Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, music, 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: reflecting on record labels as specialized lenders and the predictable decay of the stars of our youth; AI for chip design; Apple’s gift to Google, Facebook, and Amazon; elephants; brain mapping; quantum sensors; systems thinking wisdom; and lots more below...

Stuff about Innovation and Technology
Semi-Solving Ferrari’s Digital Future
Ferrari chose a former semiconductor executive as the luxury car maker's new CEO. Perhaps it's a reaction to the rising importance of chips in everything, but it's certainly an indicator that technology know-how is increasingly important in legacy industries. It’s worth noting, however, that chips are just one piece of the puzzle. IEEE reports in "How Software is Eating the Car" that cars now have well over 100M lines of code, and that complexity is just getting started. Successful transition from an Industrial-Age to Information-Age business requires a combination of software, hardware, user interface, data, AI, and vertical integration all working in harmony to create more value for customers than the company takes in return (lest they leave themselves exposed to disruption from an upstart with a better value proposition). It’s a transition few, if any, legacy companies have so far managed to pull off.

StealthCare
Walmart’s innovation lab, Store Nº8, has hired a doctor to run a new “stealth” health initiative seemingly focused on “access to high-quality, equitable and affordable healthcare at scale”.

Europe Spearheading Grocery Evolution
Many startups across Europe are focused on disrupting the grocery industry with new purpose-built warehouses and logistics, like the successful Picnic in the Netherlands. Germany's Flink raised $240M recently, and Turkey's Getir raised $555M. Another German grocery startup, Gorillas, is said to be raising $1B. This level of investment has not yet breached the US grocery industry, which is largely relying on existing stores and third-party delivery services (see last week’s post on Instacart for how that might change).

Smarter Chip Design
Google continues to find ways to use AI to design more efficient semiconductors. A recent Nature paper details how AI can locate memory blocks in chips. “Modern chips are a miracle of technology and economics, with billions of transistors laid out and interconnected on a piece of silicon the size of a fingernail. Each chip can contain tens of millions of logic gates, called standard cells, along with thousands of memory blocks, known as macro blocks, or macros. The cells and macro blocks are interconnected by tens of kilometres of wiring to achieve the designed functionality.” Notably, AI seems to prefer placing memory blocks in sequence next to each other, a tactic that became unpopular with chip designers decades ago.

Beat It Mr. Tambourine Man: Record Labels are Glorified Banks
The following is an exchange with artist Mavi from a 2019 interview:
Interviewer: Is that how you think about entering into a record deal, as taking out a loan with some label?
Mavi: I think that’s literally what it is, unless I got it confused. Unless there’s some misunderstanding.
Interviewer: Not everyone would conceive of it that way.
Mavi: Well. [Laughs] It’s not funny that they don’t see that.

People mostly listen to music they first heard when they were teenagers. While one's listening selections sometimes expand later in life, music from this era of youth is so foundational that it has to be included in the catalog of any successful music streaming service. That means streaming services need licensing rights for the last ~70 years of recorded music at any given time to cover all of their customers. A streaming music service could aggressively sign every new artist direct today, and, in a couple decades (if they survive that long), their foresight might start to positively impact margins. That’s because, for the past 70+ years, a small number of music labels have controlled the vast majority of popular music and will likely continue to do so for the next few decades. (That said, clearly some kids today are forming lifelong listening relationships with independent, label-free artists on TikTok and social media.) In some cases, those labels own songs outright (e.g., Universal recently purchased Dylan's catalog for $300M, and Sony acquired Michael Jackson’s collection in 2016, when it was valued at $1.5B); note: these valuations are for publishing rights exclusive of recording rights). There is some information in those two numbers: Dylan just turned 80, and, even though the famous singer-songwriter has a Nobel Prize in poetry, the majority of youths who experienced Dylan’s 1960’s heyday will be gone from planet Earth in 20 years. Jackson would be 62 if he were still alive, and the bulk of his fans who were teens during his 1980’s zenith are only in their 50s today. That 20 year difference (and the fact that Jackson is more famous globally) explains a lot of the value difference between the two catalogs. These music catalogs are cash streams with highly predictable decays to what is ultimately a very low future value.

