SITALWeek #188 4-14-19

SITALWeek #188

Stuff I thought about last week 4-14-19

Greetings – Amazon goes on the defense in its annual letter: is this part of a broader shift from innovation to defense by the big tech platforms? Disney+ will accelerate the shift to app-based video consumption without ads, and their success highlights why Netflix should soon open “Netflixland” theme parks. What will happen when the shift to passive investing results in three shareholders controlling more than half of the votes of all public US companies in the not-too-distant future?

[Please read important disclaimers at the bottom of this post]

Stuff about Innovation and Technology

Amazon’s annual letter came out this week and is always worth reading. However, this time I was mostly disappointed, and a little depressed, because the entire letter read like a draft of congressional testimony defending Amazon as pro-competition, pro-worker, pro-innovation, and a small player with low market share. With the massive threat of regulation looming, it seems like Amazon, Alphabet, Facebook, and Apple will need to increasingly play defense (well, that’s the only game Apple has played for the last nine years, so they should be good at it by now!). We know that network effects driven by data have created a situation where the incumbent tech platforms are likely to win the next phase of innovation in AI, IoT, etc. However, they could be paralyzed by fear of regulation and feel forced into slowing innovation and new products (again, Apple has already won that game!). And, this might mean we see new challengers, maybe even built on the incumbent platforms, but with economics that exist largely outside of the existing giants. Microsoft was paralyzed by their consent decree back when they were busted for bundling Internet Explorer, and the company missed both the Internet and smartphones – it took nearly 20 years to right that ship. A huge amount of stock market appreciation over the last decade has come from this small group of mega tech platforms, but with regulation coming and a shift from innovation to defending their right to exist, it calls into question their ability to extend their platform dominance. However, these businesses aren’t going anywhere – regulation or not, these companies generate enormous value for their customers and will generate piles and piles of cash over the next five years. Network effects and complexity science dictate they are here to stay for a while. Perhaps it’s more likely that Amazon, Alphabet, and Facebook look like Apple over the next five years – creating value through share repurchases on the back of a seemingly stable businesses. However, without ongoing innovation, the durability of the network effects of all of these platforms is at considerable risk. And, if these companies go on the defense, it’s also bad for the West’s ability to dominate in AI.

This article looks bad for Amazon: the company is pursuing big oil companies as customers for AWS and they’ve gone quiet on moving their energy usage to renewable sources. This course change has caused a big employee backlash with 5000 workers signing a petition for Amazon to get back on track with renewables. And not to pile on, but reports of Amazon warehouse workers scared to take bathroom breaks...

While Bezos is on the defense and catering to big oil, Walmart is rolling out robots, which, of course, is going to exacerbate the problem of shifting profits from workers to corporations (see discussion in last week’s SITALWeek on Ray Dalio’s essay).


Speaking of the Dalio essay, here is a good rebuttal against it that claims many of the facts are wrong or exaggerated – it’s worth a read if the topic interests you.

Last week I joked about the dead man walking strategy of Oracle, and this week we got a peak at what Thomas Kurian wanted Oracle to do to save itself before he ultimately left in frustration to run the Google enterprise cloud platform. Kurian lead the developer event for Google Cloud this week and showcased a vision of open, multi-cloud interoperability (you will actually be able to run Google Cloud on Amazon, Microsoft, etc. through its new Anthos/Kubernetes product). Kurian also notably suggested Google will invest heavily in sales and customer support, which has been a key issue for Google compared to Amazon and Microsoft in enterprise cloud. Kurian indicated Google is 1/10th-1/15th the size of Microsoft and Amazon’s salesforce, and he hopes to close this gap by half. Another angle of attack Kurian is taking is embracing the open-source infrastructure and database software providers rather than trying to compete directly with them (which is one criticism often leveled against Amazon). However, there is reason to be skeptical – this is the 3rd major reboot of the Google Cloud strategy, and it continues to clash culturally with Google itself (selling and servicing enterprises is just a different DNA than the largely consumer/ engineering-driven businesses Google is in). I’d much rather see Google Cloud pulled out of Google and run as an independent company under Alphabet in order to be more optimistic about its success. That criticism aside, Google has a lot to offer its enterprise cloud customers and, most importantly, it’s not trying to compete directly with its customers and developers like Amazon is.

