Curated Insights 2018.01.14

As of this year the App Store alone will overtake Global Box Office revenues.

The iOS economy, updated

Facebook, Twitter, Linkedin, Tencent, YouTube, Pandora, Netflix, Google, Baidu, Instagram, Amazon, eBay, JD.com, Alibaba, Expedia, Tripadvisor, Salesforce, Uber, AirBnB and hundreds of others are all “free” apps enabling hundreds of billions of dollars of interaction none of which are captured in the App Store revenue data. The vast majority of activity for the top commerce, communications and media properties are now coming through mobile devices.

By weight of users and their propensity to engage, iOS enables about 50% to 60% of mobile economic activity. Based on assumptions of revenue rates for mobile services and iOS share of engagement, my estimate of the economic activity on iOS for 2017 is about $180 billion. Including hardware sales, the iOS economy cleared about $380 billion in revenues 2017.


Wal-Mart already has a thriving online grocery business—in China

Wal-Mart has already developed a big online grocery delivery business in China, capable of transporting fresh produce from its shelves to homes within an hour. To accomplish that feat, it’s created a network of chilled mini-warehouses, used artificial intelligence to tailor inventories, and employed an army of crowdsourced deliverymen to rush meat, fruits, and vegetables to customers’ doorsteps. That could provide the megaretailer with plenty of insight and experience to keep tech upstarts from disrupting it out of one of its core U.S. businesses.

Only 2 percent of fresh food was bought online in China last year, according to data from Euromonitor International.


Ensemble Capital: Nike Update

Nike’s sales are 50% larger than its closest competitor Adidas and it is more than twice as profitable. The next few competitors, like Under Armor and Puma both at $5 billion, are markedly smaller in scale. When Nike was founded in 1964 by Phil Knight, Adidas was a much larger incumbent in the sneaker business and Nike was the scrappy startup.

The bigger growth opportunity going forward comes from the international markets, where Nike expects 75% of its future growth to come from and now accounts for about 60% of sales. In addition, this growth is likely to be more profitable over time as its direct to consumer business via its own stores, website, and app will account for a greater percentage of its total sales while creating a more direct relationship with the customer.

New lift technology is reshaping cities

The lift is to the vertical what the car is to the horizontal: the defining means of transport. Like cars, modern lifts are creatures of the second industrial revolution of the late 19th century. Like cars, they have transformed the way that cities look, changing how and where people live and work. And today, like the cars that are lidar-sensing their way towards an autonomous future, lifts stand ready to change the city again.

The Chinese appetite for more, higher and faster lifts is like nothing seen since 1920s New York. In 2000 some 40,000 new lifts were installed in the country. By 2016 the number was 600,000—almost three quarters of the 825,000 sold worldwide. China not only wanted more skyscrapers; it wanted taller ones. More than 100 buildings round the world are over 300 metres; almost all of them were built this century, and nearly half of them in China. The country is home to two-thirds of the 128 buildings over 200 metres completed in 2016.

Liftmakers say that “Destination control”, in which the lift system tells the user which lift to use, rather than the user telling the lift where to go, reduces door-to-desk time by 30%. Pair it with double-decker lifts, which in very tall buildings usefully serve odd and even floors simultaneously, and you increase capacity even further.

Why experts believe cheaper, better lidar is right around the corner

“Our lidar chips are produced on 300-millimeter wafers, making their potential production cost on the order of $10 each at production volumes of millions of units per year,” MIT researchers Chris Poulton and Michael Watts wrote last year. Their chip uses optical phased arrays for beam steering, avoiding the need for mechanical parts.

Experimental, low-volume hardware for cutting-edge technology is almost always expensive. It’s through the process of mass manufacturing and iterative improvement that companies learn to make it cheaper. Right now, lidar technology is at the very beginning of that curve—where antilock brakes were in the early 1980s.

The world’s biggest miner is building a battery supply hub it doesn’t want

BHP began work to build a nickel sulphate plant at Nickel West in recent weeks and is considering a slate of further expansions to make it the largest source of the material and a hub for other battery ingredients. It’s aiming to sell 90 percent of output into the battery supply chain by about 2021, from less than a third at the end of last year. Global nickel demand could more than double by 2050, fueled in part by rising electric vehicle sales, Bloomberg Intelligence said in a June report.

The world’s biggest mining companies are ratcheting up their response to the booming demand for battery raw materials. Rio Tinto Group is developing a lithium project in Serbia, while Glencore Plc plans to double production of cobalt and is effectively “a one-stop-shop” for investors seeking exposure to EV gains, Sanford C. Bernstein Ltd. said in a note this month.

The good luck for BHP is that only about 40 to 45 percent of existing nickel mine supply is suitable for processing into a battery-grade chemical product, Melbourne-based UBS Group AG analyst Lachlan Shaw said by phone. “BHP’s Nickel West fits into that category.”


The most powerful research tool is a great network

The two changes he noted are global environmental standards sponsored by the International Maritime Organization. The first is the “Ballast Water Management Convention” that went into force late last year. It requires that newly built ships have waste-water treatment equipment that purifies ballast water to certain minimum levels. After September 2019, ships that were built before these standards came into force will need a costly upgrade to their equipment to meet this standard for the vessels to pass their periodic inspections.

The second standard will be implemented in 2020. I was amazed to learn that the world’s biggest 25 ships emit more sulfur than the entire world’s fleet of cars! Accordingly, the regulation’s goal is to limit this pollution. Ship-owners must achieve this goal and have several ways to do so, such as retooling to switch to a less polluting fuel like gas or methanol or by installing scrubbers to lower concentrations of pollutants.

If freight rates do not rise with the investment required to build new ships, then there is little economic incentive for many ship-owners to spend the additional capital required to meet the new regulations. This short term squeeze on shipping economics could prompt an increase in vessel scrapping as older ships are retired from service and less new supply is forthcoming from shipbuilders, who are already under pressure from the collapse in freight rates. Any force that constrains supply relative to demand should be positive for freight rates and, in time, the economics of shipping. One unintended consequence of these regulatory changes could be a surprisingly strong bull market in shipping costs!

Why it is time to change the way we measure the wealth of nations

Invented in the 1930s by Simon Kuznets, initially as a way of calculating the damage wrought by the Great Depression, GDP is a child of the manufacturing age. Good at keeping track of “things you can drop on your foot”, it struggles to make sense of the services — from life insurance and landscape gardening to stand-up comedy — that comprise some 80 per cent of modern economies. The internet is more perplexing still. In GDP terms, Wikipedia, which puts the sum of human knowledge at our fingertips, is worth precisely nothing.

Among GDP’s shortcomings, the distinction between flow of income and stock of wealth, highlighted by the story of Bill and Ben, is one of the most serious.

Among the report’s findings, the full details of which are embargoed, is a huge shift of wealth over 20 years to middle-income countries, largely driven by the rise of China and other Asian countries. A third of low-income countries, however, especially in Africa, have suffered an outright fall in per capita wealth over that period, in what could be a dangerous omen about their capacity for future growth. In the world as a whole, the report finds, human capital represents a whopping 65 per cent of total wealth. In 2014, this was $1,143tn, or about 15 times that year’s GDP.

The report is particularly illuminating in tracing the path to development as countries, in the manner described by Dasgupta, trade in one form of capital for another. Crudely put, they use income derived from natural resources to build up other forms of capital, principally in infrastructure, technology, health and education. So, while natural capital accounts for 47 per cent of the wealth of low-income countries, it represents only 3 per cent of the wealth of the most advanced.

The Ripple effect

XRP, the Ripple token, is unlike any other crypto token in the market. It is entirely centrally controlled, operating more like an ETF unit than anything else since the issuer has the capacity to release or absorb (pre-mined) tokens in accordance with their valuation agenda. More egregiously though, the token plays little part in Ripple’s central business case. For the most part it’s just a cute add-on.

Ripple “the settlement tech” is thus arbitrage tech, highly dependent on the whims, activities and behaviours of its liquidity provider community. This means it’s partial to the same exact problems HFT suffers from: namely, the fact there’s no guarantee liquidity providers will always be around when you really need them. In FX this sort of solution doesn’t really cut the mustard. People want a dependable FX service, not one that’s subject to the whims of unknown third-party participants. A bit of historical context is useful at this point, since what XRP really aims to do (we think) is copycat the role played by the offshore dollar in the days before the euro.

Curated Insights 2018.01.07

The $100 billion venture capital bomb

Son must deploy $20 billion, or a fifth of the fund, every year for the next five years to meet investors’ terms and their expectations in a market that many already consider overvalued.

Son explained to Hauser that there was a big new wave of computing coming — the sixth, in Hauser’s estimation, following on from the mainframe, the minicomputer, the workstation, the PC, and mobile. This next wave would automate processes in industrial manufacturing and on consumer devices. Son said Arm could uniquely capitalize on this new order as the leading processor manufacturer behind the Internet of things.

“This is the company,” Son said in a televised interview. “No one can live on the earth without chips — it’s in cars, refrigerators, everywhere. So if chips are the things everyone needs, and one company has a 99 percent market share, there must be a barrier. They’re not monetizing well enough. But if I own it, we can monetize it much better. I think the company is going to be more valuable than Google.”

Aside from its 95 percent domination of smartphones, Arm has 34 percent of the global processors market. There are currently 110 billion Arm processors in the world. The company has forecast a total of one trillion by 2035. As the applications get more advanced — be that a car, a washing machine, or a drone — they demand smarter processors, which are more expensive to produce in-house. “We price our fee at a tenth of the cost of what it would cost to develop it yourself,” Thornton notes. “So when you’re staring down the barrel of $100 billion and ten years to develop that processor yourself, we can say it will cost $10 billion from us and you can have it instantly. This is why we have expanded so rapidly over 20 years. One by one, design team by design team, we will become the processor of choice in those markets.”

“Arm Holdings has an insight into the future. When Arm makes a contract with a new business venture, providing the Internet of things for automobiles or farming, Arm will know what is in the pipeline for the Internet of things two years ahead.” SoftBank, in turn, gets a head start on funding companies for a market that doesn’t yet exist.

Analysts say SoftBank, which declined to comment for this article, is at work on vertical integration: Foxconn builds devices, Arm supplies the chips, and SoftBank-owned Sprint and OneWeb, an Internet satellite company, operate the networks on which the devices run. Vision Fund portfolio companies will reap the benefits of these partnerships. SoftBank sits in the middle, introducing high-growth prospects from the fund to one another and to the infrastructure on which their success rides.

Units of time are the new currency

Buffett’s not wrong, but technology has changed the nature of competition. While businesses were once considered only as valuable as the dividends they paid out, the “impenetrable” moats that let companies spit off excess cash are dwindling. A moat today is simply a temporary buffer that helps a company get ahead of the next innovation cycle. When you compound time, you’re creating and recreating value faster than the current innovation cycle.

This is the formula for compounding time into a utility and beyond: 1) Reduce friction for your customers and yourself. Use the time you save to build your utility. 2) Compound time by investing in the ecosystem and getting other companies to integrate with your product. Other companies will integrate with you to save themselves time, building on top of your platform and giving you time to invest in the next great business. 3) Buy other people’s time to defend your utility and stay relevant. Smartly acquiring new products helps you maintain your utility.

Jeff Bezos: “All service interfaces, without exception, must be designed from the ground up to be externalizable. That is to say, the team must plan and design to be able to expose the interface to developers in the outside world. No exceptions.” While this created more work in the short-term, it broke Amazon down into hundreds of micro-services that communicated via APIs. By making all services accessible via API, Amazon drastically reduced the time it took to deploy new features and functionality.

Google’s machine-learning algorithms are reportedly five to seven years ahead of the competition. By keeping TensorFlow to itself, Google would have maintained its lead time — similar to how moats are created by stockpiling assets. But by taking the opposite approach and giving TensorFlow away for free, Google created a utility.

Building a traditional moat will be antithetical to building a great business. The only way to survive is to extract the core of your business and spread it out to compound returns on time. First, you have to save time for your customers and even yourself. Then, you have to invest it forward by co-operating with other products in your ecosystem. Finally, you have to acquire new innovation to maintain your lead.


