SITALWeek #185
Stuff I thought about last week 3-24-19
Greetings – technology and innovation driven deflation will keep rates low and continue to fuel a net decrease in investable public companies, which is exacerbated by share buy backs and passive investing; video games are shifting to streaming leaving consoles and high end PCs in the dust as Microsoft, Google, and Amazon battle for the rapidly growing $140B annual market; it’s not just big platforms in tech that are vertically integrating as retailers move into agriculture. As always, reply back with any comments.
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Stuff about Innovation and Technology
Shopping and live streaming on Instagram is mirroring the huge trend we’ve already seen develop in China – QVC on steroids.
China’s electric buses have so far removed 270,000 barrels a day of oil demand.
Evidence of Amazon’s puzzling push for profits continues as they lose e-commerce share to rivals – it’s a very anti-Bezosian trend. This week’s profit boosting behavior has Amazon banning ads on unprofitable products. Related: In categories where brands matter more, Amazon’s 23,000 private label products are mostly duds according to this survey.
Some detailed and insightful analysis on Disney’s trajectory over the next few years from Matthew Ball posted on Redef: “Disney can become a top three SVOD in the US without asking for a single incremental dollar in consumer spend. And it shouldn’t be hard to redirect this consumer spend to Disney+.”
Related, Disney continues to invest in sports content with this big win for ESPN+: all UFC pay-per-view events will be exclusive in the US through 2025.
And, as sports continue to be very high value, if the NFL creates a streaming package for the Sunday Ticket, it could be a game changer for an online platform. Why would anyone stick with DirecTV if they could get this as an app on a connected device? Could AT&T afford to lose the separate streaming rights? (Of course the NFL could still flub this by making the streaming package not available for TV screens.)
The increasing use of facial recognition in public places now includes sharing pictures of shoplifters to ban them from entering other retailers, and “Taylor Swift uses it at her concerts to spot potential stalkers, with cameras hidden in kiosks for selfies. It's being used in schools in Sweden to mark attendance and at airports in Australia for passengers checking in. Supermarkets in the UK are using it to determine whether customers are old enough to buy beer.”
Peloton is being sued for not paying license fees for music played during its popular in-home fitness classes. I always assumed they were paying, with fees built into the cost of the service and their profit model, but this seems like a legit expense the startup should be covering as they head toward an IPO. (The issue appears to surround Peloton paying for a cheaper type of public broadcast license as opposed to a more appropriate license for music synced to video content).
The rise of the “digital twin” in design and simulation is an ongoing trend as technology becomes more pervasive in everything. Many design companies such as Cadence, Synopsis, Ansys, Siemens (Mentor) will benefit from the trend.
The healthcare system is ripe for creation of a power law, data-driven network effect miracle solution. While attempted fixes are in the works, like the JV between Amazon, Berkshire, and JP Morgan, in the meantime, so-called advances like electronic health records are actually causing patient harm.
Open source hardware design is dominating the cloud now at the expense of Dell, HP, etc. This is an informative interview on the death of Moore’s Law, the rise of heterogeneous workloads in the cloud, the problems of cooling a 400W AI chip, and the push for open source hardware with the GM of infrastructure at Microsoft Azure. “It is the laws of physics, and the end of CMOS is going to be messy.”
Related: Graphics intensive workloads like AI, machine learning, video games etc. are moving rapidly to the cloud, which is expanding the market significantly. But, it also might limit the market shorter term for things like high-end gaming computers and consoles. This week Amazon Web Services launched the new NVIDIA T4 GPUs on their cloud and Google announced their anticipated gaming in the cloud platform Stadia, which is powered by AMD. With the coming wave of 5G connectivity, graphics and AI workloads will continue to grow very rapidly in the cloud, which, among other things, will help with battery life on mobile devices. I was overly skeptical of video games played over streaming, but it’s arriving faster than anticipated. Microsoft, Google (leveraging its staggering 200M daily viewers of gaming content on YouTube), and likely Amazon will be leveraging their assets in gaming to create three new rival platforms and eliminate the need for costly, dedicated game consoles and gaming PCs. The big video game publishers should be able to easily transition their content to new platforms like they have in the past. This transition probably leaves Sony and Nintendo a little stranded as they continue to rely on dedicated consoles. One of my biggest questions about Google’s Stadia seemed to have gone unanswered so far – what will their tariff be and how much of the revenues will publishers get to keep? Recall that Epic (maker of Fortnite and Unreal game engine) recently dropped its take rate to 12% (e.g., vs. 30% for app stores like Apple). Video games are a rapidly growing industry with $140B in revenues – there is a lot at stake as it moves to the cloud.
Concerns over the security of Huawei gear apparently isn’t slowing their sales down due to the company’s lead in 5G. To the extent the numbers from the private company can be believed, sales grew 36% y/y so far in 2019 through February compared the rest of the industry, which was flat. This would explain some of the growth at chip makers like Xilinx.
