Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, quantum paradoxes, 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: Amazon’s Kohl’s partnership; the shift to unscripted content as Hollywood loses its center of power in the entertainment world; GPUs in cars; can card networks enable fintech without losing banks? Apple and Google’s complicated search relationship; Sony enters the podcast market; quantum paradoxes; and lots more below...

Stuff about Innovation and Technology
Non-invasive Brain Interface
New technology could access neurons without the need for surgical implants. Using electrical signals gathered by 64 patches of electrodes on the head as input, custom analog-to-digital chips were used to control 32 body-mounted, servo-driven features of an haute-couture exoskeletal dress. The chips are so low power that they can run off a wireless signal – much like RFID chips – (although, in this case, the chips themselves were wired to the servos). Ultimately, researchers believe this type of system could be used to control artificial limbs. 

Tesla’s Virtual Grid
Tesla is building a Virtual Power Plant with the goal of getting to 50,000 linked homes with 250MW of rooftop solar and 650MWh of battery backup. In its current phase, the system will expand to 4,100 homes, which would be roughly equivalent to 50% of a typical, large, commercial battery deployment for grid support. This type of centrally-controlled, linked solar and battery system can act as a significant support element to the wider grid.

Mercedes’ in-Cabin AI
The new Mercedes-Benz S-Class features three GPUs from Nvidia just to run the in-car AI voice and gesture recognition. In addition, it features Mercedes' attempt at autonomous driving functionality, which runs on chips/sensors from Mobileye and various other suppliers. In some ways, it’s a black eye for Nvidia to not get the autonomous chip contract; but, on the other hand, three GPUs in a car is a feather in their cap. The amount of tech needed to shift cars from Industrial-Age commodities to AI- and software-driven platforms is astonishing, and Tesla continues to be years ahead of everyone, or, as Elon recently put it on Twitter: “Tesla is best understood as a collection of about a dozen startups, mostly in series, increasingly in parallel. Every product line & new production system was invented. Instead of playing chess with the same pieces as everyone else, create new pieces.”

Kohl’s-Based Amazon Grocery
The future of retail is clearly a multi-fulfillment model where lower-frequency, higher-margin items are fulfilled more centrally, while higher-frequency, lower-margin items are fulfilled locally, often with more of the work being done by the customers themselves. Fulfillment is a mix of click-and-collect, store-based delivery, local warehouse-based delivery, long-distance delivery relying on 3rd-party shippers and/or vertically-integrated drivers, and in-store consumer shopping. This convoluted matrix continues to favor a vertically-integrated retailer like Amazon. Indeed, Amazon checks all these boxes, except it has a relatively small physical store footprint from which to fulfill the higher-frequency, lower-margin items. However, their store base has been increasing with the acquisition of Whole Foods and new Amazon-branded retail openings. Now, Amazon appears to be deepening its relationship with discount apparel retailer Kohl’s by opening an Amazon grocery store inside of a Kohl’s. The two stores will be separate, but Amazon will occupy around 40% of the existing, 88,000-square-foot Kohl’s in La Verne, California. While this could be an opportunistic one-off, Kohl’s has been partnering with Amazon since 2019, when they began allowing customer returns for Amazon orders inside of Kohl’s stores. Given the risk of regulatory scrutiny, Amazon might find it hard to acquire another chain like Whole Foods. One alternative would be to take over the leases of bankrupt retailers, but the draw of Kohl’s customers may be a better scenario.

