Curated Insights 2018.06.29

75% of bull markets are nothing but multiple expansion

Hedge funds’ best ideas? Those are just stocks they’re dumping

“This suggests that the pitched stocks were their ‘best ideas’ but not likely any longer. Returns of pitched stocks diverged from market immediately after the pitches—long pitches spike up and short pitches spike down. These results suggest that these investment conferences are closely followed by other investors and have high market impacts. The majority of the outperformance occurs before the pitches. Outperformance after the pitches are likely driven by inflows from other investors that follow these investment conferences.”

Amazon’s scale in Japan challenges rivals and regulators

In the wake of Amazon’s rise, Rakuten, its largest Japanese rival, which operates the country’s biggest online marketplace, has expanded aggressively into financial technology, mobile phones and home-sharing. Still, to compete better against Amazon, the company is aiming to create its own logistics and delivery network within two years. Unlike its US rival, it had left warehouse and inventory management to the retailers that use its marketplace rather than building its own proprietary systems.

Amazon held a 23 per cent share in Japan’s internet retail market compared with Rakuten’s 18.5 per cent share last year, after overtaking its Japanese rival in 2016, according to Euromonitor. Other industry data shows the two rivals in a tight race.

“There is no way rivals can compete against Amazon. They invest in the best-in-class technology with little regard for profits so that they can create a sophisticated logistics operation,” said Shinichiro Nishino, a former Amazon executive who was hired by Mr Bezos to launch the business in Japan.


Amazon wants the whole package in delivery

Amazon plans to provide entrepreneurs known as “Delivery Service Partners” with guaranteed delivery volume, use of Amazon’s logistics technology, and discounts on Amazon-branded delivery van leases, vehicle insurance, Amazon uniforms, and even fuel. The company envisions hundreds of owners operating fleets of 20 to 40 vehicles and eventually having “tens of thousands of delivery drivers across the U.S.,” Amazon trumpeted in its press release.

The independent contractor owner-operator model is similar to how FedEx handles its last-mile deliveries, while UPS delivery trucks are staffed by unionized employees, Blackledge writes. Amazon has been steadily encroaching on all parts of the traditional delivery firms’ turf in recent years, with initiatives including a delivery service for small businesses, building its own air cargo hub, and even expanding into ocean freight shipping. Amazon already boasts a fleet of 7,500 trucks, 35 aircraft, and over 70 delivery centers. This pales in comparison, however, to FedEx’s stated world-wide armada of 650 planes, 150,000 delivery trucks, 400,000 employees, and 4,800 fulfillment facilities.

Danny Meyer’s recipe for success

Rather than rolling out replicas of USC in other cities, as is a common tactic for ambitious restaurant empire builders, Meyer employed a different strategy. Sticking close to home, Meyer expanded by replicating his enlightened hospitality, cultivating regulars, and stimulating buzz by endowing each new restaurant with its own memorable menu and décor.

“The fact that Danny has been so successful translating the culture across so many different restaurant brands, and engaging a lot of people to help him, is key to understanding the quality and influence of the culture he inspired. He happens to be in the restaurant business, but if he had been a university president, you would have a different kind of college. When he looks at you, he sees you. He’s not playing the role of an executive. He’s a hugger. He trusts his gut, and his gut is always working.”

Meyer never set out to be a business mogul. He simply wanted to create a homey, unpretentious, and affordable Michelin star–quality restaurant that did not exist in New York in the 1980s. Unlike the dominant, ultra-expensive, and exclusive French haute cuisine establishments, such as Le Pavillon and Lutèce, which oozed effeteness, Meyer wanted USC customers to feel comfortable asking their server, or even the sommelier, to explain and pronounce menu items. He wanted people walking in without a reservation to feel welcome ordering a full-course meal at the bar.

Stewarding the culture in association with every business decision is the main responsibility and passion for Meyer, who recently turned 60, and is not slowing down. Also on his agenda? Creating a few more fine casual brands, such as Shake Shack and Tender Greens, and making them all as essential to millennials as McDonald’s once was to boomers.

All the questions you wanted answered about Bird Scooters and their recent $300 million funding

Capital. Because Bird was first to market, extremely innovative, quick to hire talented leadership and an experienced founder it was able to raise $125 million in an extraordinarily short period of time. That has allowed the company to launch in many markets, build amazing applications, design future versions of the scooter and monetize while many companies are still just drawing up their go-to-market plans. This allowed Bird to then raise $300 million from some of the top VCs in the country. Capital of course drives scale advantages and when you have “winner take most” markets it also has a way of scaring away some investors from investing in the 3–5th “me too” competitors. You can expect some strong competition, but it’s unlikely that there will be 5 great scooter companies.

Density. One huge advantage the early-movers have is “density.” A dockless eScooter solution is only compelling if you believe that you’ll always be able to find a scooter in a relatively short walking distance or it defeats the purpose. If Bird has thousands of scooters in a neighborhood (and if it can acquire these scooters at cheaper prices due to scale advantages) then it’s significantly more difficult for new entrants to launch without serious capital and it’s hard to get serious capital from investors who perceive you’re late to the game.

