Stuff I thought about last week 6-9-19

Greetings – Facebook shareholders voted in futility to strip Zuckerberg of his voting control, which both highlights the problem of super voting and results in an amusing exchange at the company’s shareholder meeting; Amazon’s new drone has an incredible amount of tech behind it; teaching a car that snowmen don’t walk; and, in the Geopolitics/Economy/Finance section, there are three longer-than-usual sections on tech regulation, the economy, and the platformization of everything. Just remember, I always put the economy last for a reason: having one of my degrees in economics uniquely DISqualifies me from talking about any of these subjects! As always, reply back with thoughts or grab me on Twitter.

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Stuff about Innovation and Technology

Amazon leveraged AWS to run 50,000 different simulations with 30 million hours of compute time to design their new delivery drone. The amount of sensors, processing, and machine learning required to build a drone this sophisticated is staggering, and it represents another example of distributed AI and sensors driving significant growth for the semiconductor industry for years to come:

“To see what’s happening around it, the new drone uses a number of sensors and machine learning models — all running independently — that constantly monitor the drone’s flight envelope (which, thanks to its unique shape and controls, is far more flexible than that of a regular drone) and environment. These include regular camera images and infrared cameras to get a view of its surroundings. There are multiple sensors on all sides of the aircraft so that it can spot things that are far away, like an oncoming aircraft, as well as objects that are close, when the drone is landing, for example.”

In other Amazon delivery news, FedEx has decided to drop Amazon as an express (air delivery) customer, which represents 1.3% of FedEx business. As we know, Amazon has been building out their own capabilities to avoid using outside overnight contractors like FedEx. So, in some sense, FedEx is taking their ball and going home when the other kids have already left the playground. This decision demonstrates that FedEx is not a platform. A platform would enable any and all customers. If the tables were turned, I suspect Amazon would be thrilled to carry FedEx volume on Amazon Prime cargo planes. Philosophically, this is the difference between Amazon being a platform-based business while FedEx is stuck in a 20th-century, legacy business mindset. (There is more discussion of this conceptualization of platforms down in the final section of this week’s newsletter for those interested). Meanwhile, in ground package delivery news, FedEx has decided to shift to 7-days/week delivery as growth in e-commerce supports this new level of service. I think this is a good example of Amazon, rather than being anti-competitive, causing a positive competitive reaction in the delivery sector.

Wrapping up Amazon news for the week, the company’s Ring Doorbell division is questionably using video of suspicious people from customers’ cameras in Internet ads. Amazon has also filed for facial-recognition technology patents to automatically alert law enforcement to suspicious individuals spotted by the cameras.

New puncture-proof tires are being tested by GM and Michelin on Chevrolet Bolts. Ok, this isn’t exactly high tech, but it is cool. I think the biggest joy of owning an electric car (besides the positive environmental impact, which I guess is ok) is never having to stop at gas stations and almost never needing to have the car serviced (punctured tires being, so far, the sole exception). Lighter tires or evolved tire designs should help further with car maintenance and battery efficiency.

The power of platforms is evident as Oracle teams up with database rival Microsoft (Microsoft has been gaining share with its SQL database for years), so that Oracle customers can better leverage Microsoft’s huge cloud platform. Microsoft previously established a partnership with software-giant SAP as well. Platforms with the right network effects will accrete partners, even competitors, like a black hole event horizon accretes matter and energy, and this is yet another example of that phenomenon.

I know I unfairly poke fun at the “lost decade of risk taking” at Apple since the iPhone's debut, and I am well aware and appreciative of the thousands of bright and hard working folks that have improved the iPhone in subsequent iterations. But, please Apple, don’t make it so easy to make jokes: this week Apple announced a $999 monitor stand – just a stand, nothing else! This struck me as the most significant announcement from their developer conference, and that’s no joke.

RISC-V is SITALWeek’s favorite topic in semiconductors because it represents a potentially larger trend in open source moving from software to hardware. The consortium has an open-source RISC architecture that disrupts ARM Semiconductor (which is owned by Softbank currently). Key RISC-V ecosystem partner SiFive recently did a big fundraising led by ARM’s key customer Qualcomm. In other “bad news for ARM”, Samsung signed a big licensing deal with AMD (likely displacing ARM’s Mali GPU IP).

