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

In today’s post: the shift from gas to electric cars requires a painful transition in the labor force; connected set-top boxes like the Amazon Fire are not platforms; online grocery curbside pickup is taking off; 2nd hand apparel is growing rapidly around the world; Facebook’s TikTok mistake; direct listing IPOs setup for VC insider trading; as disruption comes, what is the new value add of an investment adviser? new data shows all types of ETFs underperform the market; and, lots more below...

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Stuff about Innovation and Technology
Major League Baseball has partnered with an eight-team league to experiment with technology: the Atlantic League is working on robotic umpires and rule changes. It turns out the “robot umpires” are machine vision that just tells a real umpire what the call is and they repeat it. I love this idea of experimentation, but it’s my impression that more than half of watching sports is complaining about coaching/refs/umpires, so if spectators can’t blame a real person, it could take all the fun out of it!

Call of Duty Mobile, co-developed with Tencent, had 20M players in its first two days of launch, exceeding expectations.

38% of Amazon’s top-10,000 sellers are China based. And, 7% of Amazon 3rd-party sales are said to originate from sellers in one zip code in Brooklyn.

Be careful crossing the road! Pedestrian deaths by cars have risen from 4,300 in 2008 to over 6,000 in 2018 after decades of decline. Increases in autonomous safety features in cars are not translating into pedestrian avoidance. While there isn’t one reason experts can trace the increase to, let’s just assume it’s not a good idea to look at your phone while you cross a street.

As America’s Funniest Home Videos kicks off its 30th season, one thing I have learned is that we now have a lot more footage of Americans falling down their front porch steps, backing their cars into various objects, and curious critters. This is all thanks to the rise of doorbell and other connected security cameras. And, this footage is increasingly becoming content for social media, local news, crime watchers, police, nosy neighbors, and more. Wired discusses some of these issues in “The Ringification of Suburban Life”.

Speaking of video surveillance, Motorola Solutions is fast becoming a supplier of video monitoring and AI to schools and law enforcement. The maker of radios and other government hardware is a potential competitor for Axon, the leading maker of body cams and non-lethal weapons (Tasers). So far, Axon is taking a much more cautious approach to facial recognition than Motorola, recognizing the risks involved before the technology is mature and regulations are in place.

An electric motor and battery takes 40% fewer hours to assemble than a combustion engine. The shift required in the labor and skills from manually building legacy gas cars to fabricating software-heavy EVs with autonomous features is creating a big gap in the workforce. Engines and transmissions (EVs don’t even have gears!) are just under half of the manufacturing capacity at legacy car makers in the US. Outside of Tesla, batteries for EVs are imported from Asia, further shifting value away from legacy supply chains in the US and Europe.

The shift to EVs really ups the ante on technology and integration. It’s not just a matter of replacing an ICE engine with batteries, as this Semi Engineering article explains. As batteries become bigger (for increased range) and charging speeds increase “[t]hey need to switch faster, because the faster you switch the less power you’re going to waste, and it’s all about efficiency”, which will drive a lot of semiconductor demand. One estimate for silicon carbide (for high power chips in cars) is 30% annual growth for the next 5-7 years.

Earlier this year, there was optimism that Square would be able to secure a federal banking charter (ILC, or industrial loan charter). The WP reports that Square’s application appears to have gone stagnant, but that hasn’t stopped them and other fintech companies from leveraging community banks as partners and offering bank-like services to customers. This setup of tech companies partnering to be bank-like without charters still feels temporary and risky – both for the small banks, which could lose the business if charters are given out, and for tech companies relying on the banks if the rules around leveraging them change. On the one hand, the US government is allowing for innovation with these community bank partnerships (even though their future is uncertain), but on the other hand, they are significantly impeding innovation by not allowing tech companies to get banking charters.