Why has Waymo taken so long to commercialize autonomous taxis?

To estimate the rate at which passengers will tolerate autonomous taxi errors, we analyzed the manually driven car statistics to set the hurdle. On average human driven cars break down roughly once every 50,000 miles and crash once every 240,000 miles,2 thus offering perspective on acceptable tolerance rates for autonomous vehicle SIFs and UFs.

Supporting this hypothesis, its cars seem to have had difficulty making left turns. One possible explanation is that it has chosen not to vertically-integrate, outsourcing vehicle production to partners like Fiat Chrysler and then taking engineering shortcuts by integrating its sensor suite into a product manufactured away from its controls. In contrast, Tesla’s and Cruise Automation’s (GM) manufacturing operations are vertically-integrated, which could become an important source of competitive advantage.

We are skeptical of that negative conclusion for a number of reasons. Today, Waymo probably is trying to maximize its failure rate to identify faults and root them out. Some stretches of road are trickier and some intersections more difficult to navigate than others.

Getting my fix of Starbucks

SBUX has been successful engendering loyalty from its customers as well- Starbucks Rewards has 13.3mm members in the US and an incredible 36% of all dollars tendered in the stores is transacted through the loyalty program (US Company operated stores).

In the US- the average new SBUX location generates revenue of $1.5mm (average unit volume or AUV) and generates a year 1 store profit margin of 34% or $510k. Based on an average store investment of $700k in the US, this results in an ROI of ~75%. Compare this to a McDonalds with an ROI of ~30%, an average fast casual operator at ~40% or even Chipotle (at its peak before the food illness issues) at ~70%. This means that the average SBUX store earns back its investment a third of the way into its second year – very compelling unit economics. The math likely changes with higher investments in Reserve stores and premium Roasteries in the coming years but if these seek to elevate the overall SBUX experience and thus drive pricing power through the entire system, it’s the right move for the long term.

Starbucks is a well-positioned company led by a smart management team playing “the long game”. While store growth in more mature markets and continuing competition in premium coffee may be a drag to future growth, Starbucks benefits from a moat in the form of a strong brand and a loyal, repeat customer that can be extended into more markets and into more than just coffee. And I believe that this moat is sustainable under the right leadership team that understands that Starbucks delivers an experience that extends far beyond just selling coffee. The sustainability of the moat is predicated on continued investment to elevate the store experience and thus drive pricing power. Management has demonstrated a willingness and enthusiasm to invest and has ample runway to do so while also rewarding shareholders with share repurchases.

How big tech is going after your health care

Now, as consumers, medical centers and insurers increasingly embrace health-tracking apps, tech companies want a bigger share of the more than $3 trillion spent annually on health care in the United States, too. The Apple Heart Study reflects that intensified effort.

Each tech company is taking its own approach, betting that its core business strengths could ultimately improve people’s health — or at least make health care more efficient. Apple, for example, has focused on its consumer products, Microsoft on online storage and analytics services, and Alphabet, Google’s parent company, on data.

Last year, Facebook made it more appealing for pharmaceutical companies to advertise their medicines on the platform by introducing a rolling scroll feature where drug makers can list their drug’s side effects in an ad. Such risk disclosures are required by federal drug marketing rules.


Western Digital, Nvidia on board with ‘RISC-V,’ so pay attention, says Benchmark

Any investor interested in learning how adoption of RISC-V stands to disrupt the CISC and RISC processor domains, including discrete processors and/or processor IP (cores and architectures) embedded within simple MCUs as well as advanced ASICs. Additionally, RISC-V stands to disrupt R&D development roadmaps for merchant and captive SoC companies. For example, if Western Digital truly intends to adopt RISC-V in storage products, Marvell will need to reconsider usage of Arm cores. This could lower the upfront licensing and royalty costs for Marvell; however, it may require a revamping of Marvell’s storage controller design flow. Processor IP companies such as Arm Holdings, Synopsys, Cadence Design, Imagination Tech and even CEVA, Inc. could see an impact.

China removes 1,400 baby formula products from shelves

The regulations, effective Jan. 1, require factories making formula to register those products with China’s Food and Drug Administration and pass safety inspections. Plants are limited to working with three brands, and those brands can make only three different products each. China’s FDA has approved 940 infant-formula products from 129 factories so far, the agency said. That compares with more than 2,300 formulations available to parents before Jan. 1.

That vaulted Nestle, Danone and Reckitt Benckiser Group Plc into the top spots in the $20 billion market, according to Euromonitor International.

Capturing those families will be crucial. With the relaxation of China’s one-child policy, Reckitt Benckiser anticipates about 20 million babies being born annually, which could trigger an annual growth rate of at least 7 percent in the infant-formula category during the next five years, said Patty O’Hayer, a spokeswoman. The company bought Mead Johnson for $16.6 billion last year, and its Enfa and Enfinitas brands were approved for sale. Asia generated half of the Enfa lineup’s $3.7 billion in sales for 2016.

The Paris-based company wants to deploy technology such as laser printing to make tampering more difficult and QR codes to ensure traceability of a product back to the factory — moves intended to assure Chinese parents concerned about food safety.

Cancer deaths fall to lowest rate in decades

While a number of breakthrough, high-cost drugs have improved the outlook for people with some deadly cancers, the biggest cause of the decrease in deaths is that Americans are smoking less. The report found decreased smoking rates, and improved detection and treatment, have led to sharp declines in the rate of lung, breast, prostate and colorectal cancer deaths.

How blockchain technology is redefining trust

‘Regulators will like that blockchain-based transactions can achieve greater transparency and traceability– an “immutable audit trail”,’ Masters says. In other words, it could help eliminate the kinds of fraud that come from cooking the books.

How do typical loans work? A bank assesses the credit score of an individual or business and decides whether to lend money. The blockchain could become the source to check the creditworthiness of any potential borrower, thereby facilitating more and more peer‑​to‑​peer financing.

Consider traditional accounting, a multi-billion industry largely dominated by the ‘big four’ audit firms, Deloitte, KPMG, Ernst & Young, and PwC. The digital distributed ledger could transparently report the financial transactions of an organization in real time, reducing the need for traditional accounting practices. And that is why most major players in the financial industry are busy investing significant resources into blockchain solutions. They have to embrace this new paradigm to ensure it works for, not against, them.

In the patent, Goldman describes SETLcoin as having the potential to guarantee ”nearly instantaneous execution and settlement“ for trades. It would mean all the capital the bank is required to keep in reserve, to hedge against the risk of transactions if they don’t settle, would be freed up.

The blockchain raises a key human question: How much should we pay to trust one another? In the past year, I’ve paid my bank interest and fees, some hidden, to verify accounts and balances so that I could make payments to strangers. I’ve spent thousands of dollars on lawyers to draw up contracts because I am not quite sure how another person will behave (and to sort out a few incidents where trust broke down). I’ve paid my insurance company to oversee the risk around my health, car, home, and even life. I’ve paid an accountant to reconcile an auditing issue. I’ve paid an estate agent tens of thousands of dollars essentially to stand between me, the prospective buyer, and the current owner to buy a house. It would seem we pay a lot for people to lord over our lives and double-check what’s happening. All these ‘trusted intermediaries’ are part of the world of institutional trust that is now being deeply questioned.

Today, it is circa 1993 for blockchain technologies. Even though most people barely know what the blockchain is, a decade or so from now it will be like the internet: We’ll wonder how society ever functioned without it. The internet transformed how we share information and connect; the blockchain will transform how we exchange value and whom we trust.


Bitcoin-is-Worse-is-Better

It’s not the decentralized aspect of Bitcoin, it’s how Bitcoin is decentralized: a cryptographer would have difficulty coming up with Bitcoin because the mechanism is so ugly and there are so many elegant features he wants in it. A cryptographer’s taste is for cryptosystems optimized for efficiency and theorems; it is not for systems optimized for virulence, for their sociological appeal. Centralized systems are natural solutions because they are easy, like the integers are easy; but like the integers are but a vanishingly small subset of the reals, so too are centralized systems a tiny subset of decentralized ones. It may be that Bitcoin’s greatest virtue is not its deflation, nor its microtransactions, but its viral distributed nature; it can wait for its opportunity. If you sit by the bank of the river long enough, you can watch the bodies of your enemies float by.

Gyms ditch machines to make space for free weights

In recent years the 420-location chain has scaled back cardio and weight machines to 50% of floor space from about 66%. The gym devotes the other half of floor space to free weights and functional training, which includes things like kettlebell swings and body-weight exercises with TRX suspension straps. It has also expanded its studio group-exercise classes.

“I prefer to do classes, because the teacher pushes me farther than I would push myself,” she says. “I get bored on cardio machines or on the weight machines.”

The shift away from machines is even more pronounced overseas. In 54 gyms of varying price levels in the U.K., members’ time spent on cardio machines dropped 7% between 2013 and this year, even as the total number of gym visits increased, according to an analysis from Edinburgh-based tracking firm GYMetrix.

The Remarkable Early Years of Warren Buffett (Part 1)

The risks of buying a home that’s too big

“The biggest house isn’t necessarily the best house or even the best investment. An older, smaller home with a shorter commute, bigger lot or greater remodel potential may appreciate more. In fact, many fancy new homes can lose value quickly if a developer builds newer homes nearby, while older areas may have more enduring land value.”

“You want enough space to live comfortably, but you don’t want to heat, clean and pay taxes on space you aren’t utilizing.”

Long-term returns. The money saved in buying a right-size home could pay dividends in the future—literally. A $20,000 savings each year over the life of a 30-year mortgage could result in a nearly $1.2 million nest egg if invested in a stock market portfolio earning 4% a year, Ms. Adam says. The annual savings, when compounded over time, is likely to exceed the appreciation in your home’s value over the term of the mortgage.

Curated Insights 2017.12.24

Why Tesla wants a piece of the commercial trucking industry

But above all, it’s business opportunity—and trucking is the physical embodiment of a thriving economy. Trucks moved more than 70% of all U.S. freight and generated $676 billion in revenue in 2016, according to the American Trucking Associations. Some 33.8 million trucks were registered for business purposes in 2016. Almost 4 million of them were categorized Class 8, denoting the largest freight trucks.

Other autonomous trucking startups are in hot pursuit. TuSimple, a company that has operations in China and San Diego and is backed by Nvidia and Sina Corp., plans to test fleets on two routes: one 120-mile stretch between Tucson and Phoenix and another segment in Shanghai. Meanwhile Nikola Motor is designing and building its own driverless, hydrogen fuel cell–powered Class 8 truck—“the iPhone of trucking,” says CEO Trevor Milton. “In the next eight years, you’re going to see a complete transformation of trucking,” he adds.


In China, a three-digit score could dictate tour place in society

In 2015 Ant Financial was one of eight tech companies granted approval from the People’s Bank of China to develop their own private credit scoring platforms. Zhima Credit appeared in the Alipay app shortly after that. The service tracks your behavior on the app to arrive at a score between 350 and 950, and offers perks and rewards to those with good scores. Zhima Credit’s algorithm considers not only whether you repay your bills but also what you buy, what degrees you hold, and the scores of your friends. Like Fair and Isaac decades earlier, Ant Financial executives talked publicly about how a data-driven approach would open up the financial system to people who had been locked out, like students and rural Chinese. For the more than 200 million Alipay users who have opted in to Zhima Credit, the sell is clear: Your data will magically open doors for you.

Zhima Credit is dedicated to creating trust in a commercial setting and independent of any government-initiated social credit system. Zhima Credit does not share user scores or underlying data with any third party including the government without the user’s prior consent.”

The State Council has signaled that under the national social credit system people will be penalized for the crime of spreading online rumors, among other offenses, and that those deemed “seriously untrustworthy” can expect to receive substandard services. Ant Financial appears to be aiming for a society divided along moral lines as well. As Lucy Peng, the company’s chief executive, was quoted as saying in Ant Financial, Zhima Credit “will ensure that the bad people in society don’t have a place to go, while good people can move freely and without obstruction.”

