SITALWeek #183 3-10-19

SITALWeek #183

Stuff I thought about last week 3-10-19

Greetings – Zuckerberg’s shift to private communication away from Facebook’s core business has largely been mis-analyzed and unnoticed by investors; tech platforms are power laws fed by information – breaking them up is like trying to kill a biological ecosystem with damaging, unpredictable outcomes; why is Amazon focusing on profits as it starts to lose share to US rivals? These topics and more covered in this week’s note – hit me up on Twitter with any feedback of questions.

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Stuff about Innovation and Technology

Zuckerberg’s memo this week declaring the company was shifting toward private communication between individuals and small groups was incredible both in its boldness and in the way that the stock market completely ignored it! Zuck wrote:

“As I think about the future of the internet, I believe a privacy-focused communications platform will become even more important than today's open platforms. Privacy gives people the freedom to be themselves and connect more naturally, which is why we build social networks.”

Zuck explained further in an excellent Wired interview:

"The thinking is that there needs to be two types of platforms in the world: one is a more public platform, like the digital equivalent of a town square where you interact with lots of people at once. That’s largely what Facebook and Instagram are. And the other platform is the private space, the digital equivalent to the living room. And the foundation that we have for WhatsApp and Messenger is going to be the starting point for developing those platforms."

This is a huge pivot for a company seemingly morally bankrupt when it comes to user privacy. I think this is Facebook’s reaction to the unwinding of the core Facebook social network effect in the US and Europe as people have shifted to 2 different ends of the communication spectrum: on one end, we have public, one-way communications on Instagram (owned by Facebook) and Twitter while, on the other end, we have private messaging like texting, WhatsApp, Signal, Facebook Messenger, etc. The problem is that private messaging is not monetizable – it never has been and it never needs to be – no one wants a Pizza ad in the middle of texting their friends and family. And, Facebook will move toward encrypted communication, which limits their ability to extract data to serve ads with. Effectively, this is the unwinding of the core Facebook – the 15-year business that has driven the company to this point. It’s probably half of the company’s market cap that goes away IF this happens. I think the private message shift is actually the right thing to do for users despite the future revenue impact. Maybe Instagram can grow through it to help offset the eventual decline of the core Facebook newsfeed ad revenues, which may go away very, very slowly – previous dying media platforms like Yahoo, AOL, and MSN ended up just stabilizing or slowly decaying, but MySpace disappeared quickly. Or maybe Facebook can leverage their network effect into a new, as yet unknown business. But, the reality is, Zuck has voting control, and if he thinks cutting the business in half is the right thing to do, he has been given explicit permission by shareholders to do that. It’s worth noting that Zuck is more optimistic on monetization than I am in that Wired interview:

Wired: Got it. And then how will the business model work with this new system? Because Facebook's current business model is based upon collecting lots of data and then building targeted ad experiences. That would be much harder with disappearing data and end-to-end encryption.

Zuck: So yes, parts of this will be harder. But the basic way that we’ve approached things is first to focus on building the consumer service that people really want. Then focus on making it so people can organically interact with businesses, and then focus on paid ways that businesses can grow and get more distribution. So we're still in the phase on this private messaging platform, of phase one, where we're really focused on nailing the consumer experience. You know, a lot of countries, we are the lead messaging app. But in a lot of important ones, especially really important for the business, like the US for example, we're not yet the leading messaging app. So there's still a huge amount of work just in building the consumer experience that people love, and that will be the foundation. If we do that well, the business will be fine. Well, you know, depending on how well we execute it, it could be better or worse, but it will be fine as long as we focus on building something that's good for people.

It is true that if we have access to less information, then that makes a lot of our ranking in filtering systems, it makes them somewhat less effective. That's something that we’re going to have to deal with across everything that we want to do, so not just on ads—I’ll get back to that in a second—but safety, our security, and safety, and spam systems...

I am a big advocate of the ad- and cookie-busting, privacy-focused browser Brave. Now the company is hatching a plan to cut users in on advertising revenues. Brave expects the average user could make $5/month to start. “Brave's ads are designed to preserve privacy, with the browser itself matching ads to its own assessment of your interests without telling advertisers or website publishers anything about you other than the verification that you saw an ad. It's the polar opposite of today's online advertising technology...”

Amazon is apparently shifting more products from its own inventory to 3rd party sellers:

“ Inc. has abruptly stopped buying products from many of its wholesalers, sowing panic...The company is encouraging vendors to instead sell directly to consumers on its marketplace. Amazon makes more money that way by offloading the cost of purchasing, storing and shipping products. Meanwhile, Amazon can charge suppliers for these services and take a commission on each transaction, which is much less risky than buying goods outright.”