Silicon photonics allows for faster chips, which might be more power efficient for AI engines. Recently, semiconductor maker GlobalFoundries struck a deal with silicon-on-insulator tech provider Soitec, who, among other things, makes silicon photonics chips. And, this week Bill Gates invested in an AI silicon photonics startup Luminous. If you are interested in learning more about AI in edge smart devices, this article is a good overview of the inferencing market.

A proposal to take away Zuckerberg’s super voting shares was supported by 82% of non-Zuck shareholders (which, by definition, didn’t matter, because Zuckerberg controls the vote). As longtime readers know, I value skepticism above cynicism (except when it comes to critiquing Apple’s lack of innovation), but it’s really hard not to be cynical about Mark Zuckerberg’s leadership of Facebook. Last week at Facebook’s annual shareholder meeting, Zuckerberg gave a scripted answer to a question about whether he would consider ceding voting power – the problem was that it was a script for a different question than what was asked! Zuckerberg repeatedly stated at the shareholder meeting that it’s the government’s responsibility to create policies for the Internet, implying private companies should not be responsible for their actions and impact on the world until governments take action. Zuckerberg's non sequitur on government responsibilities was followed by:

Shareholder: But more directly, would you be willing to step down from your role as Chair and cede your super voting shares? That's really my question.

David Kling, Facebook, Inc. - VP, Deputy General Counsel & Corporate Secretary: I think we're going to try to limit to just one question.

Shareholder: It's just a yes or no.

David Kling: Of course, we just have a long [line of] people. We're going to go around this side.

I hope Aaron Sorkin is working on a sequel to The Social Network, and he does a copy/paste of this exchange for the script! In the meantime, shareholders have one clear option: if you don’t have a real vote, then vote by not owning the stock. This highlights a significant problem with passive investing: big ETFs with huge Facebook positions have no choice but to own FB because it’s so large in the various stock indices. However, the broader concern here is that shareholders – the actual majority owners of FB – don’t have any influence over management, and management is making mistakes with potentially global ramifications.

Miscellaneous Stuff

“How do you teach a car that a snowman won’t walk across the road?” Here is a great article from Melanie Mitchell (who has, in the past, taught Brinton and me complex-systems science through the Santa Fe Institute!) about the difficulty of teaching common sense to AI. She suggests instead that AI needs to learn like a biological human learns – it cannot be simply taught what a human knows.

I admit to being a big fan of “dark mode” for any app on my phone that makes it available; however, maybe we are actually doing harm and making ourselves less productive with it: “Except in extraordinary situations, Dark Mode is not easy on the eyes, in any way. The human eyes and brain prefer dark-on-light, and reversing that forces them to work harder to read text, parse controls, and comprehend what you’re seeing.”

(And, it’s worth noting that artificial blue light exposure is dwarfed by the mighty Sun, to which few of us get enough exposure!)

Back in January, I mentioned the emerging links between Alzheimer's and dental disease; here is an update with more evidence on the link...so brush and floss your teeth!

“Researchers have previously discovered that the bacteria causing gingivitis can move from the mouth to the brain where the harmful enzymes they excrete can destroy the nerve cells in the brain. Now, for the first time, Mydel has DNA-evidence for this process from human brains. Mydel and his colleagues examined 53 persons with Alzheimer´s and discovered the enzyme in 96 per cent of the cases. According to Mydel, this knowledge gives researchers a possible new approach for attacking Alzheimer´s disease. 'We have managed to develop a drug that blocks the harmful enzymes from the bacteria, postponing the development of Alzheimer´s. We are planning to test this drug later this year', says Piotr Mydel.”

China is both innovating (and copying at much cheaper costs) cancer drugs known as PD-1 inhibitors that boost your body’s natural immune system. These drugs could be exported back out at significant discounts to Western drug pricing (and Western versions of these are already cheaper in China, highlighting the drug pricing problems in the US).

Neal Stephenson’s new novel, Fall, explores the logical conclusion of the Internet on its current trajectory: “How did things get so bad? For one thing, residents of Ameristan, unlike Sophia and her well-off pals, can’t afford to hire professional “editors” to personally filter the internet for them. Instead, they are exposed to the raw, unmediated internet, a brew of “inscrutable, algorithmically-generated memes” and videos designed, without human intervention, to do whatever it takes to get the viewer to watch a little bit longer.” Maybe Zuckerberg will read it...