For those with good behavior, Zhima Credit offers perks through cooperation agreements that Ant Financial has signed with hundreds of companies and institutions. Shenzhou Zuche, a car rental company, allows people with credit scores over 650 to rent a car without a deposit. In exchange for this vetting, Shenzhou Zuche shares data, so that if a Zhima Credit user crashes one of the rental company’s cars and refuses to pay up, that detail is fed back into his or her credit score. For a while people with scores over 750 could even skip the security check line at Beijing Capital Airport.


Tencent and Alibaba go abroad to push for growth and know-how

“[Tencent] are willing to look at anything they think will help them to export what they know in China to other countries,” he says, describing the company’s efforts as a China-inspired “third way” of doing M&A. “The deals they are doing tend to be very strategic, and the size of the deals is typically hundreds of millions of dollars or single-digit billions, whereas those by Anbang, HNA and the rest are tens of billions of dollars and unrelated with nothing strategic about it,” says one banker.

Meituan-Dianping, the biggest company in food delivery, ticketing and other services that was valued at $30bn in its latest fundraising, gives Tencent access to swaths of merchants and customers in physical restaurants and stores. “This capability is not something Tencent has in-house, but it’s something that will be beneficial to help it grow its ecosystem. We can push Tencent payments, and small merchants to work with Tencent platforms. And Tencent can bring their traffic to us, provide infrastructure, mapping, cloud services. So this is very complementary.”


Facebook: The bear case will only gain momentum, says Moffett Nathanson

Bull case is predicated on its massive scale […] 2.1 billion monthly users and 1.4 billion daily active users, representing 58% and 39% of the globe’s Internet users […] the level of scale, reach and gigantic trove of data that comes with it clearly has immense value for targeted marketers […] still growing MAUs at respectable rates […] growth is even more impressive in the developing regions [….] 17% CAGR in the Rest of World over the past three years has and has sourced more than a third of its growth from here over that period […] immense base of advertisers […] staggering 6 million advertisers in November of 2017 […] this diversification is a huge asset […] very different than traditional media where, in areas like Network TV, the top 100 clients generally represent 2/3 of ad dollars […] still has a huge opportunity in international and messaging […] in every country except France, Canada, China, the U.S., and the U.K., WhatsApp is the dominant IM platform with more than 60%+ penetration […] We think that if it can get the formula right, it already has a significant user foothold and runway for ramping revenue quickly […] Street estimates look too conservative [for 2018] Street’s conservatism in forecasting despite years of outperformance is a result of Facebook’s aggressive expectation management […] It’s still really cheap! Facebook currently trades at 19x 2018 EV/Ebitda […] By comparison, Priceline (PCLN) is trading at 18X.

Facebook’s video strategy remains a mystery [….] It hosts this content in its standalone Watch Tab […] We don’t think it has been terribly successful here, and wonder how many users even realize or opt to click the Watch Tab when on Facebook […] Facebook hasn’t been aggressive in approaching studios or smaller video creators for content. It appears that Facebook is slowly trying to tiptoe […] Facebook has really frustrated producers by continually changing what it is looking for […] Engagement amongst younger demos has been waning […] Facebook’s video push is more than simply nice to have, it’s now a must have if it wants to stave off further engagement declines […] Facebook has apparently hit the upper bound of its ad load on core Facebook […] The story has moved from a largely volume driven one to a largely pricing driven one […] businesses that have years of significant double digit volume growth ahead of them certainly look more appealing and greenfield other things being equal than those that have moved into the pricing growth phase of their lifecycle […] Despite the significant traction for Messenger and WhatsApp globally, Facebook’s ability to meaningfully monetize them still remains a major question mark […] [Congressional investigations into Russian advertising, etc.] are just the beginning of a bigger regulatory review of Facebook’s influence on our society and political process. As a result, it could spell years’ worth of incremental investment to help police the problem […] With 82%+ of analysts with a Buy rating on Facebook for the last 3.5 years […] any hiccups in growth or profitability could lead to a downside reaction that is amplified.


Amazon hasn’t figured out drugstores yet. But it will have to

Even so, many shoppers prefer get their medications from a store, which offers peace of mind that their order is correct and the opportunity to speak with a pharmacist. Mail-order prescriptions fell 23 percent from 2012 to 2016, according to Adam Fein, CEO of the Drug Channels Institute, with mail pharmacies dispensing only 10 percent of all 30-day equivalent prescriptions in 2016. And the cash generic-drug market for the uninsured — once eyed by Wal-Mart — is considerably smaller thanks to Medicare Part D and Obamacare. The cash market makes up about 7 percent to 8 percent of all prescriptions, and has been declining slowly along with the number of uninsured people, according to Fein. Revenues from cash-paid prescriptions are about $25 billion a year, he said.The most promising window for Amazon may be the rising out-of-pocket costs shouldered by those with prescription-insurance plans. About half of all insurance plans had deductibles on prescription drugs in 2016, up from 23 percent in 2012, according to Pharmaceutical Research and Manufacturers of America. If insured drug-takers become more cost-conscious, Amazon could attempt to bring convenient online price transparency to a complex industry that makes it difficult for customers to shop around. Amazon could be encouraged to push through the complexities to increase the value of Prime membership. Two-thirds of Prime members would fill prescriptions through Amazon if the company offered them, according to research by Cowen Inc.

The loopholes drug companies use to keep prices high

The expiration date for the main Revlimid patent will be 2019. But Celgene’s business tactics, also used by other drugmakers, could allow the company to put off unrestricted competition from generics until 2026. That would cost Americans an extra $45 billion just for Revlimid, according to I-MAK, a consumer advocate.

Among the shenanigans: Securing new patents that extend old ones. Keeping brand-name drugs under wraps so generic makers can’t copy them. Filing so-called citizen petitions that gum up the FDA approval process for rivals. Negotiating restrictive deals with drug plans that crowd out less expensive drugs.

Citizen petitions are another way brand-name drug companies delay approval of competitors’ products. The petitions were designed to elicit public concerns about the drugs. The FDA is required to divert resources to address each one. From 2011 to 2015, brand-name drugmakers filed 108 citizen petitions during the approval process for cheaper versions, and 91 percent were denied, according to a paper by Rutgers University Law Professor Michael Carrier. The petitions “can play a crucial role in delaying generic entry,” he wrote. The introduction of cheaper generics can be delayed even after a brand-name patent has been invalidated in court.


A hospital giant discovers that collecting debt pays better than curing ills

The amount of past-due medical debt in the U.S. is about $75 billion, spread among 43 million people, according to estimates from economists at MIT, Northwestern University and the University of Chicago.

As Tenet and other hospital companies struggle to make money providing medical care, they are turning to the profitable and growing business of collecting debt. Most hospitals have finance departments or outside companies that try to ensure they get paid by insurers and patients. But Tenet has gone a step further than most, turning its operation into a separate business line called Conifer and contracting its services to other medical providers.

Collecting payment has become more important as hospitals’ traditional revenue streams come under pressure. Looming cuts to Medicare reimbursements may make as many as 60 percent of U.S. hospitals unprofitable, compared with about 25 percent currently, according to a 2016 Congressional Budget Office analysis.


Blow to Uber in Europe as top court rules it’s a transport service

The judgement means Uber must comply with individual Member States’ transportation regulations, and cannot claim its p2p ride-hailing services are only governed by less restrictive EU-wide ecommerce rules.

In its ruling the court writes that Uber’s “intermediation service… must be regarded as being inherently linked to a transport service and, accordingly, must be classified as ‘a service in the field of transport’ within the meaning of EU law. Consequently, such a service must be excluded from the scope of the freedom to provide services in general as well as the directive on services in the internal market and the directive on electronic commerce. It follows that, as EU law currently stands, it is for the Member States to regulate the conditions under which such services are to be provided.”


Asimov: Engineering biology

Not only do such biological circuit design automation tools give bioengineers the ability to debug biological circuits much like we debug software — with complete detail of what the simulated circuit is doing — but Asimov engineers have also developed modular biological circuit components that don’t have adverse reactions to other parts of the cell. Why does this matter? It’s akin to a computer programmer designing code that is then injected into a running program or existing operating system. These biological building blocks can be easily used downstream by circuit designers — the bio advance in turn facilitates the computer science advance, namely the accurate simulation of biological circuits.

With Asimov’s approach, high-accuracy simulation, and circuit building-blocks, we can greatly speed the development of biological circuits — decreasing their cost, and greatly increasing their sophistication and complexity.

Because biology is everywhere, living cells have applications in everything from food and materials to agriculture to healthcare. In fact, 7 of the top 10 drugs today are biologics, i.e., proteins that have therapeutic properties. These proteins are manufactured in cells at the cost of billions of dollars. Asimov’s technology could drive a dramatic reduction in cost to patients — enabling these drugs to be in the hands of more and more people.

Auctions & power

This results in decaying economics to the advertisers, as more advertisers join the auction to bid on keywords and clicks become more expensive. Google hides behind the overall statistic that its cost-per-click has been routinely getting cheaper on the aggregate even though this is a direct result of the mix shifting from desktop to mobile, where clicks are nearly ⅔ lower than on desktop.

Since Google is effectively a toll road on the internet, capturing over 90% of the searches performed in nearly every country it touches, advertisers are forced to play ball. But they’re not happy. Not many bidders to an auction come away saying, “wow, we got such a great deal.” In fact, the entire online travel industry is starting to find television advertising an equally compelling offer for their businesses over time. Even in real estate transactions, even if there are just two parties bidding on the property, the auction is designed to capture the highest value from the buyers.

The worst case scorched-earth scenario is far worse for Priceline. It’s a particularly bad time for booking.com to open up space for hotels to be bidding on clicks in TripAdvisor’s auctions. At the same time, ctrip.com is getting more aggressive in western markets and third party OTA supply on TripAdvisor has been building, with >80% of listings having a third, fourth or fifth OTA option. Because booking.com charges considerably higher commissions than TripAdvisor, hotels are highly incentivized to divert traffic away from Priceline’s channels.


China’s $189 billion giant of finance reveals a huge bet on tech

In the first nine months of 2017, Ping An got more than 70 percent of its earnings from insurance, with banking and asset management each contributing about 15 percent. Profit from its fintech units amounted to 1 percent of the group’s total, a proportion that Bloomberg Intelligence analyst Steven Lam estimates could increase to 3 percent to 5 percent in five years.

One risk for Ping An is that China’s tech companies are building their own financial services ecosystems. Alibaba and Tencent already dominate the online payments industry and are expanding rapidly into areas including asset management, lending and insurance. Ping An’s Tan argues that the company’s massive cache of financial data (it has nine petabytes of the stuff), combined with its offline resources, make the company’s products “fairly difficult” to replicate.


Beijing’s electric-car push could produce a world-class Chinese auto brand

China already leads globally in EV sales, passing the U.S. in 2015. Sales of new-energy vehicles, or NEVs (EVs, plug-in hybrids, and fuel-cell vehicles), may top 700,000 units in 2017 and 1 million in 2018, says Xu Haidong, assistant secretary-general of the China Association of Automobile Manufacturers. Almost all those cars are Chinese brands. The government has set a target of 7 million vehicles by 2025. To reach that goal, it’s doling out subsidies and tightening regulations around fossil-fuel cars.

“With electric cars, the cards are being reshuffled,” says Wolfgang Bernhart, a senior partner at Roland Berger Strategy Consultants in Munich. “We’ll see significantly more competition.” That could happen far from the mainland. “It’s obvious that Chinese carmakers want to sell their cars abroad,” says Klaus Rosenfeld, chief executive officer of German parts maker Schaeffler AG. “China’s manufacturers know that it will be tough for them to compete on combustion engines in our home market. But the shift to more and more electric cars may become an opportunity for them.”


China is building some of the world’s biggest packaged food companies

Having American brands gives WH Group a way to reach upscale consumers in the country that eats about half of the world’s pork, said Kenneth Sullivan, chief executive officer of Smithfield Foods and an executive director of Hong Kong-listed WH Group.

