far) to be a unique, high-fidelity immunogenic target.

Seasonal Flu Bypass
The flu moves from human to human in a similar way as SARS-CoV-2, so, given all our pandemic precautions, it should not come as a surprise that there was effectively no flu season over the last year. Flu deaths dropped to only 600 in the US, down from 22,000 for the 2019-2020 season and 34,000 for the season before that. The circulating strains at the end of each season help determine the vaccine formulae for the following season, but this year we don’t have much data. Could we significantly tamp down the flu in subsequent years if we maintain some modest vigilance with regard to masking up and social distancing?

Facial Emotion Recognition Fallacy
Using AI to read human emotions from faces continues to be a scam (previously covered in #217). This hasn’t stopped a variety of startups from claiming it’s legitimate science for job interviews, employee/driver monitoring, etc. Even Amazon, Microsoft, and IBM have bogus emotion recognition programs, and Apple recently acquired a company in the sector. As outlined in this informative article in The Atlantic, the entire idea goes back to the flawed premise from psychologist Paul Ekman in the 1960s: “if affects are an innate set of evolutionary responses, they would be universal and thus recognizable across cultures.” Neuroscientist Lisa Feldman Barrett (whose work we’ve taken a keen interest in – e.g., see #272) conducted a comprehensive review in 2019 of all of the studies based on this concept and found: “there is no reliable evidence that you can accurately predict someone’s emotional state in this manner.” Further, the study concludes: “It is not possible to confidently infer happiness from a smile, anger from a scowl, or sadness from a frown, as much of current technology tries to do when applying what are mistakenly believed to be the scientific facts.” The face, vocal intonation, and body language are not open books to be read by other people, AI, or even ourselves. The machinery of human feeling and intention is vastly too complex.

And yet, despite the facts, Microsoft is pushing forward with algorithmic detection of emotional states for AI-driven virtual psychotherapy. Remarkably, the researchers at Microsoft’s Human Understanding and Empathy group even reference Feldman Barrett’s paper, but then appear to entirely brush it off! Unfortunately, even among research scientists and academics, it's not uncommon to have an entire ecosystem unable to unmoor themselves from past mistakes. I think it is likely that, over time, AI can get better at reading emotions if it can take into account readings from your heart, skin, and brain and combine that with contextual awareness of the situation. But, even then, will it account for the impact on your mood from what you ate for breakfast last Tuesday? Conversely, I think we will be able to imbue AI bots with a discrete array of simulated human emotions (e.g., as with CGI characters); however, I doubt we will ever be able to accurately understand/mimic the full breadth and depth of multi-layered human emotional expression with today’s technology.

99 More Bits
Kevin Kelly is back with 99 more useful bits of advice following his popular list of 68 last year. Like before, Kelly mixes the philosophical: “Contemplating the weaknesses of others is easy; contemplating the weaknesses in yourself is hard, but it pays a much higher reward” with the practical: “If you think you saw a mouse, you did. And, if there is one, there are more.”

Color Script
Wired ran an excerpt on how Pixar manipulates viewers with color effects from the book Full Spectrum: How the Science of Color Made Us Modern. It’s a fascinating look at Pixar’s extraordinary efforts to evoke a particular emotional response from their audience. The technology continues to improve for projectors and TVs, and soon screens may be able to trick our brains into seeing colors that we would have no way of perceiving in the real world.

Stuff about Geopolitics, Economics, and the Finance Industry
Chit Chatting with Jon
Jon was on the Chit Chat Money podcast last week talking through our process at NZS Capital, his career journey, and semiconductors. Our thanks to Ryan and Brett for their high praise of Complexity Investing as “one of the seminal pieces for investors in the last decade”.

To the Burbs
As data start coming in from last year’s great migration, the WSJ analyzed change-of-address forms from the US Postal Service to track the exodus from cities. Most folks landed in the suburbs outside of big cities, with a 43% increase in this type of move vs. 2019. These suburb seekers were greater in number than the combination of people who moved to towns and smaller cities. The Northeastern US continued to lose people while the Southern and Western US saw gains. The move to the 'burbs was already underway, and it will pull some urban commerce habits with it (see 30 Something Sneaker Wave for more on Millennial demographics).

Labor Dearth Demands Immigration
Spurred by the section on labor in SITALWeek #292, I had several interesting conversations with readers regarding labor inflation and the missing workforce. We are all wondering if the current lack of labor has more to do with government payments or if the preexisting shift away from some labor-heavy jobs was accelerated by pandemic closures. The market clearing price to get people back to work continues to rise, but it could reverse this summer/fall when there is more economic motivation to go back to work (and when kids are back in school and households can return to dual income streams). I appreciate the arguments that people need to work their way up a ladder of wages, but it seems like the first step on that ladder could be a little higher. But, don’t tell that to Walmart, which is working hard to keep wages as low as possible. As I read about the paltry population growth in the 2020 Census – only 7.4% from 2010 to 2020 – and had some of these conversations this past week, a pretty clear conclusion emerges: we need a much more open and welcoming immigration policy. In the meantime, expect wage inflation and an increased emphasis on tech and automation.

Why Do We Still Have Income Taxes?
The amount of fiscal and monetary stimulus in the last year adds up to multiples of the typical annual tax collection in the United States, which was $3.6T in 2019. I know we had a sharp downturn and are experiencing rising inflation this year, but if we can shell out multiples of the annual tax receipts and not see significant impacts, why are we collecting taxes at all? Yes, I am being provocative here, and I understand where this takes the math on sovereign debt levels if we think about the world in terms of traditional (but wrong) economic theory. As an experiment I’d suggest we eliminate income tax completely (which might actually motivate some more people to return to work in this tight labor market!). The experiment could go further by subsidizing low earners (or raising minimum wages, etc.). I pulled together various thoughts on interest rates and inflation here, and I think it’s worth running the experiment of no income taxes to see whether or not the ongoing power of deflation from technology has created a goldilocks scenario. Of course, the consequence of low rates continues to be asset price bubbles, which I think can be treated with targeted policies and an increase in capital gains tax rates to target short-term speculation (but not long-term investing). It’s the Information Age! So, let's experiment with no taxes and generate some data for making better policy decisions. I don’t know what the answer is, but the experiment from the last year is thus far intriguing.

Democracy's Culture of Innovation
“The question is: In a democracy that’s such a genius as ours, can you get consensus in the timeframe that can compete with autocracy?” This comment from Biden was circulated prior to his addressing Congress last week, and it’s worth reflecting on. I frequently come across the following false narrative: the West should worry about China because top-down control can move faster and get more done while democracy remains in gridlock. Well, if gridlock means the incredible pace of innovation we’ve seen from Western companies over the last couple of centuries, accelerating in recent decades, then I’ll take gridlock. If gridlock means entrepreneurs can create value without facing house arrest and having their companies taken away from them, I’ll take gridlock. I think Biden frames the question correctly, but I don’t think the answer is more autocracy in the West, and I especially don’t like Biden using these philosophical arguments so that his team can act more like autocrats. One of the great advantages of gridlock (most of the time) is that innovation can happen before the government gets in its way (for more, see: Pace Layers: Tech Regulation). Back in SITALWeek #214 I wrote:
“Throughout human history, there has been a spectrum of freedom and equality: if you have 100% freedom, you tend to end up with extreme inequalities; if you have 100% equality, you tend to end up with very little freedom. Capitalism, on the one hand, has tended toward freedom, thus causing ever-rising inequality, while Communism strives for equality by suppressing freedom. There is some threading of the needle of equality and freedom that we still need to do as a global society, but for now the path isn’t yet clear. I’d suggest the ultimate tact to take for companies and investors struggling to make sense of the China situation is to support rising freedom over the long term.”
And in SITALWeek #226 I wrote:
“Innovation requires free expression of creativity without fear. For a period of time, China did allow Alibaba and Tencent to create monopolies and monopoly-like profit pools, which caused them to pull ahead of the Western Internet platforms in terms of innovation. But, then they reversed course as Jack Ma relinquished his control of Alibaba and the government took increased control of the sector through board seats, censorship, etc.”
It’s hard to have autocracy without fear and lies, and it’s impossible to have significant progressive innovation in a system based on fear and lies.

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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 #293

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, tiny whiskers, 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

In today’s post: physical therapy in VR; old chips are even harder to find than new ones; movie makeovers; streaming video and the void of power laws in art; the ESG guarantee fairy; the asymmetry of direct listing IPOs; and lots more below...

Stuff about Innovation and Technology
VR PT
Physical therapy for rehabilitation in VR is more fun and the moves are easier to remember, giving a boost to recovery. There have been some examples of patients able to achieve more in VR, such as regaining balance, than in real life. Health and wellness seems to be emerging as a key VR use case (e.g., see also last week’s post on exercising in VR). Given the number of Internet videos I’ve seen of people falling while doing VR, virtual rehab might even be a self-perpetuating business. Wired has some tips for how to avoid motion sickness in VR.

Dark Side of Moore’s Law
This old 2008 IEEE article on the costly challenges of dealing with the rapid obsolescence of parts has some mind-blowing numbers, and the problem has likely been even further exacerbated in recent times given chip shortages and a shrinking legacy manufacturing base. Back then, the DoD was already spending $10B a year to manage the problem of spare parts for fighter jets, control systems, outdated software, etc. Fighting obsolescence can take the form of recreating, redesigning, or stockpiling. For example, there are companies that focus on recreating legacy wafers from Texas Instruments at a cost of thousands of dollars per chip, and Rochester Electronics has a vault that stores ten billion obsolete wafer dies. However, shelf life can be a concern. Since the introduction of lead-free alloys, soldered parts can be subject to the phenomenon called “tiny whiskers”, whereby the unleaded alloys sprout conductive tendrils that can cause short circuits. The problem caused Boeing to scrap an entire satellite.

Classic Movies Get Digital Ad Remake
The $20B industry for product placements in movies and TV shows is adopting technology to insert ads in old movies, according to the BBC. The tech allows the ads to change over time as people stream the programs. Given movies are increasingly filmed in digital world engines like Unreal and with virtual sound stages, I wonder how long it will be before nearly everything is changeable post production? A lead actress could wear one fashion brand for the US and a different one in France, China, etc. A getaway car could be a Tesla Plaid in one market and a Ferrari in another. A movie streaming in your house could even have personalized targeted ads. This scenario is already a reality for virtual worlds and games, so, in some ways, movies are just late to the party. Hopefully, customization will be done thoughtfully without changing the intention of the writers, directors, and actors. I think Casablanca would lose some of its charm if I were to spot Humphrey Bogart drinking Nespresso.

Consumerization of Health Tech
Consumerization is a common theme when industries go from the analog Industrial Age to the digital Information and AI Ages. We frequently see expensive, custom legacy hardware (that traditionally relied on distribution to act as a barrier to competition) eclipsed by an alternative with more widespread consumption. For example, in the continuous glucose monitoring (CGM) sector, Abbott’s Freestyle Libre wearable wireless patch, which cost less than $200/month, is being used by health nuts (via a number of different startups that offer off-label use for a higher membership fee) despite a current lack of published studies justifying their off-label use. It’s not necessarily that the devices being used are cheaper, but opening up the market allows startups to collect data to fuel an alternate business model that ultimately subsidizes the technology and grows volumes substantially, all of which should decrease the cost over time.

No Power Laws in Art
As media brands continue to promote their streaming services, cable network programming is turning into infomercials. In my recent experience, Discovery is using Animal Planet to show mostly reruns that advertise new episodes streaming exclusively for paying app subscribers. It’s not clear how the cable and satellite companies feel about paying Discovery to show reruns rather than new content on linear TV or how advertisers feel about buying ad spots that run with old content. The practice seems likely to cause the last of the non-sports fans to jump to streaming, especially if we see bundled apps. However, data from Nielsen suggest a deceleration in cord cutting since the 2016-2018 dive, perhaps because young folks have already left, and older folks are more likely to be sticking around for live sports. Sometimes top-down analysis of a trend can be useful, and the shift from linear to streaming video seems amenable to that line of thinking. To see the value creation, we need some ranges for the number of households paying for streaming services, how many they are paying for, what they are paying (the inevitable streaming bundle combines these last two figures), the amount of money spent on content, other costs, and a multiple of earnings the market might pay for the sector. Here are the numbers I’ll choose for the sake of the exercise: in five to 10 years we might have 500M global households paying an average of $30/mo for streaming apps (combining subscription and advertising ARPU; that figure would be higher in developed worlds/lower in developing); industry-wide spend of $80B on scripted and live (sports) content; an additional 25 points of other costs; and, a 25x multiple of income. So that’s: 25 x (500M x $30/mo x 12mo x 75% − $80B) = $1.375T. You can run various sets of numbers through this exercise, but a range of $1-2T in market value for streaming platforms five to ten years from now seems in the ballpark. This assumes that scripted video is an entertainment of choice because, on a long time horizon, user-generated content (social networks, YouTube) and immersive game universes could take share (unless we enter the metaverse to watch a movie on our virtual TVs).

The next step would be thinking about how that $1-2T in market value will divide up between content makers. There is one school of thought that media is just like any other business that goes from analog to digital, which implies a power law would emerge around data network effects, and one or two studios would make most of the popular content. However, I would argue there is no power law in art, so we are unlikely to see a winner-takes-most scenario. There are certain musicians at points in time who garner a large share of listening, and the same could be said of painters and other artists. But, there is no painter or singer who gets 90% share of all art and music over decades. Indeed, Netflix has seen its share of originals viewed globally drop from 64.6% to 50.2% over the last two years (and to an even lower 48.1% in the US). It seems more likely to me that studios who have proven most capable of producing enduring, quality content at scale (at least here in the US that would be Disney, WarnerMedia, ViacomCBS, NBCUniversal, and newcomer Netflix) will share the bulk of the market value of scripted streaming content with a long tail of niche creators. But, perhaps there is a power law in content spending because we will soon see TV shows that cost around $1M per minute of final, edited video to make, as Amazon’s new Lord of the Rings is apparently clocking in at $465M for the first season. Data (from the same Bloomberg article with the Netflix stats) do show mini power laws quarter to quarter for original streaming shows. For example, WandaVision was viewed ~85x as much as the average streamed show followed by The Mandalorian at 55x. So, while there are some small examples of power laws in video, the industry will most likely be leveled by the concept that there are no power laws in art. That means a handful of successful Hollywood studios with streaming apps splitting a multi-trillion dollar market value opportunity. But, as always, we'll watch the data and consumer preferences, because power laws are more typical in digital transitions.