Data. Bird already has an enormous lead in data collection. What appears as just an electric-powered scooter is really a computer with wheels. Between our on-board CPUs and your mobile phone companions we have an enormous amount of data on transportation routes, where riders want to pick up scooters in the morning and where they leave them in the evening. This not only allows Bird to have advantages in right-sizing city inventory levels and proper placement to maximize yield, but the company has already been providing this data to cities to help them better plan their cities of the future. We clearly need a world in which gas cars don’t dominate dense city environments and providing this data to cities is a great start in that direction.

Mechanics. What is even more remarkable than “chargers” is how Bird has build out local teams of mechanics in each market, providing large legions of skilled labor the ability to earn meaningful dollars for repairs to wheels, brakes, cables, batteries, electronics, etc. Local politicians wanting to see local job creation rather than jobs at tech firms all migrating to San Francisco should be heartened. Because each market won’t have unlimited labor suppliers of repair people and because the largest services can pay the best, there is inherent advantage in capturing the early pools of mechanics.


How WeWork’s revenue-sharing leases could affect property investors

Both WeWork and THRE are keeping details of the revenue-sharing lease under wraps but, broadly, it means that WeWork does not have to pay a fixed amount of rent. If it is doing badly and cannot attract tenants, it pays less — or nothing — to its landlords, THRE and PFAE. Conversely, if it does well, it can pay more.

This has implications for property investors. By offering an uneven and potentially volatile income stream in place of a steady and fixed one, a lease of this kind changes the bond-like nature of property as an asset class into something closer to an equity.


The business of death has a bright future in Japan

The funeral business has a bright future in Japan, where deaths have outpaced births every year since 2007. Almost 30 percent of the population is 65 or older. And this year is a tipping-point of sorts. After 2018, the number of Japanese women of child-bearing age will decline so sharply that by 2025 the population is forecast to drop by four million people, equivalent to the population of Los Angeles.

Trump tariffs would be bad for the entire global auto industry, says Moody’s

Daimler AG, BMW and Volkswagen AG all import more than half the vehicles they sell in the U.S. from other countries. The breakdown is 50% for Daimler, 70% for BMW and above 80% for VW. “However, these imports represent only about 12% of BMW’s total annual unit sales, about 8% of Daimler’s global light vehicle sales, and around 3% of VW group sales (figures include sales from Chinese joint ventures),” said Clark. “On the other hand, BMW and Daimler export more than half the vehicles they produce at their U.S. assembly plants. Fiat Chrysler Automobiles NV produces about half its vehicles in the U.S., with the remaining units imported mainly from Mexico and Canada.”

Moody’s estimates that Toyota exports roughly 22% of cars produced in Japan to the U.S., while Nissan exports about 31% of its domestic production to the U.S. market. Honda has the most diversified production of the three and a low ratio of exports to the U.S. but is planning to increase exports in 2018. Korean car makers Hyundai Motor Co. and Kia Motors Corp. import a bit more than half their vehicles sold in the U.S., mostly from Korea but also from Mexico. Both were planning to produce more SUVs and crossovers in the U.S. in the next two years.

Mexico would be hurt more than other markets as many big car makers have assembly plants there to serve the U.S. market. Mexico produced 3.8 million vehicles in 2017, 82% of which were exported. Of that total, 84% went to the U.S. and Canada. In the first quarter of 2018, the car industry accounted for 2.9% of Mexico’s GDP, meaning tariffs would hurt more than the car manufacturers and auto-parts suppliers.

One group that will be especially hard hit is U.S. car dealers, which rely heavily on imports. “These companies have minimal U.S.-produced vehicle penetration to offset reduced sales from price increases on imported vehicles,” said the report.

Where 3 million electric vehicle batteries will go when they retire

By 2030, there will be a 25-fold surge in battery demand for EVs. Automobiles have overtaken consumer electronics as the biggest users of lithium-ion batteries, according to Paris-based Avicenne Energy. By 2040, more than half of new-car sales and a third of the global fleet –- equal to 559 million vehicles — will be electric. By 2050, companies will have invested about $550 billion in home, industrial and grid-scale battery storage, according to BNEF.

Introducing a16z crypto

Trust is a new software primitive from which other components can be constructed.

The new primitive of trust also means that 3rd-party developers, entrepreneurs, and creators can build on top of crypto-powered platforms without worrying about whether the rules of the game will change later on. In an era in which the internet is increasingly controlled by a handful of large tech incumbents, it’s more important than ever to create the right economic conditions for developers, creators, and entrepreneurs. Trust also enables new kinds of governance where communities collectively make important decisions about how networks evolve, what behaviors are permitted, and how economic benefits are distributed.

Cryptogoods can unlock new experiences and business models for games and other forms of media.


Ten lessons from Michael Batnick’s book ‘Big Mistakes’

Ben Graham understood that no approach works all the time. There are time and place for everything. Markets evolve and some concepts stop working. A margin of safety doesn’t matter during periods of forced liquidation, especially when you are leveraged to the hill.

A high IQ guarantees you nothing! This is one of the hardest things for newer investors to come to grips with, that markets don’t compensate you just for being smart.” and “Intelligence in investing is not absolute; it’s relative. In other words, it doesn’t just matter how smart you are, it matters how smart your competition is.

The most disciplined investors are intimately aware of how they’ll behave in different market environments, so they hold a portfolio that is suited to their personality. They don’t kill themselves trying to build a perfect portfolio because they know that it doesn’t exist.

