Stuff I thought about last week 6-23-19

Greetings – Tesla Powerwall owners can sell power to virtual power companies, making up to $1,000 a year; the rise of institutional home ownership is driving a lot of changes, and the trend generally seems to still be misunderstood; the regulatory reaction to Facebook’s new transactional currency signals more of the wrong approach to regulating big tech platforms; and, Bob Dylan’s newest half documentary-half mockumentary is a commentary on the half-truths of the modern era. As always grab me on Twitter with any feedback.

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Stuff about Innovation and Technology

Walmart is using AI cameras in 1,000 stores to check for items that don’t get scanned. Most missed items are accidental, but still contribute to meaningful lost sales. One of the most missed items is milk, which is apparently hard to scan.

Tesla Powerwall home battery owners can now join virtual power provider National Grid (in states where available) and earn up to $1,000 a year by providing energy from batteries during peak demand hours. Arbitraging peak energy demand hours can be quite lucrative, especially if you have solar panels collecting photons during those peak rate, sunny afternoons. It doesn’t take too much imagination to see this idea of a virtual power plant rolled out much more broadly, replacing much of the peak energy demand generation at power plants via distributed, connected batteries. Consumers earning a return on their technology purchases like this reminds me of when Elon declared Tesla cars would go up multiples in value once they join a hypothetical robo-taxi fleet for hire. Related: African telecom company Econet is deploying 520 Powerwalls to create a distributed backup system for its cell towers.

Neuroscientists working with birds and mice are landing seven-figure jobs at the Internet giants, who hope their brain knowledge will improve the platforms’ AI offerings. “The implicit goal is a functionally sentient machine that can figure out things by itself, instead of relying on humans to train it, and that independently wants things.”...oh, is that all?

YouTube launched a new ad format that allows viewers to virtually try on makeup. This follows a similar trend that started on Alibaba in China a couple of years ago that enabled many brands to build a strong presence in China.

The Oura high-tech ring monitors sleep and activity levels, and can even detect when you’ve had a few drinks; however, it’s good to remember that the very devices designed to make us healthier can actually increase anxiety levels by feeding orthosomnia – an “unhealthy obsession with achieving perfect sleep.”

As Facebook announced Libra, its blockchain-based and sovereign-currency-backed mechanism to pay for virtual and real goods inside Messenger and WhatsApp, it’s been interesting to see the immediate regulatory concerns. This is a very strong warning of what’s to come for big tech – even if the current Internet giants aren’t split up or handcuffed, they will likely be unable to expand into adjacencies going forward, even if those new products would benefit users greatly. I fall back to my prior argument on the topic of regulating network-effect platforms: instead of handicapping their ability to grow users and features, I recommend allowing any data they collect to be accessed on reasonable terms (with user permission) by potential competitors or platform participants. Related: the FT had an interesting take on how Libra might not help the under-banked as Facebook hopes.

Speaking of Internet competition, it’s interesting to see the proliferation of new privacy-focused browsers. Chrome, despite being developed as an adjacency by Google, is open source and has enabled many of the new browser competitors (can you imagine the regulatory protests against a giant Internet platform that controlled the world’s largest mobile operating system trying to launch a browser in current times!?). This balance of platforms and open source products, like Android for example, is a powerful defense for tech companies. “Open source data” is the right way to think about tech regulation in my opinion.

The big shift in home ownership due to low rates and stubborn wages:

Over the last couple of decades, the number of homes that have sold to institutional buyers has nearly doubled to 11%, and in some cities the number is around 20% or even higher. The NYT and the WSJ ran dueling articles this week on the rise of institutional ownership and iBuying of homes in the US. This is a topic I’ve covered a few times in the past, but I think the mainstream media continues to completely miss the foundation of these trends in the single-family home market. Instead of vilifying institutions for turning homes into mass scale investments, you have to look at the real causes: low interest rates have not been enough to maintain affordability for home buyers, (especially first-time buyers and homes under $500-600k), and, at the same time, low rates give big institutions access to cheap capital. As a result of technology-driven deflationary trends, rates are structurally low, and the world is awash in capital at the top of the economy. The only way to get homes back into the hands of families instead of institutions would be to drive wages significantly higher. That sounds like an echo of the article I discussed last week from Nick Hanauer on the paradox of the US education system, which also called for higher wages. Yet, as this article argues, there is ample labor pool available, and therefore no reason to expect widespread wage inflation any time soon which also feeds lower rates. So, absent rising wages, the shift to renting instead of owning isn’t all bad (e.g., more flexibility and less maintenance for the renter, nationwide investment in home improvement by institutional owners). I suspect the trend will continue, and it will be important to see increased renter rights and benefits that match the advantages homeowners already have (as a result of social engineering policies after WWII, home owners receive significant tax advantages, although Trump has walked some of those back). The transparency of the Internet and new data-driven software platforms can make it easier to find quality rentals and maintain good renters – Invitation homes, which owns more than 100,000 single-family home rentals in the US, is a good example. iBuyers like Zillow, Redfin, Opendoor etc. are enabling the acceleration of institutional buying by packaging up and handing off fixed-up homes to be transformed into rentals. According to the WSJ, about 10% of iBuyer homes in Phoenix are flipped to institutional owners, and the iBuyer platforms in Phoenix are now buying about 5% of homes sold. The biggest issue I see with declining home ownership is the loss of a key mechanism for saving and building equity for households, which has the potential to exacerbate inequality long-term (see also: “The One Percent Have Gotten $21 Trillion Richer Since 1989. The Bottom 50% Have Gotten Poorer.”.

Electronic Arts CEO Wilson addressed the network-effect shift of video games from pure entertainment to social platforms:

“Once you get to the point where social interaction is really, really, important, then you discover that network effect in the context of games is as important as it is for Facebook, or Snapchat, or Twitter, or any of these other social grounds,” Wilson explained. “Once you come to terms with that, what you understand is that people will come together to consume this content together and they will want to stay and continue to consume that content and fuel those relationships as part of that. The reality is that is going to mean games as service is going to be foundational to our industry because that is how you will fulfill the motivations of players who have social interaction at the very core of why many of them play games for much of the time they play...Players will always orient towards the big network live service games because that's where all their friends are. If you're making a purchase decision that involves a $60 price point as a friction point, you are likely always going to choose the ones that will fulfill your core motivation, which is social interaction, and you likely will forgo [other] motivations. In the context of subscription, where there is no barrier, you will go and play those games. But more than that it also is a place where we are likely to make more of those games.”

And, here’s the first part of a three-part interview with Microsoft’s head of XBOX, published as the company plans to evolve into a broader streaming and social platform for games (and here are parts two and three). (It’s interesting that Phil walks back the Sony gaming partnership a little by emphasizing it’s just a “memorandum of understanding” at this point.)

AI in the cloud: despite competition from Intel, custom-built chips, and programmable FPGAs, NVIDIA accounts for 97% of the available accelerated computing options across AWS, Azure, GCP, and Aliyun, the four largest global cloud platforms. Industry analyst Paul Teich also notes that Xilinx is poised to gain some share in the rapidly growing market.

The dystopian social credit system isn’t having much of an impact in China, at least not yet. “About one in eight of the 13 million people monitored in Suzhou had a score above 100 as of last August, according to local media reports. Only 4,731 were below 100, and all were so-called defaulters who hadn’t paid back loans or had failed to obey court rulings. That leaves more than 11 million people with scores at the baseline.”...“There’s no promotion of the system in the city — no billboards, no ads or public campaign as far as I see.”

Amazon changes the name of Freedive to IMDb TV. As I said back in January “Freedive also continues a long tradition of brilliant tech companies failing to understand branding and marketing – I keep accidentally calling if Fee-Drive...” I think newly named IMDb TV is a good example of an ad-supported TV platform. It carries a tolerable load of ads – about half the normal for US TV – and the targeting is quite interesting. Within minutes of doing a Google search for ‘which vegetable seeds need shade vs. sun’, I saw an ad for Miracle Grow’s new organic soil during an IMDb TV show...either a coincidence or a very good indicator of how good Amazon’s ad tech stack is becoming (I think it’s the latter).

In other Amazon video news, the company is pulling back from kids programming. This is a great disappointment as shows like Tumble Leaf, along with great animated series based on popular kids books, were really well done. From Disney’s perspective, however, it’s positive news ahead of the Disney+ launch, as both Netflix and Amazon in my opinion had won young kids away from Disney, and the burden is on Disney to win them back (which will be crucial for the success of Disney Parks, which may also have to contend with the drop in Chinese tourism).

I previously criticized the hypocrisy of Tim Cook back in a February SITALWeek, but it was nonetheless good to hear Cook, in the Stanford commencement speech, call for tech platforms to take responsibility for their products, since we’ve seen Facebook and Amazon recently state they aren’t responsible for how their platforms are used, or abused.