Alibaba’s Ant Financial arm has a new health insurance program – it’s a co-op where everyone pays evenly when one of the members gets sick, leveraging the huge user base of Alipay along with blockchain to combat fraud:

“As more people participate, the costs of the plan are spread more widely. Given the growing user base, every member should pay no more than 0.1 yuan for every critically ill person, according to Ant. It covers a list of no more than 100 ailments. If a dispute over claims arises, a jury consisting of hundreds of thousands of pre-approved users will vote on whether to pay out compensation.”

China is moving to ban crypto mining: “China’s top economic planning body has proposed new rules that would see the closure of all local cryptocurrency mining facilities if enacted – a move that would potentially end the country’s dominance in the energy-hungry, yet lucrative industry.”

Some thoughts on Disney and the entire video ecosystem:

Disney revealed details on their new streaming service Disney+ this week, and most of the ubiquitous press coverage seemed to overlook the synergy with Disney’s global parks and leisure businesses (cruises, etc.). Not only will parks be an important place to advertise and offer Disney+ (buy a park ticket and get 6 months free of Disney+ for example), Disney+ will be a major driver of visits to parks globally through connections to the vast array of Disney content. Disney categorized the marketing potential on stage this week as a “synergy campaign unprecedented in the history of Disney.” Disney’s content, which covers all corners of viewers with kids content, Marvel, Star Wars, Fox, Nat Geo, ESPN etc., is much more likely to have 300M global subs than the ~70M Disney is predicting five years from now. And, it’s likely to carry a much higher price tag than the initial $6.99/mo, with pricing power and bundling opportunities over time. The target audience for direct access to Disney’s content will be billions of households around the world with connected devices – much like Netflix – and the market continues to underestimate the potential subscriber-base and data-driven network effects of these businesses. Also, don’t miss this video from The Simpsons folks to commemorate all 30 seasons of the show being available on Disney+.

I believe video consumption is starting to break into two types of customers. The first bucket is the folks who want live TV and a cable or satellite experience – a lot of sports fans in particular, and, frankly, a lot of households that simply want their TV to work like it always has. This group of viewers will drive a long duration but steadily declining subscription-TV business for the incumbents. The second group of customers will be multi-app households. They will probably have a few apps on a regular basis and turn others on and off. Video viewing for this 2nd group will shift to app-based from “channel”-based, and the more engaging, original content an app can provide, the more likely the app will be successful. Netflix and Disney are the two strongest apps by far. They are followed by WarnerMedia, CBS, and then a bunch of sub-scale content owners/creators like Amazon, Discovery, Viacom, etc. (it’s a long list). It’s likely that the top 2-3 platforms aggregate all the others, or someone with an ulterior business model and distribution like Amazon (which uses video as a means to sell Prime memberships) acquires CBS and a few others to put enough original content together to get consumers’ attention. And, of course, the first group of customers who will drive that long but steady decline in pay TV will also be “app” households as well. So, if you have lots of content and are good at creating engaging content, it’s a golden age; and, if you can build a direct consumer business with your content, it will be even more golden. Meanwhile, OTT or “over the top” packages, like Hulu Live and YouTube TV, are in a middle ground that is going away completely. They were never the right solution, aren’t profitable, and don’t meet any real customer needs. For evidence of this, look no further than the recent price hike by YouTube TV to $50/mo.

Notably, the two largest video apps going forward, Netflix and Disney+, are ad free. There is going to be a big shift toward app viewing of content, and it’s likely to be ad free or have far fewer, more highly-targeted ads. Given ads are about half of the profits of linear TV on cable/satellite, and that consumers aren’t generally paying more for app based content, this can be seen as a value transfer from cable/satellite margins to consumers and a loss of audience for brand advertisers. This shift in viewing to ad-free content will create scarcity for reaching large audiences through video content and drive up ad rates at YouTube, Facebook, Twitch, Twitter, and the remaining linear TV programs (like sports) with a large live audience.