Curated Insights 2018.06.24

Tails, you win

Correlation Ventures crunched the numbers. Out of 21,000 venture financings from 2004 to 2014, 65% lost money. Two and a half percent of investments made 10x-20x. One percent made more than 20x return. Half a percent – about 100 companies – earned 50x or more. That’s where the majority of the industry’s returns come from. It skews even more as you drill down. There’s been $482 billion of VC funding in the last ten years. The combined value of the ten largest venture-backed companies is $213 billion. So ten venture-backed companies are valued at half the industry’s deployed capital.

The S&P 500 rose 22% in 2017. But a quarter of that return came from 5 companies – Amazon, Apple, Facebook, Boeing, and Microsoft. Ten companies made up 35% of the return. Twenty-three accounted for half the return. Apple alone was responsible for more of the index’s total returns than the bottom 321 companies combined. The S&P 500 gained 108% over the last five years. Twenty-two companies are responsible for half that gain. Ninety-two companies made up three-quarters of the returns. The Nasdaq 100 skews even more. The index gained 32% last year. Five companies made up 51% of that return. Twenty-five companies were responsible for 75% of the overall return.


16 years late, $13B short, but optimistic: Where growth will take the music biz

The primary problem, however, is how the major labels monopolize royalty payments. Spotify and Apple Music take roughly 30% of total revenues (which goes to operating costs, as well as customer sales tax and platform fees), with the remaining 70% paid out in royalties. Out of this remainder, the major labels keep roughly 70%, with 15% going to performers and 15% to composers. And remember, a hot song often boasts a handful of writers and several performers, each of whom will share in the net royalty (Spotify’s most streamed track in 2017, Ed Sheeran’s “Shape of You,” counts six writers; Kanye West’s 2015 hit “All Day” had four performers and 19 credited writers).

A common rejoinder to this argument is that growth in subscriptions will solve the problem – if everyone had Spotify or Apple Music, per-stream rates would remain low, but gross payments would increase substantially. There are three limits to this argument. First, prices would likely need to drop in order to drive additional penetration. In fact, they already are as the major services embrace student pricing and family plans (which cost 50% more but allow four to six unique accounts): Over the past three years, premium user ARPU has fallen from $7.06 per month to $5.25. To this end, family plans exert significant downward pressure on per-stream rates, as the number of streams grows substantially more than revenue. For related reasons, the industry is also unlikely to return to the days where the average American over 13 spent $80-105 a year (1992-2002). Even if every single American household subscribed to Spotify or Apple Music, per capita spend would be around $65-70. This is still more than twice today’s average of $31, but such penetration is unlikely (in 2017, only 80% of American mobiles were smartphones). Put another way, much of the remaining growth in on-demand streaming will come from adding additional users to existing subscriptions. While this increases total revenue per subscription (from $120 to $180), it drops ARPU to at most $90 and its lowest, $20.

Second, growth in on-demand music subscriptions is likely to cannibalize the terrestrial and satellite radio businesses. In 2017, SiriusXM (which has the highest content costs per listener hour in the music industry) paid out $1.2B in US royalties, roughly 33% of that of the major streaming services. US terrestrial broadcast revenue generates another $3B+ in annual royalties. These formats are rarely considered when discussing the health of the music industry, even though one reflects direct consumer spend. But they provide significant income for the creative community (though notably, terrestrial radio royalties compensate only composers, not performers). As on-demand streaming proliferates and cannibalizes more terrestrial/satellite radio listening (still more than half of total audio time in the United States), streaming royalties will continue to grow – but much of this will come at the expense of radio royalties.

Streaming services have an opportunity to cut out labels by forming direct-to-artist deals or establishing their own pseudo-label services. Not only has this long been predicted, it’s been incubated for years. Since 2015, the major services have cultivated exclusive windows and radio shows with major stars, including Beyoncé, Kanye West and Drake. While this construct still went through the label system, it generates clear business cases for further disintermediation.


How Netflix sent the biggest media companies into a frenzy, and why Netflix thinks some are getting it wrong

Hastings has never really feared legacy media, said Neil Rothstein, who worked at Netflix from 2001 to 2012 and eventually ran digital global advertising for the company. That’s because Hastings bought into the fundamental principle of “The Innovator’s Dilemma,” the 1997 business strategy book by Harvard Business School professor Clayton Christensen. “Reed brought 25 or 30 of us together, and we discussed the book,” Rothstein said of an executive retreat he remembered nearly a decade ago. “We studied AOL and Blockbuster as cautionary tales. We knew we had to disrupt, including disrupting ourselves, or someone else would do it.”

BTIG’s Greenfield predicts Netflix will increase its global subscribers from 125 million to 200 million by 2020. Bank of America analyst Nat Schindler estimates Netflix will have 360 million subscribers by 2030. Netflix estimates the total addressable market of subscribers, not including China, could be about 800 million.

Netflix has another edge in the content wars. While networks make decisions on TV ratings, Netflix plays a different game. Its barometer for success is based on how much it spent on a show rather than hoping every show is a blowout hit, said Barry Enderwick, who worked in Netflix’s marketing department from 2001 to 2012 and who was director of global marketing and subscriber acquisition. Since Netflix is not beholden to advertisers, niche shows can be successful, as long as Netflix controls spending. That also gives Netflix the luxury of being able to order full seasons of shows, which appeals to talent.