Cloudflare’s Network Is the Computer
The zero-trust edge network company, Cloudflare, was showcasing their culture of innovation again last week, hosting their sixth product announcement ‘week’ in less than 18 months. Joe has some thoughts on the pace of innovation and their edge computing breakthroughs: Cloudflare has been making the dream of “the network is the computer” (they actually own Sun’s old trademark) a reality for many years by running what Cloudflare calls “isolates” and “durable objects” at the edge. In contrast, the typical cloud application today runs in containers and databases in giant, centralized data centers like AWS or Azure. Cloudflare’s use of isolates (similar to what is running your chrome browser) is an intuitive way to bring compute to the edge in a way that dramatically lowers cold start times (to virtually 0 ms) as well as the cost to the developer (as the company discussed back in 2018). Tie this into Cloudflare’s programmable network, zero-trust security suite, and durable objects (that address the question of storage and state in serverless workloads), and you truly have a distributed computer running on the network instead of in a cloud data center. Last week, Cloudflare took this a step further and partnered with Nvidia to bring AI to the edge. No longer do your AI/ML models need to be confined to a centralized data center, which has a number of hindrances in terms of performance and security. Now, your AI/ML can run on Cloudflare’s edge, utilizing ultra-low latency and high performance, adhere to data sovereignty and other compliance measures, and utilize higher security since you aren’t running your model on the end user’s device. As the world moves closer to AI and IoT via 5G and private networks, distributed inference will play a key role. Equally important as the discrete product announcements is the culture and structure that Cloudflare has developed, which has led to an innovation machine. Cloudflare exhibits several of the attributes of our Complexity Investing framework, including adaptability, a high degree of non-zero sum, stacking s-curves, and data network effects.

Stuff about Geopolitics, Economics, and the Finance Industry
False Platitude Investing Hazards
I am always puzzled when investment firms identify specific funds as ESG focused. If you want to invest in companies gaining share of the global economy (which seems like the goal for all but rearview-mirror investors), then every fund should be looking at the impact their portfolio companies have across a broad spectrum of the world. Having an ESG fund implies, at least to me, that your other products are not focused on the factors that will distinguish tomorrow’s winners. At NZS, we don’t think conscientious, globally-minded investing is just semantics; indeed, we named our company after our guiding principle of non-zero sum, or win-win. Jeff Bezos called it “create more than you consume” in his 2020 annual letter, but even that characterization would seem to require an asterisk: if what you create/consume uses resources in a damaging way, or takes advantage of people, then your contribution could be zero sum (no net benefit) or even negative sum (net negative). Labeling something “ESG” brings to my mind the Guarantee Fairy. In related news, Gisele Bündchen was hired by online betting company DraftKings as their new ESG advisor. Bündchen’s (who has a good track record in environmental and social activism), first task is to plant a bunch of trees (which is great in principle, but I might suggest that DraftKings choose less flammable regions than California and Oregon for seeding combustible fuel). If a company’s interpretation of ESG means carving special products out for investors, or hiring philanthropic supermodels as nominal advisors, it doesn’t necessarily indicate to me any meaningful, culturally-ingrained level of understanding of what types of companies are going to thrive in our economic landscape of ever-increasing transparency, complexity, and uncertainty. In contrast, if a company has, as its core business model, the goal of creating more value for all constituents – and thereby offering consumers a more valuable product/service – it will naturally take share of global GDP, particularly as the economy transitions from analog to digital.

Direct Listing Mechanics
I’ve flagged direct listing IPOs in the past because I worry about investors buying shares from company insiders who may have more information than new public investors regarding the company’s prospects. There are obviously elements of this issue in any corporate transition from one set of shareholders to another, and there is no perfect IPO process today as I covered in The Great IPO Debate in 2019. It is indeed the point of a direct listing to have a handoff directly from insiders to non-insiders, but it seems like disclosures could use a lot of improvement. For example, on the recent Coinbase IPO, senior insiders, including board members, sold around $5B worth of stock a couple of days before disclosing the details of those trades in SEC filings. It’s not clear to me that average investors understand this dynamic, and it would seem to contradict the entire point of direct listings, which is to make the process more democratic! Some unlucky investors acquired shares from insiders above $400, and the stock is below $300 today. I am not sure what is democratic about someone with potentially more information selling before disclosing to someone with potentially less information. To be clear, I am completely fine with insiders selling shares and diversifying their holdings. Also to be clear, I don't think anyone did anything wrong or had any bad intentions, I just question the motivations of direct listings in general. It would be nice to see stronger disclosures ahead of time listing the senior management/board members who plan to sell (and how much they intend to liquidate) and/or a staggered lockup similar to traditional IPOs. Of course, those lockups aren't perfect either, but giving some time for companies to report a quarter or two will typically enable investors to do more due diligence before insiders are free to start selling.

Some Recent Posts From NZS
In case you missed it, checkout our Q1 2021 Letter (PDF). Also, don't miss Brinton's whitepaper on network theory explaining what types of organizations are setup to succeed, and which ones are a recipe for failure (PDF). Lastly, I have collated a couple of SITALWeek sections on inflation and interest rates for easy reference here.

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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 #292

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, Sparklemuffins, 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

In today’s post: Fitness takes off in VR; labor force shifts may be the unlikely cause of post-pandemic economic changes for low paying jobs; indoor air quality challenges; Nvidia’s Grace; creating more than you consume; Sparklemuffins and T. rexes; too much cash in one place and not enough in another; difficult NFTs; and lots more below...

Stuff about Innovation and Technology
DillBot
Dill is a robot from Pickle Robots that can unload around 1600 packages per hour of different shapes, sizes, and weights from the back of a truck. Designed to work alongside a human, this co-bot is an interesting choice for fulfillment centers that intake a lot of packages. The company projects that one person could oversee five Dills at a time, stepping in when necessary to help with any awkward loads. Dill is about twice as fast as the Boston Dynamics Stretch bot, which is designed to work without any human oversight. Pickle’s strategy is to solve for most, but not all, use cases as a way to speed up co-bot adoption. Although Dill is much faster, more accurate, and less prone to injury compared to a human, it runs around the same cost as one humanoid ($50-100k for both upfront and annual operation costs).

Dance-Fighting VR Fitness
Exercise is the killer app for virtual reality, according to this Verge interview with the maker of the “dance fighting” game Supernatural. An unexpected benefit of exercising in VR is that things hurt less because your perception of your physical body becomes somewhat disconnected, which allows you to potentially work harder without noticing it. “We’re building a lot of different sort of music-driven, cohabitated social experiences...working with Pharrell, and OKGo, and Justice, and building these really cool, immersive, music-driven experiences where you’re moving your body and you’re inhabiting crazy, magical experiences.” I am reminded of the omnidirectional treadmill from Ready Player One.

Labor Logic Inversion
As I was reading about the extreme labor shortages my local restaurants are grappling with, this line really stood out: “Is the classic restaurant model fundamentally doomed and/or outdated—in a way the pandemic made clear for those providing its life force?” In that sentence, “those” refers to wait and kitchen staff. While investors fret about labor inflation, I am wondering if something different is happening, a sort of inversion of logic: you can’t have labor inflation if there is no labor. If people have moved on to other types of jobs or exited the labor force, it could cause a shift in the underlying economy more profound than the pandemic-induced consumer behavioral shifts. Perhaps the main issue isn’t that people no longer want to eat out at casual dining restaurants, it’s that casual dining restaurants have lost their labor engine. Even Uber and Lyft are struggling to find drivers as the economy reopens. It's as if there is a nationwide strike or walkout against low paying jobs that lack benefits and safety nets. Most of us have been thinking about the post-pandemic world in terms of consumer behavioral shift, but what if a labor behavioral shift is the more important angle? Logic inversions are rare beasts, and when you come across one, you want to examine it closely even if it ultimately proves wrong. The economic downturn disproportionately slammed people under 30 and those making under $30,000 per year (as I read recently in a client-only report from Empirical Research). Pandemic closures also pulled forward a lot of retirements, according to Empirical, with retired folks climbing from 19% to 20% of the US population.

The entire situation seems to again support the idea of a hollowing out of the middle of the restaurant industry, leaving a long tail of niche/high-end food providers and a large head of national chains that can invest in technology (like Chick-fil-A’s delivery robots or Domino’s new driverless delivery pods from Nuro). What’s left for the large middle segment of the industry that relies on seated dining and drinking? Rather than consumer behavior causing a shift toward delivery, will all of these factors instead force a shift to delivery for casual dining? The labor cost to draw people back into the kitchen and dining area might be even higher than the cost to deliver a meal, especially for a more efficient ghost kitchen with cheaper overhead costs. If this continues to play out, will the currently unsustainable and zero- to negative-sum value proposition of delivery morph into something more viable? The problem with delivery, which was recently very well explained by Jason Hirschhorn here, is that it appears to be an unnecessary abstraction of the relationship between the consumer and the business (similar to the credit card situation that I wrote about last week, which Square is trying to fix). There is also a big push to make the temporary alcohol-to-go rules more permanent, which would boost delivery margins as well. A Deloitte survey – which probably merits a degree of skepticism since who knows how we’ll all behave when the world reopens – suggests eating at home is a behavior pattern people are keen to stick with: only 7% of people surveyed said they would cook less at home post-pandemic. I believe most extended unemployment benefits taper off this September, and I think we should hold all predictions until we are a few months past that point in time. Recent government data on unemployment is encouraging, suggesting that there may not be a tidal wave rush back into sub-optimal services jobs.

While we’re on the topic of unviable businesses of the past, let’s look at brick-and-mortar retail trends. McDonalds is shutting down hundreds of locations inside of Walmarts. That seems pretty pessimistic to me – do we really think people won’t go back to stores in any meaningful way? That would seem to spell serious trouble for just about every retailer that isn’t either a long-tail niche provider or Amazon. As I wrote in #287, even Walmart appears “stuck in the middle” and saddled with the wrong business model. Without impulse buying and a good way to recapture lost trade promotion dollars – as foot traffic shifts to click and collect or delivery – traditional retail is upside down on its business model, physical space, and fulfillment capabilities. To see the challenge retailers are facing, look no further than the convoluted ways in which Kroger is creating duplicate robotic warehouses and Target is putting items on shelves, only to take them back off to send to a different sortation center for direct consumer shipping.

Indoor Air Quality Conundrum
The WaPo has a story on the Sierra Mar restaurant at Big Sur’s Post Ranch Inn and its new air purification system implemented to mitigate viral spread and improve air quality during California’s smoky wildfire season. While bad indoor air is certainly at the root of a host of medical problems/ailments (e.g., poor cognition – see #227), Sierra Mar’s elaborate system of air purifiers (including mini tabletop units), vents, and sensors seems perhaps intrusive and a little bit of a damper on the otherwise magnificent ambiance of the location. The proven, more elegant solution for protecting indoor air quality is the vertical laminar flow we’re used to seeing in semiconductor plants or other clean rooms: a uniform, steady flow of air venting from the entire ceiling sucked down through a grated floor. Granted, this setup would be a challenging retrofit for most buildings. Even just adding heavier filters and/or an air exchanger to constantly recycle air and/or seasonally heat/cool introduced outdoor air is going to significantly increase the HVAC energy burden. Just opening the window helps, but it’s the movement of air down and out that I suspect makes the greatest difference. Wholesale retrofit of our current infrastructure without significantly increasing energy usage seems a daunting task.

Masking Transaction Data
Encrypted messaging app Signal discussed why they are starting to trial payment platforms inside of Signal in a blog post last week:
“As the world stands today, the future of transaction privacy does not look great. The existing landscape is dominated by traditional credit companies, who over the past decade have been steadily pushing their networks for increased access to user data. They (and their data customers) are on a track to getting SKU level data of every purchase everyone makes everywhere. There are other contenders, such as regional online payments networks (like Venmo in the US), but the data story there is similar.
This is not a future we are particularly excited about. At Signal, we want to help build a different kind of tech – where software is built for you rather than for your data – so these are trends that we watch warily.”
Further, Signal sees much of the crypto world focusing on speculation over user interface and usability (I agree! See the last paragraph below on NFTs). For now, the company is open to connecting to wallets that meet its requirements around privacy, starting with one called MobileCoin.

Semi Fab Semi Shortage; Nvidia’s System-Level Advances
The chip industry, already struggling to keep up with demand, now faces a circular reference problem as the equipment needed to make more chips is itself facing a chip shortage. However, that’s not stopping Nvidia from pushing the boundaries of compute, as Jon reports: at their GTC conference earlier this week, Nvidia added an important piece to their ambitions in solving the world's toughest computing problems with the announcement of Grace, their first CPU for the data center. Grace will be based on the Arm instruction set, and Nvidia's goal (at least for now) isn’t to compete head-to-head with Intel for the vast majority of workloads, but to optimize at a system level for the next decade of large AI models and high performance computing (HPC) problems. In classic Nvidia fashion, the Grace CPU is much less about the CPU itself than its contribution to the overall system performance – Grace appears to be a relatively off-the-shelf ARM-based CPU, but it will allow Nvidia to leverage its NVlink interconnect to create a very high speed pipe between the CPUs and GPUs to access system memory, removing what was previously the bottleneck in training large AI models. As Karl Freund from Cambrian-AI Research put it: “Since no CPU vendors are building such an interconnect to enable this level of outrageous performance, NVIDIA had no choice but to design it themselves”. Jensen's ambition with Grace is to enable AI models with trillions of parameters, which seems a ways off given the reigning champ for large AI models is GPT-3 at 175B parameters, but we also know these models are doubling in size every 3.4 months. The broader takeaway is that the pace of innovation at the system level is in some ways starting to outpace innovation on the silicon itself, with Nvidia now offering the CPU, GPU, and DPU, and, equally importantly, their own interconnect technology in NVlink. Grace is scheduled to be deployed alongside Nvidia GPUs in the Swiss National Computing Centre's “Alps” supercomputer in 2023; Alps will be used for heavy simulations in weather, climate, materials science, astrophysics, etc. and will offer 20 exaflops of performance, a 10x improvement over the US DOE's “El Capitan” system that is also scheduled to come online in 2023.

Amazon’s Welcome Refocus
Following a string of disappointing annual letters from Jeff Bezos that seemed to put politics ahead of innovation (see #241), I thoroughly enjoyed this year’s letter. Sure, it had a lot of not-so-subtle bragging meant to put Amazon on a pedestal, but it also had a lot of great insight. “Create more than you consume” is so important to us at NZS Capital that we named our firm after it. It’s the win-win, non-zero-sum outcomes that we seek in companies we invest in and it’s how we run our own business.

Miscellaneous Stuff
Flamboyant Arachnids
Sparklemuffin and Skeletorus are two types of Australian dancing peacock spiders. This type of adorable jumping spider, of which there are 92 known species, is vibrantly costumed and employs elaborate mating dances. National Geographic has the story and the video for anyone not arachnophobic.

