Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, concrete-healing fungus, and whatever else made me think last week. Please grab me on Twitter with any thoughts or feedback.

In today’s post: hide-and-seek-playing AI teams learn how to use tools; how a modern payments platform would function; what’s worse: the IPO discount or the terms and valuations on VC deals? Drugstores face dual threats from Walmart and Amazon; increased scrutiny of Google and Amazon’s search prioritization; the great re-bundling of content; Netflix is not on its deathbed; Bob Iger is also not short Netflix, and other insights as his memoir comes out; and lots more below...

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Stuff about Innovation and Technology
Daimler will shift all of their resources to electric engines as they stop development on future combustion engines. I think the odds are against the traditional car makers as they find themselves a decade behind Tesla and the Chinese EV makers on software and battery technology.

A fungus called Trichoderma reesei can be used to self heal small cracks in concrete before they become bigger problems: “The fungal spores, together with nutrients, will be placed into the concrete matrix during the mixing process. When cracking occurs, water and oxygen will find their way in. With enough water and oxygen, the dormant fungal spores will germinate, grow and precipitate calcium carbonate to heal the cracks.”

Dating app Tinder is launching an interactive streaming video where the choices you make can match you with potential partners on the platform. It seems like dating apps are increasingly becoming social networks, so it’s no wonder Facebook is trying hard to get into the dating gig. In Japan, people use Tinder to find others to help them practice different languages. As one SITALWeek reader pointed out to me, it’s yet another move toward the gamification of dating, and I wonder if it’s a factor in the delayed Millennial marriage trends?

OpenAI had teams of AI agents play hundreds of millions of games of virtual hide and seek. After 25M games, “hiders learned to move and lock the boxes and barricades in the environment to build forts around themselves so the seekers would never see them”; and at 100M games, the seekers found ways to breach those forts. This back and forth escalated for some time and demonstrated many emergent and unexpected behaviors.

In case you missed it, check out our new long read on the evolution of the trillion-dollar food industry. I also just recently came across this detailed look at delivery economics with tons of data and interesting insights from the founder of restaurant CRM software provider Thanx.

Walmart opened its first healthcare supercenter with “primary care, dental, optometry, counseling, laboratory tests, X-rays, hearing, wellness education and behavioral health” all in one location. As we discussed in our new piece on the evolving food industry, Walmart is well positioned to take share in grocery, especially with their $98/yr unlimited delivery plan, and perhaps they have a shot at becoming a winning platform for healthcare as well.

CVS and its subsidiary / joint-venture Surescripts stopped doing business with Amazon’s Pillpack prescription delivery company. This is an embarrassing sign that the incumbent pharmacies are scared enough to risk monopolistic “refusal to deal” government action in order to stop the competitive threat. Surescript is already being sued by the FTC for illegally monopolizing the e-prescription market. Raise your hand if you find the current experience of going to a drugstore for a prescription a real joy in your day...anyone? (We wrote a bit about this issue of standalone businesses like drugstores struggling to become platforms a year ago.)

But, Amazon is not looking so innocent either: as the WSJ revealed this week, the company changed its search algorithm to favor its own products. What Amazon did is very similar to how all of retail operates, especially a company like Walmart. Walmart sees what sells well, creates a private-label version, gives it preferential shelf placement (like a “search result” in a store), and undercuts the brands all while pressuring brands to also lower their prices. Many stores get 10% of sales and a higher percent of profits from private label. Drugstores do the same thing with private-label OTC drugs. What feels a little more manipulative with Amazon is the importance of top placement in the often-lengthy search results, and the presence of the "buy box", which creates a more restrictive consumer experience than when we physically scan shelves as we walk through a real store. Investors are left wondering if the increased appearances of a yachting Bezos on the society pages is correlated with questionable decision making at Amazon. It was encouraging, however, to see the company step up their environmental focus and order 100,000 electric delivery trucks from Rivian this week. Rivian expects to have 10,000 of those vehicles on the road for Amazon by 2022.

