Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, muons, 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: Q1 update from NZS; VR takes off; Chief Dissonance Officers; APIs and tolls; custom data center chips; single-family home rentals begging for regulation; digital Yuan; global conflict; and lots more below...

Stuff about Innovation and Technology
NZS Q1 2021 Investor Letter
The NZS Capital Q1 2021 Letter is available to read here on our website and in PDF form.

Sleepstreaming
According to StreamElements, hours streamed on Twitch in March again surpassed 2B, up 105% y/y. StreamElements also notes the rising phenomenon of watching people sleep on Twitch, with one streamer staying on continuously from March 14th to April 4th. The Truman Show continues to predict the future...

VR Game On
Monthly-connected VR headsets (approximating monthly active VR users) on game platform Steam have nearly tripled from 1M in January of 2020 to just under 3M in March of this year. For comparison to another disruptive platform shift, the first iPhone sold just over 6M units. This notable acceleration of use, which follows the release of the new Oculus Quest 2 headset from Facebook, indicates a growing flywheel for the market. More users will attract more developers/games that will attract more users. Facebook overall had 58% share of VR devices on Steam. It’s way too early to call the AR/VR hardware winner, and it’s also too early to know whether the headset itself will be akin to a computer monitor (e.g., having little value compared to the underlying software and developer platforms). The biggest question remains whether an open platform will win against the walled-garden, vertically-integrated efforts from Apple, Facebook, and others. Over the history of technology, things tend to migrate back and forth between open and closed, and I’d argue we’ve overstayed our welcome in closed systems like iOS.

Consumers Limit Local Aisle Browsing
Google reports that searches adding the word “local” are up 80% year over year while “in stock” searches are up 8,000%. Searches for “curbside pickup” on Google Maps are up 9,000%. YouTube is also becoming a hot spot for ‘see before you buy’, with 45% of viewers claiming to watch a YouTube product demo ahead of purchase.

Free API Usage Ruled in Interest of Common Good
Google’s Supreme Court victory – following a decade-long battle with Oracle – marks a critical step for keeping software APIs (application protocol interfaces) open and accessible. The case concerned Google copying Java’s API without permission, which allowed them to make Android compatible with Java. Copying operational code is a common practice, and a lot of companies make a business out of API management (or are built off the ability to use APIs). Google celebrated by pouring salt on Oracle’s wounds with their announcement that the Internet giant would be switching from Oracle ERP to SAP. Notably, the Supreme Court ruling makes it clear that value is created by the companies building on top of the APIs, as, otherwise, the API itself would have no value. There are some major API battles that could emerge in the coming years. For example, companies like Plaid that access various accounts at financial institutions largely for free could end up being denied access or charged for the data. Indeed, as various platforms garner more and more proprietary data, we may see tolls on the cloud highways for data access via APIs, which would be allowed under the Supreme Court ruling as I interpret it.

Cook's Dissonance
I was impressed as always with Tim Cook’s mastery of cognitive dissonance in this interview with Kara Swisher. He railed against the problems of a surveillance world while failing to mention Apple’s existential dependence on China and its manufacturing system: “If you think about a surveillance world, a world where you know, somebody is always watching everything you're doing. And in the case of a phone or a computer, it's also what you're thinking because you're typing in searches and so on and so forth. And so I think in that kind of world, you begin to do less. You begin to think less. Your freedom of expression begins to narrow and the walls move in on you. And I start thinking about that at its natural endpoint. And I don't want to be a part of that society.” And he also said everyone should rely on Apple to decide what they should or shouldn’t view, ragging on competing platforms: “I can only speak for Apple. And from the very start, we've always believed in curation...The reality is that the web in some areas has become a dark place. And without curation, you wind up with this firehose of things that I would not want to put into an amplifier. Right. Which is what tech is in a large way. If you have a platform, you amplify things.” Curation is good when it's an open platform for all curators, but when it's one curator's opinion, that sounds more like we are under the CCP in China. (Quotes are copied from Happy Scribe.)

Dimon’s Dissonance
Jamie Dimon penned a rather lengthy annual letter to shareholders this year (weighing in at 66 pages for the PDF). The document resembles a business book with chapters on corporate purpose and lessons on leadership, which, frankly, I skipped (our personal experience with Chase, not to mention Dimon’s prior pandering comments on these topics, suggests those sections are probably fictions at best). I did take initial interest in section three: “Banks’ Enormous Competitive Threats – from Virtually Every Angle”. However, this too was disappointing; rather than being an honest account of Dimon’s failure to lead and innovate at Chase, this section appears to be a call to regulators to squash the competition (a topic covered in #275). Dimon says: “We believe that many of these new competitors have done a terrific job in easing customers’ pain points and making digital platforms extremely simple to use. But growth in shadow banking has also partially been made possible because rules and regulations imposed upon banks are not necessarily imposed upon these nonbanks.” Dimon also simultaneously praised big tech platforms while suggesting they could face regulatory pressure on various aspects of their businesses. Lastly, Dimon suggested Chase is on the hunt for fintech acquisition targets.