Quantifying Fossil Finding Serendipity
A mere one out of every 80 million T. rexes that lived to be adults has been found as a fossil. This calculation is reported in a new Science paper that predicts around 20,000 of the adult giant dinosaurs were alive at any given time during their 2.5-million-year reign of terror. With an average lifespan of 19 years, that gives 127,000 generations for a cumulative total of 2.5 billion T. rexes in the history of Earth. Clearly, becoming – and being found as – a fossil is an extraordinarily rare event. There are lots of fun facts in the summary link – for example, their bite strength apparently increased by an order of magnitude as they entered adulthood (at around 15.5 years old), suggesting that the juveniles and adults existed as different populations with different prey species, which could explain why there is no fossil record of other medium-sized predators coexisting with T. rex, as the juveniles would have filled that niche role.

Time’s Arrow from Orthogonal Neural Coding?
As the brain takes in sensory input, it has to find a way to quickly distinguish new information from memories of the very recent past without getting the states confused. Scientists recently discovered the brain does so by rotating the neural signal to be encoded as a memory, thus preserving the ability for both states to utilize the same set of neurons without overwriting or muddling information. Physicist Sean Carroll suggests the feeling that time is flowing in one direction might come from this mechanism of constantly comparing past to present. This leaves me with a couple of questions: given thoughts and emotions are essentially a sixth and seventh sense, does the brain also flip these as your mind goes from one random idea or feeling to another? Regarding Lisa Feldman Barrett’s work on the brain as a prediction machine – where in this mechanism does the prediction lie, if it’s not encoded in the memory or the new information? I wrote more about Feldman Barrett’s seminal work in the final section of #272.

Quantum Computing Radiation Wrench
If the hypothetical idea of quantum computing turns out to be a real thing in some other universe (I suspect not this one), one of the big problems will be cosmic radiation. Scientists have been calculating just how much error correction would be needed to deal with cosmic rays hitting an array of qubits several times per minute. “An impinging particle ionizes the substrate, radiating high energy phonons that induce a burst of quasiparticles, destroying qubit coherence throughout the device.” The rays would cause a burst of errors that would need to be dealt with in order to get accurate results from the theoretical devices.

Stuff about Geopolitics, Economics, and the Finance Industry
From Way Too Much to Way Too Little Cash
VC funding reached a record smashing $64B in Q1 2021. That tally is 43% of all the money raised throughout 2020. SPACs also raised $99B in Q1. There’s been a whole lotta money burning holes in select people’s pockets lately.

In contrast, outside of venture-backed startups, people are turning their empty pockets inside out to look for change. Pew reports that over 150M people fell out of the middle class in 2020, the first time the global number of middle-income individuals has shrunk since the 1990s. Most of this loss happened in emerging markets, with the middle class cohort’s total number somewhat buoyed by around 100M people dropping from upper-middle/high into middle class. The number of poor people, the lowest earners, rose from 691M in 2019 to 803M in 2020. If I circle back to the section above on restaurant labor, it’s quite possible the free lunch of underpaying the low-skilled service industry (not to mention the lack of benefits and savings programs for those jobs) might be forced to come to an end in the US with wages that need to be many multiples of where they are to reach stability. Or, maybe Dill will just take all the jobs.

NFTs Are No Picnic
Brinton and I each bought some Bitcoin back in 2014, not because we had some unique view, but because we were curious – it seemed interesting, but we didn’t understand it. What better way to learn than first-hand experience! In a similar spirit, I bought my first NFT this past week just to get a feel for what it's like to own something digital that anyone else can see. Buying Bitcoin even back in 2014 was quite easy. Buying an NFT now is anything but. Between the user interface of OpenSea (a leading NFT platform with backing from a16z), which makes a dumpster fire look like boat drinks, the kludgy interplay with Fortmatic (don’t even ask me what their role is), and connecting to a separate wallet, the entire process is for the brave at heart. It felt a bit like using eBay in 1996 when I had to go to the post office to get a money order to mail to the seller before they would ship my item. I assume it will get easier, and I look forward to continuing to experiment and learning more. I wrote more about NFTs in SITALWeek #284 and #287.

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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 #291

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, muons, 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: Q1 update from NZS; VR takes off; Chief Dissonance Officers; APIs and tolls; custom data center chips; single-family home rentals begging for regulation; digital Yuan; global conflict; and lots more below...

Stuff about Innovation and Technology
NZS Q1 2021 Investor Letter
The NZS Capital Q1 2021 Letter is available to read here on our website and in PDF form.

Sleepstreaming
According to StreamElements, hours streamed on Twitch in March again surpassed 2B, up 105% y/y. StreamElements also notes the rising phenomenon of watching people sleep on Twitch, with one streamer staying on continuously from March 14th to April 4th. The Truman Show continues to predict the future...

VR Game On
Monthly-connected VR headsets (approximating monthly active VR users) on game platform Steam have nearly tripled from 1M in January of 2020 to just under 3M in March of this year. For comparison to another disruptive platform shift, the first iPhone sold just over 6M units. This notable acceleration of use, which follows the release of the new Oculus Quest 2 headset from Facebook, indicates a growing flywheel for the market. More users will attract more developers/games that will attract more users. Facebook overall had 58% share of VR devices on Steam. It’s way too early to call the AR/VR hardware winner, and it’s also too early to know whether the headset itself will be akin to a computer monitor (e.g., having little value compared to the underlying software and developer platforms). The biggest question remains whether an open platform will win against the walled-garden, vertically-integrated efforts from Apple, Facebook, and others. Over the history of technology, things tend to migrate back and forth between open and closed, and I’d argue we’ve overstayed our welcome in closed systems like iOS.

Consumers Limit Local Aisle Browsing
Google reports that searches adding the word “local” are up 80% year over year while “in stock” searches are up 8,000%. Searches for “curbside pickup” on Google Maps are up 9,000%. YouTube is also becoming a hot spot for ‘see before you buy’, with 45% of viewers claiming to watch a YouTube product demo ahead of purchase.

Free API Usage Ruled in Interest of Common Good
Google’s Supreme Court victory – following a decade-long battle with Oracle – marks a critical step for keeping software APIs (application protocol interfaces) open and accessible. The case concerned Google copying Java’s API without permission, which allowed them to make Android compatible with Java. Copying operational code is a common practice, and a lot of companies make a business out of API management (or are built off the ability to use APIs). Google celebrated by pouring salt on Oracle’s wounds with their announcement that the Internet giant would be switching from Oracle ERP to SAP. Notably, the Supreme Court ruling makes it clear that value is created by the companies building on top of the APIs, as, otherwise, the API itself would have no value. There are some major API battles that could emerge in the coming years. For example, companies like Plaid that access various accounts at financial institutions largely for free could end up being denied access or charged for the data. Indeed, as various platforms garner more and more proprietary data, we may see tolls on the cloud highways for data access via APIs, which would be allowed under the Supreme Court ruling as I interpret it.

Cook's Dissonance
I was impressed as always with Tim Cook’s mastery of cognitive dissonance in this interview with Kara Swisher. He railed against the problems of a surveillance world while failing to mention Apple’s existential dependence on China and its manufacturing system: “If you think about a surveillance world, a world where you know, somebody is always watching everything you're doing. And in the case of a phone or a computer, it's also what you're thinking because you're typing in searches and so on and so forth. And so I think in that kind of world, you begin to do less. You begin to think less. Your freedom of expression begins to narrow and the walls move in on you. And I start thinking about that at its natural endpoint. And I don't want to be a part of that society.” And he also said everyone should rely on Apple to decide what they should or shouldn’t view, ragging on competing platforms: “I can only speak for Apple. And from the very start, we've always believed in curation...The reality is that the web in some areas has become a dark place. And without curation, you wind up with this firehose of things that I would not want to put into an amplifier. Right. Which is what tech is in a large way. If you have a platform, you amplify things.” Curation is good when it's an open platform for all curators, but when it's one curator's opinion, that sounds more like we are under the CCP in China. (Quotes are copied from Happy Scribe.)

Dimon’s Dissonance
Jamie Dimon penned a rather lengthy annual letter to shareholders this year (weighing in at 66 pages for the PDF). The document resembles a business book with chapters on corporate purpose and lessons on leadership, which, frankly, I skipped (our personal experience with Chase, not to mention Dimon’s prior pandering comments on these topics, suggests those sections are probably fictions at best). I did take initial interest in section three: “Banks’ Enormous Competitive Threats – from Virtually Every Angle”. However, this too was disappointing; rather than being an honest account of Dimon’s failure to lead and innovate at Chase, this section appears to be a call to regulators to squash the competition (a topic covered in #275). Dimon says: “We believe that many of these new competitors have done a terrific job in easing customers’ pain points and making digital platforms extremely simple to use. But growth in shadow banking has also partially been made possible because rules and regulations imposed upon banks are not necessarily imposed upon these nonbanks.” Dimon also simultaneously praised big tech platforms while suggesting they could face regulatory pressure on various aspects of their businesses. Lastly, Dimon suggested Chase is on the hunt for fintech acquisition targets.

Square Rooting Out Credit Card Networks/Issuers
Elsewhere in the world of fintech innovation, Square is reportedly hiring to build out a system that would sidestep the big credit card networks – and the banks like Chase that issue the cards. It would take significantly more adoption of the Cash App and businesses using Square’s products to facilitate enough direct money transfers to create a sustainable business, and they need to figure out how to overcome the loyalty-program switching barrier. A while back, Jack explained (in a meeting I attended) that he viewed credit card companies as abstracting loyalty between business and customer and inserting it between the customer and the credit card. Clearly, a long-standing part of Square’s plan is achieving reversion of this loyalty back to the business-customer relationship.

Custom Chips Taking Over the Data Center
In reading this Next Platform article about all of the chips Amazon has designed in house, including a new rumored networking chip to take on Broadcom, I wonder how big the merchant silicon business will be for the data center in a decade? If we are moving toward a world where, outside of China, nearly all compute takes place at Amazon, Google, and Microsoft, and these companies will ultimately design a series of ASICs tuned for their various workloads, what’s left for everyone else? In the tech sector, it’s always been a tug of war between custom vs. standard chips, but these giant cloud platforms taking such a high share of compute might mean that war is ending, at least until new standard silicon comes around that is ahead of the captively-designed chips. I recall covering the communications chip market (Comm ICs) in the late 90’s and seeing the ebb and flow of custom ASICs vs ASSPs (application-specific standard product), etc. It’s almost always and (not or), meaning we will still need a lot of standard silicon along with custom chips. Following historical patterns, Amazon might even start selling these chips externally, becoming a merchant provider of many types of chips to others – an outcome that Amazon’s head of EC2 doesn’t rule out in this video interview, but there are no current plans. This question is at the heart of the potential transformation at Intel – can they provide both standard processors and the ability to collaborate on custom chip manufacturing for cloud platforms? It’s a significant challenge with the outcome to be determined.

TSMC’s Capex Explained
A couple of weeks ago, there were a lot of headlines around TSMC’s $100B three-year capex spending announcement. Jon provides some helpful context on these numbers, which are not very far off trendline: This allocation is not out of character for TSMC – they go into heavy capex cycles, where they spend ~50% of sales on capex, ahead of critical technology transitions (something we addressed in a podcast over the summer). They followed the same spending pattern early last decade before 4G smartphones ramped, which, in turn, accelerated TSMC’s revenues and moved them into a leadership position for the next decade. Their record investment levels also reflect the upward pressures on capex of Intel outsourcing more to TSMC, and TSMC presumably spending ahead of capacity being built on US soil. Meanwhile, insatiable chip demand and drought in Taiwan continue to collide as the country has now cut water to 20% of the country’s irrigated land in an effort to keep chip manufacturing running. As Jon noted in this Motherboard article (probably the only time Jon will be in the same paragraph as a Wes Anderson reference!): “The current shortage was triggered by COVID-19-related production and shipping problems but has become increasingly dire over the past few months, as the list of whimsical disasters affecting the industry start to resemble a Wes Anderson montage sequence. ‘Unless you were in the tech industry, no one even knew what a semiconductor was two years ago. And now it's on the cover of the Bloomberg and The Wall Street Journal.’”

Miscellaneous Stuff
Wobbly Muons
A couple weeks ago, I highlighted the evidence for a new particle discovered at CERN. When quarks decay, the Standard Model assumes equal decay into electrons and muons, but there were muons missing from experimental results, which meant quarks might be decaying into something different. This past week, results from Fermilab showed that the wobbliness of muons is much larger than expected. This would mean that some other type of particle is messing with the muon’s magnetic moment, effectively pushing on them. It’s not necessarily the case that these two anomalies are related, but both suggest some missing part of the Standard Model. The Standard Model is still right, it’s just in need of some additional characteristics, which is good, because we can’t explain a large portion of the mass and energy in the universe today! Amazingly, the discrepancy in the latest experiment comes in the 8th decimal place! The Standard Model predicts a number of 2.0023318362 and the actual results were 2.0023318412 (for Fermilab’s first run, which conforms to the previously reported Brookhaven experimental number...the two experiments were run on the same 700-ton electromagnetic ring, which, incidentally, was moved via barge/truck from New York to Illinois to take advantage of more advanced equipment). All the results are not 100% certain, but are moving toward highly likely, and we will probably need even bigger, better particle accelerators to track down the missing part(s) of the Standard Model equations describing the universe. I can’t help but picture some alien kid (or human from the “real” world that contains this simulation) named Barry, who has been running our universe as a simulation for a science class project, snickering “They still haven’t found the Barry particle!”.

Stuff about Geopolitics, Economics, and the Finance Industry
Pensions Push Home Ownership Out of Reach
The cheapest one-third of homes in the US are up roughly 80% in value since 2014 – significantly more than the middle-third (up ~60%) and twice the most expensive homes (up ~40%), according to CoreLogic data. This increase is (at least in part) a result of increasing scarcity as homes are converted to rentals. There are $4.5T single-family rental homes in the US, up from the 2007 peak of just under $2.5T, according to the WSJ. Most of the growth has come from the large number of institutions (like pensions) seeking yield and returns by owning and renting houses at scale. Perversely, these pensions are driving up the home costs, and, in some cases, rendering home ownership unachievable for the same employees they are supposedly assisting with saving money for retirement! It’s not just pensions though, there are now 200 players in the institutionalized single-family housing finance ecosystem, according to John Burns Real Estate Consulting. Homebuilders are even skipping the middleman, and, instead of selling new houses to institutions, are just building rental-only communities to manage themselves. Demand for this class of housing will be on the rise as Millennials scatter from cities to start families but find home ownership out of reach (owing to high student debt and rising home costs). When I wrote about this topic back in SITALWeek #202 (nearly two years ago), I suggested that even companies like Zillow and Opendoor might eventually be large owners of rental homes. The entire trend now seems unsustainable to me. I am not a fan of unnecessary regulation, but the government has played a role in creating this problem whereby institutions have ample access to capital at substantially lower rates than individuals (the entire situation is also a side effect of the multi-hundred year decline in rates due to technological deflationary pressure), making it impossible for many aspiring home buyers to have a shot at owning a home (which is one of the best ways to save for the future and participate in the rising-asset-price economy). It appears this trend will exasperate inequality, and it seems like something has got to give sooner rather than later.