And, speaking of manipulating search results, this recent survey shows that 68% of liberals, 67% of conservatives, and 71% of independents are in favor of breaking up Internet platforms to stop prioritization of their own results and content. A slightly lower percentage was also in favor of breaking up platforms if it meant more competition broadly. The questions in the survey appear somewhat leading; the company has a reputation for doing legitimate surveys, but I am unable to track down the methodology. Politicians on both sides are already in favor of moving against big tech. This is not straightforward from an investment perspective because regulatory capture or breaking companies up can cement monopolies. As we said in our recent tech reg papers: it’s likely governments won’t inflict a lot of harm, but they could cap the upside to these businesses.

This week FedEx stumbled on its outlook. They blamed the economy, but I can’t help but wonder if it’s also the broader factors we’ve previously discussed in SITALWeek. FedEx might be looking to Google’s drones to help it out, but it probably won’t be enough to offset the rising competition in the delivery world as the center of power shifts from global logistics, which are now table stakes, to technology platforms with vertically integrated customer relationships. We like to ask: if a company were to disappear overnight, what would the impact to the world be? Here is an excerpt on that from SITALWeek #205 back in August:
“FedEx ended the rest of their relationship with Amazon this week. It’s widely expected that Amazon could soon offer a broader delivery service, allowing anyone to use their logistics and delivery network for packages. Although FedEx can still partner to deliver for many other shippers, the reality is that, if FedEx disappeared overnight, within a few months the system would re-equilibrate as competitors hire drivers and lease trucks. In the US, it’s not clear why we need UPS, FedEx, Amazon, USPS, and a host of regional carriers and on-demand couriers all visiting each house every day.”

This FT article makes a flimsy bear case on Netflix. The article cites Damodaran, a professor of finance who tries to precisely predict the future by calculating the equity risk premium down to the 2nd decimal point (spoiler: he can’t, nor can anyone else). Whether you are a bull or bear on Netflix, at least checkout more-informed views on the company’s debt and other misunderstandings like this analysis from Matthew Ball on REDEF. And, this article from Matthew is great as well. (Oh, and I have an article on ViacomCBS where I discuss my thoughts on the proliferation of streaming apps.)

Viacom CEO Bob Bakish did a good job articulating the strategy around the merger with CBS in this CNBC interview. Viacom also announced a partnership with BritBox in the UK that I thought was smart for both companies as well as securing the rights to Seinfeld for its cable networks (like Comedy Central). Meanwhile, Netflix’s CEO discussed how inflation will keep rising for creating content, and Netflix only has 5% share of video viewing today. And, this week Disney reached a carriage deal with AT&T/DirecTV after the video provider lost over 300,000 subscribers due to the CBS blackout last quarter proving the drop off in traditional video subscribers remains manageable, favoring the content owners.

In other streaming news, in a smart move Comcast is making it’s Flex digital set-top box available free to data subscribers. The shift to streaming is just a re-bundling opportunity, plain and simple. In the past, Comcast made money in video by bundling content and owning the customer relationship. Digital streaming has shifted the power permanently to the content creators and owners, who can now go direct and own the customer. But the customer (or at least me!) needs a single user interface with functional universal search. No one even comes close to providing a good customer experience across apps today – not Roku, not Amazon, not Apple, not Google, not anyone. Hulu and Disney+, with the reselling of premium channels like HBO, gets you about half way there, but the UI is still mediocre. Maybe Comcast will fail at this as well, but we need more companies trying to bundle apps with a single UI + universal search across platforms for the benefit of consumers.

You might ask: what's the difference between a content owner distributing their app through a digital bundler like Comcast Flex, Roku, Amazon Fire, Apple, etc., compared to selling their channels through a package on Comcast, DirecTV etc.? Data, data, data, and pricing. The content owners can strike new digital distribution deals for their apps and content that allow them to control data on customer viewing and marketing. And, they can set app pricing and revenue splits that more accurately reflect actual consumer demand. So, again, this is a "have their cake and eat it too" shift in distribution whether they go direct or through a digital gatekeeper.

The attacks on Saudi oil facilities were a combination of unmanned winged planes and cruise missiles. The widespread press reports of a “drone” attack were a bit misleading. That said, the risk of cheap swarms of drones that could be operated together with explosives in attacks is concerning. Recently Lex Fridman interviewed Penn professor Vijay Kumar on drones, and I found the podcast insightful.