In what is sadly becoming a regular SITALWeek feature, this week’s plastic apocalypse news impacts my local Monterey Bay, which is now home to more microplastics than the giant, floating plastic island in the Pacific Ocean. As I said last week, plastic seems essentially no longer recyclable. We could see a rapid shift to eliminate single-use plastic in the developed countries.

Due to extreme weather in the US midwest, “US farmers have just 58% of their corn crop in the ground (versus a five-year average of 90% by this time) and 29% of the soybean crop (compared to 66%). Those are among the lowest rates in history. Other farmers may end up planting nothing and have declared a total crop loss.”

Stuff about Geopolitics, Economics, and the Finance Industry

Tech Regulation: don’t wall-off data, just get smarter about its use:

A crescendo of attacks on “big tech” from the US government this week creates a good opportunity to share this piece we wrote back in March about the risks of regulating a power-law-based business in the Information Age. It’s not that we shouldn’t have oversight or taxes on big-tech businesses, but taking apart a data-driven network effect ignores the fundamental nature of information-based businesses: the more data they have available to parse and analyze, the better their products can be. Consumers and society benefit greatly from these data network effects (e.g., Google maps, self-driving cars, search engines, product recommendations, etc.). Data network effects provide a fly-wheel effect for advancement, and if we damage the West’s ability to advance in AI, then we could irrevocably fall behind other countries.

Thoughtful regulation of big tech would achieve three things: 1) keep the network effects of the large platforms intact, but 2) force much better transparency and user control over data collection and use, and 3) make specific data, at the user’s discretion, available to other companies on reasonable terms so they too could leverage data network effects to improve their products. For example, Facebook would stay as they are now, but they would give actual, regulated control to users over what and how data are used, and they would make that data available, with user permission, to anyone that wanted to start a rival social network or other business leveraging the social graph (the data behind all of the interactions on Facebook) at a reasonable fee. While data sharing would significantly level the playing field, Facebook could certainly remain the biggest social network, provided they have the best product. I’d suggest the announcement from Apple this week to restrict user data through an Apple-controlled login is the wrong mentality (but, luckily, Tim Cook says Apple isn’t a monopoly in this interview on CBS news). We should not restrict data collection/use to a single company; instead we should give users full knowledge and control over data collection, use, and, importantly, how the data is shared. CEO Todd McKinnon of Identity platform Okta makes a similar point here. I believe we will only keep moving forward as a society if we embrace and use data smartly and transparently. Creating more walls and barriers around information seems like a huge step in the wrong direction.

The shift from the Industrial Age to the Information Age changes everything about everything:

The two main drivers of the Industrial Age economy, as defined by Adam Smith in Wealth Of Nations, were population growth and the productive reinvestment of profits for growth. We are now well into the transition from the Industrial Age to the Information Age economy, and these two factors are no longer necessary or sufficient drivers of wealth creation (defining wealth here broadly as money and happiness, or quality of life). While surely the population is growing globally, it has slowed to a snail’s pace vs. historic precedence, and most developed countries have birth rates below the replacement rate. With respect to Adam Smith’s 2nd engine of capitalism, the productive reinvestment of capital, as we shift from asset-based, industrial businesses to information-based tech businesses, capital is far less in demand. This has been a major contributor to low- or zero-interest rate policies globally, which has created an unprecedented, widespread surplus of capital. Comparing the profit per employee of Google vs. Ford would be one way to conceptualize this change from the industrial to the information economy: Google makes around 10x as much net income per employee as Ford does (around $300,000 vs. $26,000 in 2018; the difference is still >5x even if you also include Google’s large contractor base of employees).