Chinese per-capita consumption is 39.4 kilograms (87 pounds) a year, and domestic hog farms can’t keep up with demand. U.S. pork exports to China and Hong Kong totaled 545,000 metric tons last year, a 61 percent increase from 2015, according to the U.S. Meat Export Federation.

Smithfield can’t export sausage, ham and bacon from its U.S. factories because China prohibits imports of processed meat. So WH Group opened an 800 million-yuan ($116 million) factory in Zhengzhou that will produce 30,000 metric tons of those meats when it reaches full capacity next year.

Truth from zero?

The achievements in Go and Shogi—the Japanese game whose higher depth in relation to Western chess we discussed three years ago—strike us as greater than AlphaZero’s score of 28 wins, 72 draws, and no losses against the champion Stockfish chess program. One measure of greatness comes from the difference in Elo ratings between the machine and the best human players. AlphaGo Zero’s measured rating of 5185 is over 1,500 points higher than the best human players on the scale used in Go. In Shogi, the paper shows AlphaZero zooming toward 4500 whereas the top human rating shown here as of 11/26/17 is 2703, again a difference over 1,500. In chess, however, as shown in the graphs atop page 4 of the paper, AlphaZero stays under 3500, which is less than 700 ahead of human players.

Although AlphaZero’s 64-36 margin over Stockfish looks like a shellacking, it amounts to only 100 points difference on the Elo scale. The scale was built around the idea that a 200-point difference corresponds to about 75% expectation for the stronger player—and this applies to all games. Higher gains become multiplicatively harder to achieve and maintain. This makes the huge margins in Go and Shogi all the more remarkable.

Bitcoin billionaires may have found a way to cash out

The U.S. Securities and Exchange Commission rejected the use of the Gemini exchange to determine bitcoin prices — which Cboe is using for the daily settlement of bitcoin futures — and has expressed doubts about using an index of exchanges — which CME is using. This creates the possibility that a few million dollars of actual bitcoin transactions, assembled in untested ways, will drive hundreds of millions of dollars of derivative settlement payments, which in turn could set the price for potentially tens of billions of dollars of ETFs.

If, say, 1 percent of all bitcoin were taken off the market and held as option collateral, 4 and financial investors put up cash in one-year derivatives, that could do a lot to stabilize the market. That means both reducing price volatility and giving confidence that market prices represent true trading prices for institutional quantities of bitcoin. This, in turn, could make Cboe and CME cash-settled futures more attractive, and thereby represent a solid base for bitcoin ETFs.

On the other hand, if bitcoin billionaires stay out of the market, institutional investment in bitcoin will remain problematic. Individuals will be able to trade small amounts in a fragmented market of loosely regulated exchanges, but futures and ETFs will not be securely backed by physical bitcoin — their prices will be pushed around by betting sentiment of people who own no bitcoin.

What Is Ethereum?

Note that because every single operation on the EVM is executed by every node, computing on the EVM is expensive. Therefore — and according to Ethereum’s development tutorial — the best current use-cases for Ethereum are for running business logic: “if this, then that.” Other use cases might be prohibitively expensive. Due to current issues around scalability and the size of Ethereum’s blockchain, more computationally-intensive programs will find it difficult and expensive to operate on the EVM.

Here’s another way to think about it: where Bitcoin could help users avoid banks, Ethereum could help users bypass platforms like Facebook, Amazon, or any number of more complex middlemen. Once upon a time, developers of a game or a collectible like CryptoKitties might have launched a Farmville-style game on Facebook, or a physical product on Amazon. Today, instead of doing that or building their own blockchains from scratch, developers can use the EVM to create their own decentralized applications – like Cryptokitties.

Can this man build a better bitcoin?

Vitalik Buterin grasped the significance immediately. Prior to creating Ethereum, Buterin covered the San Jose Bitcoin conference as a correspondent for Bitcoin Magazine, a publication he cofounded. The wunderkind programmer interviewed Ben-Sasson about his breakthroughs, and it left an indelible impression. “Personally, I think zk-SNARKs are a hugely important, absolutely game-changing technology,” Buterin tells Fortune. “They are the single most under-hyped thing in cryptography right now.”

In January 2009, Wilcox became perhaps the first person ever to blog about Bitcoin in a post titled “Decentralized Money” on his personal blog, Zooko’s Hack Log. Satoshi Nakamoto returned the favor several weeks later, linking to Wilcox’s write-up in an addendum to a preliminary release of the Bitcoin software on Bitcoin.org, the newly created project’s home page. Wilcox was one of only three people to receive an honorable mention in the “related links” section. (The others were Nick Szabo, inventor of “bit gold,” and Wei Dai, creator of “b-money.”)

Curated Insights 2017.11.26

What Tesla’s big rig must do to seduce truckers

In North America alone, the largest heavy duty freight trucks—Class 8 semis—account for about $30 billion in sales each year, or more than 250,000 new trucks, according to industry data tracked by Bloomberg. Class 8 trucks, which have a loaded weight rating of at least 33,000 pounds, come in a variety of shapes and sizes, from trash trucks and cement mixers to city buses all the way up to tractor-trailers whose drivers spend days and nights living on the road. The most common day cab delivery trucks cost around $100,000, and big rigs with sleeper cabins are about $150,000.

Batteries are the single most expensive component of an electric truck, and the battery of a cross-country hauler could cost $100,000 even before they build the truck around it. But that upfront investment can be offset by cheaper operating costs. Running a truck on electricity saves tens of thousands in fuel costs as well as savings of roughly 7 cents a mile on lower maintenance costs. And if the autonomous driving system is good enough to run without a driver, it could also dramatically cut labor expenses, which add about 57 cents for every mile on the road.

Any range less than 400 miles is likely meant for local and regional deliveries, the sort of thing done by UPS and FedEx or the type of hub-and-spoke model used by giant retailers such as Wal-Mart Stores Inc. to move goods from distribution centers to stores or warehouses. If Tesla wants to go after the longest routes to replace what are known as “over-the-road” trucks, which feature sleeping cabins for multi-day driving stretches, the company will need a range of at least 500 miles—or else a way to charge an electric truck that’s faster than anything in use now. The battery needs for each of these categories would be different, and so would the costs.

Perhaps Tesla’s biggest advantage over other truck makers is that its semi will share some core parts with the Model 3. Musk disclosed during an earnings call in May that the semi uses “a bunch” of Model 3 motors, which sit in line with the truck’s axles. These relatively cheap electric motors will give the semis unparalleled electric torque for getting quickly up to speed with a heavy load.


This man is leading an AI revolution in Silicon Valley—and he’s just getting started

Booming demand for its products has supercharged growth at Nvidia. Over the past three full fiscal years, it has increased sales by an average of 19% and profits by an astonishing 56% annually. Nvidia meanwhile has so far managed to retain its roughly 70% market share in GPUs despite competition from formidable rivals—among them Intel and AMD—who want their share of the billions in chip sales to come from this new tech revolution. “IBM dominated in the 1950s with the mainframe computer, Digital Equipment Corp. in the mid-1960s with the transition to mini-computers, Microsoft and Intel as PCs ramped, and finally Apple and Google as cellphones became ubiquitous,” wrote Jefferies equity analyst Mark Lipacis in a July note to clients. “We believe the next tectonic shift is happening now and Nvidia stands to benefit.”

“We believed this model of computing could solve problems that general-purpose computing fundamentally couldn’t. We also observed that video games were simultaneously one of the most computationally challenging problems and would have incredibly high sales volume. Those two conditions don’t happen very often. Video games was our killer app—a flywheel to reach large markets funding huge R&D to solve massive computational problems.”

“In the future, companies will have an A.I. that is watching every single transaction—every business process—that is happening, all day long. Certain transactions or patterns that are being repeated. The process could be very complicated. It could go through sales to engineering, supply chain, logistics, business operations, finance, customer service. And it could be observed that this pattern is happening all the time. As a result of this observation, the artificial intelligence software writes an artificial intelligence software to automate that business process. Because we won’t be able to do it. It’s too complicated.”

“We’re seeing early indications of it now. Generative adversarial networks, or GAN. I think over the next several years we’re going to see a lot of neural networks that develop neural networks. For the next couple of decades, the greatest contribution of A.I. is writing software that humans simply can’t write. Solving the unsolvable problems.”

Google advances their future smart clothing vision with focus on delivering an ‘interactive garment’

Notably the user is able to trigger various different types of functionalities through interactions with the interactive garment, such as by touching or swiping the user’s shirt sleeve. In addition, by enabling the triggering of functionality through interactions with a wearable garment, instead of a device, the user does not need to fiddle around with the user interface of a smartwatch or smartphone in order trigger a functionality. In fact, the user may be able to provide the gesture to the interactive garment without even looking at the garment. In addition, a simple gesture to a garment is discreet and thus enables the user to trigger functionalities in a crowded setting without the need to take out their smartphone or other electronic device.


Apple’s ginormous share of industry profit expands, says Canaccord

Apple is capturing more and more, at 72% of total industry profits, up from 68% in the July quarter, while Samsung’s share dipped slightly to 24%. Looking ahead, Walkley thinks Apple’s share of all smartphone units shipped in 2018 will expand to 14.5% from an expected 13.3% this year, while Samsung’s share he thinks will dip to 19.1% from 20.2%. He expects Huawei and Xiaomi, two big privately held Chinese vendors, to both see share rise in 2018, at 11% and 6.4%, respectively. They won’t do as well, however, as Oppo and Vivo, two other Chinese competitors, who may capture 7.8% and 7.5% of the market next year, he opines.


Why Apple’s HomePod is three years behind Amazon’s Echo

The Echo is a truly standalone product at the center of an ecosystem. The cloud-based operating system has made it easy for developers to create thousands of skills or voice-activated apps. By contrast, the HomePod is essentially an extension of the iPhone, like an accessory. When someone asks the HomePod to open a third-party app, the request won’t go directly to the cloud, as with the Echo, but to an iPhone. As a result, developers can’t write apps for the HomePod. They must create tweaked versions of existing iPhone apps. What’s more, Apple has limited the kinds of apps to messaging, to-do lists and notes. If Alexa is the beating heart of the Echo, Siri is almost an afterthought.


Asia’s consumers snubbing global brands for these products

In Indonesia’s $1.3 billion instant-coffee market, the disparity is more pronounced. During that period, Javaprima gained about 12 percentage points for a 33 percent share, while Nestle lost 1.4 percentage points to 16 percent. Nestle declined to comment on the Indonesian market. Javaprima is capitalizing on local trends, such as demand by women and new coffee drinkers for a smooth and creamy brew, director Agus Susanto said.

Nestle’s revenue from Asia, Oceania and Africa fell 23 percent between 2012 and 2016 to 14.5 billion francs ($14.7 billion). To capture more Asian consumers, the company introduced ready-to-drink cold coffees in the region, opened branded cafes at Chinese universities and formulated a Cafe Viet lineup.

Pechoin, owned by closely held Shanghai Pehchaolin Daily Chemical Co., saw its market share jump fivefold between 2012 and 2016, according to Euromonitor. The parent company had revenue of about $1 billion in 2016. The newfound popularity came partly at the expense of the L’Oreal Paris label, which lost more than a fifth of its market share in the same period. Pechoin, founded in 1931, focuses on herbal products and claims to be one of China’s first cosmetics brands.

L’Oreal remains the No. 1 beauty group in China, and the nation’s increasing demand for luxury cosmetics bodes well for its premium positioning, the company said. Paris-based L’Oreal also has boosted efforts to tailor products for Asia. In 2014, it bought Magic, a Chinese brand known for skincare masks, a popular local beauty ritual. The company also introduced a liquid foundation that uses a cushion applicator popularized in South Korea, and it’s competing with Amorepacific Corp. for the Muslim cosmetics business in Southeast Asia.

A new kind of self-sustaining fishery could offset the worst impacts of animal farming

The Ocean Farm 1 – created by leading salmon farming company SalMar – is the first offshore fish farm capable of complete automation in feeding and monitoring fish. According to SalMar, the farm can mature up to 1.5M fish in just 14 months. If the experimental facility proves viable (and environmentally sound) it may compel more companies and governments to use offshore fish farms to help grow our global food supply.