“Reality is, the biggest distributor of content out there is totally vertically integrated,” said Stephenson. “This happens to be somebody called Netflix. But they create original content; they aggregate original content; and they distribute original content. This thing is moving at lightning speed.”

Hastings derived many of his strategy lessons from a Stanford instructor named Hamilton Helmer. Hastings even invited him to Netflix in 2010 to teach other executives. One of Helmer’s key concepts is called counter-positioning, which Helmer defines as: “A newcomer adopts a new, superior business model which the incumbent does not mimic due to anticipated damage to their existing business.”

Google’s half-billion bet on JD.com

With the second-largest share of China’s B2C e-commerce market after Alibaba’s Tmall, JD.com already sells most major multinational consumer brands within China. Among CPG brands, 100% of home care and 95% of personal care brands are present on the platform. Gartner L2’s recent Digital IQ Index: Beauty China finds that 97% of mass beauty brands are sold on JD.com, either through brand flagships or JD.com-operated stores. Premium beauty brand presence is slightly lower at 77%. International luxury brands have generally been more wary of mass-market e-tailers, but JD.com has scored major names like Saint Laurent and Alexander McQueen since the launch of its luxury app Toplife and white-glove delivery service.


Google places a $550 million bet on China’s second-largest e-commerce player

For its part, JD.com said it planned to make a selection of items available for sale in places like the U.S. and Europe through Google Shopping — a service that lets users search for products on e-commerce websites and compare prices between different sellers. When retailers partner with Google, it gives their products visibility and makes it convenient for consumers to purchase them online. For the tech giant, its shopping service is important in helping to win back product searches from Amazon and to stay relevant in the voice-powered future of e-commerce.


Google is training machines to predict when a patient will die

Google has long sought access to digital medical records, also with mixed results. For its recent research, the internet giant cut deals with the University of California, San Francisco, and the University of Chicago for 46 billion pieces of anonymous patient data. Google’s AI system created predictive models for each hospital, not one that parses data across the two, a harder problem. A solution for all hospitals would be even more challenging. Google is working to secure new partners for access to more records.

A deeper dive into health would only add to the vast amounts of information Google already has on us. “Companies like Google and other tech giants are going to have a unique, almost monopolistic, ability to capitalize on all the data we generate,” said Andrew Burt, chief privacy officer for data company Immuta. He and pediatric oncologist Samuel Volchenboum wrote a recent column arguing governments should prevent this data from becoming “the province of only a few companies,” like in online advertising where Google reigns.

Adobe could be the next $10 billion software company

“The acquisition of Magento will make Adobe the only company with leadership in content creation, marketing, advertising, analytics and now commerce, enabling real-time personalized experiences across the entire customer journey, whether on the web, mobile, social, in-product or in-store. We believe the addition of Magento expands our available market opportunity, builds out our product portfolio, and addresses a key underserved customer need.”

Both have a similar approach to the marketing side, while Salesforce concentrates on the customer including CRM and service components. Adobe differentiates itself with content, which shows up on the balance sheet as the majority of its revenue .


After 20 years of Salesforce, what Marc Benioff got right and wrong about the cloud

Cloud computing can now be “private”: Virtual private clouds (VPCs) in the IaaS world allow enterprises to maintain root control of the OS, while outsourcing the physical management of machines to providers like Google, DigitalOcean, Microsoft, Packet or AWS. This allows enterprises (like Capital One) to relinquish hardware management and the headache it often entails, but retain control over networks, software and data. It is also far easier for enterprises to get the necessary assurance for the security posture of Amazon, Microsoft and Google than it is to get the same level of assurance for each of the tens of thousands of possible SaaS vendors in the world.

The problem for many of today’s largest SaaS vendors is that they were founded and scaled out during the pre-cloud-native era, meaning they’re burdened by some serious technical and cultural debt. If they fail to make the necessary transition, they’ll be disrupted by a new generation of SaaS companies (and possibly traditional software vendors) that are agnostic toward where their applications are deployed and who applies the pre-built automation that simplifies management. This next generation of vendors will put more control in the hands of end customers (who crave control), while maintaining what vendors have come to love about cloud-native development and cloud-based resources.

What’s so special about 21st Century Fox?

The attraction of Fox’s movie studio is clear. 20th Century Fox owns blockbuster franchises like “X-Men” and “Avatar,” as well as a highly regarded arthouse-movie shop in Fox Searchlight. All told, Fox’s studios collected more than $1.4 billion at the box office last year, according to Box Office Mojo.

One is the company’s 39 percent stake in Sky, the European satellite and broadband internet provider, which is already the subject of a bidding war between Comcast and Fox. Here’s what DealBook wrote about the attraction of Sky last week: Based in London, the broadcaster and internet service provider has 23 million customers in five countries, and it owns valuable broadcasting rights to English Premier League games, Formula One races and other sporting events. It also produces its own entertainment programs and has a streaming service, Now TV.