China’s Digital Yuan Scheme
China’s central bank is issuing a new digital currency that just sounds like digital cash rather than being any meaningful innovation. However, the WSJ report implies it’s the start of something bigger: “Beijing is also positioning the digital yuan for international use and designing it to be untethered to the global financial system, where the U.S. dollar has been king since World War II. China is embracing digitization in many forms, including money, in a bid to gain more centralized control while getting a head start on technologies of the future that it regards as up for grabs.” Janet Yellen and Jerome Powell are apparently considering a digital dollar as well. Such digital cash is much easier to track and surveil centrally, unlike crypto currencies, which can be anonymous. The digital Yuan will track the paper version closely and could allow a circumvention of the global money transmission networks, thus allowing people and companies to get around Western sanctions. This is the main reason the US is said to be concerned about the digital Yuan. Bloomberg reports on Peter Thiel’s recent comments that Bitcoin “should also be thought [of] in part as a Chinese financial weapon against the U.S...It threatens fiat money, but it especially threatens the U.S. dollar...[If] China’s long Bitcoin, perhaps from a geopolitical perspective, the U.S. should be asking some tougher questions about exactly how that works.” Thiel’s comments reported in the article include a wide variety of trolls against various companies, including, amusingly, ones in which he is directly involved.

How to Frame the Global Conflict
I think the best framework to understand the rising conflict between the West and China is to assume we are already a few years into WWIII (or whatever you want to call the next global conflict), and then to ask the question: what are the odds this conflict will de-escalate versus the odds it will continue to escalate? What are the motivations – political, ideological, economic, egotistical, etc. – that will cause rising conflict? Is decoupling possible? Who has the most to lose? Who has the leverage? Things that would cause me concern about further escalation would be economic unrest or increased suppression in China, because these are historically very good reasons to distract people with a patriotic battle. Access to advanced semiconductors remains the largest leverage point in the conflict, which comes down to whether or not the West can defend Taiwan long enough to build out leading-edge capacity in the US and Europe. I am often haunted by the notion that war historically tends to be overall positive sum (a topic covered by Robert Wright in his book NonZero).

✌

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 #290

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, coin tosses, 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

In today’s post: big tech signals that remote work was a bust; German radios, AR, and human flaws; Hollywood studios deprive Netflix; new Arm products underscore Nvidia acquisition; what ants teach us about canals; coin tosses; over the hill Millennials; and lots more below...

Stuff about Innovation and Technology
Flamethrowing Virtual Villains Coming to Park Near You
Pokémon-Go-maker Niantic has released a video demo of what a 5G, augmented-reality, multiplayer game experience might look like. In Codename: Urban Legends players use their phones to cast spells (send virtual fireballs) at their AR adversaries, and everyone can see the gameplay taking place in the real world via their phones. Regardless of where you are standing, AR characters/projectiles appear to occupy externally-consistent physical locations thanks to the low latency of 5G networks.

Green Commuting
Google Maps has a new feature that will provide a route option with the lowest carbon footprint in addition to the fastest route. Maps will also start showing routes based on what it thinks is your preferred method of travel (bike, subway, car, etc.). Google is also working on a pilot with a Fred Meyer grocery store in Oregon that will allow store employees to know when you will be arriving for your order pickup.

Hollywood Streaming Success Deprives Netflix
As the big Hollywood studios see success with their streaming apps, they have all signaled they will be hanging onto their content rather than continuing to license it to rival Netflix. Last week I mentioned that of the top 19 streamed shows, 10 were licensed by Netflix from other studios. NBCUniversal is thinking of bringing movies, like the Fast & Furious and the Jurassic series, back from Netflix and HBO Max, according to Bloomberg. Meanwhile, Netflix is paying $450M for Knives Out 2 and 3. Previously, Netflix topped out at $130M for The Irishman.

Nvidia's Arm Acquisition Part Defense
The Next Platform reports on Arm’s new V9 chip architecture in this informative article and implies that Nvidia’s targeted acquisition could be more defense than offense. At question is the ultimate size of the GPU market for standalone, homogeneous data centers for machine learning/training compared to the vastly larger market for custom instructions for inference in a variety of heterogeneous situations. “In other words, Nvidia’s GPU compute business has a limit to its expansion, and perhaps it is a lot lower than many of us have been thinking. The pendulum will be swinging back to purpose built CPUs that have embedded vector and matrix capabilities, highly tuned for specific algorithms. This will be specifically true for intermediate edge computing and endpoint IoT devices that need to compute locally because shipping data back to be processed in a datacenter doesn’t make sense at all, either technically or economically.” The combined prowess of Nvidia and Arm will set the bar even higher and accelerate the moving target for many would-be chip challengers. The FT reports on Groq, a chip startup from one of the brains behind Google’s custom TPU for cloud-based inference workloads, which is looking to raise $300M. That amount might get them to their first version of a chip, but how much progress will Nvidia or Amazon’s team make in the meantime? SemiWiki has a post on the rising, but still small by historical standards, VC market for chip deals.

Big Tech Returning to Offices Casts Doubt on Remote Work
Big tech platforms seem to be following diverging paths for returning to the office. Microsoft has already started bringing some employees back but is maintaining a flexible policy by allowing any employee to work remotely for less than half of their time or apply to work remotely full time. Facebook will begin welcoming employees back at 10% of capacity in May and 50% in September for their California locations. Last year, Zuckerberg indicated half of employees might work remotely long term, and the company has been ramping up their focus on VR collaboration lately. However, that goal doesn’t seem to apply short term, as Facebook has said all employees will come back within one month of each office returning to 50% capacity. Free food at corporate cafeterias and buses hauling workers into offices will be missing when offices reopen. This change will surely put a burden on highways and make for some interesting local restaurant dynamics. You’re also out of luck if you want to kick back at home and work for Google, as the company will allow employees to work remotely for more than 14 days a year only after formal application, and they indicate full-time remote will only be granted in “the most exceptional circumstances”. Amazon is also seeking butts in seats as it returns to an “office-centric culture”. The company noted: “We believe it enables us to invent, collaborate, and learn together most effectively”. Apple has not yet publicly updated their plans for employees returning to work. If you work for Salesforce, Zillow, or a number of other tech companies, it seems flexibility will be on your side. This should be a major recruiting advantage for these companies, unless the downsides of working from home outweigh the recruiting upsides – after all, the big Internet platforms herding employees back to the office are data junkies, and they’ve clearly crunched the numbers on the negatives of remote work. I am surprised job location isn’t being defined by function, with more collaborative/creative jobs back in the office and more routine number-crunching/programming/support positions at home. It seems like a real shame that some of the biggest companies in the world didn't decide to evolve the concept of work, perhaps wasting a once-in-a-lifetime opportunity.

Restaurant Bifurcation; Comfort Food Survives Pandemic
Overall, 10% (80,000) US restaurants closed permanently in the pandemic, according to data reported in Restaurant Dive. Other estimates have put the number above 100,000, and surely more are still to close. Largest chains fared the best, while chains with 500 or fewer locations have closed at a higher rate than independents. Of the small chains, those having only 51 to 100 locations experienced the highest (16%) closure rate. This evidence of a hollowing out of the middle is something we see often in the analog-to-digital transition where the big get bigger, the niche independents do well, and those in between tend to struggle. Comfort food providers had the lowest closure rates.

Stuff about Geopolitics, Economics, and the Finance Industry
New Edition of Ole Peters’ Non-Ergodicity Economics
Ole Peters has a fresh new video walk-through of his Gresham College coin toss. It’s a great way to get a handle on why the path through time matters more than the average expected outcome, and thus why all the math most investors are using is misinformed. In short, there is only one you and only one path your portfolio will ultimately take through time. You don’t have the luxury of playing the game over and over again and averaging the outcome. We’ve been passing the old Gresham talk around (which is still great!) since we wrote about it in our 2014 paper Complexity Investing, and we’re thrilled there’s a new high-def explanation. The logic also explains why GDP can grow while the individual outcome continues to decline on a relative basis.

1930’s German Radio, Facebook, and AR
I had two thoughts when I saw the headline that Microsoft will be selling $22B of HoloLens augmented-reality headsets to the US Army. First, I flashbacked to the disturbing Black Mirror episode “Men Against Fire” where neural implants are used to cause a group of humans to appear diseased in order to spur their extermination. With human proclivity toward tribalism, it’s easy enough to convince one group of people of falsehoods concerning another group of people, and AR/VR could make it much easier. The second thought I had was: I thought killing people was all about AI drones these days, so who needs $22B of goggles? The typically pacifist Satya Nadella defended the decision to a group of upset employees by saying: “we made a principled decision that we’re not going to withhold technology from institutions that we have elected in democracies to protect the freedoms we enjoy.”

Of course new technology has a long history of adoption by militaries. IEEE Spectrum has an interesting explanation of German radio in the 1930s. It takes time for humans to get used to new forms of communication, and Hitler used this fact to his advantage in the 1930s with the discount Volksempfänger (“people’s radio”). The receiver was about half of the cost of other models at the time and provided entertainment leading into propaganda. One of the important points about the overwhelming power of media is the often-overlooked direct parallel between the destructive aftermath that follows the introduction of a new media form (e.g., as with German radio) and our current media neophyte: Facebook. Historically, over time, humans have developed ways to counteract the manipulative power of various iterations of media – from spoken, to print, radio, and, most recently, TV. Eventually, the new media forms all lose the swaying power they had early on (after we’ve had a chance to develop immunity, so to speak). But, the persistent novelty of social media has apparently been able to – yet again – virally overwhelm our brain’s prediction machine to such an extent that we haven’t had time, as a species, to engage defensive mechanisms and take back control. Unfortunately, thanks to the ever-accelerating pace of technological change, our adaption windows are shrinking dramatically. Now, the fear is that AR/VR may be arriving too quickly after the advent of the Internet; and, they will have the ability to disrupt our brain’s sensory information processing and utterly garble the line between truth and fiction. Hopefully we don’t run out of time to inoculate ourselves from such profound manipulation before it’s too late.

Ants and Canals
Efficiency is fragile. That is a lesson we learned from ants. In Complexity Investing we wrote:
When it comes to Resilience, we have a lot to learn from ants – masters of Resilience. When we think about ants most of us would describe them as industrious. We’d certainly not think them lazy. Stanford University professor Deborah Gordon offers a different take. She’s been studying the same group of ants for the past 30 years and may know more about the behavior of ants than anyone. What she found is surprising: most of the time about half the colony is just sitting around doing absolutely nothing. Why? Certainly they could gather much more food if they all pitched in, right? Going back to complex systems, in nature, we see extreme events happen with some regularity. What if a flash flood destroys the part of the colony out harvesting or destroys the nest? Conversely, what if someone sets up a picnic nearby? No problem, call out the reserves! Ants have adapted.
When I read all of the press about the Suez Canal blockage, all I could think of was ants. If ants were in charge of global maritime freight, they would have engineered the system so as to avoid such a crippling event! One of the funny paradoxes of the rising use of technology in the supply chain is that efficiency has created fragility (especially in combination with globalization, which has created its own vulnerabilities). Just-in-time is great until it isn’t. And, when the entire supply chain has been MBA’d to death by consultants and data analytics squeezing pennies out of working capital, you’re going to have problems. We’ve seen a lot of these supply chain problems since COVID hit – from safety gear, to semiconductors, to hacking, to whatever was sitting in those 20,000 containers on the Suez (hopefully not toilet paper!). The head of shipping leader Maersk says solving this problem will require supply chains to move from just-in-time to “just-in-case”, a transition reportedly already underway. Distributors who are in the business of staging inventory and parts will likely reassume a bigger role after being sidelined by technology, which previously allowed many companies to cut out the middlemen. For industries that rely on the ability to quickly change products, like fashion, moving supply chains closer to customers is another likely trend.

Debt-Burdened Millennials Enter Prime Spending Years
Millennials start turning 40 this year. Peak income, savings, and consumption years in the US are from 35 to 54, where spending has historically averaged around $60,000/year. The Boomers have been, and continue, entering their lower spending years (and who cares about us stuck-in-the-middle Gen X losers!?). It’s worth noting the transition because the Millennial group, which will dominate the peak spending cohort for another 15 years, is coming in with more debt, higher housing costs, and less net worth. Kids are a big driver of those higher spending years as well, and birth rates have been down; although, as I wrote in 30-Something-Sneaker Wave in 2019, there might be a little tailwind coming.

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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 #289

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, hummingbirds, 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

In today’s post: creator confusion; manufacturing exits China; Salesforce and Slack's new collaboration tools; AI from robots; SoCs, Intel progressing, and Phoenix rising; Amazon’s expanding healthcare initiatives; a mystery particle; EVs on the road; and lots more below...

Stuff about Innovation and Technology
Cloud Spending Outpaces Legacy
Enterprise spending on cloud computing reached nearly $130B in 2020, passing on-premises for the first time, with 35% growth in cloud compared to 6% decline for on-prem to $90B.

Digital Ad Power-Law Winners
Google, Amazon, and Facebook garnered 90% of digital advertising in the US in 2020, up from 80% the prior year. That tally of around $117B amounts to half of all US ad spend, according to GroupM estimates as reported in the WSJ.

Streaming’s Surge and Carbon Footprint
Streaming video subscriptions grew 26% globally to 1.1B in 2020. Nielsen pegs Netflix as having 19/20 top original and acquired streamed series, while Disney+ had 7/10 top streamed movies. In related news, an hour of Netflix video streaming uses about the same amount of carbon as driving a car a quarter mile.

Watching Wearables
Smart wearables grew 27% in Q4 2020 to 154M total units and 28% for the year to 445M. IDC included earbuds (hearables) in the tally if they also contained some sort of fitness tracking or smart assistant.

Airborne Virus Vigilance
Thermo Fisher Scientific’s AerosolSense Sampler is a $5,000 device that can sense the presence of viruses like COVID in the air. One expert said it’s like “looking for a needle in a haystack in a field of haystacks”. The device isn’t real time – collection cartridges require removal and laboratory analysis to obtain results – but potential applications include compliance for hospital safety protocols. If we’ve learned anything in the last year, it’s that we’ve been underestimating air as a vector of viral spread. I'd expect an increased focus on indoor air quality.