The WSJ reports that Amazon and Disney continue to fight over Bezos’s misplaced Fire TV demands. Bezos continues to overestimate the value of his Fire TV set-top box installed base to the detriment of his customers. At my house, we've already ditched our Fire boxes in favor of Roku (which also have their share of problems) after it became clear that Disney+ wasn’t likely to be available. I wrote about Bezos's video blindspot in SITALWeek #207, discussing how he is wasting $6B by overplaying his hand. Here is my message to Bezos: Fire TV with Prime Video isn’t a platform, and it’s not something you can use as leverage over your video competitors – Fire TV can be swapped out for $30 in approximately 30 seconds. It wouldn’t surprise me to see Disney partner with Roku to give the devices out to new Disney+ subscribers as the tensions with Amazon rise. The Disney/Amazon war is the equivalent of a network fighting over carriage fees with a cable or satellite company; however, in the new direct world, I don’t believe the content owners will give any ground to the new-era distributors like Amazon.

Click-and-collect grocery pickup is set to be a $35B market by next year according to this story. Retailers like Walmart could see over 10% of customers picking up groceries. The retailer is experimenting with robots and other tech to increase speeds and decrease wait times. Meanwhile, as Amazon plans to open more grocery stores – apparently with large kitchens – I’ll be eager to see if these are more delivery hubs/cloud kitchens versus traditional grocery stores. Amazon is also in talks to put its cashierless “Go” tech platform into other retailers like airport shops and movie theaters. For those that missed it, I wrote about the evolution of the grocery store and food supply chain here.

As food consumption shifts toward meals and away from ingredients, the availability of chefs will be a key hurdle. Picnic is a Seattle company with a pizza robot that can make 300 fresh ‘zas per hour to help out with the pending chef shortage.

Tencent and Alibaba helped create a $100B annual market for secondhand goods in China, in particular apparel, which saw new clothes purchases drop 25% between 2017 and 2018. Beyond the thrift factor, global awareness of the green factor in reusing textiles is likely to propel greater clothes renting and recycling. From an article discussing the bankruptcy of Forever 21: “Young customers are losing interest in throw-away clothes and are more interested in buying eco-friendly products. They’re also gravitating toward rental and online second-hand sites like Thredup, where they see clothes worn again instead of ending up in a landfill.”

Zillow provides more data to support the impact of student debt on home-buying Millennials. We’ve discussed the ramifications of Millennials’ large debt – advanced in this insightful Deloitte report – earlier this year in SITALWeek #201. Zillow highlights that 39% of renters can’t buy a home due to student debt; and, medical debt is another factor for many would-be home buyers. As I mentioned in #201, the multiplier effect on the economy of reducing/eliminating student debt could far exceed the moral hazard and political charge of such an action.

Consumers' use of social networks, and, more generally, myriad communication tools, tends to be fickle. We have decades of examples of this phenomenon with the rise and fall of various online services around the world all the way back to Prodigy and AOL. One of the reasons consumers move on from one social network is the loss of authenticity. I suggested last week that we’ve already seen peak Instagram, and evidence of the platform becoming just an advertising medium surfaced this week as Disney introduced the new line of ‘Frozen 2’ movie merchandise by enlisting 200 social media influencers across 30 countries to promote the products. The lack of authenticity is perhaps giving rise to the “getting real” movement on Instagram, which, as I understand, is people inauthentically pretending to be authentic.

Another example of the fickleness of social media user attention spans is the rise of TikTok, whose parent company in China, Bytedance, is said to have clocked $7B in revenues in the first half of 2019. A lot of that revenue is being funneled into ads on Facebook and Snapchat to drive usage growth on TikTok: double indemnity! Mark Zuckerberg seemed to write off TikTok in some leaked internal meeting comments by saying it was just a subset of something Instagram already does. This article in Techcrunch points out how risky that underestimation is likely to be. That said, a lot of TikTok usage today is simply teens driving their follower counts and connections on Instagram, Snapchat, and YouTube. However, there is one obvious difference between Facebook and sunny TikTok: not only does TikTok censor political views (as I covered last week), it’s also banning all political ads. Who wouldn’t want to be on a social network with no political comments and no political ads for the next year!?