But American seas are newly open for business: The National Oceanic and Atmospheric Administration announced a rule in 2016 that allows for large-scale fish farming in federally controlled waters three or more miles offshore. In Europe, the regulatory environment has been more friendly. The EU embraced policy changes recommending the shift of aquaculture offshore back in 2002; by 2008, offshore farms were operational in Norway, Ireland, Italy, Spain, and several other countries. Norway is arguably the aquaculture capital of the world: Fish farming helped Norway produce around 1.18M metric tons of salmon in 2016, and fish contribute $8B annually to Norway’s economy – accounting for about 8% of its exports.

Developing only 1% of Indonesia’s suitable ocean area could produce more than 24 million tonnes of fish per year or over 3.9 × 1011 individual 4 cm bivalves. If consumed entirely within Indonesia, this volume of additional fish production would increase seafood consumption per capita sixfold. In fact, there is already considerable activity working to expand Indonesian aquaculture.


Asia’s richest banker spots a once-in-a-lifetime opportunity

For India, it’s a $207 billion mess, a pile-up of bad loans years in the making that’s dragging on growth. For the nation’s wealthiest banker, it’s the kind of opportunity that very rarely presents itself. What has billionaire Uday Kotak salivating is the government’s attempt to finally draw a line under delinquent loans, with recent steps to overhaul India’s bankruptcy laws and recapitalize state-owned banks. The moves are intended to lift a burden from the country’s banks and encourage them to accelerate lending, supporting economic growth.

The sense among some Indian executives that they could walk away from their debts without facing consequences was a major factor limiting past efforts to bring delinquent loans in check. The government’s announcement last month that it will inject a record 2.1 trillion rupees into state-owned banks is another sea change, in that it should give the lenders sufficient capital to write off bad loans weighing down their balance sheets.


Billionaire Kotak says Indian banks need to cut costs: Q&A

Debt markets and other segments will put pressure on the bank loan markets because they are working at much narrower spreads between the investor and the issuer. This is going to be one of the biggest challenges at a time when non-bank sectors like mutual funds, insurance, debt capital market and so on are dis-intermediating on the one hand, and technology is commoditizing the lending business at the other.

First is the formalization of finance. For instance, you see a reduction in the cash economy as less money is going into land and real assets, especially in rural India. That money is going into the formal economy which is a mega change which we are seeing. The second trend which we are seeing is the broad-basing of financial services. As finance became broader, savers wanted to look at things in addition to or beyond bank deposits. So money is going into mutual funds, insurance and equities markets. The third is digital. It, combined with Aadhaar (India’s biometric identification program), is a very potent force. We are at about 1,360 branches now. In the past we would have thought we would need about 5,000 branches. But with the digital economy, Aadhaar and customer behavior changes, we believe we can do with less.


Traffic is piling up—and so are its costs

Last year, congestion cost each U.S. driver $1,400 on average, for a total of nearly $300 billion, according to Inrix’s latest annual scorecard. The cost reflects wasted fuel, decreased productivity and lost time, which might include longer delivery times or missed meetings. The biggest losers are the most congested cities.

“We find that 49% to 61% of ride-hailing trips would have not been made at all, or by walking, biking or transit,” the researchers reported.

First digital pill approved to worries about biomedical ‘big brother’

Experts estimate that so-called nonadherence or noncompliance to medication costs about $100 billion a year, much of it because patients get sicker and need additional treatment or hospitalization.

The technology could potentially be used to monitor whether post-surgical patients took too much opioid medication or clinical trial participants correctly took drugs being tested. Insurers might eventually give patients incentives to use them, like discounts on copayments, said Dr. Eric Topol, director of Scripps Translational Science Institute, adding that ethical issues could arise if the technology was “so much incentivized that it almost is like coercion.”

This ex-trucker has some questions about the Tesla Semi

This first version of the Semi will not replace the dozens of thousands of trucks on huge regional or coast-to-coast runs, clocking 2,000 to 5,000 miles per week.

I understand acceleration is a core Tesla brand value, but I’m far more interested in braking. An 80,000-pound tractor trailer needs about 550 feet to come to a complete stop from 55 miles per hour, and I spent a surprising portion of every driving shift trying not to obliterate car drivers who weren’t aware of that fact. Show me how much the Semi can lop off that braking distance.

Companies like Wal-Mart and JB Hunt that have placed orders for Tesla Semis have the routes, terminal control, and money for terminal infrastructure to make the most of the Semi, so we’ll see what the production unit looks like in 2019 (hopefully) and parse the feedback after 10,000 miles of road duty. Don’t be surprised to see more mirrors.


Can carbon-dioxide removal save the world?

Carbon-dioxide removal is, potentially, a trillion-dollar enterprise because it offers a way not just to slow the rise in CO2 but to reverse it. The process is sometimes referred to as “negative emissions”: instead of adding carbon to the air, it subtracts it. Carbon-removal plants could be built anywhere, or everywhere. Construct enough of them and, in theory at least, CO2 emissions could continue unabated and still we could avert calamity. Depending on how you look at things, the technology represents either the ultimate insurance policy or the ultimate moral hazard.

As a technology of last resort, carbon removal is, almost by its nature, paradoxical. It has become vital without necessarily being viable. It may be impossible to manage and it may also be impossible to manage without.

Building arks, rather than trying to predict The rain

“One thing I’ve come to as an investor, is recognizing that there are a lot of ways to make money in the market. There are a lot of investment approaches and philosophies that can do very well, but all of them test the investor in one way or another. Therefore, it’s important for you to figure out how to align your investment philosophy with your own personality – so that when the investment philosophy inevitably tests you, you’re the sort of person who will pass the particular types of tests required to successful manage your investment strategy.”


What is blockchain technology?

The blockchain is still in its nascent stages. However, blockchain technology promises to entirely reshape money, middlemen, and trust. Ultimately, blockchain is as much a political and economic hypothesis as a technological one. Blockchain technology provides a new way to think about how we agree on things. For the first time, multiple untrusted parties can create and agree on a single source of truth, without the use of a middleman. The technology’s implications for traditional middlemen and corporate players are therefore potentially enormous. As the landscape evolves, the future of blockchain will likely take on forms yet to be imagined.

It’s fructan, not gluten, that’s causing stomach problems, says new research

The scientists found that the participants only developed bloating symptoms after eating fructan-containing bars. Other bars, including those with gluten, did not cause the distress. This led the researchers to conclude that fructan, not gluten, may be behind the bowel problems. One big reason it’s important to figure this out – people who are on a gluten-free diet were found to have an increased risk of developing type 2 diabetes by other recent research.


To solve problems caused by sitting, learn to squat

In the past half century, epidemiologists have been forced to shift how they study movement patterns. In modern times, the sheer amount of sitting we do is a separate problem from the amount of exercise we get. Our failure to squat has biomechanical and physiological implications, but it also points to something bigger.

“Every joint in our body has synovial fluid in it. This is the oil in our body that provides nutrition to the cartilage,” Jam says. “Two things are required to produce that fluid: movement and compression. So if a joint doesn’t go through its full range—if the hips and knees never go past 90 degrees—the body says ‘I’m not being used’ and starts to degenerate and stops the production of synovial fluid.”

Curated Insights 2017.10.15

86-year-old billionaire iPhone chipmaker retires just as his industry heats up

“Since we established ourselves, fabless companies began to mushroom worldwide. Most of the innovations in the semiconductor industry in the last 30 years came from those fabless companies. That’s probably my biggest pride, to have caused a lot of innovations in the industry.”

Liu and Wei inherit a company that is about 30 times larger than local rival United Microelectronics Corp. and commands 59 percent of the $50 billion global foundry market.

Growing chipset demand from China spells another opportunity for TSMC: the country spent $227 billion importing integrated circuits in 2016, according to data from Chinese customs authorities, the fourth consecutive year that chip imports have exceeded $200 billion.


Nvidia, Intel, Marvell: Look how they’ve slimmed down! Says Stifel

“The end markets of semiconductors have changed dramatically over the past 10 years,” he observes, given how much automotive and industrial, two industries with longer product cycles, and therefore more predictable revenue, have taken from more volatile industries.

Another reason for rising valuations is simply scarcity: “In 2007 there were roughly 118 publicly traded semiconductor companies. Today there are roughly 55.”


Shopify S-1 analysis – Smiling all the way to $10B

How are they able to sustain more efficient growth as they scale? The first reason is Shopify has been able to grow their contract value by 14% annually. The average subscription payment by merchant has remained flat over the past four years. Instead of growing subscription revenue on a per customer basis, Shopify is capturing more share of GMV. The chart above shows the merchant services revenue generated per billion dollars of gross merchandise value by Shopify. You can see that figure has quite nearly doubled in four years. In other words, as Shopify merchants sell more, Shopify benefits Proportionately from the growth in GMV, but also at an increasing slope because they capture almost twice as much in fees as they have been historically.

Consequently, merchant services now account for greater than 50% of revenue up from just above 20% four years ago. The gross margin on the software business has remained 78% over the past four years, while merchant services gross margin has fallen from 50% to 30%. Overall gross margin has fallen from 80% to 54%. But that is an advantageous trade considering the massive revenue growth.

Citron exposes the dark side of Shopify the FTC will take notice

Out of the claimed 500,000 websites, Shopify has about 2,500 “Plus” clients and maybe another 20,000 “Advanced”. So where are the other 450,000 + websites?

The majority of Shopify’s customers are not SMB merchants; rather, they are people who are buying a system and Shopify goes as far as to supply them a theme and inventory.


Ikea puts Latin America, Southeast Asian markets in its sights

Ikea has more than 400 stores in 49 markets across Europe, North America, the Middle East, Asia and Australia.

According to Ikea’s plans, it will have opened its first store in South America within the next five years, which is the same timeframe it has set for its expansion into Vietnam and the Philippines. As South America is a new region, it’s likely to enter two or three markets there around the same time in order to secure supply and production, Loof said.

Ikea plans to add 22 new stores this year, up from 14 new stores in 2017. In the future, Ikea will probably open some 25 new stores annually, Loof said. Ikea’s website attracted 2.3 billion visitors last year, while its stores got 936 million visits.


Singapore home-sharing quietly grows despite the rules

Airbnb said its travelers to Singapore typically stay 4.1 nights compared with 3.6 for the average tourist, and three-quarters of listings are outside of traditional hotel districts, allowing tourism spending to accrue in areas that don’t usually host outside visitors.

In a February debate in Parliament, Louis Ng Kok Kwang, a lawmaker for the ruling People’s Action Party, urged the government to regulate rather than ban home-sharing services, noting that the approach so far is inconsistent with how Singapore treated car-sharing businesses, such as Uber Technologies Inc. and Grab.


How we’re solving the LIDAR problem

Strobe’s new chip-scale LIDAR technology will significantly enhance the capabilities of our self-driving cars. But perhaps more importantly, by collapsing the entire sensor down to a single chip, we’ll reduce the cost of each LIDAR on our self-driving cars by 99%.

Strobe’s LIDAR sensors provide both accurate distance and velocity information, which can be checked against similar information from a RADAR sensor for redundancy. RADARs typically also provide distance and velocity information and operate under more challenging weather conditions, but they lack the angular resolution needed to make certain critical maneuvers at speed. When used together, cameras, LIDARs, and RADARs can complement each other to create a robust and fault-tolerant sensing suite that operates in a wide range of environmental and lighting conditions.

 


India stock market could triple in a decade

” … The sectors poised to benefit the most are consumer-oriented and financials. Total online shoppers in India are set to skyrocket from 60 million to 475 million in 2027, while online retail as a percentage of total retail will grow even faster, from 2.2% today to 12.1% in a decade. Unsurprisingly, Amazon.com, China’s Alibaba Group Holding and South Africa’s Naspers have been aggressively investing billions of dollars in India. Morgan Stanley figures Softbank alone has invested some $46 billion in local e-commerce and on-line payments, ride-hailing, and real estate platforms.