Robots Can Accelerate AI
Jeff Hawkins, creator of the Palm Pilot and founder of neuroscience company Numenta, has some intriguing ideas around the importance of embodiment to developing artificial general intelligence. Hawkins believes researchers should focus on robots interacting with the real world and learning to build artificial intelligence instead of deep learning in the data center. Robot progress has been slow as this WaPo article points out, but that is an overly cynical take. We see this mistaken analysis quite often when a group of companies or experts is stuck in an Industrial-Age mental model, unable to see how the consumerization of a sector brings innovation, scale, and simplification. I’m not saying Rosie from the Jetsons is around the corner, but let’s not forget what happens when an industry shifts into the Information/AI Age like robotics is about to do – I covered the robot revolution in more detail at the top of SITALWeek #257.

Salesforce Advances Collaboration Tools
Salesforce has announced an AI overlay on Zoom that gives you information on conference participants and helpful advice, like suggesting to slow down your talking speed. It’s hard NOT to imagine the world five years from now with Terminator-style, augmented-reality AI overlays. The vast potential this technology has to eliminate cognitive bias in the decision making process is hard to wrap your head around – sensors and AI will easily be able to spot bias when we can’t spot it ourselves, and eye tracking and health sensors might know our preferences before we are conscious of them. It breaks my brain to think about it. In other Salesforce news, its pending acquisition target, Slack, announced you can Slack to Slack with other companies, an effort to remake the tool into a full competitor of email. From one perspective, buying Slack is part of a larger arc in the Benioff vs. Nadella battle. Benioff got a little irritated when Nadella snaked the LinkedIn deal away from him five years ago, so he paid $750M to hire Bret Taylor for his would-be Office-killer Quip. Taylor is now President of Salesforce. Benioff chose AWS as Salesforce’s preferred cloud as the LinkedIn deal fell apart. Benioff is perhaps a lover scorned after the rumored merger between Salesforce and Microsoft came to naught the year before the LinkedIn deal was inked. Does his revenge plot now have a chance at success as Slack iterates quickly on features and will have the full Salesforce sales force backing it soon? What else does Salesforce need to storm the walls at Redmond?

Fools Rush in Where Angels Fear to Tread
For Microsoft, first it was “Windows, Windows, Windows!”, then “developers, developers, developers!”, then “advertisers, advertisers, advertisers!”, and now it’s “creation, creation, creation!”. As Microsoft is rumored to be buying chat service Discord, Bloomberg reported Satya Nadella’s words from a month ago: “Creation, creation, creation—the next 10 years is going to be as much about creation as it is about consumption and about the community around it, so it's not creating alone...If the last 10 years has been about consumption—we're shopping more, we're browsing more, we're binge watching more—there is creation behind every one of those. But I see that phenomenon being much more democratized.” I think I might agree with the spirit, but I am having a hard time with the math. If everyone is a creator, then who has time to consume? What is the ratio of creators to consumers in today’s economy, perhaps 1:100? For every person working hard to create art, 100 people are sitting back and consuming it. Where could the ratio go – 1:10? A 1:1 ratio seems illogical without an absurdly densely overlapping Venn diagram of creators and consumers, but maybe I lack sufficient imagination.

Kevin Kelly famously wrote about 1,000 true fans in 2008 (and, Kevin is right about everything 20 years early!). A few years before that essay, Marc Andreessen started Ning to go after niche networks of connected people and super fans (it failed, and I am always surprised by how few people have heard of it!). Twitter is trying to build a business around Super Follows. What is the motivating force behind this new creator community building? Could it be that in our digitally isolated world, we’ve lost our sense of physical community? In a 1973 Playboy Magazine interview (which I reference frequently!), author and human-condition commentator Kurt Vonnegut had the following soul-piercing commentary on community:
"Until recent times, you know, human beings usually had a permanent community of relatives. They had dozens of homes to go to. So when a married couple had a fight, one or the other could go to a house three doors down and stay with a close relative until he was feeling tender again. Or if a kid got so fed up with his parents that he couldn’t stand it, he could march over to his uncle’s for a while. And this is no longer possible. Each family is locked into its little box. The neighbors aren’t relatives. There aren’t other houses where people can go and be cared for. When Nixon is pondering what’s happening to America—“Where have the old values gone?” and all that—the answer is perfectly simple. We’re lonesome. We don’t have enough friends or relatives anymore. And we would if we lived in real communities...For a community really to work, you shouldn’t have to wonder what the person next to you is thinking. That is a primitive society...Human beings will be happier—not when they cure cancer or get to Mars or eliminate racial prejudice or flush Lake Erie but when they find ways to inhabit primitive communities again. That’s my Utopia. That’s what I want for me."

Community is essentially based on tribalism, and tribalism usually leads to strife and zero/negative-sum outcomes. Humans have experienced a disturbing rise in us-versus-them tribalism over the last few decades. Is a world of mini tribes built around creators a solution or an even bigger problem? Can we have community without the rampant negative effects of tribalism? (e.g., organized sports seem to occupy a comfortable, largely good-natured middle ground; how can we recreate that dynamic?) Can these rising creative leaders stand the pressure? I love that new tools are democratizing access and making it easier to create and share. But, creating art is hard for a reason. Entertainers and artists make it look easy, but great art belies an immense amount of hard work. Creating art is vulnerable: “The poet stands naked before the world” is a quote attributed to beat poet Jack Kerouac. Should everyone be a creator?

Phoenix is the New Hsinchu
Is Intel being run for customers again instead of shareholders? White knight Pat Gelsinger has galloped in with a plan to spend on manufacturing and foundry initiatives instead of share buybacks. Recall back in SITALWeek #287, before Gelsinger was hired, I laid out five things Intel could do to get back on track. With the recent announcements, they are checking (or partially checking) off the first four items: installing an engineer as CEO, milking the x86 cash cow, outsourcing leading-edge chiplet components, and forming a fab consortium with big tech clients and TSMC/Samsung (the fifth point was the wild speculation they should acquire Arm).

We’re quite skeptical about Intel’s foundry aspirations. They have tried and failed. Being a services company for others requires a completely different set of DNA, and, more importantly for chip making, a large library of IP and processes for customers to use very early in the design process. One way around these hurdles would be for Intel to license a foundry “stack” from someone like TSMC. Huh? Why would TSMC do that? Well, TSMC has become a victim of its own success. The world has become very dependent on, and thus fragile to, TSMC. We’ve been spotlighting the dangers of Taiwan’s status as the semi supply chain lynchpin for nearly five years now (as we say: “we’re not always right, but we are always early”). While Samsung has a few foundry customers, it has struggled to compete with the full ecosystem and network effects of TSMC for a variety of reasons. The world now basically runs on TSMC...and Intel chips. Intel also needs TSMC until it catches up using ASM Lithography’s EUV technology over the next couple of years. Intel is so bad at being a foundry that TSMC is still making all the chips for companies Intel has acquired over the years going all the way back to Altera in 2015. Potential early partners for Intel’s foundry efforts would be the cloud platforms making custom SoCs (see also section below on Google SoCs); Intel could outsource part of these to TSMC and make other chiplets (as well as the advanced packaging) in their own foundry.

The world will have software running on Intel x86 chips 50 years from now, just like we have IBM mainframes still alive and kicking. Software almost never dies, and, historically, it has been coded for specific processor architectures (this is finally changing with serverless, containers, abstraction, etc. that are allowing Arm to gain traction). Intel is also too big to fail. The world’s largest companies – Microsoft, Google, Amazon, Apple, and more – would struggle to get by without Intel in the next decade. TSMC and Samsung cannot make enough alternative processors in the next 5-10 years to replace Intel, as the capital/time required would be prohibitively large (and, AMD also needs that TSMC capacity). Just looking at the near-term demand for advanced chips is daunting: smartphones and PC’s are growing at a double digit clip and Hynix expects hyperscale data centers to double in the next five years, and decades of software can’t be economically altered to run on Arm overnight. So, if Intel can catchup and perhaps pull a foundry business together, that is Out-Of-The-Money Optionality (OOTMO™ as we call it!). Right now, the global economy is undergoing a decades-long transition from analog to digital and is wildly fragile to the town of Hsinchu, home of TSMC, on the island country of Taiwan. But, a decade from now, Phoenix, Arizona is slated to be just as important. Between announcements and rumors, Intel, TSMC, and Samsung could be building over $70B of new chip fabs in Arizona. On top of the vibrant desert chips scene that already exists, this investment is big enough to recreate an entirely new supply chain for inputs and outputs of the chip industry – packaging, testing, engineering, etc. We have been calling for building in this resilience for a half decade, and it is amazingly gratifying to see it now becoming almost inevitable.

Staying Moore’s-Law Competitive with Collaborative SoC
The Next Platform has an article about the recent departure of a top Intel engineer to work on the System-on-Chip (SoC) effort at Google. In order to keep Moore’s law conceptually alive, Google sees a need for chip makers to come together with various bits and pieces on a single chip instead of across the motherboard or via PCI Express: “In a way, what Google really wants to do is teach the chip makers to cooperate in a way that they really do not, and have not historically. Imagine if you could take bits and pieces of technology from Intel, AMD, IBM, and Nvidia and make the right kind of specific compute device. This is the kind of thing Google is dreaming about, and maybe it can happen if Google buys some IP here and there and integrates it to prove it works. Maybe it will happen at the chiplet level first.” The trend for the last decade in hyperscale cloud computing is for the data center itself to become the unit of compute rather than individual servers (we’ve written about this topic a few times and highly recommend this interview with Nvidia’s founder). And, now we can see a variation taking shape with a fabric of SoCs creating the entire data center.

Amazon Care Baby Steps Toward National Healthcare
STAT reports on Amazon’s new Care initiative, which is expanding to provide healthcare services to other companies following the collapse of the Amazon-Berkshire-JP Morgan JV: “For its part, Amazon has been laying the foundation for what could be a massive, wraparound service for years. It launched prescription delivery service Amazon Pharmacy in late 2020, completed its pilot project with Crossover Health, and launched a health tracker called the Halo that lets users share data with electronic medical record vendor Cerner. Notably, Care is also advertising its ability to conduct virtual and in-person visits focused on sleep, joint health, and overall wellness — components that Trzinski said will play an increasingly important role in employer-focused offerings of the future...Should Amazon take all the beads in its sprawling health care treasure chest and fashion them into a necklace, the company could go even further than Care and create a comprehensive national, technology-enabled health care service that offers everything from prescriptions to virtual and in-person care.”

Miscellaneous Stuff
Hummingbirds Offer Solution to Nuisance Noise
With 12 high-speed cameras, six pressure plates, 2176 microphones, and three years of mathematical analysis, researchers determined how hummingbirds create their distinct hum. Most would agree that, especially compared to buzzing and whining winged creatures, the hummer’s hum is a pleasing sound. This fact is a bit surprising since hummingbird wings beat at 40 times a second, and humans typically find 40-Hertz (40-cycles-per-second) sounds irritating. It turns out the movement of the hummingbird’s wings reorients the pressure wave in space, which is what we are hearing. The wing create bass frequency and higher frequency harmonics at 80 and 120 hertz, which make hummingbirds more like a violin or piano than a propeller. Aside from the cool science, it’s possible we could use these findings to engineer noisy machines like drones with more pleasing harmonics.

New Player in Particle Physics?
Recent experiments at CERN’s Large Hadron Collider imply there is a chance that electrons and muons act differently than previously assumed. The results imply the existence of some new type of particle or law at play in the universe not previously seen or assumed in the standard models. While there is still confirmation to come, odds are there is only a 1 in 1,000 chance the results are wrong (ideally more analysis would move these odds much lower if true). “Dr. Michael McCann, who also played a leading role in the Imperial team, said: 'We know there must be new particles out there to discover because our current understanding of the Universe falls short in so many ways – we do not know what 95% of the Universe is made of, or why there is such a large imbalance between matter and anti-matter, nor do we understand the patterns in the properties of the particles that we do know about.'”

Charting Elemental Origins
This rendition of the periodic table shows each element’s historical source – from the fusion during the Big Bang (hydrogen and helium) to various types of dying/exploding stars, with the outliers beryllium and boron arising from cosmic ray fission.

Stuff about Geopolitics, Economics, and the Finance Industry
Manufacturing Leaving China
Delta Electronics, the Taiwan-based maker of power components for customers like Apple and Tesla, is reducing its headcount in China by 90%.
“‘For China the problem is, even without the US-China conflict, China is no longer a good place for manufacturing,’ [Delta’s Chair] Hai said. Wages in the southern Chinese city of Dongguan have grown tenfold since the company set up shop there in 1992. ‘More discouraging than that is the [staff] turnover rate. In India, it is much more stable,’ he said. Delta has responded with automation. On its most advanced production line in the eastern Chinese city of Suzhou, near-complete automation has cut the headcount from 42 to just three.”

EV Beats ICE for Lifetime Carbon Costs
The WSJ has a really nice visual article comparing the carbon from EVs and ICE cars. You can drive down the article to see the higher upfront carbon for EV manufacture vs. the long-term cost of driving ICEs, with EVs ending up much lower carbon over the lifetime of the vehicle. Given batteries can likely be reused/recycled and power will increasingly come from renewable sources, the gap will surely increase over time. Perhaps more importantly, the vast majority of passenger vehicles only need a range of 100 miles or less, which would also lower the initial carbon footprint for EV manufacturing.

Road Maintenance Shortfall Ahead
Governments will need to find a way to replace gas taxes to maintain roads as the consumer and commercial vehicular fleets shift to EV (or perhaps hydrogen) in the coming decades. In the US, Federal taxes amounted to ~$36B in 2019 or 18.4c per gallon (under 1 cent per mile traveled for the average vehicle). Additional state taxes vary greatly, but average to around 34c for gasoline and slightly higher for diesel bringing the total to somewhere in the neighborhood of $80B per year, or ~2-3c per mile driven. This would amount to roughly $200+ for every 10,000 miles driven depending on the fuel efficiency of your vehicle. As a household of longtime EV drivers, we’ve paid negligible gas taxes for seven years, but we are still driving on the same roads. Some states are turning to vehicle-miles traveled (VMT) taxes, and the Federal government is looking into the idea as well. Given the privacy problems of monitoring mileage for taxation, and the need to incentivize a more rapid shift to EVs, governments best option is to directly shoulder the road maintenance costs rather than offset through new taxes. In the meantime, if you drive an EV, make sure to thank all the ICE drivers out there for paying for your roads.

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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 #288

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, style bias, 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

In today’s post: this week we have a video interview with our investment team and a brand new whitepaper on corporate structure and culture. SITALWeek will return to regularly scheduled programming next week, in the meantime enjoy a week off from reading my rambling thoughts!