This week, Microsoft reminded the world of the power shift away from the operating system toward apps. CEO Satya Nadella commented in a Wired interview: “The operating system is no longer the most important layer for us...What is most important for us is the app model and the experience.” They also reminded us of the declining importance of the processor with the introduction of ARM and AMD devices alongside an Intel-powered laptop (Intel is also aggressively cutting prices to compete with AMD). Microsoft is even working with AMD to customize future chips. The relevance of the “Wintel” monopoly of the olden days is now 100% dissolved. As we move more and more toward an app-centric world, the OS and processor become less and less relevant – it really becomes all about the apps, and, to a lesser extent, innovative hardware form factors.

Software buyout firm Thoma Bravo has $12.6B in its 2018 fund to lever up and go after $10B+ sized companies. I always loved that scene in Gene Wilder’s Willy Wonka where Charlie and his Grandpa float among the bubbles.

Licensing intellectual property for design into semiconductors generated $2.7B in 2018 but could exceed $10B in just a few years. Design software companies like Cadence and Synopsys have been ahead of this trend for a while.

Graphcore is a UK-based chip startup trying to build a general-purpose AI chip. For AI, you need to look at machine learning (training models on datasets) and inference (running queries against those models). Today, ML is done mostly on GPUs by NVIDIA with assists from x86 chips. For companies with specific workloads, custom chips (e.g., Google’s TPU) can be a good, but expensive choice. If you have specific math you need to calculate very quickly, then FPGAs from companies like Xilinx can fit the need. So far, companies like Graphcore haven’t had the software ecosystem for training models – like NVIDIA has had with their popular CUDA language – and their speed advantages have not been enough to break in. We are likely to see an array of winners as workloads become more and more heterogeneous; but, for now, NVIDIA remains far in the lead and they aren’t standing still.

Following last week’s pitch by Uber that it wants to transform into a broader platform, the FT reports they are trying a new app in Chicago today to match temporary workers with employers for a variety of job tasks.

Miscellaneous Stuff
Virgin Galactic is getting ready to fly space tourists at a cost of only $250,000, which includes pre-flight training. The company is targeting $600M in revenues by 2023.

I shared several of my highlights from Bob Iger’s new book The Ride of a Lifetime in this twitter thread for those interested.

Speaking of Mickey Mouse, the free speech heroes behind South Park just tackled China’s control of US-made movie and TV content. It’s a remarkable protest episode, especially given that it aired on a Viacom-owned network – the same Viacom that altered Tom Cruise’s leather jacket in the recent Top Gun sequel so as to not offend the Chinese. The episode features Stan’s dad getting arrested in China, where he runs into Winnie the Pooh in prison. Pooh bear is a banned image in China and last year’s Christopher Robin movie by Disney wasn’t screened in the country. As a long-lime Disney and media investor, I laughed out loud when a satirical version of Mickey Mouse asked “What’s South Park? Do I own that?” and someone in the background calls out “Not yet sir!” I also watched the episode on Disney-owned Hulu, because, you know, free speech wins. Hollywood does at the very least seem to embrace satire.

Stuff about Geopolitics, Economics, and the Finance Industry
Thanks to everyone for the comments on my post balancing the pros and cons of traditional IPOs versus direct listings last week. The claim of billions of dollars “left on the table” by the current IPO process is wrong and blatantly misleading, and I’d encourage anyone who is interested in the real math to check out my post. What became clear to me last week was that VCs are asking for what appears to be a type of insider trading privilege with direct listings. Because most companies use IPOs to raise fresh capital, which is not an option for direct listings, VCs (and late-stage public investors) are encouraging you to sell them shares at a discount right before a direct listing; then, they can then turn around and sell on the listing event. VCs typically have far greater information (e.g., from access to board meetings, product roadmaps, and internal forecasts) than what public investors have access to at the time of an IPO. This informational asymmetry has clear potential risk for insider trading. And, those pre-IPO fundraising rounds are going to cause more stock dilution than would an IPO, just by the very nature of investors trying to price a stock at a discount to what they think it will trade at in the public markets. The Silicon Valley VCs don’t look so “woke” attacking the “evil” Wall Street bankers. As I said in the post: I don’t have a dog in this fight, and I want each company to do what’s right for them. There is a lot of room for improvement in the current IPO process, and managements should not be intimidated by elite Silicon Valley VCs – it’s your company, your shares, and your IPO, so take the route that serves your employees and business best. Once you go public, the VCs become the short-term traders exiting a stock, while public market investors are your long-term holders.

