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

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In today’s post: vertical integration of digital platforms are much higher than legacy businesses; libertarian marketplace tactics enable network effects; self driving groceries; can a robot own its creations? Mister Rogers and the search for “graciousness at the heart of creation”; SEC approves non-transparent ETFs; and lots more below...

Stuff about Innovation and Technology
“What a Piece of Work is...Robot”
Can AI own copyrights and patents on its own creations? The US patent office wants to know, so it’s asking for feedback. No word yet on whether the opinions of AI bots will be considered. For now, if a machine creates something with no human input, it’s not granted authorship of the creation, which seems a little sad to me at some level. We’re reminded of how well Gene Roddenberry anticipated and tackled some of these human vs. AI topics in Star Trek: The Next Generation 30 years ago; one great example is the 1988 episode The Measure of a Man.

Solar Power gets a Reflective Boost
Bi-facial solar panels, which rely on the albedo effect – the reflection of photons off the underlying surface back to the underside of the panels – generate about 8-20% more power, depending on the surface.

The Inevitable Vertical Integration of Information-Based Platforms:
As the global economy transitions from the capital-intensive Industrial Age to the data-intensive Information Age, is vertical integration more inevitable, and perhaps even more necessary than it was in the past? Before I dive deeper into the ramifications of this idea, here are a few examples of digital businesses vertically integrating:

• Netflix has turned watching video into an information-based business, and in doing so, has vertically integrated the making of original content, thus feeding their data value and network effects. They have also built their own content delivery network (CDN). Infrastructure providers like telcos and cable companies have also vertically integrated by buying media companies like Warner, NBC, etc.

• Amazon has turned buying products into an information-based business, and in doing so, has vertically integrated logistics/delivery, product design (private label), video content production (Prime Video), etc. The company has also gone into physical retail with Go Stores, Whole Foods, and plans for a new chain of grocery stores.

• Google has turned information itself into an information-based business (we used to have just a library full of physical books!), and in doing so, they have built enormous data centers and designed their own specialized semiconductor called the TPU. They have also built scores of custom and open-source software code. Oh, and they build autonomous vehicles leveraging their own mapping data.

• Zillow and Redfin have turned searching for a home into an information-based business, and now they are building a marketplace and putting up capital to buy and sell homes themselves alongside services such as mortgage, title, and other vertical integrations of the buying process.

• Tesla has turned a car into an information platform, and in doing so, has built its own autonomous data platform and custom semiconductors for autonomous AI. And, Musk’s other company, SpaceX, is launching its own communication service with Starlink and building its own ferry to Mars. (Here is a cool deep dive on Starlink for anyone interested.)

• Uber has turned taxi rides and food delivery into an information-based business, and in doing so, they are also building maps, logistics, cloud kitchens with their own food brands, etc. (Also, the only successfully-scaled and profitable food delivery company today is the vertically-integrated Domino’s Pizza, whose scientists concoct its cheese in laboratories and whose own drivers deliver the ‘za!).

A lot of these examples come with asterisks, and I’m also aware of many Industrial-Age businesses that were heavy vertically integrated as well – it's been nearly 20 years, but I still remember marveling at the Forest City, Iowa Winnebago plant, where they had craftsmen custom milling cabinets for RVs! So, I think it can be stated more generally that platforms of any type that have a data or informational advantage and network effect tend to vertically integrate. Vertical integration might be a necessary enabler of increasing network effects. What does this vertical integration trend suggest regarding other businesses where information is beginning to impact legacy, Industrial-Age sectors like healthcare, finance, and energy?

Curious counter-examples to this trend also exist. Spotify (which is not currently vertically integrated) continues to grow market share despite vertically-integrated offerings from Amazon (Alexa hardware in the home), Apple (iPhones, AirPods, music app), and Google (home speakers, Android, YouTube Music). Spotify is trying to vertically integrate as a label and podcast producer, but it doesn’t yet hardware – is that a vulnerability or is music different? (Here is an excellent podcast Patrick O'Shaughnessy posted with Spotify’s founder/CEO Daniel Ek this week.) Video games are another industry where despite some vertical integration of studios, distribution, and/or hardware (Microsoft, Sony, Tencent, and new efforts by Google with Stadia), there remains many large players that are not vertical. Will these two industries inevitably fall to vertical integration or bundling?