Can Card Networks Disintermediate Banks?
Over the years, I have remarked that Visa and Mastercard are not creating significant, positive, non-zero-sum (NZS) value for their constituents. The card networks themselves seem to have decent NZS, but they enable an ecosystem of banks, merchant acquirers, and other middlemen who have, in many instances, stifled competition while over-extracting from merchants and preying upon consumers. The card industry has seen decades of regulatory action against fees in the credit and debit markets, as well as lawsuits from merchants, etc. All of this has been enabled by a concerted lobbying effort to keep the status quo going and fend off disruptive threats that provide higher-NZS solutions for consumers and merchants. The rapid shift to digital payments spurred by COVID may favor the incumbent rails of Visa and Mastercard, since they are already here to enable the transition. Over the last year, both companies have been dabbling more with fintech innovation and disruptors. A good example would be Mastercard enabling fintech startups in installment payments, which allow consumers to buy now and pay later at the point of sale. Mastercard and Visa are also trying to aggregate more data through acquisitions of Plaid and Finicity. But, at the end of the day, the big banks are the big customers for Mastercard and Visa, and they have each other’s backs in the regulatory and lobbying world. So, will banks actually allow the card networks to enable fintech disruptors? A former Visa exec cited in this American Banker article says: “The banks know how big their chunk of business is for the networks and tend to throw their weight around when they really need to...Some do it just to remind them that they can”.

Netflix on Sidelines of Unscripted Entertainment Revolution
Los Angeles is an entertainment machine for music, movies, and television; but, according to Joe Rogan, many of the new forms of entertainment have less of a reason to be tethered to that machine. In a recent podcast, he discussed moving his podcast empire from LA to Austin: “I don’t believe we have to be tethered to this machine that makes things that we don’t do...we’re in a totally different business”. Now, this is interesting because I would argue that Rogan – and a slew of other new-media moguls – are still in the entertainment business – which is the same business that Netflix co-CEO, Reed Hastings, says Netflix is in. Hastings also said that the future threats to Netflix are the “sideways” ones. He commented in the NYT: “If you think of Kodak and Fuji, competing in film for 100 years, but then ultimately it turns out to be Instagram”. He apparently even remarked to CNBC that drugs from big pharma could be competitors to Netflix’s form of entertainment (perhaps he’s been watching the new ‘Brave New World’ series on Peacock!). 

Despite the clear expansion of entertainment options into the non-scripted sphere – including video gaming, live/life streaming on social networks, YouTube, podcasts, etc., – Netflix is more committed than ever to the Hollywood machine. When asked about expanding into other areas, Hastings was quoted in Variety as saying: “I doubt news, but sports, video gaming, user-generated content — if you think of the other big categories, someday it could make sense. But right now, Ted’s [co-CEO and chief content officer Ted Sarandos] got every billion dollar earmarked for bigger movies, bigger series, animation of course… At least for the next couple of years, every content dollar is spoken for”. And, anchoring even further on scripted content, when the NYT asked him where Hollywood would be in 15 years, he said: “I see producing stories and sharing them as bigger than ever. But those stories will be produced in Atlanta, in Vancouver, in London, all over the world as opposed to strictly in Hollywood.” 

For the last few weeks, I’ve been talking about the shift from scripted to “real” world content. The bar that scripted, Hollywood-style content now has to clear to compete with the proliferation of Truman-Show-like live and interactive content is rising every day. And, the COVID-caused delay in new scripted content – which has highlighted its sluggish production nature – is leaving a gaping hole of opportunity for newer forms of entertainment to fill. Certainly, there will be a lot of demand for scripted, Hollywood-machine content in ten years, but will it be more demand than we see today? That seems increasingly difficult to assess. It does seem clear, however, that new forms of content stands a significant chance of gaining considerable share. So, can a streaming platform focused on producing Hollywood studio content maintain relevance in that increasingly likely scenario? When The Hollywood Reporter asked about the possibility of telling stories in video games, Reed responded “In principal? Yes. But Hollywood companies have tried forever to be big in gaming and it hasn’t worked out. There’s enough differences between the art forms that, you know, it’s pretty challenging.” In his new book on Netflix, No Rules Rules, Reed explains "Our risk is failing to come up with creative ideas for how to entertain our customers, and therefore becoming irrelevant" (p.136). Reed also discussed the Keeper Test, Netflix’s policy of getting rid of any employee that people wouldn’t fight to keep at the company, when he described letting Netflix's CFO David Wells go in order to replace him with a entertainment-centric alternative. The Keeper Test raises the question: would Netflix be better off with a management team more versed in the forms of entertainment now gaining share against scripted, streaming video? Or, will Netflix instead do fine by gaining share from other studios and streaming platforms inside of the shrinking Hollywood entertainment piece of pie? 