This week in facial/image recognition news: a woman in China can’t pay for anything after a nose job; UK police have arrested 58 suspects since 2017 using facial recognition tech; private investigators and repo men have built their own database to track you by pooling data collected as they drive around. And, in lighter machine vision news thanks to cows' unique markings, it’s easy to track them around the barnyard: new platforms are emerging to keep tabs on cow behavior and diet to improve overall animal health.

Qualcomm is acquiring its RF joint venture in a bid to integrate the radio chips into a single 5G package. This move could be a threat to incumbent filter and RF-chip makers like Broadcom, Skyworks, and Qorvo. But, it might also be an attempt to create an integrated and easy-to-adopt IoT 5G system on a chip. In other words, this might be to expand the market for 5G more quickly beyond phones.

The irrelevant patent troll IBM, which I consider leftover flotsam from the 1900s, has filed yet another suit against a tech company that is actually innovating. In this case, IBM says they invented "using computing power to analyze the quality and desirability of a geographic area and list-based searches that let users see the results on a map that fits within their screen", and Zillow needs to pay up. This is the second notch in Rich Barton's IBM lawsuit tally – IBM also went after Expedia, a company Rich co-founded.

What would a modern payment network look like?
In terms of value, cash, check, and debit are roughly 45% of the payments market in the US. About 34% is ACH or automatic electronic payments, 17% is credit cards, and the rest is mobile and miscellaneous (e.g., prepaid) as of 2017. Credit cards are mainly for rich folks: households that make less than $25k/yr use credit for 7% of transactions compared to 33% for those that make over $125k/yr. Debit is mainly for young folks – accounting for 48% of transactions for the under-25 age group, but only 16% for people 65 and older (source). I worry that the current credit card monopoly tech stack is an unnecessary tax on payments and the economy. But, let’s put that credit card debate aside for now and assume credit cards will stay on their current growth trajectory (because, in 21 years of professional investing, I’ve never seen stocks so universally loved, defended, and idolized as Mastercard and Visa, and I’ve lost my will to debate them).

Instead, let’s look at the 45% of the cash/check/debit payments that is no- or very-low fee. This transaction group is also 63% of actual transactions (more frequent usage for smaller amounts vs. credit). Instead of turning the several hundred billion dollar tax on payments into a trillion dollar tax, as credit cards continue to take share from cash, there is a real opportunity to create a much bigger win-win outcome for merchants and consumers.

What would be the highest non-zero-sum, or win-win, payment replacement for cash and checks? Here’s what I think it would look like: payments would be free to merchants; the actual cost of transacting would be paid for by data. Consumers would be rewarded with a loyalty program if they opt-in to sharing their valuable data. Reliable merchants would get their money right away. Data would also be leveraged to provide user friendly and transparent credit to consumers and merchants alike. This type of product would be easily doable today and would create enormous value for merchants, consumers, and the payment platform that pulls it off. It wouldn’t have to be exclusive of credit cards, but it’s likely that the monopoly payment stack would withhold their cards from such a competitive platform.

Who could pull this off? When we are paying in cash, we are usually there in person, so a smartphone-based system with no physical cards of any kind would seem to make the most sense. Certainly Apple, Google, Amazon, and Walmart in the US are large enough and interested enough to create this alternate payments platform, but government regulation is going to be tricky for those companies as they expand into adjacencies. PayPal has already rolled over and gotten into bed with the establishment, so I’d count them out. Square and Stripe could give it a go, but are also largely beholden to the established card system. Replacing cash with something better than debit and credit cards is just one of the many fun thought exercises in the payments landscape, which is ripe for digital disruption.

Miscellaneous Stuff
Disney CEO Bob Iger’s new memoir The Ride of a Lifetime has arrived before his actual retirement, which he keeps postponing. This excerpt in Vanity Fair covers his relationship with Steve Jobs and the Pixar acquisition including this interesting comment: “I believe that if Steve were still alive, we would have combined our companies, or at least discussed the possibility very seriously.” I am eager to read Iger’s book as soon as it's released this week, and I will greatly miss his stewardship of Disney when he finally retires.

This line in from a NYT interview with Iger reminds me of the ancient Confucius idea of wu-wei, or trying not to try: “[Iger’s] book makes clear how much effort went into his effortless demeanor.”