As platforms become bigger with more and more vertical integration, they eventually begin to create negative externalities and invite the regulators to come knocking. Standard Oil itself was the pioneer of vertical integration! Often, the outcome of regulation is to cement existing monopolies via regulatory capture and limit their abilities to further vertically integrate or expand horizontally. There is a tipping point where platforms, whether vertical or horizontal, are taking too much value for themselves vs. what they create for the world, and they become neutral or negative sum as opposed to having positive non zero sum. Platforms can avoid this eventual handcuffing or breakup by constantly increasing their NZS, or win-win value creation. I’ll leave this section with more questions than answers, but it’s an interesting trend that information platforms enable, and/or perhaps feed off, vertical integration more than their Industrial-Age predecessors.

Internet Giants' Laissez-Faire Attitude Creates Fraudster Paradise
While I’m on the topic of platforms, I couldn’t help but notice this other repeated pattern: spam and abuse cycles. It seems like there is always some fast-growing, multi-sided marketplace or Internet platform that grows unbounded with libertarian values, then faces massive fraud, spam, or other problems, which is remedied in-part or in-full by the platform/marketplace with little negative impact to usage and growth. This happened in both organic and paid search, as Google seemed to spend much of the 2000-2010 period in a race against spammers. And, now Google is fighting the same battle with YouTube videos and folks gaming the algorithm. Social networks are obviously a good poster child for this problem, as they claim to not even be able to police the content that users upload. We’ve seen the same issues with Amazon's 3rd-party sellers and counterfeit products, eBay, Yelp, Grubhub, Groupon, AirBnB, Uber, Lyft...is there any Internet platform or marketplace that hasn’t taken a laissez-faire attitude towards policing content, which subsequently blew up on them? Is it laziness on behalf of the companies? Would more regulation break the businesses too early and sever the network effects? Or is this just the way things work in the Information Age with the race between algorithms and fraudsters?

The WSJ reported this week on the rampant fraudulent items on Amazon’s marketplace sold by Chinese sellers. Nike will stop selling shoes on Amazon perhaps related to fraud on the platform as well. Free startup idea: create a service that verifies goods sold on Amazon. Vendors can pay you to verify the items. Consumers can search on your site, and you can affiliate link over to Amazon to purchase the items.

Self-Driving Groceries
Autonomous startup Nuro’s grocery delivery partnership with Kroger in Houston is spotlighted in this WaPo article. In other delivery news, Doordash’s successful journey to 35% share of the US food delivery market has hinged on its dominance in the suburbs, previously only home to pizza delivery. It’s also hinged on raising $2B, as there continues to be no sign of profitability in food delivery – beckoning for vertical integration (see above!). This article also makes the interesting point that Papa John’s Pizza is experiencing a shortage of drivers as they switch to working for on-demand service apps.

Now You can Soundscape your Augmented Reality
Spotify comes to augmented reality as it launches on the Magic Leap headset. Developers can also integrate Spotify streams and controls into their other apps developed for the ML1. I tried it out on my Magic Leap this week, and it’s very slick.

Microsoft Launches New Machine Learning Chip into the Cloud
The FT reports that Microsoft is offering Graphcore AI workloads on Azure. Recall Graphcore is the AI chip startup with VC backing from Microsoft. As I understand, Graphcore’s native language would allow the six million C++ developers around the world to write machine learning models. NVIDIA’s core network effect around its AI chips is their large base of CUDA programmers (CUDA can also be programmed with C++).

ViacomCBS Casts Itself as Content Arms Dealer
Further fueling my 'crystallization of the media landscape' thesis (see 2 weeks ago for details and diagram), ViacomCBS increasingly looks like an arms dealer of content as they sign an agreement to bring library and new Nickelodeon content to Netflix. I think this is a smart move – ViacomCBS doesn’t own theme parks, cable/telephone network, they don’t run an e-commerce site or deliver packages, and the don’t make cell phones; therefore, they should pursue AVOD (advertising-based streaming apps) and selling content to other OTT platforms as well as new-age and legacy video bundlers. I'll admit that it's a challenge to fit this concept into my vertical integration comments above.

Miscellaneous Stuff
Universe is an Entangled, Super-Galactic Web
Large-scale structures appear to link the Universe is massive patterns:
“These dim structures are made of hydrogen gas and dark matter and take the form of filaments, sheets, and knots that link galaxies in a vast network called the cosmic web. We know these structures have major implications for the evolution and movements of galaxies, but we’ve barely scratched the surface of the root dynamics driving them.”

Aftermarket E-Mods
Classic cars are being outfitted with electric drivetrains and battery packs:
“They found that putting maintenance-free electric drivetrains into vintage vehicles eliminated a lot of mechanical babysitting that classic cars demand of their owners. ‘There are people who are in love with the design of these classics, but they don’t want to do the wrenching on them,’ Benardo said. ‘They just want to spend more time driving.’”

