Stuff I thought about last week 1-13-19
Greetings SITALWeekers, and welcome to all the new subscribers from the last week! Long time readers will note a formatting change this week - I have started to embed the links in my ramblings rather than put them at the end of each topic - let me know if you have any feedback or encounter any issues. And, as always I’d love to hear from anyone with questions, comment, or reading suggestions - just reach out on Twitter or reply back to the email.
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Stuff about Innovation and Technology
CES was last week and my main observation is: IoT! We are at the start of a Cambrian explosion of “species” of new connected devices and yet the stock market seems to think the semiconductor supply chain will be largely out of business over the next decade. The next 20 years for chip makers will be orders of magnitude bigger than the combination of PCs, phones, servers, TVs, game consoles, etc.
Also from CES last week we got several new stats and developments in the Internet video industry: we learned that Hulu has over 25M subscribers, Amazon Fire TV is in 30M households, and Roku has an estimated 27M accounts. Given many of these services and devices are in shared living rooms/households, we are looking at many 10M’s households with these devices and services on top of the seeming ubiquitous penetration of Netflix in the US. There is a clear new distribution king rising with Amazon Prime and Fire TV boxes. I was particularly interested to see Amazon launch their new advertising based IMDB-connected streaming service Freedive which instantly appeared (completely unwanted from my perspective) in my Amazon Fire TV app carousel pushing down my other frequent apps. (“Freedive” also continues a long tradition of brilliant tech companies failing to understand branding and marketing - I keep accidentally calling if Fee-Drive.) The Fire TV carousel was prime real estate for Amazon to launch a big new streaming service while disadvantaging competitors. I can’t help but think of the parallel Microsoft favoring Internet Explorer a couple decades ago showing that today’s tech giants largely still have their heads in the sand with respect to regulation risk. Lastly on this topic I was intrigued to see Apple’s failing TV platform and content efforts launch on Samsung and other TV makers. This last point is yet another example of rising cooperation amongst the mega platform competitors as we see winners and losers shakeout and new “frenemy” lines being drawn across big tech.
Google is playing important catchup to Amazon’s Alexa platform and developer tools (recall in last week’s note on Amazon seeing Alexa “skills” double to over 50k). Historically Google tends to assume that developers, advertisers, and enterprises can just figure out how to use Google services on their own without good tools and support. So, the odds are culturally against Google vs Amazon which is extremely developer friendly. Yet, Google still has the far superior product to Alexa, and an installed base of billions of Android users to leverage, so if they don’t win the voice platform war, that will be pretty hard to conceive. (After being fairly uninterested in the current gen of smart home technology, our house now completely runs on google assistant - there are well over 50 devices it controls and that number is growing quickly - this tech is ready for mainstream adoption - go IoT and semi’s!)
Google is rolling out their ad blocker in chrome which is something I’ve discussed in the past - it’s a nutty development that the company accused of monopoly web control is increasing that control and likely causing a further consolidation of Internet ad revenue amongst the companies with large pools of first party data (Google, Facebook, and Amazon). I’ve been using the Brave browser exclusively on my phone for some time now and highly recommend it - it’s clear to me the online ad world is going to go through a massive shift and consolidation toward the big 3 (outside of China) and advertisers should see ROIs increase in the transition as that useless long tail of ads that causes a bad consumer experience is cut off. This seems to be another case of head in the sand like Amazon’s Freedive launch - both the companies and the regulators seem to be unconcerned about the consequences. Developments like GDPR in Europe, the California data privacy legislature and ad blocking are all driving toward creating 3 dominant ad platforms in the West for good or bad.
Disney is a classic example of what we call ROOTMO under our Complexity Investing framework - “Resilience with Out of the Money Optionality.” This is an informative interview with CEO Bob Iger in Barron’s. A couple things that stood out to me which I believe underscore the high quality of Iger as a leader during a time of disruption: 1) “Not doing anything, really, creates more uncertainty than this.” (this referring to the new Disney+ streaming strategy broadly which is considered expensive and risky by investors); 2) Iger is over compensating people during a time of transition which over penalizes earnings in this investment period to focus on what matters - producing high quality content to make the new streaming service a success. There aren’t a lot of CEOs I’d hand my wallet over to, but Iger in my opinion might be one of those worth taking the risk on from this point.
Related: Disney continues to move pricing schemes around to help manage the massive thrust of visitors they are expecting from the new Star Wars themed attractions.