Iger also comments on the last-minute decision to kill Disney’s acquisition of Twitter in that NYT article: “I like looking at my Twitter newsfeed because I want to follow 15, 20 different subjects. Then you turn and look at your notifications and you’re immediately saying, why am I doing this? Why do I endure this pain? Like a lot of these platforms, they have the ability to do a lot of good in our world. They also have an ability to do a lot of bad. I didn’t want to take that on.”

At the end of that NYT interview Maureen Dowd did a rapid fire “confirm or deny” with Iger which yielded this:
Maureen Dowd: “Your biggest position in your personal stock portfolio is a Netflix short.”
Iger: “Very false.”

Google’s quantum computer was said to have performed a calculation in three minutes that would require the world’s most powerful silicon machine 10,000 years. It seems likely the calculation was designed specifically for the quantum computer and has no real-world value. Just a reminder – we are still in the ‘BS phase’ of quantum computing; maybe someday, in the distant future, they might be functional with some real-world value, but not today.

Stuff about Geopolitics, Economics, and the Finance Industry
Bill Gurley took banks to task again this week over IPO mispricing – citing an average 30% discount that favors investors over companies (Twitter thread). Having participated extensively in the IPO process for 20 years, I agree there is room for improvement. The very small number of shares floating at the time of IPO makes it difficult to balance finding long term holders while also assuring there is ample liquidity in the stock. That said, there is also a lot of opacity and lack of good, market-clearing “price discovery” for private investment rounds. In many cases, private companies are leaving a LOT more money on the table by underpricing themselves in VC rounds as compared to their IPO rounds. IPOs will always be a lower cost of capital compared to VC rounds (which can sometimes have costly rights associated with them), which argues for going public sooner rather than later (there are many more benefits to going public sooner as well for employees, marketing, recruiting, culture, etc.). That said, young companies have a wide range of outcomes, and whether doing a VC round or an IPO, they are going to have to give something up to investors for that risk. While there is no reason the mega Wall St. banks need to be involved to the extent they are now, some of them can be quite helpful in the IPO process (especially all the thoughtful bankers that read SITALWeek!). I recommend private companies use banks to get to know public investors well before the IPO process – then they can “pick” their investors by communicating, operating consistently, and underpromising such that they can out-deliver expectations over time.

I’ve been getting questions about whether I think the US is headed into a recession. My answer is this: invest always like you are already in a recession, then it won’t matter whether we have one or not. That means invest in adaptable companies that will do well over the long term and create opportunities out of short-term problems. We cover those characteristics in detail in our Complexity Investing paper (chapters 2 & 3). So, it doesn’t matter that more investors think a recession is coming than any time in the last 10 years (38% now believe) or that Gundlach thinks the US is going into a recession and it will be “a long time before it goes back to the high of October 2018.” Nobody knows – the economy is a complex adaptive system that defies predictions of nearly any type.

Trump understands the value of Taiwan, and that is increasingly important in the US-China trade war, which is highly unlikely to have a resolution. As I’ve said in the past, we are simply in a long period where the cost of doing business with and in China is rising.
“At this point, we can only guess what President Trump really thinks about Taiwan. He has yet to address the public on this issue. But if actions speak louder than words (and tweets), then he must see tremendous value in this island democracy.”

Alibaba and Tencent are refusing to cooperate with the Chinese government’s Baihang credit scoring system by holding back the data from their users' financial transactions. It’s a notable rebellion as the Chinese control of the two companies has risen dramatically in the last couple of years.

“The Los Angeles-based real-estate firm [Colony Capital] is a global investor with $55 billion in assets under management. Colony aims to sell as much as 90% of its $20 billion property portfolio of hotels, warehouses and other commercial real estate by the end of 2021, company officials said last week. Colony said it would use the proceeds to buy data centers, mobile phone towers and fiber and grow its digital real-estate investment management business.” Maybe they can sell to Blackstone, which has raised the largest property fund to date of $20B to chase the bubble in illiquid private assets. “The capital ready to be deployed has swollen to over $2 trillion, according to data provider Prequin, driving up asset prices and deal making activity.”

Big Wall Street banks are trying to compete with consultants by selling their research – which professional investors apparently no longer find particularly valuable – to corporations, who, I imagine, are likely to find it of equal utility. This discussion excludes, of course, the great research from the smart analysts that read SITALWeek ;-)

-Brad

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