Mister Rogers Left a Legacy of Kindness with no Successor
Here is a moving new story by Tom Junod about Mister Rogers, and what he might say today, were he alive.
“...because we all long to know that there’s a graciousness at the heart of creation.”
“He wanted us to remember what it was like to be a child so that he could talk to us; he wanted to talk to us so that we could remember what it was like to be a child. And he could talk to anyone, believing that if you remembered what it was like to be a child, you would remember that you were a child of God.”
This is heartbreaking:
“[Mister Rogers] lost because the great conceit of the internet is that it has unveiled and unmasked us, that it shows us as we really are and our neighbors as they really are, and that hate is more viral than love.”
But, to end on an upbeat note, here is the delightful PBS remix of Mister Rogers’ memorable moments on YouTube.

Pale Red Dot?
Elon Musk did a short podcast with Lex Fridman this week covering some great topics around consciousness and AI. At the end, Lex asked Elon to read Carl Sagan’s Pale Blue Dot speech, and Elon of course had an amusing response to it.

Will Jet Setters be Grounded?
Flight shaming is taking off as some in the UK are calling for a ban on private jet flights by 2025, which, in the UK alone, are purportedly responsible for the equivalent of 450,000 cars on the road. It’s likely a safe prediction that flight travel, private and commercial, could be taxed at industry-crippling levels in the future.

Stuff about Geopolitics, Economics, and the Finance Industry
Steve Milunovich, head of tech strategy at Wolfe Research, had me on their webcast this week to discuss complex adaptive systems and various topics across the tech sector. SITALWeek readers exclusively can read the transcript of the interview here.

Non-Transparent ETFs get Qualified Nod from SEC
The SEC approved applications this week for non-transparent ETFs from T. Rowe, Fidelity, and others following the approval of Precidian in May. If these products take off, it will be a massive win-win for the active-management ETF industry – consumers get better tax advantages in ETFs vs. mutual funds, and, ultimately, fees should be lower and liquidity higher. The problem remains: how do you provide fair, real-time pricing without burdening the cost structure or creating unnecessary risk? The SEC’s approval this week comes with a bit of an asterisk, as two commissioners expressed concerns about the products, especially in times of market crisis. T. Rowe plans to compensate for this risk by printing a daily portfolio that trades like their ETF, but isn’t their actual holdings (PDF). From the SEC:
“Nontransparent ETFs come with real risk that, in moments of limited liquidity, ordinary investors will face wider spreads and hence get prices that do not accurately reflect the value of their shares. By targeting largely liquid assets and adopting guardrails to address these issues, these applicants have helped mitigate that concern. But we would be skeptical of nontransparent funds focused on different asset classes that lack those characteristics.”

PE Sees No End to PE Cycle
The chief investment strategist at Blackstone's private-wealth solutions division called sovereign debt the “mother of all bubbles,” which can only make Blackstone the child of all bubbles!?

In related news, PE-giant Brookfield had the following to say in their earnings commentary this week (PDF):
“With interest rates in Japan and Europe now negative for all maturities, we seem to be in a new phase with global rates in the range of –2% to +2% for the next five to seven years. This is particularly relevant for us and will positively impact on all asset values and businesses that generate cash. Should this interest rate environment continue to prevail, and with institutional capital growing, we expect that capital will increasingly be allocated to alternatives. We think that institutional investors will continue a push towards 60% alternatives allocation in their portfolios—from a global estimate of 25% today.”
This logic appears to be a classic example of what we would call a narrow set of predictions that rely on an unknowable, emergent outcome of a complex adaptive system that is inherently unpredictable. Could it happen? Sure, but it’d require more than a healthy dose of luck!

Pensions Struggling Despite Decade of Market Outperformance
Despite a tripling of the stock market over the last decade, many public pensions have become MORE underfunded in the same time period. For example, the Illinois State Pension Fund has gone from a $78B shortfall to a $137B shortfall, and that’s without facing the reckoning of realistic expected returns, which still remain stubborn in the face of negative sovereign debt rates. Illinois is the 3rd-worst underfunded pension at 38%. Chicago Fire and Police pensions sit at only 18% and 24% funded, respectively, creating a significant future tax burden for the population.

Public/Private Market Mismatch Explained
There are two main reasons why the private markets are more illiquid and carry more risk compared to public markets – beyond the obvious increased debt loads: 1) there are fewer buyers and only one seller, which makes price discovery much more of a guess than in the public markets, and 2) related to point 1, there are no short sellers for private assets, thus “the price gets set by the optimists” as this WaPo article suggests. The same problems make pricing VC rounds difficult as well, and it’s often why private valuations can be wildly mismatched with public market expectations.

✌-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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