The other is Star, one of India’s biggest broadcasters, which operates 60 channels and the mobile streaming service Hotstar. Neither Comcast nor Disney has a meaningful presence in the fast-growing India market. Owning one of the country’s top content creators and distributors would give either company both a wealth of locally produced content and platforms on which to provide its other movies and TV shows.


Disney tests pricing power at theme parks

Raising prices—currently around $100 on average days and more than $120 during “peak” times around holidays—could mitigate tourist appetite and increase Disney’s profits. Internal projections at Disney show that even after raising prices at roughly double the rate of inflation over the past five years, it could charge much more than it currently does without driving away too many customers, a person familiar with the company’s parks operations said. Disney parks executives are working on adopting a dynamic pricing model similar to airlines, in which prices fluctuate depending on when a ticket is purchased, this person said.

Disney doesn’t release annual attendance figures for its parks, but more than 38.8 million people visited its domestic locations in 2017, an annual increase of about 1.3%, according to the Themed Entertainment Association trade group. Rising prices and attendance at the parks have contributed to strong growth in the company’s parks and resorts division in recent years. Annual income for the segment has grown more than 70% since 2013, hitting $3.8 billion in 2017.

These are the world’s biggest disruptors (and how the disrupteds are fighting back)

According to Barclays, historically the competitive advantage of legacy consumer focused businesses depended on either: 1) creating a monopoly⁄oligopoly in supply (creating a “scarce resource” in the process), or 2) controlling distribution by integrating with suppliers. Here, the fundamental disruption of the internet has been to turn this dynamic on its head by dominating the user experience. Barclays explains further:

First, while the mega-tech internet companies have high upfront capital costs, their user base is so large that the capital costs per user are insignificant, specially relative to revenue generated per user. This means that the marginal costs of serving another customer is effectively zero, thus neutralizing the advantage of exclusive supplier relationships that were leveraged by legacy distributors. Secondly, the internet has led to the creation of infinitely scalable networks that commoditize⁄modularize supply of “scarce resources” (thus disrupting the legacy suppliers of those resources), making it viable for the disrupting internet company to position itself as the key beneficiary of the industry‘s disruption by integrating forward with end users⁄consumers at scale.

As a result of the disruption, the user experience has become the most important factor determining success in the current environment: the disruptors win by providing the best experience, which earns them the most consumers⁄users, which attracts the most suppliers, which enhances the user experience in a virtuous cycle. This is also why so many legacy businesses find themselves unable to compete with runaway disruptors, whose modest advantage quickly becomes an insurmountable lead due to the economics of scale made possible by the internet. This has resulted in a shift of value from the disrupted to the disruptors who modularize⁄commoditize suppliers, integrate the modularized suppliers on their platform, and distribute to consumers⁄users with which they have an exclusive relationship at scale.

This further means that the internet enforces strong winner-take-all effects: since the value of a disruptor to end users is continually increasing it is exceedingly difficult for competitors to take away users or win new ones. This, according to Barclays, makes it difficult to make antitrust arguments based on consumer welfare (the standard for U.S. jurisprudence), but ripe for EU antitrust regulation (which considers monopolistic behavior illegal if it restricts competition).

Japan robot makers outperform Europeans in profitability

Fanuc, Yaskawa Electric and the other two top players worldwide, ABB of Switzerland and Germany’s Kuka, together hold more than 50% of the global market for industrial robots, Nikkei estimates. Fanuc is strong in numerical control devices for machine tools, while Yaskawa boasts expertise in motor technologies. On the European side, ABB is known for dual-arm robots and supplies a wide array of manufacturing equipment, while Kuka’s strength lies in automotive production equipment such as welding robots.

Fanuc is far ahead of the other three in margin, but Yaskawa has boosted its number in recent years. Its margin rose to 9% last fiscal year, surpassing ABB’s 7% and marking the first time in 14 years that the Japanese duo each logged better margins than their two European rivals. In-house production of core component motors helps the Japanese players secure wider margins, said Yoshinao Ibara of Morgan Stanley MUFG Securities. Fanuc’s thoroughly automated production processes also contribute to high profitability.


Why aren’t we all buying houses on the internet?

“The old idea that real estate is never going to change, that we’re going to pay 6 percent, is completely untrue,” argues Glenn Kelman, the CEO of Seattle-based Redfin, a publicly traded brokerage whose calling card is lower commissions. For Kelman, the rush of cash into real estate startups feels like vindication for a corporate model that investors have regarded with skepticism. Redfin’s low-fee model relies on an army of in-house agents who trade typical commissions for the volume that’s possible with internet-generated leads. A Redfin world isn’t a world without real estate agents, but it is one where fewer agents do more. The nation’s 1.4 million working real estate agents do not particularly like Redfin.

Zillow has a different approach. The company hasn’t disrupted the traditional agent model; on the contrary, it’s dependent on it. In the first quarter of 2018, Zillow raked in $300 million in revenue (Redfin’s revenue for all of 2017 was $370 million); more than 70 percent of that came from the company’s “Premier Agents,” who pay for prime placement on the site to generate leads. In becoming an iBuyer (the industry’s term of art, short for “instant buyer”), the company won’t bite the real estate–brokering hand that feeds it. If anything, the pivot provides a lucrative opportunity for local agents to cement their relationships with a company that is trying to become an industrial-scale homebuyer.