Square Rooting Out Credit Card Networks/Issuers
Elsewhere in the world of fintech innovation, Square is reportedly hiring to build out a system that would sidestep the big credit card networks – and the banks like Chase that issue the cards. It would take significantly more adoption of the Cash App and businesses using Square’s products to facilitate enough direct money transfers to create a sustainable business, and they need to figure out how to overcome the loyalty-program switching barrier. A while back, Jack explained (in a meeting I attended) that he viewed credit card companies as abstracting loyalty between business and customer and inserting it between the customer and the credit card. Clearly, a long-standing part of Square’s plan is achieving reversion of this loyalty back to the business-customer relationship.

Custom Chips Taking Over the Data Center
In reading this Next Platform article about all of the chips Amazon has designed in house, including a new rumored networking chip to take on Broadcom, I wonder how big the merchant silicon business will be for the data center in a decade? If we are moving toward a world where, outside of China, nearly all compute takes place at Amazon, Google, and Microsoft, and these companies will ultimately design a series of ASICs tuned for their various workloads, what’s left for everyone else? In the tech sector, it’s always been a tug of war between custom vs. standard chips, but these giant cloud platforms taking such a high share of compute might mean that war is ending, at least until new standard silicon comes around that is ahead of the captively-designed chips. I recall covering the communications chip market (Comm ICs) in the late 90’s and seeing the ebb and flow of custom ASICs vs ASSPs (application-specific standard product), etc. It’s almost always and (not or), meaning we will still need a lot of standard silicon along with custom chips. Following historical patterns, Amazon might even start selling these chips externally, becoming a merchant provider of many types of chips to others – an outcome that Amazon’s head of EC2 doesn’t rule out in this video interview, but there are no current plans. This question is at the heart of the potential transformation at Intel – can they provide both standard processors and the ability to collaborate on custom chip manufacturing for cloud platforms? It’s a significant challenge with the outcome to be determined.

TSMC’s Capex Explained
A couple of weeks ago, there were a lot of headlines around TSMC’s $100B three-year capex spending announcement. Jon provides some helpful context on these numbers, which are not very far off trendline: This allocation is not out of character for TSMC – they go into heavy capex cycles, where they spend ~50% of sales on capex, ahead of critical technology transitions (something we addressed in a podcast over the summer). They followed the same spending pattern early last decade before 4G smartphones ramped, which, in turn, accelerated TSMC’s revenues and moved them into a leadership position for the next decade. Their record investment levels also reflect the upward pressures on capex of Intel outsourcing more to TSMC, and TSMC presumably spending ahead of capacity being built on US soil. Meanwhile, insatiable chip demand and drought in Taiwan continue to collide as the country has now cut water to 20% of the country’s irrigated land in an effort to keep chip manufacturing running. As Jon noted in this Motherboard article (probably the only time Jon will be in the same paragraph as a Wes Anderson reference!): “The current shortage was triggered by COVID-19-related production and shipping problems but has become increasingly dire over the past few months, as the list of whimsical disasters affecting the industry start to resemble a Wes Anderson montage sequence. ‘Unless you were in the tech industry, no one even knew what a semiconductor was two years ago. And now it's on the cover of the Bloomberg and The Wall Street Journal.’”

Miscellaneous Stuff
Wobbly Muons
A couple weeks ago, I highlighted the evidence for a new particle discovered at CERN. When quarks decay, the Standard Model assumes equal decay into electrons and muons, but there were muons missing from experimental results, which meant quarks might be decaying into something different. This past week, results from Fermilab showed that the wobbliness of muons is much larger than expected. This would mean that some other type of particle is messing with the muon’s magnetic moment, effectively pushing on them. It’s not necessarily the case that these two anomalies are related, but both suggest some missing part of the Standard Model. The Standard Model is still right, it’s just in need of some additional characteristics, which is good, because we can’t explain a large portion of the mass and energy in the universe today! Amazingly, the discrepancy in the latest experiment comes in the 8th decimal place! The Standard Model predicts a number of 2.0023318362 and the actual results were 2.0023318412 (for Fermilab’s first run, which conforms to the previously reported Brookhaven experimental number...the two experiments were run on the same 700-ton electromagnetic ring, which, incidentally, was moved via barge/truck from New York to Illinois to take advantage of more advanced equipment). All the results are not 100% certain, but are moving toward highly likely, and we will probably need even bigger, better particle accelerators to track down the missing part(s) of the Standard Model equations describing the universe. I can’t help but picture some alien kid (or human from the “real” world that contains this simulation) named Barry, who has been running our universe as a simulation for a science class project, snickering “They still haven’t found the Barry particle!”.