With more progress achieved per dollar of capital, the world is awash in cash with limited options to put it to work productively. Rather than seeing that wealth being distributed among employees, we are seeing record share buybacks and growing inequality as money pools at the top of the economy. One consequence of this abundance of capital and the Information-Age-driven low interest rates is growing institutional ownership of private assets. This makes it harder for individuals to own assets, like houses and cars, while it becomes easier for large institutions, such as private equity, to do so. I’ve written a few times over the last year about the impact of this trend on the single-family housing market in the US: increasingly, for the lower price points, it’s more difficult for individuals or families to own houses, but large institutions can buy up hundreds of thousands of them and rent them out by leveraging technology platforms, data, and low interest rates. Publicly-traded real estate investment trust Invitation Homes is an example of this trend with 80,000 rental homes in 17 regions across the US. This phenomenon compounds the problem of households building equity: because it’s harder to build equity in your house (or the stock market or the company you work for), it becomes more difficult to improve your economic situation. The current situation leaves few alternatives for wealth building outside of deeper equity ownership of private and public companies or increased government welfare support.

Platforms as a lens on the global economic transition from Industrial to Information:

The Industrial-to-Information economic transition is creating new platforms for assets, products, and services. Indeed, the Information Age economy is dominated by platforms and platform participants; as such, understanding the concept of platforms and having a detailed framework for their analysis is increasingly important. In the Industrial Age, many companies controlled, to their selective advantage, some element of their business like distribution, marketing, brand, supplier control, vertical/horizontal integration – classic “Porter’s 5 Forces” or other legacy-minded Harvard MBA strategies. I think those strategies now belong in the business-theory dustbin of the 1900s. Why? The transparency of the Information Age melts away that old method of doing business by obfuscation. It’s not enough to have a standalone product or service built on some dissolving 20th century “competitive moat,” instead you need to be a platform with network effects and significant win-win/non-zero-sum (NZS) strategies. Alternatively, you could plug into someone else’s platform while maintaining your own economic viability (i.e., holding onto enough margin or data to sustain your business). Information creates power laws and power laws feed platforms. Platforms have scale, network effects, and data, and enduring platforms deliver excess value to their participants above the value they create for themselves. In the 21st century, businesses inherently need to take into consideration a broader set of constituents (employees, customers, suppliers, global society, the environment, etc.) to be a viable platform or platform participator. (We cover this topic in detail in our NZS whitepaper).

Last year I wrote this opinion piece (with the objective and excellent writer Dex McLuskey) on the failure of legacy businesses to embrace the platform mentality. We discussed 5 elements of platforms, including: “global scale; access to substantial customer data and permission to use it; a product or service that can be provided where, when and how people want it; protection from disruption/startups; and the ability to adapt as markets evolve.” The article keeps paying dividends of truth: we called out JP Morgan Chase’s new “Finn” bank targeted at millennials as too little, too late, and failing to embody the idea of a platform. Just this week, JP Morgan shut down Finn after it’s apparent market failure. It’s very difficult, if not impossible, to take a legacy, 1900s-mentality product or service and transform it into a platform, even if you are spending $11B a year on technology like JP Morgan.

It’s an interesting exercise to apply the “platform” lens to four enterprise software companies that have recently stumbled. Two of those companies are Cloudera and Pivotal. Both of these businesses were built on the back of open-source projects: Cloudera on Hadoop and Pivotal on Cloud Foundry. The platforms here are the underlying open-source projects, not necessarily the businesses built on them. As Cloudera and Pivotal discovered, it’s very hard to build a platform on someone else’s platform, especially if it’s open source. Further, mega IT platforms like Amazon Web Services and other cloud infrastructure providers have goals of providing their own versions of these open-source products, providing further competition from players who already benefit from established network effects. Another example is Box, which has seen slowing growth recently. While it remains a great product, Box competes with (and cooperates with) much larger collaboration platforms like Microsoft Office. It’s very difficult to extract value away from an existing, large, network-effect platform like Office. Lastly I’d mention Zuora, a subscription billing and accounting cloud software company that has recently encountered difficulties. Zuora is a great product, but it feeds off of other accounting software platforms, such as NetSuite, Workday, etc. When you are a feature of a bigger platform, it’s more difficult to create your own platform with sustainable growth and network effects. It’s a little unfair to wash over the nuances of these four very different companies, which are filled with very bright and hard working employees; however, using the lens of platforms to analyze the businesses strikes me as a useful tool for understanding why some accomplished and well-managed companies don't succeed in the market.

-Brad

Disclaimers:

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

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