Zillow also isn’t the first company to try acting as a middleman. San Francisco–based Opendoor has made tens of thousands of offers on homes, mostly in Sun Belt cities like Phoenix and Dallas. These places are an easier market than New York or San Francisco: The housing stock is newer, cheaper, and more suburban—which is to say, self-similar. Transactions taxes tend to be lower. The company sees itself as competing against seller uncertainty. “[Zillow] keep[s] the agents at the center of the transaction, which is in line with their business model,” says Cristin Culver, head of communications for Opendoor. “And we keep the customer at the center, which is really our North Star, and that’s the difference.” The company’s rapid appraisals make it possible for sellers to skip agents on the first transaction, and after doing some small renovations (paint, HVAC, basic repairs), Opendoor’s “All Day Open House” allows buyers to find and unlock the house themselves with a smartphone. Easy, right? And yet most of them come with an agent, and the company says it’s one of the biggest payers of commissioners in its markets today.*

Why Japan’s sharing economy is tiny

A generous estimate of the sharing’s economy value in Japan is just ¥1.2trn yen ($11bn), compared with $229bn for China. “It’s a very difficult situation,” says Yuji Ueda of Japan’s Sharing Economy Association. Almost 29m tourists visited Japan last year; the goal is to attract 40m by 2020, when Tokyo hosts the Olympics. But the number of hotel rooms is not keeping up with demand.

Indonesia ecommerce through the eyes of a veteran

50% of all ecommerce orders are still limited to JABODETABEK (The Greater Jakarta Area) while the next 30% are in the rest of Java. This leaves 20% spread unevenly throughout Indonesia. Lots of marketing dollars (and education) will have to be spent outside JABODETABEK to push more traffic and conversion online.

Social commerce is massive in Indonesia and it is believed that transactions happening via Facebook and Instagram may be equally as big as the ‘traditional’ ecommerce. As of now, there is no official way to track how big this market is but looking at the data from various last mile operators based on non-corporate customers, this market share is between 25% and 35% of their volumes and has been constantly growing.

Domestic ecommerce supply chain design is becoming more critical in ensuring lower OPEX. Decentralisation of distribution centres are happening with various major marketplaces and 3PL investing in distribution centers (DC) outside JABODETABEK with the objective of bringing products closer to market and also reducing the last mile cost. With a long term view, some too have started investing in having a presence in 3rd Tier Cities outside Java, in line with the government’s infrastructure development.


Malaysia’s economy more diversified than thought

While commodities make up about 20% of total exports, electronics constitute an even larger portion: 37% in 2017. Even when oil prices were at their peak in 2012, commodities comprised 30% of total exports versus electronics at 33%.

Higher oil prices add to the government’s fiscal revenue. We estimate that for every 10% rise in global oil prices, Malaysia’s current account increases by about 0.3 percentage points of GDP after four quarters.

Government estimates suggest that every US$1 per barrel increase in oil prices adds about RM300mil to revenue. That said, oil revenue is only budgeted at 14.8% of revenue for 2018 compared with the peak in 2009 when it constituted some 43% of total fiscal revenue.


SEC says Ether isn’t a security, but tokens based on Ether can be

For the SEC, while cryptocurrencies like bitcoin and ether are not securities, token offerings for stakes in companies that are built off of those blockchains can be, depending on the extent to which third parties are involved in the creation or exchange of value around the assets. The key for the SEC is whether the token in question is being used simply for the exchange of a good or service through a distributed ledger platform, or whether the value of the cryptocurrency is dependent on the actions of a third party for it to rise in value.

“Promoters, in order to raise money to develop networks on which digital assets will operate, often sell the tokens or coins rather than sell shares, issue notes or obtain bank financing. But, in many cases, the economic substance is the same as a conventional securities offering. Funds are raised with the expectation that the promoters will build their system and investors can earn a return on the instrument — usually by selling their tokens in the secondary market once the promoters create something of value with the proceeds and the value of the digital enterprise increases. Just as in the Howey case, tokens and coins are often touted as assets that have a use in their own right, coupled with a promise that the assets will be cultivated in a way that will cause them to grow in value, to be sold later at a profit. And, as in Howey — where interests in the groves were sold to hotel guests, not farmers — tokens and coins typically are sold to a wide audience rather than to persons who are likely to use them on the network.”


Study: Charts change hearts and minds better than words do

Through survey experiments, Nyhan and Reifler arrived at a surprising answer: charts. “We find that providing participants with graphical information significantly decreases false and unsupported factual beliefs.” Crucially, they show that data presented in graphs and illustrations does a better job of fighting misperceptions than the same information presented in text form.

Regional Notes 2018.05.18

Japan seeks private sector’s help with blowout health costs

Faced with an aging crisis that’s projected to push up heath-care spending by more than 50 percent in the decade through 2025, the economy ministry is leading efforts for local governments to draw on the expertise of private companies.

The focus in Japan is preventive medicine, which could in time cut trillions of yen from government spending, according to Shinichiro Okazaki, an official overseeing the effort at the economy ministry in Tokyo. The nation’s annual health-care spending is forecast to reach 54 trillion yen ($500 billion) in 2025, according to the health ministry.