Sony Music Adding Podcasts
Speaking of the music machine, Sony is adding podcasts to its movie, television, and music stable. The effort is being handled by Sony Music, the Japanese conglomerate’s record label. Record labels are experiencing a renaissance in revenue, following years of declining physical album sales, as streaming usage has started to grow the overall recorded music market again. After troughing around $15B in 2014, the industry is back to $20B, around where it was nearly two decades ago. From Sony’s perspective, podcasts are one of the share gainers as radio loses listeners. Ultimately, podcasts and new artist engagement behaviors (like live streaming on Twitch, which also beams to the Amazon Music app), will become a threat to streaming music. Here is one way to think about the size of the overall “audio” market in five to ten years: around a billion people will be consuming music worth around $100/person/yr, or $100B/yr. Today, recorded music is around a $20B market, with a global radio ad market of around $40B. So, over the next decade, we are likely to see a rough doubling of the current market. However, the listening share of content inside of that $100B could change dramatically from music and talk radio to podcasts; or, it could be that music loses share to video, particularly with the rise of augmented reality over the next decade; or, it could be that audio is part of a much broader bundle of media and telecom services. The audio pie is clearly growing, but how the slices will be allocated is a hard call.

Apple Considering Search and Ads?
I was reading in Fix (an ad-industry newsletter) about how Apple might be stealthily working on their own search engine and broader ad platform. This possibility is an interesting thought experiment to consider, but with a healthy dose of skepticism given that Apple has failed to create an effective ad platform despite their intentions to do so for over a decade. Search is expensive – tens of billions of dollars in CapEx and R&D annually – if you’re going to do it right. And, you need great local search and mapping as well. Apple currently probably makes around $10B a year in TAC (traffic acquisition cost) payments from Google for search on iOS. So, starting from scratch could be a $20B cost (in CapEx and TAC out the door). That amount may seem like small change; but, if investors don’t believe in Apple’s search and advertising prospects, that would be a $500B+ hit to Apple’s valuation (using its current forward FCF multiple). However, if the pitch is to create a privacy-focused ad network for search, apps, and the web, then the prize could be quite large, given the multi-hundred-billion online ad market. Alternatively, Apple could point iOS users to DuckDuckGo’s privacy-focused search engine.

Miscellaneous Stuff
New High for Multi-Generational Living 
52% of adults aged 18-29 now live with their parents, up from 47% before the pandemic (it appears that about one quarter of the increase is due to college campuses being closed down in the spring). The last time the percentage was this high was in the 1930s – during the Great Depression – when it peaked at 48%. The numbers hovered around a 29-32% trough in the 1960s-1980s before beginning a steady climb up. They were jolted higher to 44% in the financial crises a decade ago. While not necessarily causal, this rise in young adults living at home coincides with the last 40 years of stagnating real wages and declining interest rates. 

Quantum Computing’s Paradoxes
Caltech’s John Preskill discusses a few of the many challenges of quantum computing as he begins working at Amazon’s new AWS quantum computing group in Pasadena, California.

Stuff about Geopolitics, Economics, and the Finance Industry
Little Manufacturing Reshoring to US
A survey from the American Chamber of Commerce in China indicates that – despite the trade war and pandemic tensions – only around eight (4%) of the 200 manufacturers surveyed plan to shift any manufacturing back to the US. However, around 21% of respondents did plan to move some capacity out of China to other countries besides the US.

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Disclaimers:

The content of this newsletter is my personal opinion as of the date published and is subject to change without notice and may not reflect the opinion of NZS Capital, LLC.  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. Often I try to make jokes, and they aren’t very funny – sorry. 

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