How Structure Impacts Company Culture
One of the top questions we get at NZS Capital is how we assess corporate culture inside of companies as part of our investment process. As outsiders to the companies we invest in, this is one of the hardest things to do. There is no easy answer, and often we disappoint people when we explain just how intangible uncovering excellent corporate culture is: we know it when we see it. But, there are questions you can ask and signals you can look for around the structure of a company itself that yield insights. Having the right structure in place allows an organization to slow down time and get more done than the competition. Brinton is a big network theory nerd, and he worked on this brand new whitepaper with our editor to convey a few of the important elements of high functioning teams and companies. There are three elements of any network inside an organization: the number of nodes in the network (few or many), the style bias (how many things the network is trying to accomplish), and connection structure (hierarchical or dense). It turns out there are only three combinations that work sustainably while creating the potential for healthy culture: 1) few nodes with a narrow style bias and dense connections; 2) many nodes with a narrow style bias and dense connections; or 3) many nodes with wide style bias and a hierarchical structure. Sound geeky? It is, but the paper has a lot more examples and graphics to help explain the basic concepts. You can read the PDF here.

Live From Brinton's Treehouse
Brinton and Jon on the investment team joined John Rotonti for a deep dive discussion of our investment process. I hear they even shared some top secret NZS slides. You can watch the hour-long video on the NZS YouTube channel. Thanks to the Motely Fool for having us on. In other news NZS Capital has been appointed as an additional manager on the Mediolanum Challenge Technology Fund and Jon Bathgate was recently in this Bloomberg Businessweek magazine article discussing big tech platforms becoming chip designers.

✌

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 #287

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, pi, 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

In today’s post: The powerful combination of tech and AI in healthcare; combustion-free fossil fuel generator; how to subsidize our new expectations of speedy commerce; a bundle of AVOD apps could be cheaper than Netflix; Twitter’s non-zero sumness for creators; receivable factoring reimagined; inverting your logic on NFTs; volatility; and lots more below...

Stuff about Innovation and Technology
Innerspace Imaging
The NHS in the UK is conducting a trial with 11,000 at-risk patients using a 4g, 2cm-long pill-shaped dual camera to collect and wirelessly transmit bowel images. The pills are designed to take the place of the more invasive bowel scope procedure to detect gut afflictions like cancer or Crohn's disease. The first FDA-approved capsule endoscopy technology was made by Given Imaging in Israel in 2001. Given Imaging was later acquired by Covidien, which is now part of Medtronic, the maker of the PillCam used by the NHS. Beyond the physical components of the PillCams, AI and machine learning are increasingly being used to analyze images to determine real-time capsule motility and interpret results of the scans. This is a great example of how technology – a combination of chips, sensors, connectivity, cloud, and AI – can help the healthcare system emphasize and simplify early detection, and ultimately prevent disease from taking hold.

Low-Emissions, Low-Temperature Generator
Mainspring Energy has developed a linear generator that compresses air and fuel to cause reaction without a flame, thus producing almost no NOx pollution and low CO2 emissions. Energy is produced electromagnetically via reactive expansion and rebound forces that cause magnets to oscillate through copper coils. The oscillators are cushioned by air – rather than oil – as they move through the coils. Recently, utility operator and renewables investor NextEra Energy invested $150M in the company with the goal of helping with grid outages. “Packed into box-like units the size of a parking space, they can ramp up to full power within seconds and run on natural gas, biogas or hydrogen, which offers the possibility of lower-carbon or carbon-free electricity produced on-site...Two generators packaged together into a single 20 foot-long container can produce 250 kilowatts of electricity. They can power a building or be plugged directly into the grid.”

Amazon’s Domestic Bot
Business Insider premium reports that Amazon has an 800-person team working on a home robot code-named Vesta, whose namesake is the Roman goddess of domestic life. Similar to Amazon Ring’s announced flying drone security camera (discussed in #273 with Amazon’s broader surveillance efforts), Vesta may have cameras, sensors, and fire detection capabilities. Perhaps a camera with image recognition could find lost keys, the article speculates. I’m holding out for Samsung’s Bot Handy (which I talked about in #279) because I, for one, want my futuristic home robots to be able to pour drinks in addition to surveil me.

Photogrammetry
Unreal game engine owner Epic bought reality capture company Capturing Reality. Photogrammetry, as it’s called, is the science of using multiple images of real-world objects to create 3D models. It’s a shortcut for generating realistic digital objects instead of painstakingly building them from scratch using CGI tools. The deal is a part of a string of acquisitions in the photogrammetry space to help game developers create items and tap libraries for their virtual worlds. The video here of the tech shows some of the output of the Capturing Reality software tool.

How About Now?
“I want to have it so that people have access to the full back catalog of things in the world at their fingertips at any point, just like Spotify gave you access to the full back catalog of music.” I saw that quote from Zuckerberg’s appearance on The Information podcast, and it made me think of something else I heard recently (sorry, I cannot remember where): a parent was talking about how their teenager was used to getting everything instantly or delivered in an hour: Want to play a new game? Download it. Watch a movie or listen to music? Stream it. Connect with friends? Snapchat or Facetime them. Burrito? Chipotle delivery. This is a totally different set of expectations for the world than someone like me, a washed-up Gen X’er, has. When I wanted a game, movie, or album growing up, it meant a trip to the store, and only when someone had time to drive me there. To see a friend outside of school we had to schedule in advance. Burrito? Forget about it. I remember being amazed 25 years ago when I signed up for eBay and could get something delivered in a week or two that wasn’t available locally. Next-day delivery still impresses me! But, for kids today, and increasingly adults, NOW is when we expect things. Everything – the entire back catalog of the world, as Zuckerberg put it – is on-demand.

Let’s think about this idea in the context of retail. We’ve just been through a pandemic that caused a surge in retail demand at big box stores for a number of reasons and a big jump in ecommerce. The physical stores had inventory and digital systems to enable order pickup and, in some cases, delivery as people stocked up on necessities and stopped eating out. But, in some ways, it has been profitless prosperity, or, at the very least, lower ROIC earnings (with few exceptions). It’s difficult to take something the consumer was doing on their own dime and time (driving to a store, shopping the aisles, checking out, and driving back home), transfer that cost burden to an already low-margin business, and still expect to make money. We’ve covered that issue in past newsletters (as well as in The Evolution of the Meal whitepaper). Is there a line to be drawn between 1-hour and 1-day (or longer) in terms of the type of merchandise and how fast we expect it? For example, it’s hard to imagine the long tail of fashion (every style in every size) available in one hour – this seems like a 1-day or longer expectations category. But, for much general merchandise and grocery (and prepared meals), 1-hour or scheduled same-day delivery seems like the trend.

Is there a way to standardize fast delivery in which the retailer can shoulder that labor cost transfer and still make money? Because, if there isn’t, then “get it now” seems like it’s a small market for the minority of households that can pay the premium. To make this a mass market, the winner will need ways to subsidize the low-margin sales. The best ways to do this would be: 1) purpose-built warehouses and logistics capabilities shipping a mix of high- and low-margin items, 2) vertical integration, 3) memberships, 4) broad and deep technology experience, and 5) advertising revenue stream. The ways to be disadvantaged in the “get it now” paradigm? Using existing store formats, partnering with third parties on delivery, not having a membership program, lacking tech experience, and not having a robust digital ad platform. This last point may be the most important – trade promotion is a ~$500B/year industry, almost as large as media advertising (not all of it targeted at retail though). Brands pay a lot to get in front of consumers across many channels. Owning logistics and spreading the cost of delivery out by efficient routing multiple drops with an increased diversity of items in the “shopping basket” will be a winning strategy. And, memberships with added benefits will also help. Does this sound familiar? It sounds like Amazon. Who would click and collect when it might cost the same to “get it now”? The middle is getting squeezed out of retail (a phenomenon we’ve been talking about for every industry for years), and what’s surprising is a retailer as large as Walmart might be stuck in the middle (this BI premium article discusses a leaked internal slide deck of Walmart’s challenges). On the opposite end of the distribution there’s a long tail of “deferred gratification” small businesses with specialized customer service or product curation (local mom and pop shops, Shopify merchants, Etsy, etc.) that should, as a whole, continue to do well. While I’ve mainly been talking about retail here, I think many of the concepts apply to food sales and delivery as well, where we will see a destruction of the middle as large chains vertically integrate and spend in technology, reimagining kitchen space and physical locations.

Ad-Supported Streaming FTW
We appear to be gravitating to ad-supported streaming apps. These cheaper alternatives often cost about half of the no-ads version, and the growing ad-based tech platforms are monetizing the subscribers at higher rates all-in vs. the folks paying to not see ads. This higher monetization likely portends meaningful price increases for ad-free streaming as ad rates rise even higher with improved targeting over time – which could push even more viewers to the with-ads versions. The Information talks about the trend of ad-supported streaming, citing Deloitte data that 65% of people in the US want either free ad-supported or ad-subsidized apps. Magnite reports that, in the UK and across Europe, 85% of folks prefer paying less in return for watching ads (covered last week by Fix newsletter). It’s not hard to imagine the power of a bundle of ad-subsidized streaming apps. Currently Hulu, Paramount+, and Peacock are $5.99, $4.99, and $4.99; meanwhile, HBO Max will be launching an ad-subsidized product soon. Given churn is the enemy of subscription products like these, a bundle would help everyone to stick with them month after month and create a combined data/advertising platform that could subsidize an even lower price point. Just adding up the four ad-supported apps (assuming HBO Max is in the same ballpark), it’s ~$22/mo compared to Netflix Premium at $17.99/mo in the US. Could this bundled AVOD subscription be offered cheaper than Netflix? (Digression: I have no emotional connection to anything Netflix has made themselves or the Netflix brand, yet I have a deep connection to a lot of content produced by the other studios mentioned here; maybe Netflix has proven that when you give artists too much rope...well, let's just say those “notes” from producers at the traditional Hollywood studios can add a lot of value.) As I wrote last week, this bundle is painfully obvious, so let’s see if egos can step aside and make it happen. Meanwhile, YouTube has an audience of 120M viewers on connected TV screens and is focusing on building tools for advertisers and collecting data on viewership/ratings, which in part drove 46% growth in Q4. And, FAST (free ad-supported TV) apps like Pluto from ViacomCBS are also doing extremely well. The US TV ad market is around $70B, much of which (both streaming and old-style linear TV on set-top boxes) is poised to become targetable and more valuable in the very near future.

Merchant Arm Server Chip
Internet security and content-delivery platform Cloudflare has long been waiting to port their software stack from x86 chips to Arm. Qualcomm exited the Arm server business just as Cloudflare was getting ready to test it out. Recently, Cloudflare attempted to quantify how Ampere’s Altra might stack up to Amazon’s Graviton2 Arm processor. Cloudflare, which is working with Ampere to define an Arm edge server, concluded the Altra could “attain a theoretical advantage between 20% to 50% due to Altra’s higher operating frequency and core count while taking inherent overheads associated with increasing core count into consideration, primarily scaling out the mesh network.”

Twitter’s Non-Zero-Sum Customer Focus
In this insightful interview with Twitter’s head of product, Kayvon Beykpour, I took note of their high-level non-zero-sum approach to adding a “Super Followers” direct payment utility, which will allow creators on Twitter to monetize through newsletters, audio chats (Spaces), and other interactions. Twitter’s goal is to not make money on these products, but instead to drive the ecosystem’s overall value. Notably, Beykpour also implied that the 30% cut Apple and Google will take is not something they are worried about, and that the platforms are enabling creators to monetize and providing other benefits, a view not shared by many others in the app world. However, it seems clear that the 30% app store fee eats into any fee Twitter might otherwise charge. I also thought Beykpour’s characterization of the customer-focused Jobs to be Done framework that’s applied to new Twitter features was helpful to understanding their thought process.

Miscellaneous Stuff
BeeDar
Beekeeper and radar engineer Herbert Aumann developed a two-part sensor comprising a 24-gigahertz Doppler radar and a piezoelectric transducer to monitor, respectively, bees coming/going and vibrations within the hive. The system, called Janus after the Roman god of doorways, is designed to detect both swarming events and when a rival hive is raiding the honey coffers. Swarming is when around half of a hive clusters together briefly before departing to find a new home; using the Janus monitor system and acting quickly, beekeepers can capture and relocate the swarm to a new hive. With a raid, quickly closing the hive off from rival bees can help save it.

Stuff about Geopolitics, Economics, and the Finance Industry
Receivable Factoring Reimagined
Pipe aims to create an exchange for buying and selling receivables for companies with recurring revenues. Pipe is a reboot of accounts receivable factoring with a modern-day marketplace twist, and, in some ways, it’s sort of like turning annual recurring revenue into something that looks more like traditional software license sales. The factoring gives companies more cash today to spend on growing the business, making it an alternative to venture capital or other types of loan structures. I can’t tell if this is a brilliant evolution of an old business model, yet another side effect of low rates, or a clear sign of a plateau in hyped up cloud investing (cloud companies pulled in an astounding $186B in VC money last year). Maybe it's a little bit of each. Alex Danco, who predicted this development a year ago, has a post on Pipe here: “It looks like factoring, it looks like debt, but it isn’t any of those things. It’s a new tradeable asset class with revenue contracts as the atomic unit.”

Working Backwards to NFTs
A couple of weeks ago, I wrote about NFTs (#284, #285) and mentioned the NFT digital art that Beeple had for sale. His “5000 days” collage ended up selling for $69,346,250. In the final moments, 22M viewers were watching the auction live. It’s easy, and perhaps lazy, to think this is an anomaly to be ignored. Of course it could end up being an anomaly, but what if it’s not? I think it’s very difficult for our analog, linear, human brains to get perspective on this new frontier. Here is an inversion that might help: it's the year 2050, and $100T+ of economic activity is being digitally transacted – nearly the entire economy has moved from seashells to Fiat currency to digital bits. Every transaction, whether it’s for something in the real world (like a car or a house) or in the digital metaverse, requires a “receipt” as proof of ownership and validation against piracy. It's all being transacted as NFTs in some blockchain currency – maybe Ethereum, or maybe something not yet created in 2021. Now, work backward from that to today, and you get Beeple selling a digital work of art for $69M. Of course, that’s just one possible version of the unpredictable future, but one that makes it worth keeping an open mind today.