As for the financials, Morgan Stanley sees total loans increasing 11 percentage points to 78% of GDP by 2027; total mutual fund assets under management jumping more than ten-fold over the same period; and collected life and general insurance premiums spiking, as well. Fin-tech companies should see exponential growth …”


Bitcoin’s academic pedigree

Nakamoto’s genius, then, wasn’t any of the individual components of bitcoin, but rather the intricate way in which they fit together to breathe life into the system. The timestamping and Byzantine agreement researchers didn’t hit upon the idea of incentivizing nodes to be honest, nor, until 2005, of using proof of work to do away with identities. Conversely, the authors of hashcash, b-money, and bit gold didn’t incorporate the idea of a consensus algorithm to prevent double spending. In bitcoin, a secure ledger is necessary to prevent double spending and thus ensure that the currency has value. A valuable currency is necessary to reward miners. In turn, strength of mining power is necessary to secure the ledger. Without it, an adversary could amass more than 50 percent of the global mining power and thereby be able to generate blocks faster than the rest of the network, double-spend transactions, and effectively rewrite history, overrunning the system. Thus, bitcoin is bootstrapped, with a circular dependence among these three components. Nakamoto’s challenge was not just the design, but also convincing the initial community of users and miners to take a leap together into the unknown—back when a pizza cost 10,000 bitcoins and the network’s mining power was less than a trillionth of what it is today.

The history described here offers rich (and complementary) lessons for practitioners and academics. Practitioners should be skeptical of claims of revolutionary technology. As shown here, most of the ideas in bitcoin that have generated excitement in the enterprise, such as distributed ledgers and Byzantine agreement, actually date back 20 years or more. Recognize that your problem may not require any breakthroughs—there may be long-forgotten solutions in research papers.

Academia seems to have the opposite problem, at least in this instance: a resistance to radical, extrinsic ideas. The bitcoin white paper, despite the pedigree of many of its ideas, was more novel than most academic research. Moreover, Nakamoto didn’t care for academic peer review and didn’t fully connect it to its history. As a result, academics essentially ignored bitcoin for several years. Many academic communities informally argued that Bitcoin couldn’t work, based on theoretical models or experiences with past systems, despite the fact that it was working in practice.

The lessons of Leonardo: How to be a creative genius

Be curious about everything. Leonardo’s most distinctive trait was his passionate, playful and occasionally obsessive curiosity. He made lists in his notebooks of hundreds of subjects, both marvelous and mundane, that he wanted to explore…Some of his curiosity involved phenomena so commonplace that we rarely pause to wonder about them. “Why is the fish in the water swifter than the bird in the air when it ought to be the contrary, since the water is heavier and thicker than the air?”

Observe attentively. His curiosity was aided by the sharpness of his eye, which focused on things that the rest of us barely notice. One night he saw lightning flash behind some buildings and for that instant they looked smaller, so he launched a series of experiments to verify that objects look smaller when surrounded by light.

The best reason to learn from Leonardo, however, is not to get a better job but to live a better life. Having immersed myself in his world for several years, I have resolved to be more observant of phenomena that I used to ignore.

Curated Insights 2017.09.24

Ferrari bets racetrack wins will lead to showroom sales

Ferrari’s financial success over the past 15 years has “been achieved on the back of Formula One,” the CEO said in March, adding that the company couldn’t afford many more losing seasons without suffering financially.

But there is little empirical evidence that winning races translates into increased sales. AllianceBernstein, a wealth manager, argues Ferrari doesn’t need Formula One. “There can’t be a soul on earth who doesn’t know that Ferrari makes fast red cars, with excellent technology and that it has a motor sport heritage,” AllianceBernstein wrote in a report last month, adding that Lamborghini, Porsche and other high-end brands have no trouble selling cars despite being absent from Formula One for many years.

While Ferrari doesn’t reveal its estimates for the financial and promotional benefits it derives from Formula One, Mercedes said that in 2016 it got the equivalent of $3 billion in advertising value from the team.

For years, the company limited its sales to no more than 7,000 cars annually to stoke demand. Now, Mr. Marchionne plans to raise that limit to 10,000 in the coming years, while also moving Ferrari into new areas such as home furnishings and technology products.


Liu Qiangdong, the ‘Jeff Bezos of China’, on making billions with JD.com

It was just three years ago that China overtook the US as the largest e-commerce market — but last year China’s total online retail transactions hit an estimated $750bn, nearly double the figure in the US. Most analysts predict China’s online retail market will more than double again by 2020, by which time Chinese online purchases are expected to exceed those of the US, UK, France, Germany and Japan combined.

The contradiction between Alibaba’s much larger market share and profits but smaller revenues is explained by the rivals’ different business models. Like Amazon, JD.com controls most of the supply chain and delivers goods from its own warehouses directly to customers, so it counts online sales as revenues. Alibaba, by contrast, is essentially an internet platform and payment system for other companies and individuals selling to consumers online and earns the bulk of its revenue from advertising.

“I was the first and only stall in that market to put price labels on everything and give official receipts; from day one I never sold any counterfeits and I soon had the best reputation,” he says. “A lot of rich people in China cannot sleep well because they did too many wrong things but I never made any dirty money ever so I can sleep very well.”

What’s the true TAM of search?

To truly appreciate the nature of information distribution, we need to think in a broader context and challenge some assumptions: what if “online advertising”, or even “advertising” is not the right way to measure the TAM (total addressable market) for the search engine business?

If we correctly define the role of search engines, we can see that what they are really designed to address is actually something much broader – “search cost”. Search cost is the biggest component of what economists label as “friction cost” in an economy and it can exist and be addressed in many different forms.

All of that excess rent is a form of marketing that brands and retailers pay to address “search cost”. In a purely online environment, the physical location is disintermediated and what companies would otherwise pay in excess rent in an offline setting would presumably get re-allocated in the form of Amazon commissions or Google keyword ads.

Actually, most of the time, new technological developments have a tendency to shrink the TAM as technology is usually deflationary (the search engine being an exception), so be careful when you see IR slides of tech companies where management takes an estimate of the market size today and declares that number as their company’s financial destiny – it most likely overstates the actual TAM.


Google Travel is worth $100 billion — even more than Priceline

Our estimate of $11.2 billion in Google travel revenue in 2016 would mean that travel accounted for 13 percent of Google’s total Google Segment revenue and 12 percent of the company total (includes the so-called other bets part of the business). Google’s total Google segment operating margin is in the low 30s, but the core AdWords business is likely much higher (meta would likely be in the 25 percent range).

Given a margin profile that is likely above Priceline and digital ad spend growing more than 20 percent per year, the value of the travel business would warrant a similar price-to-sales multiple as Priceline; off of 2016 results, Priceline trades at over 8x revenue. As mentioned earlier, using a 7x multiple on our estimated 2017 numbers for Google, the Google travel business could be worth as much as $100 billion or 15 percent of Google’s $650 billion market cap.

Online travel companies would like to diversify away from Google, but no other digital marketing tool offers the same commercial intent of a Google search.


Gaming sector primer

The gaming sector is the most attractive industry I see today due to: relative low price point and inelasticity; highly addictive products; cyclical defensive; ability for some to capture consumer surplus; consistent high margins and ROE. The downsides are: difficulty in developing new IP; high rate of reinvestment.

Imagine being able to sell $5 worth of coca cola to someone and $5000 worth to someone else, suddenly the need to build a massive horizontal distribution platform is terribly wasteful and your efforts are better spent capturing a smaller share of premium clients, which is made possible by the internet and ubiquitous mobile phones.

Today the gaming sector in China is dominated by mobile due to the ubiquitous nature of phones compared to the lack of platform penetration of console and to a lesser extent PC games. As a result, the two Chinese companies which dominate the gaming space, Tencent and Netease, which together control arond 80% market share, were able to leapfrog the traditional console/pc game market and focus largely on mobile and are in my opinion global leaders at the art of capturing consumer surpluses.


The death of (many) brands

Companies with a trusted brand could earn excess economic returns so long as the cost of building the brand costs less than the premium consumers were willing to pay for a product due to the brand. Because brands have historically be very durable (notice the global brands that were built in the 1950 are still dominate today), they created an economic moat that caused these companies to generate outstanding returns for shareholders.

Costco leverages their scale to identify high quality, good value products and deliver them to consumers. This process reduces the value of brands and allows Costco customers to confidently buy non-brand products or products with limited brand recognition. In this way, Costco has managed to earn excess economic returns, even while selling the products in their stores at close to cost.

Now, however, the era of search cost brands is coming to an end. The moats are being breached. Over the long term, we do not believe that these types of brands will provide a significant competitive advantage to their owners and the companies will be forced to compete directly on quality and value instead of earning a return for selling reduced search costs.


China’s electric car push lures global auto giants, despite risks

From high-speed trains to wind turbines, China has long prodded American, European and Japanese companies to hand over their know-how in exchange for access to its exciting new market. Then Chinese companies have used that knowledge and lavish government support to take on foreign rivals. China wants the big players to share their electric car knowledge, too. The foreign automakers face new Chinese regulations that put heavy legal pressure on them to transfer electric-car technology to their local partners.

The joint ventures alone may not make China a leader in electric cars. G.M., Volkswagen and other major automakers have made regular cars with Chinese partners for decades, and China had hoped its automakers would learn how to make their own worldbeating brands. Instead, Chinese automakers grew comfortable making Chevrolets and Volkswagens for local drivers. Only recently have foreign automakers begun exporting Chinese-made cars to buyers back home.

More broadly, global automakers feel that they must grow in a country that has become the world’s largest car market, one almost as big as the American and European markets combined.


Materialize.X is using machine learning to disrupt the $300B engineered wood industry

A lot of engineered wood is created using an adhesive called urea-formaldehyde, which has recently been labeled by the FDA as a toxic carcinogen…The startup has created a patented non-toxic adhesive to serve as an alternative to urea-formaldehyde. Materialize.X plans to license to chemical companies, or engineered-wood manufacturers so they can make the adhesive on site, the method for making this adhesive.

…created software that uses machine learning to take in all those variables and make slight changes to the manufacturing process that can greatly improve the quality of the final product. Examples of these changes are adjusting the amount of adhesive used or increasing the pressure in the bonding process depending on the variables listed above.


The new Texas gold rush: Buying sand for fracking

Texas energy producers have typically bought the millions of pounds of sand that each well requires from mines located far from their drilling fields. After oil prices collapsed in late 2014, though, cost-conscious drillers reconsidered their well designs and recipes for the slurries they blast underground to unleash fuel from shale formations. Many West Texas drillers discovered that they could replace sand they had been shipping from mines 1,300 miles away in Wisconsin with finer grades found in dunes nearby. Doing so eliminates rail costs that sometimes are equal to or more than the sand itself.

The prospect of tens of millions of tons of Permian sand coming to market could drive down sand prices that have been rising nationally, Mr. Handler said. Analysts say that prices rose to as much as $45 a ton earlier in the year, from as little as $15 a ton last year.

Hedge-fund manager Daniel Loeb is among those betting that sand stocks will fall further. In an April letter to his Third Point LLC investors, Mr. Loeb cited the “important shift” from special sand mined in the Midwest to abundant sand within drilling basins, including West Texas.

Superpower India to replace China as growth engine

The number of people aged 65 and over in Asia will climb from 365 million today to more than half a billion in 2027, accounting for 60 percent of that age group globally by 2030, Deloitte said in a report Monday. In contrast, India will drive the third great wave of Asia’s growth – following Japan and China — with a potential workforce set to climb from 885 million to 1.08 billion people in the next 20 years and hold above that for half a century.

“India will account for more than half of the increase in Asia’s workforce in the coming decade, but this isn’t just a story of more workers: these new workers will be much better trained and educated than the existing Indian workforce,” said Anis Chakravarty, economist at Deloitte India. “There will be rising economic potential coming alongside that, thanks to an increased share of women in the workforce, as well as an increased ability and interest in working for longer. The consequences for businesses are huge.”