Stuff about Geopolitics, Economics, and the Finance Industry
Pensions Push Home Ownership Out of Reach
The cheapest one-third of homes in the US are up roughly 80% in value since 2014 – significantly more than the middle-third (up ~60%) and twice the most expensive homes (up ~40%), according to CoreLogic data. This increase is (at least in part) a result of increasing scarcity as homes are converted to rentals. There are $4.5T single-family rental homes in the US, up from the 2007 peak of just under $2.5T, according to the WSJ. Most of the growth has come from the large number of institutions (like pensions) seeking yield and returns by owning and renting houses at scale. Perversely, these pensions are driving up the home costs, and, in some cases, rendering home ownership unachievable for the same employees they are supposedly assisting with saving money for retirement! It’s not just pensions though, there are now 200 players in the institutionalized single-family housing finance ecosystem, according to John Burns Real Estate Consulting. Homebuilders are even skipping the middleman, and, instead of selling new houses to institutions, are just building rental-only communities to manage themselves. Demand for this class of housing will be on the rise as Millennials scatter from cities to start families but find home ownership out of reach (owing to high student debt and rising home costs). When I wrote about this topic back in SITALWeek #202 (nearly two years ago), I suggested that even companies like Zillow and Opendoor might eventually be large owners of rental homes. The entire trend now seems unsustainable to me. I am not a fan of unnecessary regulation, but the government has played a role in creating this problem whereby institutions have ample access to capital at substantially lower rates than individuals (the entire situation is also a side effect of the multi-hundred year decline in rates due to technological deflationary pressure), making it impossible for many aspiring home buyers to have a shot at owning a home (which is one of the best ways to save for the future and participate in the rising-asset-price economy). It appears this trend will exasperate inequality, and it seems like something has got to give sooner rather than later.

China’s Digital Yuan Scheme
China’s central bank is issuing a new digital currency that just sounds like digital cash rather than being any meaningful innovation. However, the WSJ report implies it’s the start of something bigger: “Beijing is also positioning the digital yuan for international use and designing it to be untethered to the global financial system, where the U.S. dollar has been king since World War II. China is embracing digitization in many forms, including money, in a bid to gain more centralized control while getting a head start on technologies of the future that it regards as up for grabs.” Janet Yellen and Jerome Powell are apparently considering a digital dollar as well. Such digital cash is much easier to track and surveil centrally, unlike crypto currencies, which can be anonymous. The digital Yuan will track the paper version closely and could allow a circumvention of the global money transmission networks, thus allowing people and companies to get around Western sanctions. This is the main reason the US is said to be concerned about the digital Yuan. Bloomberg reports on Peter Thiel’s recent comments that Bitcoin “should also be thought [of] in part as a Chinese financial weapon against the U.S...It threatens fiat money, but it especially threatens the U.S. dollar...[If] China’s long Bitcoin, perhaps from a geopolitical perspective, the U.S. should be asking some tougher questions about exactly how that works.” Thiel’s comments reported in the article include a wide variety of trolls against various companies, including, amusingly, ones in which he is directly involved.

How to Frame the Global Conflict
I think the best framework to understand the rising conflict between the West and China is to assume we are already a few years into WWIII (or whatever you want to call the next global conflict), and then to ask the question: what are the odds this conflict will de-escalate versus the odds it will continue to escalate? What are the motivations – political, ideological, economic, egotistical, etc. – that will cause rising conflict? Is decoupling possible? Who has the most to lose? Who has the leverage? Things that would cause me concern about further escalation would be economic unrest or increased suppression in China, because these are historically very good reasons to distract people with a patriotic battle. Access to advanced semiconductors remains the largest leverage point in the conflict, which comes down to whether or not the West can defend Taiwan long enough to build out leading-edge capacity in the US and Europe. I am often haunted by the notion that war historically tends to be overall positive sum (a topic covered by Robert Wright in his book NonZero).

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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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