A few years ago I asked Jeff if he could one day imagine a scenario where Amazon owned no inventory and 100% of the ecommerce business was logistics, take rates, and advertisements for 3rd parties – he laughed loudly and said he couldn’t see that happening. Time might be changing his answer. At a time when Walmart, Target, and Costco are gaining significant share against Amazon in the US, why would Amazon now being making this apparent profit focused shift? Could exiting the 1st party selling business altogether help fend off regulatory attacks calling to break the company up?

A couple of good articles on the leading mixed-reality platform Magic Leap this week: Magic Leap has the biggest vision and the best developer focus of all the companies currently focused on the shift to spatial computing away from the current era of multi-touch smart phones.

“If you’re an archaeologist and you look at civilization layers, you see the current internet and the way things are, the devices–it’s an established layer, almost like sediment. There’s a new thing, a new civilization, that’s going to be built on top of it...Magicverse and these others are complex systems of spatial computing, IOT, governance, city-scale things. We want people to see that it’s not a device. It’s an entire social-technology fusion that’s coming.”

And, here is the start of a 3-part history of Magic Leap on Forbes.

A couple of criticisms of Netflix this week cracked me up: the newly in-charge bureaucrat that is ruining AT&T’s WarnerMedia said Netflix doesn’t have a brand; meanwhile Spielberg showed his lack of relevance and apparent hatred of the current generation of movie makers and movie viewers as he tries to keep Netflix out of the already irrelevant Oscars. The Onion had the best take on this. Meanwhile Apple is meddling in the production of its new premium video content, apparently not realizing Netflix has had more success allowing creative people to be creative (note the source here is the NY Post, but some of the points made are quite amusing if true).

Chime, a web based bank, now with 3M accounts, has succeeded by making it easy to save and helping its users avoid the fees and problems that typically banks make money off of. Congrats to Chris and the team on their recent fundraising.

AI-based security cameras spot shoplifters ahead of time and could be used in crowds or to prevent possible suicides.

Chinese Internet companies are being hit by layoffs and budget cuts amidst government crack-down and a softer economy.

At the company’s annual meeting this week, Disney’s Iger discussed a great new education program they have for their employees. The trend of shifting higher-education expense from individuals to corporations is a welcome opposition to mounting student debt issues.

“Above all, our results reflect the collective talent and dedication of more than 200,000 cast members around the world. And we continue to create new opportunities for their growth and advancement. And last fall, we launched a groundbreaking initiative to provide free tuition for every Disney hourly cast member in the country so that they can access the education that they need to build the careers that they want, and that's from vocational skills to undergraduate and graduate degrees. And we call this program Disney Aspire, and we've committed up to $150 million to fund it over the next 5 years. And we're going to add $25 million more each year after that. And about 40% of our 85,000 hourly employees have signed up for Disney Aspire in just the first 6 months. Thousands are already taking classes free of charge, and we're adding more everyday. Now I'm incredibly proud of this program, and nothing would make me happier if we had 100% of our eligible cast members take full advantage of this opportunity to advance their careers and hopefully to pursue their dreams.”

Miscellaneous Stuff

Are seeds going toward “open source” as certain characteristics come off patent and Bayer over-earns at the expense of farmers? “To keep prices down, Baron’s company is developing seed directly with plant breeders, cutting out a string of middlemen. Today, FBN’s non-GMO corn seed, sold under the brand name F2F Genetics Network, ships directly to farmers for $115 a bag, compared with an average price of $270 a bag for GMO seeds.”

Longtime readers know I never miss an opportunity for a Shkreli update...”He has seen a prison therapist and taken on the job of caring for prison cats. He occasionally argues with his cellmates about proper grammar.

McKinsey has $10B in revenues and apparently runs a potentially shady hedge fund on the side. Perhaps this is another example of the inescapable threat of transparency in the Information Age coming to 20th century businesses built on secrecy.

Stuff about Geopolitics, Economics, and the Finance Industry

The Information Age created natural power-law winners in the economy. Power laws are natural phenomena like we see in biology and complex adaptive systems. Now calls to break up these big tech platforms is akin to taking a power law and forcing it into an unnatural bell curve distribution. It won’t work, and may even have disastrous side effects because breaking up a biological ecosystem is very different than breaking up an old asset based business like Standard Oil or AT&T. We’ve written a longer essay on this topic with some suggestions for how to think about natural power laws in the data economy.


Nothing in this newsletter should be construed as investment advice. Nothing contained in this newsletter is an offer to sell or solicit any investment services or securities. 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.