Music labels are essentially specialized banks that lend to artists based on their future earnings potential and pay small dividends over time against the “deposit” of recorded music. Despite having historically spent a lot on A&R, physical media distribution, radio promotion, etc., I conceptualize labels the same way as Mavi: existing primarily to fund artist lifestyles ahead of their future earnings power. In the world of digital distribution and streaming, there's a lot less overhead, and labels remain mostly just specialized banks for musicians. Currently, the “spread” for lending against music is unfavorable compared to the guaranteed payments artists can get for live touring; however, this wasn’t always the case. Before Bob Sillerman consolidated the live promotion industry with SFX Entertainment in the late 1990s (now known as Live Nation), bands would take only around two-thirds of ticket sales and ancillaries (beer sales, etc.). But, in order to secure tours, Sillerman shifted the economics to upwards of 90% for the performers. This touring boon was a lifesaver at a time when pirated mp3s were destroying album sales, and it made earnings from recorded music less important to many touring artists.

Today, artists have the option of skipping labels and instead funding their lives by going direct to fans with a variety of new experiences (e.g., streamed events, merchandise, fan clubs, direct messaging, etc.). This was the motivation behind Square's acquisition of Tidal, as Jack Dorsey described it last month at the JP Morgan conference: "A lot of artists today think about building themselves as a business in order to fund their art and fund their work...the streaming market is saturated, but artist tools is not, and that's where the real opportunity is, is to give artists better tools with which to grow their fan bases and better their craft." This trend doesn't just apply to musicians. As DeFi takes off on blockchain technologies the role of a traditional bank or specialized lender evaporates. Coming back to music, touring is still lucrative as well, as artists can leverage their direct relationships to fill seats. And, eventually, streaming will have billions of paying subscribers (via direct, ad-supported, and/or loss-leader services paid for by Amazon, Google, or Apple in the West), and pennies will hopefully add up to dollars for bands. Labels, as the dominant “lenders”, will make the most money off streaming. However, in our NZS investing framework, music labels are a relatively unattractive business, being either win-lose or zero-sum (as with many traditional lending businesses from the 1900s). As a result, even as streaming grows, artists will need to continue to nurture direct channels for monetization. Barring regulatory action and/or new deals between artists, digital distribution, and streaming that are more win-win, labels should start to see revenues decline within 20-30 years as catalog listening dies off with the listeners. As with Dylan, Elvis – and even the Beatles – will likely be dropped from the popular lexicon in a few decades – just ask any 13-year-old if you don't believe me! To be sure, their music will still be appreciated, studied, and licensed for period movies, but it won't be generating much revenue. However, as I noted above, as long as anyone is alive who grew up with artists controlled by labels – which should be another 40+ years since us Gen Xers and the Millennials have emotional attachments largely to label-based artists – streaming services will need those deals to survive. However, if labels want to live on beyond just leveraging their position as lenders to bands, they'll need to create more win-win for today's rising stars.

Christmas Comes Early for Internet Ad Platforms
Apple had a series of privacy-related product announcements at its WWDC last week, adding to the slew of new privacy features in iOS 14.5. I expect many of these will find their way into Android as well (with some subtle differences). For the moment, there are several loopholes that Apple has left open, and, according to the FT, people are still being tracked just as much as before. I expect these loopholes will eventually be closed, and the end result of increased privacy mechanisms will be a lucrative gift from Apple to the small number of very large companies that have proprietary data on users. Currently in the US, Google, Facebook, and Amazon control around 65% of the online ad industry (note: the estimates vary, with some outlets, like GroupM, putting these three as high as 90%, but that seems unlikely to me). I expect that share percentage will trend much higher with the industry’s new privacy push (which extends to web browsers on desktops as well). Even though the big three might lose some access to user behavior across apps and devices, their smaller competition will have access to far less data over time on a relative basis. Ad-supported streaming video apps and other owners of customer data, like Twitter and Snapchat, should gain share of ad budget as well. The short-term impacts are hard to predict as return-on-ad spend could drop without the data. Many popular apps that depend on ads, like mobile games, could suffer in the transition. There are lots of puts and takes here as businesses like Google’s DoubleClick and/or Facebook’s Audience Network, which rely on serving ads across other sites, could become less effective. As we discussed in our tech regulation whitepapers, centralizing data with a small number of large platforms is not necessarily bad as long as users have control and transparency.

Tangled Up in Red Tape
Anyone else getting the sense that Zuckerberg may follow in the footsteps of Bezos, Brin, and Page and step aside from running the giant social network, as the founder’s time is increasingly taken up by regulatory inquiries around the world? Zuckerberg will continue working remotely for half his time, longtime product chief Chris Cox returned to Facebook last year (after he unexpectedly quit in 2019), and COO Sheryl Sandberg has created a newly expanded role of chief business officer, to be filled by Marnie Lavine, following the departure of the company’s chief revenue officer earlier this year.