Why machine learning funds fail

The complexities involved in developing a true investment strategy are overwhelming. Even if the firm provides you with shared services in those areas, you are like a worker at a BMW factory who has been asked to build the entire car alone, by using all the workshops around you. It takes almost as much effort to produce one true investment strategy as to produce a hundred. Every successful quantitative firm I am aware of applies the meta-strategy paradigm. Your firm must set up a research factory where tasks of the assembly line are clearly divided into subtasks, where quality is independently measured and monitored for each subtask, where the role of each quant is to specialize in a particular subtask, to become the best there is at it, while having a holistic view of the entire process.


The case for & against cryptocurrencies (for those tired of all the noise)

The strongest cases for the existence of cryptocurrencies in my mind include: (1) allowing for a decentralized Internet in which value is accrued to infrastructure, protocols and applications that serve market needs; (2) allowing electronic trade across actors who may not know or trust each other without middlemen who take a heavy toll / tax on the transaction; (3) allowing for (the potential of) a more stable currency than one’s own government for citizens who may live under despotic or irresponsible regimes.

The simple case against cryptocurrencies includes three completely related factors: (1) powerful governments who won’t tolerate the loss of monetary control or illegal activities; (2) societal pressure to regulate cryptocurrency will increase as more people are duped, as more fraud is discovered, as more hacks occur and as more market participants collaborate to manipulate the value of the currencies themselves; (3) erosion of trust as first-time cryptocurrency participants get duped, lose money and develop skepticism for the asset.

There is a fascinating story in “The Ascent of Money” by Niall Ferguson in which Ferguson describes how the modern corporation emerged. About 400 years ago merchants from the Netherlands were sending ships to Asia in search of spices widely desired in Europe. More than 50% of all ships that sailed wouldn’t return so groups of people banded together and formed the Dutch East India Company to share the risks and the rewards of their conquests.

This is amongst the first examples of the modern corporation. The company brought back spices and reaped profits that went back into building more ships and sailing back to Asia. The company didn’t distribute the profits to individual shareholders who instead were issued the modern form of a share certificate for their ownership. Because they couldn’t monetize this ownership they started selling shares of their ownership to others, thus perhaps the first stock market and transaction dating back to the early 1600s.

No sooner did people start selling shares in these companies than market speculators started spreading false stories about merchant ships being sunk or about large spice conquests to drive up or down the price of these stocks through false information and manipulation. So oversight became necessary to establish trust in the value of these assets.


What Jamie Dimon got wrong about bitcoin and tulips

Mackay confused two distinct eras. He reports stories from around 1610 about high prices paid for individual bulbs. What he failed to realize is that people were not paying for single flowers, but for the entire breeding stock — or a significant portion of it — of popular new tulip varieties. People have continued to pay higher inflation-adjusted prices for new tulip and lily bulbs to this day.

A quarter century later, a futures market grew up around fractional interests in low-priced, ordinary tulip bulbs. In premodern Europe investment returns were very high, 20 percent or 30 percent per year on low risk investments, but laws and customs prevented anyone not in the merchant class from taking advantage.

Holland accidentally created a loophole by allowing contracts for fractional interests in tulip bulbs for the convenience of the industry. These were needed because the price of popular new bulbs was higher than even rich individuals could afford. In the early 1630s ordinary people discovered that these contracts could serve as money to support business and investment. These contracts then became “monetized,” as happens to all assets used as bases for monetary activity. That means their value decoupled from the use value of the underlying asset and became determined by demand for money services.

By 1637, contracts for fractional interests of low-priced tulip bulbs had risen to 20 times the price of the actual bulbs, reflecting the explosion of economic activity they stimulated. In February 1637, the market collapsed; six weeks later it was outlawed.


What Jamie Dimon is missing about Bitcoin

It’s no secret that Bitcoin and other digital currencies may dramatically fall in value at any time. How can an asset whose value jumps by 20 percent some days, and which no one can accurately value, plausibly not also suffer huge declines? But that’s a long way from Bitcoin being a worthless fraud.

Of course, fiat currencies like the dollar have the backing of a sovereign nation. Digital currencies are obviously far more speculative, have been around for only a few years, and don’t have a government’s underlying support. But almost all currencies today are conjured up from nothing — the euro didn’t even exist 20 years ago — and their value is largely dependent on trust.

His firm conjured up its own currency: Chase Ultimate Reward points, its credit card loyalty program. Millions of customers have accumulated billions of points, trusting in Chase’s promise that this currency can be converted into cash or used for travel and other delights. And they hope that Chase won’t unilaterally choose to devalue them…

But new use cases for digital currencies are just starting to take shape. They are now being used to create value in the way that Silicon Valley has traditionally done so: regulatory arbitrage. Ride-hailing got its start avoiding onerous taxi medallion costs; Airbnb avoided hotel taxes and regulations; and YouTube played fast and loose with copyright rules.

Curated Insights 2017.08.27

Inside Waymo’s secret world for training self-driving cars

Collectively, they now drive 8 million miles per day in the virtual world. In 2016, they logged 2.5 billion virtual miles versus a little over 3 million miles by Google’s IRL self-driving cars that run on public roads. And crucially, the virtual miles focus on what Waymo people invariably call “interesting” miles in which they might learn something new. These are not boring highway commuter miles.

And in both kinds of real-world testing, their cars capture enough data to create full digital recreations at any point in the future. In that virtual space, they can unhitch from the limits of real life and create thousands of variations of any single scenario, and then run a digital car through all of them. As the driving software improves, it’s downloaded back into the physical cars, which can drive more and harder miles, and the loop begins again.

Not surprisingly, the hardest thing to simulate is the behavior of the other people. It’s like the old parental saw: “I’m not worried about you driving. I’m worried about the other people on the road.”

“Right now, you can almost measure the sophistication of an autonomy team—a drone team, a car team—by how seriously they take simulation. And Waymo is at the very top, the most sophisticated.”

And in reality, those 20,000 scenarios only represent a fraction of the total scenarios that Waymo has tested. They’re just what’s been created from structured tests. They have even more scenarios than that derived from public driving and imagination. “They are doing really well,” Peng said. “They are far ahead of everyone else in terms of Level Four,” using the jargon shorthand for full autonomy in a car.


Halliburton and Microsoft do not compute for OPEC

Contrary to conventional wisdom, the oil business is a high-tech one. You don’t map out complex rock formations thousands of feet beneath the ground in three or four dimensions and then drill into them without advanced tools. For example, Total SA, the French oil major, boasts the 19th-most powerful supercomputer in the world, Pangea, which has clocked a speed of more than 5 quadrillion calculations a second (technical note: pretty fast) according to The Top 500 List.

…the average well has less than 10 gigabytes of data associated with it, equivalent to a couple of high-definition movies.

…the company’s teams now have access to more than 80 real-time data streams and sensors embedded in wells, giving them a constantly updated picture of what’s happening beneath the ground. The killer app here, in every sense of the word, is providing crews and their managers with an integrated platform; a suite of sensors and software communicating seamlessly, updating constantly and available to all involved.


Costco is playing a dangerous game with the web

Costco’s reluctance to embrace the web is understandable. Its warehouse club business model is based on selling a limited assortment of bulk-size food and household items at low prices, alongside an ever-changing selection of general merchandise—everything from margarita machines to kayaks. This creates an in-store treasure hunt experience. Both elements are costly and difficult to replicate online.

Potentially more worrisome: Half of Costco’s shoppers are Amazon Prime members, Kantar Retail says, up from 14 percent five years ago. Sharing too many of the same subscribers could be risky, since Planet Retail RNG analyst Graham Hotchkiss says Amazon now offers many bulk-size goods at prices that rival Costco’s. And Amazon’s pending $13.7 billion deal to buy Whole Foods Market Inc. will give it a firm foothold in groceries—the primary reason people shop at Costco, according to Barclays’s Short.


What is Amazon, really?

At last count, Amazon’s delivery infrastructure included more than 180 warehouses, 28 sorting centers, 59 local package delivery stations, and 65 hubs for its two-hour Prime Now deliveries. Investment bank Piper Jaffray estimates that 44% of the US population lives within 20 miles of an Amazon warehouse or delivery station. Amazon’s proposed $13.7 billion acquisition of Whole Foods could add another 431 distribution nodes in bougie neighborhoods to that network.

“Our goal with Amazon Prime, make no mistake, is to make sure that if you are not a Prime member, you are being irresponsible,” Bezos told shareholders in May. The plan is working: 63% of US Amazon users subscribe to Prime, and estimated to reach more than half of American households by the end of the year. Prime doesn’t just lift $99 off of regular Amazon users each year—it’s proven to be a powerful customer loyalty program. The average Prime user spends $1,300 each year on the site, with 78% of Prime users still citing free 2-day shipping as the main reason for coughing up the fee.

The service first reached customers by 2005, and was officially launched in the summer of 2006. Tom Szkutak, Amazon’s CFO at the time, said the business was “exposing the guts of Amazon,” using the knowledge gained from 11 years of building Amazon.com. Today AWS is on a tear. It’s the world’s dominant cloud computing provider, and the nearest competitors aren’t even within shouting distance: Amazon’s servers deliver 34% of the world’s public cloud services, reports Synergy Research Group, while Microsoft, IBM and Google provide 24% combined.


Amazon vs Maersk: The clash of titans shaking the container industry

Manufacturing is new step for Amazon and they won a patent earlier this year to develop a system to rapidly create clothing and other products after a customer order is placed. This forms a cheap and simple method for Chinese exporters as Amazon have effectively wiped out the middle man, acting as a shipbroker for itself and on behalf of smaller companies.

Freight forwarders may find it hard to compete with companies as powerful as Amazon and Maersk, who can afford to develop disruptive technology and prioritize increasing market share over higher profits.

Small independent ship owners will be left behind unless they adapt their business model to seek different shipping routes, for example choosing container lanes that do not feed into deep sea ports where the ultra large container vessels operated by Maersk can only dock.


Great Wall Motor’s better path leads to emerging markets

The Proton purchase not only gives Geely inroads to the Malaysian consumer market but also access to production plants in the region that could be used to manufacture other car brands. Being closer to the end customer would lower production costs. While Proton’s Tanjung Malim plant has the capacity to churn out one million cars annually, it made only 72,000 last year, according to the Malaysian government.

A lean company, analysts estimate Great Wall makes 60 percent of its parts in-house. It spends little on marketing and is the fourth-most-profitable automaker globally by net margin and return on equity. Its return on invested capital ranks number one among 40 manufacturers tracked by Bloomberg Intelligence.


A handful of companies control almost everything we buy — and beer is the latest victim

A whopping 182 beauty brands fall under the massive umbrellas of seven huge manufacturers: Estée Lauder Companies, L’Oréal, Unilever, Procter & Gamble, Shiseido, Johnson and Johnson, and Coty.

A 2015 Morgan Stanley report found that 10 companies controlled 41% of the clothing market. No other retailer had more than 2% of market share. The retailers dominating the market were Walmart, T.J. Maxx, Macy’s, Gap, Kohl’s, Target, Ross Stores, Amazon, Nordstrom, and J.C. Penney.

According to a Bank of America Merrill Lynch chart, in 2014 AB InBev and SABMiller alone controlled about 58% of the beer industry’s $33 billion in global profits.

Winner-takes all effects in autonomous cars

… it seems pretty clear that the hardware and sensors for autonomy will be commodities. There is plenty of science and engineering in these (and a lot more work to do), just as there is in, say, LCD screens, but there is no reason why you have to use one rather than another just because everyone else is. There are strong manufacturing scale effects, but no network effect. So, LIDAR, for example, will go from a ‘spinning KFC bucket’ that costs $50k to a small solid-state widget at a few hundred dollars or less, and there will be winners within that segment, but there’s no network effect, while winning LIDAR doesn’t give leverage at other layers of the stack (unless you get a monopoly), anymore than than making the best image sensors (and selling them to Apple) helps Sony’s smartphone business. In the same way, it’s likely that batteries (and motors and battery/motor control) will be as much of a commodity as RAM is today – again, scale, lots of science and perhaps some winners within each category, but no broader leverage.