97% of Americans are now aware of Uber and Lyft and 36% of folks have used them - up from 15% in 2015. I wonder what percentage of Americans used have used a taxi over the same period?
Amazon is wading into the massive “trade spend” advertising market with free samples of stuff you might like in shipments. If memory serves, of the roughly $1T global ad industry, half is in trade spend (don’t quote me on that, or anything really - I probably make most of this stuff up). This will accelerate Amazon’s ad business which I believe will rival or surpass the size of Google’s ad business in the next 5-10 years or so. With the increasing ad blocking happening, Amazon is one of 3 companies with a massive amount of 1st party data on all of us.
Google’s board is being sued by shareholders who are trying to shift the boundary of “fiduciary duty” - I find this interesting because fiduciary responsibilities are somewhat defined culturally by the current values of society - rarely are they defined with hard rules. Something like the “prudent person rule” is a good example. This is right in the sweet spot of a topic dear to SITALWeek - in an age of increasing transparency and information, social responsibility and governance become more tightly defined and important concepts. If shareholders are successful in redefining the rules of corporate director duties to investors, then I’d wager we’re gonna see major reform at just about every public company. In other words, this lawsuit could be the start of something very big, or a signal of other lawsuits that will push this envelope in the future.
Continuing my series on 20th century companies struggling to figure out the operating rules of the Information Age - this article on Bayer’s struggles with Monsanto (facing billions of dollars of cancer lawsuits from Monsanto products) is incredible to me. It’s legacy, bald faced capitalism grasping to hang on to relevance, probably not a CEO I’d hand my wallet over to:
Wenning, a serious-looking 72-year-old, is sitting in a massive leather armchair, a large pot of tea bearing his signature in front of him. He is at pains to exude calm. "I've already experienced so much," he says, adding that the current crisis has triggered a bit of "déjà-vu," reminding him as it does of the cerivastatin (Lipobay) crisis in the early 2000s, his first major test as newly installed CEO. The cholesterol-lowering drug had to be withdrawn from the market in 2001 because of its severe side effects and Bayer faced lawsuits from thousands of people affected. For a time, Bayer's share price plummeted to around 10 euros, and the company's banks refused to renew its credit lines.
And yet the situation today is quite different, says Wenning. He paints a picture of a perfectly healthy "life science" company whose pillars include nutrition (crop science) and health, with a very solid balance sheet and a strategy that few analysts would question.
Continuing with the theme of the age of transparency - this is a win-win and big increase in non-zero sumness for AT&T as they agree (no doubt reluctantly) to stop selling your location data to 3rd parties. We’ll have to watch and see if they follow through. AT&T has made some interesting moves lately with their augmented reality investments, WarnerMedia, etc. With the pending spectrum flood and 5G, I wonder if this there is something interesting to look into here with this company?
Yet on the other end of the spectrum - watchout for all the data your TV is collecting on you!
In my region we have two interesting examples of public utilities suffering in the information age of transparency. Our local county is considering dropping our water provider in favor of a citizen owned alternative. Our water company is currently owned by publicly traded American Water Works, which by the way has an EBITDA margin clocking in at 50% - perhaps overearning!? Last year they pushed through a “cost of capital” based rate increase when based on my calculations their WACC actually dropped. Meanwhile PG&E, our power provider seems to have cut resources to the bone based on my personal experience as their debt was downgraded to junk and executives face consequences of years of possibly focusing on shareholders over the safety of their customers. I wonder if there is a broader trend here of utilities increasingly facing the consequences of their principal-agent problem? On the one hand I’d be bullish for electricity providers as we move to EVs (though longer a term decentralized grid driven by green energy probably kills them), but on the other hand, are the days of for profit government granted monopoly utility providers? I know about nothing on this topic, so would be interested in people’s views.
China based Sensetime, the largest global facial recognition AI company, set to raise $2B. The interesting point here is that Sensetime can crush the rest of the world in facial rec because of the data they have access to - an example of policy driving a lead in innovation that the West wouldn’t be able to catch. From the article “The Road to Digital Unfreedom: President Xi’s Surveillance State”:
“In 2017, it was reported on CCTV that the "Skynet" project had been completed, bringing into being the largest video-surveillance network in the world. By that year, China's network included 176 million surveillance cameras, and there were plans to increase this number to a staggering 626 million by the decade's close. The network's many AI-equipped cameras monitor the gender, clothing, and height of passersby, transforming the information captured on screen into data.”
