Welcome to Stuff I Thought About Last Week, a personal collection of topics on tech, innovation, science, the digital economic transition, the finance industry, and whatever else made me think last week.

Click HERE to SIGN UP for SITALWeek’s Sunday Email.

In today’s post: There's a trio of paragraphs about automation and our interaction with it. Traditionally, we have co-evolved with new tech at an analog pace. But, now, robotic and software automations are happening so fast that we don’t have time to learn to use them properly or mentally/technically prepare for manual intervention when they don’t work. The problems range from robotic surgery to driving, and they will only get worse as the population ages and vital skills fade away; content producers are overspending today given a future of infinite content and finite time; consumers are now scrolling through real-world choices much like we scroll through TikTok; the challenges of refining Lithium; and, much more below...

Stuff about Innovation and Technology
Automation Paradox
Inventing tools and co-evolving with them is an essential part of being human. Historically, tools we created were adopted at analog speeds, spreading from tribe to tribe. (Consider wheels: not only did they take a long time to invent, but we’ve spent millennia figuring out the best ways to craft and implement them!) Today, however, tech adoption is moving at an ever-faster pace. We thus find ourselves in an awkward period of evolution with digital tools, where we risk losing our analog artistry for many tasks. IEEE writes about the loss of basic surgery skills, as most medical students don't have the same training opportunities now that many surgeries have gone robotic. While there are still many surgeons who are able to step in and manually take over (which happens with some frequency in robotic-assisted surgeries) – because they trained well before robots were around – how many of them will still be in the OR in ten to twenty years? There’s inherent vulnerability from the rising complexity of automated systems, reliance on opaque algorithms, hacking risks, and systemic failures (flawed software, bad data, faulty hardware design, etc.). From IEEE:
“In many ways, the issues arising in robotic surgery mirror those confronted by other professions as they have come to rely increasingly on automation. The situation is summed up as the ‘automation paradox’: The more advanced and reliable the automated system, the more crucial the contributions of the human operator. That’s because the system will inevitably encounter unexpected circumstances that fall outside its design parameters or will fail in some way. In those rare but critical moments, the operator must detect the failure and take over, quickly bringing the very human faculties of creativity and problem solving to bear on a tricky situation. Airline pilots became familiar with this issue as autopilot became ubiquitous, and the promise of self-driving cars is bringing this conversation to the general public. Surgical robots have quite limited autonomy at this point, so the surgical profession should learn from these examples and act now, changing the human-machine relationship to both preserve surgical skill and avert tragic crashes in the OR.”
For the next few decades, humans will increasingly work alongside robotics and software, and we should make some efforts to always have a failsafe, or (at the very least) a deep understanding of how the technology, algorithms, and data work together to accomplish a task (see Algorithmic Threat to Illusion of Free Will for more). At some point in the next twenty years, ongoing labor shortages and technological advances will rapidly accelerate automation across all industries as the human race ages and shrinks. Sometimes, when an algorithm makes the calls, the outcomes are bad, but at least not life threatening, as was the case with Amazon’s aggressive software-advised and costly overbuild of fulfillment capacity in the US. We don’t want to find out what happens when automated decisions are made while lives are on the line and we’ve lost the ability for analog intervention.

Tricky Tech Tango
The introduction of automation can also be distracting as we learn to live with new technologies. When you switch from doing a task manually to having some level of digital assistance, you have to learn how to handle the new levels of information and interaction. This was true of the Apache attack copters in the late 1980s, when the “torrent” of new data streaming into the cockpit overwhelmed pilots. The LA Times reports the same thing is happening with drivers now as larger screens with complex navigation, more information, and more smartphone distractions increased 2021’s fatal crashes to a 16-year high. It seems counterintuitive that layering in automated driver assist tech, like lane keeping and braking/cruise control, would ultimately create more accidents, but I think another contributing factor could be our brain giving too much credit to the AI and, consciously or subconsciously, engaging in other distractions. Essentially, we are at an uncomfortable time in our co-evolution with all sorts of systems where our trust and reliance in (semi)autonomous tech exceeds its capabilities, thus causing more problems than it solves. We’ll ultimately reach a point of symbiosis, but we need to be careful how we handle the in-between time.

Automotive Automation
Transportation is a big candidate for automation as labor shortages persist over time. Airlines have been in the news for pilot shortages lately as travel demand bounces back. And, US Railroads are short an estimated 4100 crew members needed for a return to normal operational service levels, according to a report from Loop Capital. Is there a better candidate for automation than a train on a track traveling between two points? Granted, rail yard navigation is complex, but it seems like conductors working alongside advanced technology could resolve a lot of the labor shortages. Autonomous long-haul trucking is also soon to arrive in the US, as the WSJ reported a few weeks ago.

The TikTokification of Consumption Habits
Professional content, like movies, series, music albums, etc., is generally created with some hope of monetizable longevity. If you spend $100M on a movie today, you want to maximize the duration of returns, as with any investment. The 1986 original Top Gun is still paying large backend dividends to its owners and creators, and that was even before the major success of the $1B-grossing sequel. If content has only short-tail relevance, however, it should be worth far less (i.e., demanding a steeper markdown when you discount future cash flows back to today’s value). The current problem with expected returns for content is the vast proliferation of all types of media – from TikTok to video games to you name it. When divvying up the finite time we have available to consume various content forms, the denominator has dramatically increased. And, because content is getting shorter, it no longer becomes embedded into our common cultural lexicon to the same degree as it used to (see Digital Tribalism for more on this theme). The faster we binge or scroll through content, the more forgettable it becomes – with little time to process or appreciate, it evaporates before it can enter our long-term memory. Yet, producers are largely continuing to follow the old forecasts for future windfalls, spending more and more on content despite its risk of diminished value over time. Following in the footsteps of Netflix, the other Hollywood studios are shifting business models to streaming and copying the strategy of more upfront payments and very little, if any, backend.