Short-term transitional issues expected in shift back to SST

“GST as you know covers everyone, retailers and traders. On the other hand, sales tax only covers manufacturers while services tax covers certain prescribed services such as professional services, so there must be a thought process on the transition to SST. Also there are still GST issues hanging around such as liabilities to be settled, so having transitional rules in place is going to be a challenge, and it is not something that can be done overnight.”

Meanwhile, there is the issue of how the government would make up for the shortfall in revenue with the abolishment of GST. Last year alone, some RM44 billion was collected in GST revenue. SST, according to chairman of the board of trustees of the Malaysian Tax Research Foundation SM Thanneermalai, used to only contribute about RM17 billion to the government’s coffers before GST came into force on April 1, 2015.

“That, to some extent, resulted in discontent for many, particularly in the B40 group, who were not previously taxpayers from the outset. Despite the fact that there are a multitude of exempt and zero-rated items, GST still translates into a significant amount for the B40 through its impact on prices, so the abolishment is most certainly a boon for this group of Malaysians. But it is left to be determined if the abolishment of GST will result in retail prices being adjusted downwards and in what manner and form.”


Malaysia sees favorable growth outlook as policy risks mount

The government must still outline how it will raise enough revenue to fill the GST gap in order to keep the budget deficit under control. The Finance Ministry said on Thursday the move will be “cushioned by specific revenue and expenditures that shall be announced soon,” with plans also to re-introduce a sales-and-services tax.

A revenue squeeze may prompt the government to cut back on spending, while a review of infrastructure projects could put a halt on construction, curbing growth in the economy. “It’s encouraging to see that the new government is already taking action to try and rationalize unnecessary and unproductive government expenditure,” said Goh. “We think that would actually help in keeping the fiscal balance in check.”

The gridlocked streets of Manila have become the latest battleground for Grab, despite the fact that it controls more than 90 percent of the ride-hailing market in the Philippines. With just 35,000 vehicles on its app to service as many as 600,000 requests a day, Grab has struggled to keep up with demand in areas like Manila, where an estimated 19 percent of commuters use ride-hailing, nearly double the average in other Southeast Asian capitals, according to Boston Consulting Group Inc. The challenge has created an opening for startups like Hype Transport Systems Inc. and Ipara Technologies and Solutions Inc., both of which plan to start services this month.

A Saudi-backed Asia refinery is going to be a fuel juggernaut

“The immediate impact from RAPID will lead to more Malaysian exports of diesel and jet fuel, while also reducing the need to import as much gasoline,” said Joe Willis, a senior research analyst for refining and oil products at Wood Mackenzie Ltd. in Singapore. “For middle distillates, Johor is conveniently located next to the Singapore storage hub.”

The RAPID project, operated by Malaysia’s state-owned Petroliam Nasional Bhd, known as Petronas, is due to start operations in 2019 with 300,000 barrels a day of crude-processing capacity. That’s a massive increase for the Southeast Asian country, which has a total 660,000 barrels of daily capacity now, according to Willis.

Still, Chin is hopeful the overall impact will be limited in the long-run. When RAPID reaches full utilization in early 2020, Asian refiners will be scrambling to meet a bump in appetite for the fuel as maritime rules that start in 2020 push shippers to replace dirtier fuels with cleaner ones like diesel, Chin said.

“With new mega refineries starting up in China and Saudi Arabia by the first quarter next year, there could be a brief window of weakness in diesel cracks before IMO effects kick in,” he said, referring to the upcoming maritime regulations to be implemented by the International Maritime Organization.


Willowglen sees challenging year ahead

“This year, I am not too sure, it could be quite a testing year. We should be all right in the longer term, [but] in the immediate term, there [could be] not much improvement compared [with] last year, it could be even worse.” This is due mainly to issues in project execution and delaying of awards from clients who are still resolving technical issues, especially those that are infrastructure-related.

While more than 70% of its revenue was contributed by its primary market of Singapore, with the balance coming from Malaysia, the group said it will continue its exploration of business opportunities elsewhere, especially in Vietnam, where it commenced operations a year ago. He assured that the group will not exit the Indonesian market — where it is involved in trading as well as the provision of hardware and software consulting services — but instead work on restrategising operations there to improve efficiency.

Curated Insights 2017.12.03

A dynamic knowledge tool to understand the issues and forces driving transformational change across economies, industries, global issues and the Forum’s system initiatives.

How to tame Google, Facebook, Amazon, and Apple

The problem with price regulation is that Google doesn’t charge high prices—at least not to consumers, the traditional victims in monopoly cases. The company initially helped wipe out the profitability of newspapers and magazines, in part, by undercutting the price of print advertising. These days, however, Google can charge hefty prices to advertisers because it controls so much inventory and user data. Advertisers can feel they have no choice but to pay up, while consumers pay precisely zero to do searches or send emails.

Amazon is a “cheetelephant,” said one analyst: an elephant that runs as fast as a cheetah. It’s considerably faster than the regulators and lawmakers who have been caught flat-footed and are now wondering what, if anything, to do about its increasing market power, from books to groceries to moviemaking.

“If you look at the business models of these firms, none of these is a predatory pricing model. These firms are making a lot of money doing what they’re currently doing,” said Penn’s Hovenkamp. Besides, he said, “there are constantly new entrants” that would prevent a company from earning monopolistic profits. For antitrust enforcers, the problem is that by the time you know for sure whether a company predatorily drove rivals out of business, it’s too late to prevent it.