Maps have network effects. When any autonomous car drives down a pre-mapped road, it is both comparing the road to the map and updating the map: every AV can also be a survey car. If you have sold 500,000 AVs and someone else has only sold 10,000, your maps will be updated more often and be more accurate, and so your cars will have less chance of encountering something totally new and unexpected and getting confused. The more cars you sell the better all of your cars are – the definition of a network effect.

The more real world driving data that you have, the more accurate you can make your simulation and therefore the better you can make your software. There are also clear scale advantages to simulation, in how much computing resource you can afford to devote to this, how many people you have working on it, and how much institutional expertise you have in large computing projects. Being part of Google clearly gives Waymo an advantage: it reports driving 25,000 ‘real’ autonomous miles each week, but also one billion simulated miles in 2016 (an average of 19 million miles a week).

So, the network effects – the winner-takes-all effects – are in data: in driving data and in maps. This prompts two questions: who gets that data, and how much do you need?

This leads me to the final question: how much data do you really need? Does the system get better more or less indefinitely as you add more data, or is there an S-Curve – is there a point at which adding more data has diminishing returns? That is – how strong is the network effect?


The stereo speaker company giving sight to self-driving cars

Although it will soon face plenty of competition, Velodyne has become the industry’s go-to lidar supplier and is cranking up production to match. Last year, Ford Motor Co. and Chinese Internet giant Baidu pumped $150 million into Velodyne, money the company used to open its “mega-factory” on San Jose’s southern edge.

Lidar works by firing laser beams — thousands per second — at nearby objects and measuring how quickly they bounce back. With the notable exception of Tesla, most companies pursuing autonomous vehicles rely on lidar, along with radar and cameras.

“The prevailing view is that in the near term — at least a decade — you’re not going to be able to execute this safely without lidar,” said Mike Ramsey, research director at Gartner.

“One major automaker told me they had vetted 50 lidar companies,” Ramsey said. “So more than 50 companies exist, but only Velodyne is producing a lidar they can use.”

Now, the race is to cut lidar’s cost. Velodyne’s most popular lidar, about the size of two stacked hockey pucks, sells for $8,000. As it ramps up production, the company hopes to bring prices down to “a few hundred dollars,” Hall said. “We’re in the inventing business, so we’re going to keep working on this thing until we crack that nut.”


The internal combustion engine is not dead yet

Mazda, which now markets no hybrid vehicles, calls the engine Skyactiv-X and says it is scheduled for a 2019 introduction. In simplest terms, the big difference with the new engine is that under certain running conditions, the gasoline is ignited without the use of spark plugs. Instead, combustion is set off by the extreme heat in the cylinder that results from the piston inside the engine traveling upward and compressing air trapped inside, the same method diesel engines use. The efficiency gains come with the ability to operate using a very lean mixture — very little gas for the amount of air — that a typical spark-ignition engine cannot burn cleanly.

…addresses the challenge of gasoline’s future from a somewhat different direction: the practical limitations of battery electric cars. “Holding a gas nozzle, you can transfer 10 megawatts of energy in five minutes,” he said, explaining today’s refueling reality. To recharge a Tesla electric at that rate today, he said, would require “a cable you couldn’t hold.”

By 2050, Dr. Heywood’s studies project, today’s fuel economy could be doubled. “A quarter to a third of that improvement would come from improvements to the vehicle,” he said, in areas like aerodynamics and weight reduction. Other promising areas include variable compression ratios — a technology Nissan plans to introduce next year — and making better use of available fuels.


Wind power is all grown up now

People tend to think of renewable energy companies as the new kids on the block but Vestas Wind Systems A/S, the world’s biggest wind turbine manufacturer, is no pimply teenager. The Danish group entered the turbine business almost 40 years ago and went public in 1998…

The wind industry is consolidating — Siemens merged its wind business with Gamesa in April — and competition is intensifying. This puts pressure on margins and makes it more difficult to lift revenue.

A bigger concern is that more countries are adopting auction-based contract awards. These promote projects that deliver the cheapest electricity as opposed to feed-in tariffs, which guaranteed a fixed electricity price. So life’s getting a little tougher for Vestas.

There are other ways to make money. High-margin maintenance contracts are an increasing share of business. There are opportunities too to upgrade the installed base with those newer, better turbines.


The very symbolic collision of Sotheby’s-Christie’s and Poly-Guardian in China art

If Sotheby’s and Christie’s are purely commercial Giants, then Poly Culture and Guardian are something else. They are certainly Giants, dominating the domestic art auction industry. But Poly in particular is also a direct extensions of the State. Because it turns out, what happens to historic Chinese art is a significant concern to the Chinese government. Part of this sensitivity is about repatriating works that were stolen and misappropriated over the centuries. Many of the works that have been returned can be seen on display at Poly’s headquarters in Beijing.

Poly Auction is now not just one of the top two auction houses in China. It is also the number three art auction house in the world (after Christie’s and Sotheby’s). Their 2013 turnover was over a billion dollars (about one-fourth of Sotheby’s). They sell approximately 10,000 objects each week, with as many as 40 different catalogs per show.

Because at the same time, Poly and Guardian have been expanding internationally. And they are now on Sotheby’s and Christie’s home turf for the first time. Both have moved into Hong Kong. And Poly is now moving aggressively into New York City, where Sotheby’s is headquartered. Thus far, they have focused mostly on finding consignments in the US for sale in China, particularly Chinese collectibles. But Poly’s openly stated ambition is to become the world’s top art auction house. According to CEO Jiang Yingchun, “We are very big in the art auction market in Mainland China but still have a long way to go to become the biggest auction house worldwide”.


It’s hard to keep up with all that lithium demand

Australia is the biggest lithium producer, though Chile and Argentina account for 67 percent of global reserves, according to the U.S. Geological Survey.

Extracting lithium from the salt flats that dot the arid northern regions of the South American countries is a lot easier and cheaper than digging underground for metals like copper. Producers just pump the brine solution into evaporation ponds, harvesting the mineral once the moisture is gone.

With demand expected to keep rising as electric cars gain a bigger share of the global auto fleet, Argentina and Chile are attracting interest from mining companies because it costs about $2,000 to $3,800 a ton to extract lithium from brine, compared with $4,000 to $6,000 a ton in Australia, where lithium is mined from rock.

Of the 39 lithium ventures tracked by CRU, only four have firm commitments, and all of those are in China, adding about 24,000 tons of annual supply. Another 10 projects representing 400,000 tons are rated “probable” — in Canada, Chile, China, Mexico, Argentina and Australia — but probably only about 30 percent will make it into production, CRU said.

“But we have a window of only 25 years to develop these projects because prices can fall again as soon as a replacement to lithium appears.”


Hunt for next electric-car commodity quickens as prices soar

As one of the key components in the new breed of rechargeable batteries and with supply dominated by the Democratic Republic of Congo, prices have surged at four times the pace of major metals in the past year.

The cobalt market is in a 5,500-ton deficit, according to CRU, with global supply contracting 3.9 percent in 2016.

“The mix of iron and cobalt is tricky. Cobalt is already mined as a byproduct of copper and nickel, but iron has the most negative impact on cobalt, which means processing would be more difficult and more expensive.”

Aging Japan wants automation, not immigration

In the absence of large-scale immigration, the only viable solution for many domestic industries is to plow money into robots and information technology more generally.

With unemployment down to 2.8 percent, companies are increasingly realizing they need to pay up to attract and keep qualified personnel. The other option — increased immigration — is politically difficult.

Bank of America Merrill Lynch forecast IT investment in Japan to rise as much as 9 percent annually in coming years, with the difference in software investment per worker versus the U.S. falling to 5 to 1 by 2020 from about 10 to 1 now.


Who really owns American farmland?

Farmland, the Economist announced in 2014, had outperformed most asset classes for the previous 20 years, delivering average U.S. returns of 12 percent a year with low volatility.

Today, the USDA estimates that at least 30 percent of American farmland is owned by non-operators who lease it out to farmers. And with a median age for the American farmer of about 55, it is anticipated that in the next five years, some 92,000,000 acres will change hands, with much of it passing to investors rather than traditional farmers.

It’s a tenuous predicament, growing low-cost food, feed, and fuel (corn-based ethanol) on ever-more-expensive land, and it raises a host of questions. Is this a sustainable situation? What happens to small farmers? And are we looking at a bubble that will burst?

In practice, our best hope of true stewardship of the land will come from enlightened, committed owner-farmers. But the trend toward treating farmland as a financial investment, and the high prices that have come with it, make it harder and harder for new young farmers to enter the field.

By buying land in other countries and farming it, foreign buyers are able to support their domestic food supply and other markets that depend on agriculture without having to compete for essential products on the global market.

The government of China now controls more than 400 American farms consisting of a hundred thousand acres of farmland, with at least 50,000 in Missouri alone, plus CAFOs (concentrated animal feeding operations), 33 processing plants, the distribution system—and one out of every four American hogs.


Yesterday’s “plastics” are today’s crypto tokens

Our ability to profit from our investments relies on two things: having the resources needed to purchase the asset and then having a way to sell it — a concept known as liquidity. Tokenizing real-world assets will allow buyers to access assets never before within their reach, and sellers to move assets that were previously difficult to unload. The secret lies in the possibility of fractionalization.

Imagine unlocking cash from the equity in your home without having to borrow or pay interest. Tokenize your home and sell fractions to the public. Buy the tokens back, or pay the investors their value at the time the property is sold.

In the future, you’ll be able to tokenize the value of unused bedrooms and backyards in your home. You’ll be able to tokenize use of your vehicle for Uber driving while you’re away on travel. You’ll even be able to tokenize access to your phone so marketers have to pay you tokens in order to gain access to your attention. Yes, this will happen.

At 5,4000 pounds, the Tesla is no lightweight, and the Aventador is a good 1,200 pounds lighter. But the Ludicrous + enabled vehicle not only beats the Lambo, it sets a world record for the quickest SUV with a quarter mile time clocking in at 11.418 seconds at nearly 118 miles-per-hour.

Twitter Snacks 2017.07.12

 

 

 

 

 

 

Curated Insights 2017.6.25

Conglomerates didn’t die. They look like Amazon

Amazon’s role as both a distributor and cloud provider for many of its competitors gives it an unfair advantage. This dual role also enables a platform to exploit information collected on companies using its services to undermine them as competitors.

…it has the potential to become so dominant in so many areas that its impact could be more than simply lowering prices for consumers; it could put large companies out of business…Were that to happen, this new breed of Silicon Valley conglomerates may become more powerful — and resilient — than the 20th-century conglomerates of yore.


Amazon’s new customer

Apple’s goal was not to build a phone but to build an even more personal computer; their strategy was not to add on functionality to a phone but to reduce the phone to an app; and their tactics were not to duplicate the carriers but to leverage their connection with customers to gain concessions from them.

Amazon’s goal is to take a cut of all economic activity.

Amazon is building out a delivery network with itself as the first-and-best customer; in the long run it seems obvious said logistics services will be exposed as a platform.

…transform the Whole Foods supply chain into a service architecture based on primitives: meat, fruit, vegetables, baked goods, non-perishables.


Hubert Sagnières, Essilor CEO, on an eyewear megamerger

Essilor, alongside non-governmental organisations, trains locals to do simple eye tests. They can then order cheap lenses costing between $3 to $4 from their mobile phones. In the long term, Essilor wants to tap into the 2.5bn people around the world who need corrective vision but do not have it because they cannot yet afford it.

“We are not meeting the demand, we are creating it.”


Wall Street blames shale, but shale points the finger right back

“The biggest problem our industry faces today is you guys. You don’t reward capital efficiency, you reward growth.

“So just think about trying to look at situations where capital efficiency actually can be rewarded and that’s not a company-specific comment, it’s more of a generic, because the more the capital-efficient companies are rewarded in the marketplace and growth is not, then you guys will help us help ourselves and we’ll be in a better place, but if you keep rewarding growth without return, you’re just going to help compound the problem that we have today, where I think a lot of us feel very much in need of showing growth because if you’re a growth and value investor, you need to see little bit of both.”

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