Two recent IPOs experienced very large one-day increases from their deal price – Zoom and Crowdstrike. Both companies expressed, in this detailed CNBC article, that the IPO pops and related global press coverage have been very good for business, and ultimately worked out well. Direct-listing proponent Bill Gurley's reaction in the article to the comments from the two companies was: “I have zero doubt that someone that just did the biggest transaction and most important financial event of their life is going to answer that way”. He added, “I don’t think being short term oriented is the right way to think about financial markets.” I am not sure if Bill's response has been taken out context, but I see no reason not take Crowdstrike and Zoom management at their word that the IPOs were positive for their long-term businesses. In the same article, Gurley describes a "workaround" that involves a "pre-listing round using a term sheet that law firm Latham & Watkins has put together." Further "[Gurley] said that 40 late-stage firms, including the big private equity shops and money managers already doing private rounds, have shown interest in participating." This seems like the opposite of democratization of the IPO process to me.

ETFs underperform at a similar rate to mutual funds:
“In this paper, we analyze a comprehensive, bias-free sample of exchange-traded funds traded on the US exchanges that invest in US equities. We show that the performance of ETFs is not as impressive as one might expect it to be, as investors in these ETFs have collectively realized a performance that does not appear to be much different from the performance that can be expected from the conventional actively managed mutual funds. We perform textual and statistical analysis to group ETFs into common investment styles such as size, value, momentum, quality, and low-risk, and show that none of them have managed to consistently add value relative to a capitalization-weighted market portfolio of all US stocks. This can be partly attributed to the generally poor performance of equity factors over much of our recent sample period. On the other hand, the anti-factor ETFs, that is, the funds with significantly negative exposures to these factors, have done significantly worse than the market in three out of six cases, and in the other three cases, their performance was not significantly different from that of the market. We conclude that the allure of ETFs finds little empirical support in the data and that ETFs have yet to prove that they can generate better performance than conventional actively managed funds.”

Insiders continue to sell shares in September – setting a new 10-year high that follows a similar trend from August. And, companies are pulling back on buybacks: Q319 buybacks were $145B, down from $280B in Q2.

This week, in a delayed response to upstart retail trading platform Robinhood, Schwab, Ameritrade, and E*Trade all took trading commissions to zero. This is a painfully classic example of a company like Schwab, once considered a disruptor themselves, being disrupted, an event we will see with increasing frequency across all industries around the world. It raises the question: what business are brokers actually in? Most brokers like Schwab make a lot of money taking advantage of their clients' bad cash management choices, as Jason Zweig highlights in this WSJ article. How long before this anti-NZS behavior is also eliminated due to pressure from disruptors? So, if a brokerage is no longer the business of trade commissions, interest rate spreads, or investment management fees, what business is it in? What about the business of advice? Advice should in most cases be: buy and hold, then buy and hold some more, and allocate either toward and away from risk depending on age, big purchases, life events, etc. That’s important, but table stakes. Instead, I would argue that the real value of any investment advice and trading platform is to save investors from themselves. It’s fear, greed, and cognitive bias that keep most investors from realizing the real value of long-term investing. So, if that’s the real value, how do you monetize it as disruption comes faster and faster?

We discuss complex adaptive systems at length in our whitepaper Complexity Investing. With recent advances in AI allowing for more advanced agent-based modeling of things like the economy, a new effort to chase the ghost of “predicting the future” is upon us. We tend to think that anyone who really understands complex systems will conclude that you can never know the future by the very nature of the universe. The best you can hope to do, I think, is get closer to knowing the range and general likelihood of outcomes. However, even SFI-veteran Doyne Farmer continues to chase the ghost, as this Bloomberg article explains. Brinton and I prefer to focus on adaptability – the ability of a company to leverage future uncertainties to its own advantage – and the fewer predictions we have to make, the better we feel. So, when I see an article like this titled “Predicting the future is now possible with powerful new AI simulations” all I can do is laugh out loud.

-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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