There were two recent interviews of media execs that got me thinking again about content’s discount rate: Jason Blum from Blumhouse (a successful next-generation Hollywood production company) appeared on a Puck podcast, and producer/investor Jeff Sagansky was interviewed for Deadline. They both argued that talent is losing out on lucrative backends as a result of streaming’s new upfront-weighted business model. But, that view seems increasingly anachronistic as it becomes clearer that the backend might be worth far less in a world of exploding media and entertainment choices. Indeed, it’s entirely possible that even the upfront is significantly overpriced. The heart of the question is: how much is the value of content being diluted by the infinite proliferation of options? Sure, someone could make another Seinfeld or Friends today that becomes a culture carrier for a generation, but those odds seem to be getting exponentially longer.

What can content investors do? A good starting point would be to hone financial models of future value to account for an ever growing denominator of content. If you think we have a lot of content to choose from today, just imagine ten years from now, twenty years...It’s likely today's production costs need to be far less for the models to sketch out with a good return. Anecdotally, this content deflation may already be happening. Lucas Shaw reports that we are entering “an age of austerity”, citing one series director who took a pay cut from $4M to $750k!. Producers can also increase the near-term monetization (higher subscription fees, ad rates, and/or ticket sales) wherever content is being undervalued today. Further, content needs to be more engaging to more people in order to enter the collective cultural memory and create lasting value, like the recent Top Gun: Maverick sequel. Abandoning streaming-era binge watching in favor of traditional weekly meted-out consumption would also help create that space needed to form memories and relationships with content. Historically, in an era of content proliferation, you were better off owning the distribution, e.g., as when cable rose to prominence in the 1980s and 1990s in the US (until the pendulum swung back to “content is king” from distribution). But, with the commoditization of distribution in the direct-to-consumer digital age, that path to prosperity no longer exists (although certainly a lot of companies make money on the distribution of content, notably Amazon Web Services and fixed/wireless Internet service providers).

Is this vanishing content phenomenon happening in other industries? What if it’s true of music as well? Many mature artists have been selling their catalogs to labels and private equity groups, but what if the rise of endless media decreases the amount of music we listen to in the future? (See Beat It Mr. Tambourine Man for more on the business of music.) I was also recently looking at consumers’ rapidly shifting beverage preferences as we see more and more “innovation” in the drinks category – from craft beer to hard seltzers to ready-to-drink canned cocktails. The rise of fast fashion is another example. Consumers seem to be rapidly shifting preferences, which might be tied to the rise of short-form media, with its real-time parade of the latest trends and accelerating churn. It feels like a rewiring of our pleasure centers to bounce from one thing to another, whether it's content, drinks, fashion, people, jobs, etc. We are scrolling real life as if it were TikTok. Will we hit a breaking point and sharply revert back to nostalgic behavior of actually paying attention to engaging long-form content and choosing one brand of brew and sticking with it for life? Or will we find a new equilibrium with this manic, second-to-second switching from ephemeral content to ephemeral cocktail in a can?

Stuff about Geopolitics, Economics, and the Finance Industry
West’s Lithium Dependence
Wired reports on China’s dominance in the lithium market, a key ingredient in the massive number of batteries needed to transition from ICEs to EVs: “...there’s an important piece missing between mine and manufacturing. Turning lithium ore into the purer lithium carbonate or lithium hydroxide needed for batteries is an expensive and complex operation. It takes years to get a lithium processing plant or gigafactory off the ground, and it could take decades and an estimated $175 billion for the US to catch up to China. China controls at least two-thirds of the world’s lithium processing capacity, and it’s this more than anything that could give it a stranglehold on the battery market for years to come.
Without urgent investment in this middle step, lithium pulled from new mines in the US and Europe might still need to be shipped to Asia and back again to be refined before it can be used in electric cars—increasing emissions, compromising energy independence, and handing China a trump card.”

✌️-Brad

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 an informal gathering of topics I’ve recently read and thought about. I will sometimes state things in the newsletter that contradict my own views in order to provoke debate. Often I try to make jokes, and they aren’t very funny – sorry. 

I may include links to third-party websites as a convenience, and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by NZS Capital, LLC. If you choose to visit the linked sites, you do so at your own risk, and you will be subject to such sites' terms of use and privacy policies, over which NZS Capital, LLC has no control. In no event will NZS Capital, LLC be responsible for any information or content within the linked sites or your use of the linked sites.

Nothing in this newsletter should be construed as investment advice. The information contained herein is only as current as of the date indicated and may be superseded by subsequent market events or for other reasons. There is no guarantee that the information supplied is accurate, complete, or timely. Past performance is not a guarantee of future results. 

Investing involves risk, including the possible loss of principal and fluctuation of value. Nothing contained in this newsletter is an offer to sell or solicit any investment services or securities. Initial Public Offerings (IPOs) are highly speculative investments and may be subject to lower liquidity and greater volatility. Special risks associated with IPOs include limited operating history, unseasoned trading, high turnover and non-repeatable performance.