We recently wrote a bit about power laws, regulation, and how the Information Age is changing every industry in the world. One interesting side effect of natural power law winners, determined by information and data-driven network effects, is they tend to vertically integrate their businesses. I remember my first tour of the Winnebago plant in Forest City Iowa in 2003 – just about the only thing they didn’t make was the Ford diesel chassis and the Samsung TVs. I couldn’t believe they made their own moldings, cabinets, upholstery, etc. In AI we see this same trend with Google making their own custom TPU chips and other AI platforms following suit. In grocery retail we are seeing Costco and Walmart (likely the only two surviving big box retailers when the e-commerce/retail wars end in a decade or so thanks to power law math) vertically integrate food processing – in this case dairy farming. This trend of verticalization is a big reversal of the century-plus of horizontalization and specialization that preceded it in the Industrial Age. Vertical integration is also likely to keep deflation going strong – Walmart and Costco can leverage it to drive prices lower and consolidate share while forcing weaker competitors out of business. Amazon’s expansion into logistics with their own planes, trucks, and delivery vans comes to mind as another example of this trend. So if you are a Dean Foods or a UPS who is just one part of the supply chain, you’re probably in trouble. And, if you are the #3 or lower market share player that can’t leverage scale and data-driven network effects, you’re on the losing end of power law math. Before power laws took over, verticalization often meant inefficiency; however, in the Information Age, it might be the opposite. And – this is probably the right criticism to launch against big tech platforms – the verticalization of their businesses could ultimately lead to a loss of diversity and a loss of the benefits that come from competition amongst specialized providers of components etc. We know that a loss of diversity leads to ecosystem failure (for example, E.O. Wilson’s work on biodiversity, and increasing diversity can fix the situation)...if we lose diversity of innovation as power law platforms vertically integrate, then we get Buy-N-Large, and things don’t end well.
Related – the EU competition commissioner said the US was likely going to far with calls to breakup big tech platforms, but also said if you are using Alexa in your kitchen, you’re “Pay[ing] with your life”...”We’re trying to figure out how access to data will change the marketplace. Can you give a different access to data? Because the one who holds the data also holds the resources for innovation. And we cannot rely on the big guys to be the innovative ones.”
And, as tech continues to dominate farming, maybe Google should start bottling their own milk as well! “The starting point for this ‘precision agriculture’ is data, which sensors and wireless networking play key roles in gathering. There are essentially three platform types involved in precision agriculture: aerial, ground-based mobile, and stationary systems. The sensors and network technology the platform types tend to utilize do vary, although there is also some overlap. One thing the platforms share, though, is tremendous diversity in feature sets of the many competing products addressing this application space.”
Making better middle managers: this recap of a Gallup study by the WSJ, which shows 70% of the variance between team performance is explained by the quality of the manager, reminded me of the excellent rules Google came up with for creating productive teams, the most important being creation of a psychologically safe environment in which to work and take measured risks.
Miscellaneous Stuff
Next time you make the “F” sound, you can thank agriculture for giving us that sound along with the “V” sound: “The ability to make labiodental sounds—which are sounds that require you to put your lower lip on your upper teeth, such as f and v sounds—may not have fully developed until agriculture introduced softer foods to the human diet, changing our jaws...”
An array of new species discovered in a Chinese Cambrian Explosion period archeology site.
K-cups for cocktails!? “Using liquid-filled pods, it adds water and carbonation to serve up cocktails like a Moscow Mule, an Old Fashioned, a mojito or a gin and tonic—plus three brands of beer and cider.”
I enjoyed David Lynch’s Master Class this week, which included lessons on daydreaming and intuition, or “feelthinking” as the most important combination of human skills. Also, I always keep in mind Lynch’s advice on having “100% final cut and total creative control.”
Stuff about Geopolitics, Economics, and the Finance Industry
If world leaders have actually been consulting with a crazy con man, it would explain why politics have completely fallen apart: don’t blame Russia, blame ignorance and stupidity of leaders! Hopefully that post is just the ravings of a mad man.
I found myself repeatedly amused by several stories on “macro” this week, and, as always, walked away grateful that I am a tech investor with tons of companies to invest in that are creating the new digital economy. Macro doesn’t need to be part of the stock-picking process for any long-term, innovation-focused investor.
However, I’ll allow myself one indulgence in “macro” and interest rates: with tech- and power-law-driven deflation (or lack of inflation) continuing, and the Fed signaling the end of rising rates, etc., we should continue to see demand to take companies private (including many in the mid cap semi and software sector) as well as continued M&A-driven consolidation built on low rates. The issues of companies leaving the public markets faster than they come in will continue (although it will temporarily reverse with some long awaited mega IPOs slated for 2019!). Gavin had a nice tweet stream on 2018’s trend of more public-to-private deals than private-to-public IPOs...along with some thoughts on institutional demand for private assets. Maybe we are in another decade of low rates causing an ever shrinking denominator of shares available to invest in publicly as we see M&A, private takeouts, share repurchases etc. unmatched by new IPOs. Meanwhile, money keeps passively filing into the index funds, which also rely on that shrinking denominator of public shares outstanding, causing an ever rising price to the market. (“Companies can now tap PE or institutional capital with relative ease and borrow at historically low rates, bypassing the myriad costs and hassles of going public. The number of U.S. public companies has declined 45% since it peaked 20 years ago. The number of IPOs has also plummeted. During the 1990s, the U.S. market averaged 652 offerings a year. Last year, the total was around one-third of that.”)
“Our strength, our power is based on truth. Chinese power based on gun,” the Dalai Lama said. “So for short term, gun is much more decisive, but long term truth is more powerful.”
Disclaimers:
Nothing in this newsletter should be construed as investment advice. Nothing contained in this newsletter is an offer to sell or solicit any investment services or securities. I may own long or short positions in stocks discussed in this newsletter. This newsletter is simply an informal gathering of topics I’ve recently read and thought about. It generally covers topics related to the digitization of the global economy, technology and innovation, macro and geopolitics, as well as scientific progress especially in the fields of cosmology and the brain. I will frequently state things in the newsletter that contradict my own views in order to be provocative. I may change my opinions without updating them in the newsletter. Lastly, often I try to make jokes, and they aren’t very funny – sorry.