Jane, Get Me Off This Crazy Thing!
It’s hard for me to remember this much day-to-day flip-flopping volatility around such a specific scenario that is, frankly, not that hard to get your head around: short- and long-term inflation. To use one high-beta example, the Philadelphia Semiconductor Index (known as the SOX) last week between daily highs and lows was down ~5.5%, up ~6.9%, down ~3.3%, up ~4.8%, down ~2.3%, and then finished the week up slightly. I’ve written a lot on inflation (#257, #258), so I won’t exhaustively repeat myself, but to summarize: the technology-driven deflationary forces of the last 40 years are still present, and, if anything, are accelerating from the pandemic and the shift from the Information Age to the AI Age. Yes, the economy is going to see a rebound in growth like nothing hardly any living investors can remember, and yes, we are going to have some inflation, but I don’t believe it has any risk of changing the long-term, tech-fueled trajectory. That said, we’re good Bayesians, and we are keeping an eye out for evidence the deflationary trends could stabilize or reverse, or for signs of structural changes (e.g., labor force size, climate, de-globalization/war). Because one person’s debt is another person’s asset, structurally higher rates would collapse the economy. Getting back to volatility, I wonder how much of the recent dramatic swings are a result of the increasingly small part of the market that is active, as passives have continued to gain share for the last decade? We like to remind people that volatility is not risk, it’s opportunity. But perhaps we could do with a little less opportunity than we had last week.

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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 #286

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, tomatoes, 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

In today’s post: Surprisingly slow digital payments adoption; rising importance of advanced technology for movie making; VR collaboration; data problem for delivery companies; indoor farming; chiplets; hoping for a sports rebound; proliferation of vertical ad networks as Google and Apple shut down data sharing for advertisers; Square is a bank; SPACs; UBI; and lots more below...

Stuff about Innovation and Technology
Digital Wallets Slow to Gain Traction
Despite the significant changes in consumer behavior in 2020, we used contactless payments – digital wallets like Apple Pay or Google Pay – for only 10% of real-world transactions in North America, according to data from card processor FIS. Globally, digital wallet payments edged out dirty old cash for the first time.

AI Video Dubbing
Researchers at Amazon are working on AI dubbing for videos. The technology attempts to recreate an actor’s voice in a foreign language along with background noise and reverberations. It’s not hard to imagine that AI could eventually change lip movements and facial expressions to match the cadence of speech in other languages. Netflix demonstrated how globally appealing local content is, and something like this AI dubbing tech could help the mega streaming platforms leverage their big international investments more broadly. There is a lot of AI coming to the film industry: in #252, I discussed Disney’s new face-swapping technology that allows them to map a reshoot onto an original film to avoid having to recreate entire scenes; and, in #276, we looked at Disney’s StageCraft virtual world technology for sets. These trends are a good example of how technology and vertical integration fuels the winners when an industry moves from analog to digital, thus creating a smaller number of bigger companies.

Supersonic Jet-Setting
It’s been 18 years since the Concorde made its last faster-than-sound commercial flight, and Aerion is attempting to bring back supersonic travel with a $120M aircraft called the AS2. The craft, which will travel at ~1000 mph (1.4x the speed of sound), has a goal of providing travel between any two points on the planet within three hours. Powered by synthetic fuel, the design is said to reach maximum speeds without an afterburner. The first AS2 is expected to start production in 2023 for delivery in 2027, and NetJets has pre-ordered 20 of them.

Modern-Day Holodeck
Traditional video conferencing isn’t much better than audio only (and in many cases worse, as we wrote last week), but we need an effective way to collaborate virtually in the future. Microsoft announced Mesh last week, a new platform for people to come together in the same virtual space using holographic AR headsets like the HoloLens. This tech is still probably 2-3 years away from mass deployment, but I am really looking forward to it. Having used some early versions on my Magic Leap ML1, I am a big fan of the immersive virtual collaboration concept, and I believe it will be one of the big changes accelerated by the pandemic and the permanent rise in remote working. The work-from-home outfit of the future will likely be made by a company like Xsens with motion capture, and maybe eventually haptic feedback, to place our avatars in as real a situation as possible with collaborators. Ready Player One is right around the corner. Mesh is another good example of the value of vertical integration by a large tech platform that could lead to a winner-takes-most scenario. Zoom is an ok Band-AidⓇ for today, but will the company need holographic AR lenses and body sensors to compete in a few years as virtual collaboration becomes a much broader platform?

Instacart Doing Grocery Delivery the Hard Way
In an article for IEEE Spectrum, the Instacart AI folks detail the immense scale of the technology used to deliver groceries at massive scale. We learn that the average grocery store has 40,000 items, for which Instacart processes petabytes of data daily – a billion data points every 24 hours to keep product listings up to date. Machine learning models allow Instacart to model inventory availability on shelves since they don’t have clean real-time feeds of actual availability. In big cities, Instacart is receiving an order almost every second. Matching algorithms are run every few minutes to batch orders/delivery in the most efficient way. One of the reasons Instacart has this huge data burden is because they are not vertically integrated, something that would allow for a much easier data solution. For vertically-integrated food delivery, we need to look to the Netherlands where Picnic is building a sustainable business by owning robotic warehouses and electric delivery vans, and serving customers on regular, preset routes. Or we can look to Dutch startup Crisp, which just raised a new round of financing to grow its fresh gourmet food delivery service.

The Tomato’s Super-Sized Carbon Footprint
Tomatoes were first cultivated in the Americas before expanding to become the world’s largest “vegetable” crop. It takes between 20 to 40 times the amount of energy contained in a tomato to grow it (using typical commercial conditions) and put it on your plate. Depending on the location, that ratio can balloon up to 150 for energy input:calories. In a colorful example, IEEE Spectrum explains that energy equivalent to 10 tablespoons of diesel fuel is required to get one tomato to your stomach. One of the reasons for this big energy consumption is shifting tomatoes to indoor growing – typically in large, centralized locations far from consumption, which requires a lot of electricity for heating, packaging, and transportation. Wired has a great article on the rise of more energy efficient vertical, indoor hydroculture that should transform the $8T agriculture industry. According to the article, indoor high-tech farming located close to cities has >100x the efficiency of the outdoor dirt alternative. It seems obvious that we should be growing/manufacturing food, including plants and proteins, in controlled, optimized indoor environments closer to the location of consumption. When I think about potential long-term inflationary shocks in the next couple of decades, drought- and climate-driven migration impacts on the food supply strike me as top candidates, but it seems like these could be easily solved with technology.

Siliconized Sliver of Hope for US Chip Fabs
TSMC appears to be upping the ante in Arizona as prior plans for a $20B facility could become (according to rumors) six fabs at a cost of $35B with 100,000 wafers/month in output – five times the original forecast. This joins the $17B planned expansion for Samsung in Austin. All in, these prospective US chip fabs are creating the potential for a sustainable – and welcome – second supply chain outside of Asia as they slowly come online over the next decade. Meanwhile, China’s chip efforts continue to fall short of the country’s ambitious goals. The $20B poster child, HSMC, was dismantled following what appears to be a large-scale fraud operation that roped in several former TSMC employees. China is committing to supporting the floundering local efforts and is threatening to stop exporting rare earth elements (REEs) needed for many electronic manufacturing applications. This is a hollow threat as I’ve pointed out in the past (see last section of #255): REEs aren’t terribly rare – they are all over, just not in high quantities. Not much effort is needed to find and extract them when the price is right. In other chip-making news, vintage fab equipment is in high demand as it’s often used to make the chips that are in shortage, like those badly needed by automakers. I knew I shouldn’t have donated that 200mm litho tool to Goodwill last year.

Chiplets Future of Moore’s Law
Speaking of litho tools, Jon chimes in with some thoughts on recent advancements in chip-making technology: TSMC's CEO Mark Liu gave an update on their roadmap last week, shining some light on the future of Moore's Law. With the improvements we've seen in EUV lithography, litho is no longer a gating factor in scaling semiconductor manufacturing, and EUV will enable sub-2nm manufacturing. There were similar takeaways from the industry's annual lithography conference last week as well. TSMC's focus from here is on new device architectures, like gate-all-around and nanosheets. System-level integration, including increasingly popular chiplet-based architectures, will also play a key role going forward. Interestingly, as this Semi Engineering article points out with a quote from Intel’s Jose Alvarez, system-level integration (also called heterogeneous integration) has been part of the plan all along and was cited in Gordon Moore's 1965 piece that defined Moore's Law: “In 1965, he wrote a very short paper, four pages, on what has become known as Moore’s Law. On the third page he said, ‘It may prove to be more economical to build large systems out of smaller functions which are separately packaged and interconnected’.”

Will Pro Sports Rebound?
Status quo for NFL broadcast rights appears to be the plan for quite a while. With most games sticking with traditional broadcasters, Facebook threw out a plea for the NFL to provide the games free-to-air across digital platforms. You know, because the NFL is well known for giving content away!? Commenting in a post, Rob Shaw, Facebook’s director of sports league and media partnerships said: “But there’s no denying the power of live events—and right now young fans aren’t being served these events where they spend most of their time. If leagues want to reverse this trend, they need to program free-to-air digital platforms like they did the major free-to-air networks 25 years ago.” In light of the supposed demand for live content, it’s hard to digest the 68% drop in Golden Globe viewers last week. Amazon appears to have not given up though, and may pick up exclusive rights to the Thursday night games, which sort of seems like Bezos just doing the NFL a solid as a future wannabe team owner. The Atlantic reports that, overall, NBA finals ratings were down 51%, NHL finals down 61%, US Open tennis down 45%, and even the Kentucky Derby dropped 49% to its smallest audience ever. The Super Bowl was down 9% to a 15-year viewership low. A lot of this is explained by schedule shifts and the difficulty of pulling off sports during the pandemic, not to mention people were a little distracted last year. Is the US’ falling out of love with pro sports yet another example of the pandemic accelerating a trend already underway? We humans love rivalries – a good “us vs. them” – we can’t help ourselves. Sports provide that outlet for many people. Last year, there was plenty of “us vs. them” going on without sports, so perhaps sports can regain their spot as our tribalism of choice at some point in the future. Or, perhaps, with an unimaginable explosion of digital entertainment options, some viewers, especially younger demographics, have moved on? In a glimmer of hope, NBA viewership across all national networks so far this season is up 3% from the same period last season.

Rise of Vertical Ad Networks
With Google and Apple further locking down cross-browser/app tracking for advertising purposes, the value of first-party data on logged-in users is going to rise for many companies. Disney is a good example given the rapid growth in Disney+ and the potential for a growing ad inventory across Hulu and other platforms including linear TV. Disney is looking to capitalize on its new ad exchange called DRAX (this is another reason that the smaller streaming platforms would benefit from a combination or bundling strategy – imagine the value of a single ad engine across several ad-supported streaming apps in combination with some sort of advertising JV between Disney and the other big video apps). Spotify is another example of a company ramping up their native ad tools to leverage the data they have on their customers for advertisers. And, Roku is yet another example of the same trend for streaming ads. Google announced last week it would not support third-party attempts to create IDs to track people, which it said fall short of user and regulatory expectations: "We believe advances in aggregation, anonymization, on-device processing, and other privacy-preserving technologies offer a solution for relevant advertising grounded in protecting user privacy—and we encourage the industry to partner with us in developing and adopting them." While, cynically, this seems to support Google’s own powerhouse of user data, as I’ve written in the past, having a small number of centralized data owners that give users control over how data is used is a positive-sum outcome for the industry.

Fintech Squaring Up
Square was finally able to officially launch its own bank after an almost five-year effort to obtain a banking license. The move should give the fintech more flexibility to support its customers than its previous partnership with a third-party bank. Almost all fintech disruptors leverage partner banks due to the difficulty of obtaining a banking license. Square was also in the news for buying Jay Z’s Tidal premium music streaming service. Various justifications were offered for the long rumored deal. If Jack is serious about building the service into a legitimate offering, I would welcome it to the field of otherwise unimpressive music streaming services out there. The ongoing problem with music streaming remains the negative-sum value proposition where customers do ok, streaming platforms make hardly any money, labels do well, and artists struggle. If Square can connect artists with fans to monetize their creativity, it would be a big improvement (to be honest, Tidal seems to fit better with the fan monetization efforts at Twitter than it does with Square). On the other end of the spectrum of wanting to help small businesses is Walmart, which poached Goldman Sachs head of consumer banking to help build out its banking efforts, something which would be easier for various companies if they were to apply for an industrial banking license like Square was granted.

Miscellaneous Stuff
Lego Soundtrack
Lego launched a white-noise playlist on Spotify last week that includes such 30-minute hits as “Searching for the One (Brick)” and “The Night Builder”. I found it oddly comforting, but if you suffer from misophonia, you might not want to listen.

Imaginary Numbers May Be for Real
As everyone knows, real numbers are real, and imaginary numbers are not. But, imaginary numbers are useful when performing certain math calculations, and, in the end, they go away and everything is real again. An imaginary number is a complex number achieved when you multiply a real number by i, where i^2 = −1. If you square 10i, you get −100. The wave function is a quantum mechanical equation that describes pretty much everything in the universe and it relies heavily on imaginary numbers (here is Sean Carroll describing the wave function in two minutes on YouTube or with more detailed physics in this CERN talk). New research (not yet peer reviewed) concludes the complex numbers don’t always go away in quantum physics, but are instead necessary when you have certain configurations of three entangled groups of interacting observers.

Stuff about Geopolitics, Economics, and the Finance Industry
SPACtastic Sarcasm
Boy there are a lot of SPACs. And more coming like a tidal wave of...well, the polite analogy eludes me. Let’s just say if this was an Oprah Christmas giveaway: yougettaSPAC and yougettaSPAC and yougettaSPAC! Goldman Sachs published to clients their satisfyingly rhyming SPAC Almanac last week with the following astounding SPACstats: 175 SPACs have collectively raised ~$1.5B per trading day so far this year, for a total of $56B. February was the largest month on record at $32B. So far, $123B of SPACquisitions™ (as I like to call them) have been announced in 2021 compared to $156B in all of 2020. GS estimates we could have $700B in SPACquisition™ enterprise value in the next two years. So. Much. SPAC. I was quite interested to see that some SPACs are now targeting spinouts of public companies, like the takeout of the aluminum can division of Ardagh. Here is some surprisingly good insight from Bill Ackman on the math and logic behind the explosion of SPACs (Bill is obviously objective on this topic because he raised $4B in the largest SPAC launch of 2020).

Given many SPACquisition™ targets are small to mid-sized companies, I tried to guesstimate how much of the passive (and, perhaps active) small cap investment market might get shaken up by the newly created market cap from SPACquisitions™. With the caveat that this math is directional at best: allegedly, the Russell 2000 (the bottom two-thirds of the 3000 largest US companies according to Mr. Russel’s calculations) has a market value around $4T. For this group, the average cap is $2B and the median is $600M. Goldman’s $700B SPACquisition™ estimate strikes me as unimaginative, so let’s round that up to $1T. Here is where my math gets more creative (i.e., made up): I think around 25% of the US stock market is passive now (estimates range from 15-40%, this is a surprisingly hard stat to nail down); if small and medium-sized companies are similar, that would imply around $1T of money invested in Russell-2000-sized companies is passive. And, that $1T might be heavily reshuffled after these SPACquisitions™ take place (although SPACs are not admitted to the index, once they complete acquisitions and become real companies, they would enter in the next annual rebalance based on how I read the rules). Presumably, some active small-cap investors will be entertaining these newly public companies as well and be selling existing small caps to fund purchases.