Zhaoxin, a competitor to Intel and AMD led by a JV between VIA and the Chinese government, has released a 16nm processor roughly on par with a 2017 Intel processor. The chip is being manufactured at Taiwan Semi (TSMC), which highlights the delicate vulnerability of China’s intentions to become a competitive chip maker – getting scale in manufacturing on mainland China is impossible without significant help from Western companies and the island of Taiwan.

A lawsuit against Amazon’s Pillpack by CVS reveals that the pharmacies are more worried than they let on about competition from the e-commerce giant. We’ve covered this topic in the past, but the current prescription filling system is miles away from what consumers want it to be, and Amazon has everything it needs to rapidly disrupt the market.

Miscellaneous Stuff

Here is a great article in the New Yorker by Salman Rushdie on what we can learn from Slaughterhouse-Five 50 years after its publication; if you are a Vonnegut or Heller fan, you will want to read this article:

“If Heller was Charlie Chaplin, then Vonnegut was Buster Keaton. His predominant tone of voice is melancholy, the tone of voice of a man who has been present for a great horror and lived to tell the tale. The two books do, however, have this in common: they are both portraits of a world that has lost its mind...

Vonnegut’s novel is about that, about the inevitability of human violence, and about what it does to the not particularly violent human beings who get caught up in it. He knows that most human beings are not particularly violent. Or not more violent than children are. Give a child a machine gun, and he may well use it. Which does not mean that children are particularly violent.”

The recent Netflix documentary by Martin Scorcese on Bob Dylan’s Rolling Thunder Revue tour is actually a fictional web of half truths and absurd plot points. Watching it without knowing this about the film makes it quite a disappointing movie, but knowing how it fits in the overall arch of Dylan’s surreal-life character makes it quite complex and entertaining: “Bob Dylan’s career is an avant-garde movie whose soundtrack is consistently more successful than its action.” (Rolling Stone also put together a list of some of the fake parts of the documentary.)

Recent air travel afforded me an opportunity to catch up on several theatrical movies, and I was struck by their lack of depth compared to the new, longer series being produced by the streaming platforms. These were great movies, but now the competition to a 90-120 minute movie is the 5–10 hour “movie” that the streaming platforms are creating as multi-part series. A six-part cinematic version of Catch-22 (that could have been 20 hours and still been too short!) on Hulu recently was able to accomplish much more than a 2-hour movie could have done (and certainly more than the original movie version). Overall, I think consumers are being trained to appreciate the much longer multipart “movies” on the streaming platforms. Perhaps this is why Disney has been successful with Marvel and Star Wars, which are long narratives stitched together from individual movies.

Stuff about Geopolitics, Economics, and the Finance Industry

The pension-funding crisis raises questions over socially responsible investing at Calpers, which is said to have left $3.6B on the table by avoiding tobacco stocks over the last two decades.

Chinese Sci-fi giant Liu Cixin defends the Chinese government in this New Yorker article. The author of the article recalls the following from the afterword of The Three Body Problem (which feels depressing as China continues to censor news and inaccurately cites US interference as a source of the Hong Kong protests): “I cannot escape and leave behind reality, just like I cannot leave behind my shadow. Reality brands each of us with its indelible mark. Every era puts invisible shackles on those who have lived through it, and I can only dance in my chains.”

Giant, the largest bike maker in the world, says “the era of ‘made in china’ is over”. A number of companies have been discussing moving manufacturing out of China back to Taiwan. Overall, it seems the island will be seeing a big boost to its economy, but the existential question is still looming as to whether China will let it remain independent.

The FT has launched a new weekly post on ESG investing.

It seems like the larger the assets at an active investment firm, the more likely they are to be less “active” – e.g., the bigger they are, the more they look like the indices they are trying to beat. It’s a little catch-22 for the industry: in order to differentiate (and therefore preserve and grow) the active management fund industry – in the face of competition from nearly-free passive alternatives – the active managers need to actually be active. However, as firms get bigger assets, they tend to become less liquid and more risk averse, thus sealing their fate of losing to passive funds. This article on Legg Mason in the WSJ this week highlights some of the cultural issues large investment firms face as the industry consolidates in order to compete with passives; focusing on costs and mitigating risk is probably not the ideal outcome for clients.

Related: this fictional, and at times seemingly cruel, account of a long-time buy-side investor losing his job highlights the risks and downsides present today in the active management industry.

-Brad

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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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