Miscellaneous Stuff
Plotting Pachyderm Practices
The elephant ethogram is a repository of video examples of all known behavior for the long-snouted behemoths. It encompasses 404 behaviors in 23 contexts and 109 behavioral constellations. For example, the Bonding-Ceremony constellation is defined as: “An exuberant display of behavior involving a constellation of vocal, chemical, tactile and visual communication that may occur, for example, during a greeting, birth, mating, kidnapping, rescue, arrival of a musth male, a coalition, or when a group of elephants have successfully routed an adversary. The term Bonding-Ceremony is a general term that includes more specific behavioral constellations such as Coalition, End-Zone-Dance, High-Fiving, Female-Chorus, Greeting-Ceremony, Mating Pandemonium. The behaviors appear to function to reinforce bonds and pull family and bond group members together for collective action.” You can also read more about the project in the NYT.

3D Synaptic Mapping
Google and Harvard researchers have a new 3D map of part of the human brain that includes 50,000 cells and 130M synaptic connections. The 1.4 petabyte image covers just one cubic millimeter of brain tissue (one millionth of a typical 1200 cc brain!) and was created by ML reassembly of 30nm-thick slices imaged by electron microscopy. Scientists anticipate the image will take years to analyze. One noted finding: “Normally, when a tendril from one neuron passed close to another, it would form just one synapse, or more rarely two to four. But there were also some tendrils that formed up to 20 synapses onto one target neuron, meaning this tendril by itself would probably be able to trigger that neuron to fire. It isn’t clear why, but [lead researcher] Lichtman speculates that the multi-synapse connections underlie learned behaviours. ‘There’s lots of things your brain does by cognition, by thinking and puzzling it out and making a decision, and there are many things you do automatically that could not have come genetically,’ he says, such as braking when you see a red light. The super-strong connections would allow a message to pass swiftly through the network.”

Quantum Sensors >> Quantum Computing
Here’s a nice 10-minute video explaining the theory behind quantum computing and why it’s unlikely to be useful for anything except physics simulations (Feynman’s original application when he conceived the idea). The main issue is that the error correction algorithms must presuppose what the answer might be...so why bother asking a question to which you already know the answer? Despite the limited use cases for quantum computing, the concept of quantum entanglement continues to see new applications in communication and, most recently, imaging. For example, a quantum microscope is able to detail cellular components in ways inaccessible by traditional light-based microscopy due to the latter’s reliance on higher energy light waves that can damage the subject. The entanglement-based sensor, developed at the University of Queensland, “...was achieved by using an optical nanofiber in a dark-field illumination configuration combined with a quantum optics technique named heterodyne detection. We demonstrated state-of-the-art sensitivity using only a tiny fraction of power compared to other sensors (four orders of magnitude reduction in optical intensity), and thereby greatly reduces photodamage dealt by detection. Our method enables, for the first time, quantum noise-limited tracking of single biomolecules as small as 3.5 nm, and monitoring of surface–molecule interactions over extended periods. We aim to use this sensor to uncover biophysical phenomena never directly observed before, such as the rotational steps of single motor molecules. Moreover, our sensing technique can be used for the development of new rapid detection platform for medical diagnostics, such as early stage cancer detection.”

Space-Aged Vino
After fourteen months in space, a case of red wine came back to Earth in the SpaceX Dragon capsule. The time aboard the ISS seemed to do the wines some good, which could open up a whole new industry for zero-g wine cellars.😏 As a research bonus, one of the space-aged bottles will be auctioned at Christie’s, where it is expected to fetch a record-setting $1M. I wonder what potentially groundbreaking experiments were bumped to make room for this stunt?

Stuff about Geopolitics, Economics, and the Finance Industry
Systems Wisdom
Systems thinking is the study of how parts of a system are all interrelated and how outcomes arise from those relations. This brief essay from Russell Ackoff on systems thinking contains some devastatingly sharp observations about how organizations fail to function and how reframing the problem can help. Here are a few excerpts: 1) “The healthcare system of the United States is not a healthcare system; it is a sickness and disability-care system.” 2) “The educational system is not dedicated to produce learning by students, but teaching by teachers—and teaching is a major obstruction to learning.” 3) “Identifying and defining the ways we can control the future: vertical integration, horizontal integration, cooperation, incentives, and responsiveness.” And, 4) “All learning ultimately derives from mistakes...Since mistakes are a no-no in most corporations, and the only mistakes identified and measured are ones involving doing something that should not have been done, the best strategy for managers is to do as little as possible. No wonder managerial paralysis prevails in American organizations.”

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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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