And, speaking of the golden age for content producers like Netflix and the synergies of parks and video franchises, when will we have Netflixland? A Netflix theme park could be more modular with more rotating attractions to match niche content popularity. It would also have global appeal given the demand for Netflix’s content around the world. And, as one Twitter user pointed out to me this week, an “Upside Down” ride based on Stranger Things would be awesome...

Miscellaneous Stuff

Studying astronaut Scott Kelly’s twin brother provides evidence humans adapt to space and then adapt back to Earth, suggesting that long-term space travel may be possible for the species. There are lots of interesting and surprising findings in the NASA study.

I think I am obliged to offer a little excitement around the first “direct” imaging of a black hole given that it was my concentration of study in college...As Stephen Hawking said in A Brief History of Time: “black holes ain’t so black”. They actually emit radiation due to quantum effects. While the vast majority of matter and energy is sucked in, a jet of magnetic energy is created that shoots off at near the speed of light. Because black holes bend light so severely due to their mass (in this case 6.5B solar masses!), you can actually see behind them! This “gravitational lensing” was predicted theoretically by Einstein 107 years ago as a consequence of general relativity. Combined, the lensing and the hot gas being circled back into the black hole gives us a “picture” of what is happening – a view of the cosmic event, beyond which nothing returns. What’s crazy is that the black hole is so massive it can bend light around and around itself. For me, the coolest part of getting to observe a black hole is that we may eventually get clues to quantum gravity. Here is one interesting account of a theory on what might be going on from Carl Rovelli, where he posits that the matter that goes into the black hole comes out at another point in time:

“These efforts are building a compelling picture based on a black-to-white-hole transition scenario, which can be summarized as follows. At the center of the black hole, space and time do not end in a singularity, but continue across a short transition region where the Einstein equations are violated by quantum effects. From this region, space and time emerge with the structure of a white hole interior...As the hole’s center evolves, its external surface, or “horizon,” slowly shrinks because of the emission of radiation—a phenomenon first described by Stephen Hawking. This shrinkage continues until the horizon reaches the Planck size (the characteristic scale of quantum gravity) or earlier, at which point a quantum transition (“quantum tunneling”) happens at the horizon, turning it into the horizon of a white hole. Thanks to the peculiar distorted relativistic geometry, the white hole interior born at the center joins the white horizon, completing the formation of the white hole.”

Glycolonitrile, a key precursor of the DNA nucleobase adenine, was imaged in distant star material, providing further evidence that stars provide the basis for life on planets.

Stuff about Geopolitics, Economics, and the Finance Industry

Interesting post from the Nasdaq market about the issues of passive investors and shareholder votes, with passives now at 30% of holdings in the US. What happens when only three companies that dominate passives will soon be voting over 50% of all shares in the US if this trend continues to accelerate? It strikes me as a dangerous situation to have large, with passive investors perhaps not taking a close look at every vote. Voting shares is a crucial burden for active managers to assure their investors’ capital is being stewarded appropriately for the long term AND that companies are being run not only for the benefit of shareholders, but also the environment, society, employees etc., (a topic we discussed in our NZS paper on the broadening definition of fiduciary duties).

WSJ reports further on the potential shift to subscription-based investing for retail investors. I did grimace a little when I read this line:

“Investment management is a commodity whose market price has dropped close to zero, whereas the advice and judgment of a good financial planner can do wonders for your net worth.

Schwab’s move should send a shock wave through the marketplace: Financial planning is the service that is worth paying more for, while it’s investment management that ought to be close to free.”

Dimensional Fund Advisors with $576B under management will begin offering Betterment’s robo-funds at 30bps.

Buffett muses on the paradox of low rates and low inflation for a long period of time:

“And we've never seen, at least, the conventional wisdom on a sustained period of long and growing deficits, while the economy's getting better. Extremely low interest rates, and really, very little inflation. So something different is happening, but something different happens all the time,” he said.

China’s $1T sovereign wealth fund has gone quiet.

Taiwan’s foreign affairs minister pens opinion piece in the USA Today:

“We bear the brunt of this battle every day as we face China’s intensified efforts to subvert our democracy, undermine our elected government and interfere with our elections through military intimidation, economic coercion, diplomatic isolation, disinformation and political manipulation.”


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.