In the shift to the cloud and containers away from virtual machines, does Dell have any legs left to stand on over the next few years? Hard for me to see them remaining a viable business more than a few years from now with the debt load, though admittedly I haven’t spent time studying their books in a while.
It’s seem too easy and obvious to keep making fun of We Work...I mean The We Company...but, maybe just one last time.
“The We Company will be comprised of three main business units: WeWork, its main office business; WeLive, a fledgling residential unit; and WeGrow, a still evolving business that currently includes an elementary school and a coding academy.”...
“Moving beyond office space, Neumann says, has always been a part of the plan. Recently he and his cofounder Miguel McKelvey found a old pitch deck they put together six months before starting WeWork. It dates back to 2009, and on it they mapped out plans for everything from WeSleep to WeSail to WeBank.”
The world’s oldest evidence of deliberate burial of human’s best friend dogs found in the midwestern US dating back 10,000 years.
An interesting read on the complexity and adaptability of genes. This calls into question the multifaceted math problem the big DNA companies like 23andme are trying to tackle with large populations and the drug companies. How many diseases are really linkable to simple gene mutations and configurations? Maybe not many.
“The problem is, many of these headlines are not discussing real genes at all, but a crude statistical model of them, involving dozens of unlikely assumptions. Now, slowly but surely, that whole conceptual model of the gene is being challenged.”
As our local elementary school gears up for a week of no screens it’s worth noting that there is no clear evidence suggesting screen time is bad. Obviously how that screen time is being used is important, but to blankly paint technology with a negative brush based on suspicion without evidence is as dangerous as saying that math is bad for your health. Of course I have no idea if this study is legit either - the point I think is use common sense and wait for enough evidence to surface.
“...there is “essentially no evidence” to support the idea that screen time is directly toxic to health, despite wild claims in the media. It says there is some evidence that it can displace other activities such as exercise. But its main recommendations are simply to ask yourselves, as a family, whether your screen time is controlled, or whether it gets in the way of things you want to do – family time, eating together – and to try to control your use if it does. It also recommends that both adults and children avoid screens in the hour before bed, because a good bedtime routine helps sleep and sleep is important for your well-being.”
“Is Sunscreen the New Margarine?” It seems like clickbait, but it’s an article worth reading.
Scientists make emergency update to GPS data as magnetic North is moving faster than anticipated.
This is one of the better articles I’ve read on mystery space object Oumuamua. It’s a good explainer of what the object might be, and at the same time it’s an excellent example of confirmation bias - humans are just now putting a big effort behind solar sails, so that weird object must be a solar sail! (and it could be!) - confirmation bias is an important one to be aware of in investing (and decision you have to make).
I like this metaphor of a “trim tab” in the Dude’s Cecille B Demille Award acceptance speech. Apparently, a trim tab is a little rudder that helps turn a bigger rudder to help turn a large ship.
Stuff about Geopolitics, Economics, and the Finance Industry
The USCC Jan trade bulletin (PDF) A few interesting tidbits in this months report- notably a nice summary of semi equipment manufacturing exports from the US to China. Something I’ve discussed at length in the past is that the entire outcome of the US-China trade war, whether it be resolution or significantly heightened conflict, hinges on the fact the operating system of Communist China today runs 100% on US semiconductor intellectual property - there would be no command and surveil structure in China with the US semi IP.
“From 2009 to October 2018, China has gone from the fifth-largest destination of U.S. SME exports to the second largest, increasing imports from $200 million in 2009 to $2.7 billion in the first ten months of 2018.”
Nothing in this newsletter should be construed as investment advice. I may own long or short positions in stocks discussed in this newsletter. 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 may change my opinions without updating them in the newsletter. Lastly, often I try to make jokes, and they aren’t very funny - sorry.
I was the portfolio manager of the Janus Henderson Global Technology products (ticker: JAGTX) from May 2011 to November 2018. Prior to that I held various roles as an analyst and portfolio manager at Janus Henderson Investors for most of the period starting as a summer intern in 1998 up until the end of 2018. I graduated from Williams College in 2000 with BAs in Economics and Astrophysics. A complete resume can be found at www.linked.com/bradsling
Investment framework co-authored with Brinton Johns “Complexity Investing” can be found here: http://www.evolusophy.com/complexityinvesting/
If you have any articles of interest, comments or questions please send them by responding to this email. I will generally try to read and respond to your comments or questions, but may not always be able to in a timely manner, for which I apologize in advance.