The denominator of earnings per share (total shares) in the US market has been figuratively and literally shrinking for decades as companies buy back more and more of their stock while at the same time the number of public companies has gone from around 8000 in the late 1900s to a low of 3600 in 2016 (due to M&A and private equity). I struggled to find the accurate number today, but it appears to be around 6,000 (this is again a surprisingly hard stat to nail down). CNBC's Jim Cramer is saying we have a glut of stock supply coming from IPOs and lockups, and SPACs. The total market cap us US listed equities is around $40T today, so if we are talking about $1T in SPACs and maybe $1-2T in IPOs, it's less than 10% of the total market. But, the impact of the increased supply of equities is going to be larger for that $4T in smaller companies as noted above. I am a big fan of companies going public, sometimes even before they might be ready, but I am definitely raising an eyebrow at the prospects for a ballooning number of small and mid-sized public companies without any profits, because that rhymes with 1999 (this Business Insider Premium article puts the number at 50% of the Russell 2000 losing money, up from 25% 2 years ago).

Anyhow, I am pleased to announce that we are changing the “S” in NZS from “Sum” to “SPAC”. We are now “Non-Zero SPAC Capital”, and we will be launching 100 SPACs very soon. Just kidding, of course. Some SPACs are backed by well intentioned and very smart investors that will bring forth some great companies to invest in. SPACs are awesome and there surely won’t be any bad behavior, so SPAC lovers please don't send me hate mail. It’s SPACs’ world and we just inhabit it.

Mitigating Financial Inequality Is Not Rocket Science
A universal basic income experiment in Stockton, California proved “The best way to get people out of poverty is just to get them out of poverty; the best way to offer families more resources is just to offer them more resources" according to a study reported on by The Atlantic. The experiment gave $500 per month to 125 randomly selected families with no strings attached. The money was largely spent on essentials and basic bills. In addition, the stipend recipients actually were able to seek out more employment, perhaps because the added funds "created capacity for goal setting, risk taking, and personal investment”.

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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 #285

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, laser combs, 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: casual games may move back into social apps; iBuyers driving real estate comissions down; Walmart backs down on healthcare; talent leaving Netflix; virtual avatars and robotic fast food; the close-talking fatigue of Zoom and a world that reverts back to audio; more on the rise of NFTs and a generation entering its saving years; and lots more below...

Stuff about Innovation and Technology
AI Replaces Fast Food Humans
White Castle is adding license-plate reader technology to automated drive-through ordering systems to improve customer experience by linking customers with their order preferences and speeding up transactions, according to a CNN report. The system only works for customers who opt-in via the White Castle mobile app. At Fair Oaks Burger in California, a system called PopPay uses facial recognition to allow customers to pay at the drive through. McDonald’s is rolling out AI drive-through displays that use voice recognition to take orders. We’ve previously covered Chipotle’s Chipotlanes for faster online order pickup. All this digitalization of the fast food experience is happening in a backdrop of rising pandemic-driven demand and underscores how much technology investment is needed to keep up with the rapid analog-to-digital transformation of the global economy.

Virtual Avatars Replace Video-Casting Humans
VTubing is a phenomenon started in Japan that is sort of what it sounds like: YouTubers (and the like) creating virtual avatars using facial/gesture recognition AI, animation software, and, in some cases, voice-changing software. The popularity of VTubing is spreading around the world on YouTube as well as Twitch. One popular VTuber, CodeMiko, uses an Xsens motion capture suit and the Unreal Engine to create a virtual streaming personality. With increased capabilities of AI, virtual avatars will encompass deep fakes of anyone that people want to appear as, which is going to be a real challenge for our real world brains.

Virtual Close Talking Induces Zoom Fatigue
One of the key drivers of Zoom fatigue (which is very real) is the proximity to other people’s faces, according to Stanford researcher Jeremy Bailenson in his peer-reviewed perspective published last week. He describes videoconferencing as a virtual invasion of personal space that you can mitigate by shrinking your app window or backing away from your monitor to make people appear farther away. Other tools to help with the fatigue include turning your self-view off (I highly recommend that one). A New Atlas article that reviews the Stanford research also quotes from David Foster Wallace, who, in his 1996 novel Infinite Jest, imagines a future where people revert back to audio-only after a short-lived foray into video calls:
“A traditional aural-only conversation […] let you enter a kind of highway-hypnotic semi-attentive fugue: while conversing, you could look around the room, doodle, fine-groom, peel tiny bits of dead skin away from your cuticles, compose phone-pad haiku, stir things on the stove; you could even carry on a whole separate additional sign-language-and-exaggerated-facial-expression type of conversation with people right there in the room with you, all while seeming to be right there attending closely to the voice on the phone. And yet – and this was the retrospectively marvelous part – even as you were dividing your attention between the phone call and all sorts of other idle little fuguelike activities, you were somehow never haunted by the suspicion that the person on the other end’s attention might be similarly divided.”

Gaming Coming Home to Social Apps?
Artie has created a novel Apple app-store workaround for Unity’s mobile games by partnering with Facebook, TikTok, YouTube, Snap, and others to stream games inside those apps – but in a way that takes advantage of the fact that those apps can access native graphics processing (which browser-based streaming generally cannot). This combination allows for better game experience without needing an app-store gatekeeper. The problem, as I see it, is that social apps just become the new gatekeepers, which (if history is any indication) creates a conflict of interest: those apps want to keep people engaged and not dipping out to play games natively on iOS and Android. If you will recall, way back in the prehistoric days of social networking (circa over a decade ago), Zynga rode the Facebook wave (after wiping out on the Myspace wave!) as Zuckerberg was very happy to have people playing Farmville while on Facebook. Things soured for Zynga as Zuckerberg had a change of heart and propelled people away from gaming on Facebook in favor of democracy-crushing fake news sharing (well, maybe that wasn’t the plan, but that’s how it played out in the 2010s). This move resulted in Zynga leaving Facebook in 2012. Zynga’s founder, Mark Pincus, is an investor in Artie, which I am frankly having a hard time interpreting given Zynga’s history with malevolent gatekeepers. Tim Sweeney, who runs Epic (which owns the rival to Unity and is battling Apple and Google’s app-store monopolies in high-profile lawsuits) even chimed in on Twitter to say Artie is “some very interesting tech to watch”. A shift away from polarized discourse and fake-news mind control toward casual gaming sounds like a wonderful idea to me.

Advantaged Agent-Based iBuyers?
Redfin CEO Glenn Kelman had some interesting comments on the evolving iBuyer market on the company’s earnings call last week: “There have been many iBuyers in a market like Phoenix for a long time. And they are duking it out. You have customers running auctions at the house where they've invited Opendoor, Zillow, in this case, I think Redfin is coming to Phoenix soon. We certainly see that in other markets. So I do think that iBuyers are competing with one another because it's a commodity service.” Glenn went on to highlight the advantages of having the low customer acquisition cost of the Redfin website/app as well as a market-leading efficient agent model vs. traditional brokers. Ultimately, many iBuyer prospects use an agent to sell, and then an agent to buy a new house. Perhaps even more interesting is the impact iBuyers are having driving commissions down. When iBuyers turn around to sell homes, they are putting pressure on buyer agent commissions, which are now transparent thanks to the DoJ settlement with the NAR last year: “And the portfolios of both builders and iBuyers are managed by very sharp Wall Street types who look at every cost as an opportunity to improve margin. And so they're being very aggressive about how much they're paying buyers' agents in places like Atlanta and other markets where builders or iBuyers are very prevalent. So we've seen a significant decrease in the commissions the businesses are paying buyers' agents, and we think that consumers are going to follow suit because the Department of Justice Lawsuit is allowing a website like redfin.com to publish the commission. So the secret is soon going to be out that you can pay a buyer's agent less and still have plenty of people bidding on the house, especially in an historic seller's market like this.”

Chip Supply Chain Woes Go from Blizzard to Drought
The Washington Post reported on chip shortages ahead of Biden’s declaration to broadly review supply chains – including semiconductors – and featured a small quote from yours truly: “Brad Slingerlend, an investor at NZS Capital in California and a former semiconductor analyst, said he started raising alarms about U.S. reliance on overseas chips years ago, to no avail. The auto sector’s current plight will draw more attention to the issue, he said. ‘This needs more of a spotlight on it,’ he said.” I’ve been called worse than a “former semiconductor analyst”! In speaking to the reporters, we emphasized the need for an industry-wide solution, which we discussed in more detail in this op-ed, in case you missed it. And, if geopolitical concerns aren’t enough to cause us to think about diversifying the chip supply chain, The Nikkei reports that TSMC needs 156,000 tons of water each day to make semiconductors, and has had to secure truckloads of contingent water supply as the island of Taiwan faces its worst drought in decades. This follows the deep freeze in Texas that also derailed chips supply (#284).

Another Healthcare Initiative Bites the Dust
Walmart once planned to open 4000 health clinic centers by 2029 at an estimated cost of $11B. The 2018 plan called for 125 clinics by the end of 2021. Currently, Walmart has 20 open centers and plans to add 22 more this year; but, according to Business Insider, the endeavor may be falling apart. I first mentioned this effort in SITALWeek #211, and, in #253, I mentioned that Walmart had entered the insurance business as a Medicare reseller. Walmart is a natural to disrupt the anachronistic US healthcare system given its large workforce, broad store footprint, and 4700 pharmacies. The early clinics were said to be performing well ahead of Walmart’s expectations, but the loss of a key executive and the pandemic stopped the momentum. I can’t help but compare this to the failed healthcare effort by Amazon, JP Morgan, and Berkshire Hathaway. Who will cure us of the over-regulated, highly inefficient, overpriced US healthcare virus?

Paramount+ Reboot Features New Shows, Talent
In rebooting and relaunching CBS All Access as the new Paramount+ streaming service, ViacomCBS has been luring talent away from Netflix, according to the Hollywood Reporter: “ViacomCBS has also lured a number of top creators to the service. Black-ish creator Kenya Barris is working on a show about modern relationships for Paramount+ as he negotiates an exit from his Netflix overall deal. The creators of Avatar: The Last Airbender have left the Netflix live-action remake of the cult classic to return to ViacomCBS, where they will develop an expanded universe based on the animated series.” Creators have been playing studio pinball in Hollywood for a few years, but mostly accreting to Netflix. As I mentioned in more detail a couple weeks ago (#283), consumers and the industry would greatly benefit from a consolidation/rebundling of streaming services. Also, one of the underappreciated trends in content spending in my opinion is the natural ceiling that we are approaching or perhaps surpassing. Streaming platforms and studios should be able to step down content spending from the current sky-high levels without impacting subscriber metrics. Long term, I would expect content to settle at less than 50% of revenues for streaming platforms with a focus on quality over quantity.

Credit Cards’ Digital Wallet Problems
After failing to gain any traction with competing digital wallets for online commerce, Visa, Mastercard, Discover, and American Express are combining their separate checkout efforts into a new unified button, according to Bloomberg. Previous attempts garnered perhaps 5% share at checkout compared to 70% for alternatives like PayPal. This effort makes little sense to me as a payment mechanism without the benefit of a full digital wallet or banking platform offered by competitors. As wallets like PayPal or Shop Pay gain share, the funding mix can shift away from traditional credit cards toward debit, checking accounts, or buy-now-pay-later funding mechanisms, all of which are dilutive or subtractive to the credit card companies and banks that distribute them.

Miscellaneous Stuff
High-Tech Search for Exoplanets
By analyzing years of observations of exoplanets, astronomers believe the Milky Way galaxy has billions of rocky Earth-like planets that are orbiting Sun-like stars in the habitable region that might allow life to evolve. And that is, of course, just in our galaxy; as Carl Sagan said: “The universe is a pretty big place. If it's just us, seems like an awful waste of space”. The push to resolve Earth-like exoplanets has created several new methods and designs for “cutting-edge digital detectors and sophisticated laser systems, tied to atomic clocks” as well as a Nobel-winning calibration device called a laser frequency comb, which boasts precision to less than a few parts per quadrillion. This is all in an effort to keep a detector the size of a car completely thermally stable. “Somewhere out there, another Earth is orbiting its star, which wobbles slowly in sympathy around their shared center of gravity. Over the course of a year or so, the star’s spectrum shifts ever so slightly toward the red, then toward the blue.” That extremely minute Doppler shift is what astronomers are trying to detect using advanced spectrographs, like NEID in Arizona. The spectrographic guts of NEID (which is calibrated with the laser comb) are kept at a constant temperature (to within one-thousandth of a degree) at less than one-millionth standard atmospheric pressure using, among other things, cryogenic charcoal to attract stray gas molecules. I could go on, but you get the picture – it’s high tech! Read more in IEEE Spectrum.

That’s Life
Willie dropped a delightful new album, That’s Life, of Sinatra standards last week without a single overlapping track vs. Dylan’s excellent and contrasting Sinatra standards album Shadows in the Night.

Stuff about Geopolitics, Economics, and the Finance Industry
NFTs and a New Generation of Investors
Following up on last week’s post about NFTs, I got several interesting responses from readers. This CNBC segment on NFTs, featuring digital artist Beeple, provides some good context and basics for the world of blockchain-based digital asset sales. I was also remiss in not mentioning NBA Top Shot, the official digital sports card NFTs from the NBA powered by the Flow blockchain. Two weeks ago, a LeBron James Lakers highlight clip sold for $208,000. For even more explanation of NFTs here is Mike Shinoda of Linkin Park discussing the importance of NFTs and his foray into selling the digital collectables.

I was recently reminded of a section in SITALWeek #203 from July of 2019 about the MY ratio: “The MY ratio is the ratio of 35-49 year olds compared to 20-34 year olds. This is a measure of roughly the number of people saving vs. spending – as you get older, you tend to put more in the stock market on average...The MY ratio bottomed in 2016 and is supposed to trend up for 16 years.” In other words, there is a growing demographic looking to benefit from appreciating assets. The surge in retail investors, which is frequently (and inappropriately) being tossed off as bored gamblers, is likely just the tip of the iceberg of a growing number of new investors. NFTs seem to be coming into popularity coinciding with this trend, providing an complimentary alternative to equity investing alone for this new generation of savers. If you missed last week’s discussion of NFTs and the scarcity of analog and digital assets, you can read it here at the end of SITALWeek #284.

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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.