Facebook, in other words, is damned if it does censor and damned if it doesn’t. How is this likely to evolve? One possibility is that Facebook will tire of taking the heat and voluntarily submit to government regulation. A regulated Facebook would still have to employ people and algorithms to scour its website of forbidden materials, as it does today, but at least it could point the finger at lawmakers and regulators if questioned about its choices. The same would go for Google and some companies not covered here, such as Twitter.

It’s a good bet that there will be more such orders in coming years. Governments want money, and the four tech giants have a lot of it. In the meantime, while trying to come up with a better tax system, Europe is toying with the idea of taxing the tech companies’ revenue rather than their profits. The reasoning is that revenue is harder to manipulate. But revenue is a crude measure of a company’s ability to pay taxes. Revenue-based taxation would be too hard on companies with lots of revenue but little profit, and too easy on companies with little revenue but lots of profit.

Under an apportionment system, each country is still permitted to set its corporate tax rate however it chooses. But it will be able to charge its rate only on its little slice of the company’s global profit—a slice that’s determined by an agreed-upon formula. A country can no longer grab a bigger piece of a shrinking corporate-tax pie by cutting its rate below other countries’. In one stroke, the race to the bottom in tax rates is cut short.

Getting low-tax countries to go along with an apportionment system would be tough, though. No country wants to give up what makes it special. So something like the current tax system, albeit with fewer loopholes, is likely to persist for at least awhile. Apple, Google, Facebook and Amazon will keep finding ways to pit countries against one another.


Why Tencent Could Become an Advertising Powerhouse Like Facebook

Tencent’s ad revenue could more than double to $11.4 billion by 2019, according to researcher eMarketer. The company is estimated to increase its market share in China’s digital ad space to 15 percent from about 9 percent, eMarketer said.

Social advertising, which relies on information from a user’s network, is still a nascent business in China. The model that drives Facebook only accounts for about 10 percent of mainland digital marketing with e-commerce and search ads still taking the lion’s share. Lau expects that to change. “Social advertising can play a larger role,” said Lau. “In China, we are kind of pioneering the categories” of that.

So Tencent’s chosen to exercise restraint, usually showing just one ad per day on WeChat’s “Moments”, a function similar to Facebook’s news feed, capping inventory by intention. That’s why it earns just $2.10 per daily active user on WeChat, versus Facebook’s $30.10, Morgan Stanley estimates.

To do that, it’s enlisted an army of more than 250 computer scientists to expand in artificial intelligence, focusing on natural language processing, image recognition and user behavior prediction. That investment is showing up in some areas: Tencent worked with BMW to target high-end users based on their friends and location logs, sending them WeChat ads through which they could book test drives. The end game is converting ads into purchases, which is why the company’s exploring also hotels, dining and property, Lau said.


How Tencent could help Snapchat

Integrating gaming into Snapchat might be a good idea – not just because it creates more ways to generate revenue, but also because it can enhance user engagement. Globally, more people watch gaming videos and streams than HBO, Netflix, ESPN, and Hulu combined. As Snapchat strives to add users globally, it would be smart to tap into the millions of gamers worldwide who are already spending hours each day playing games, many of which Tencent has invested in.

“There is a strong likelihood that the redesign of our application will be disruptive to our business in the short term. We’re willing to take that risk for what we believe are substantial long-term benefits to our business.”


Amazon focuses on machine learning to beat cloud rivals

The industry has turned into a race to provide customers tools and functions to use that data in new ways. Those tools are helping speed the transition to the cloud, since companies that don’t have access to them will be at a competitive disadvantage, Jassy said. “We are in a transition stage right now. Relatively few companies will own their own data centers, and those who do will have significantly smaller footprints. That means all of that data is moving to the cloud.”

The cloud computing market will grow to $89 billion in 2021, up from $35 billion today, according to technology research firm Gartner Inc.


Amazon AWS: Is that what the second headquarters is about? Asks Goldman

“While Amazon has never discussed any plans for a spin or any HQ2 plans relative to AWS, it is possible that the location of the new headquarters could provide some insight into the way management is thinking about the positioning of AWS.”

Terry’s curiosity is piqued by the fact that Amazon increasingly competes in the same industries that are customers for AWS, including gaming, healthcare and life sciences. Presumably, a separation of AWS might lessen the conflict there. Terry sees AWS being worth $430 billion, on a sum-of-the-parts basis, equaling 60% of Amazon’s enterprise value.


Broadcom could bid as much as $100 for Qualcomm and still see a payoff, says Canaccord

We assume Qualcomm settles its licensing dispute with Apple with Apple paying roughly half of what it previously paid Qualcomm for iPhone royalties. We also assume Qualcomm settles its dispute with Huawei or the other large OEM currently not paying Qualcomm royalties. We believe Broadcom management has solutions for Qualcomm’s disputes as part of its reasoning to make a bid for Qualcomm, but we have used these assumptions based on our Qualcomm scenario analysis used for our Qualcomm price target in our last published Qualcomm note. We also assume $500M in synergies achieved between Qualcomm and NXP in our scenario analysis including NXP. Further, we assume a 4% interest rate on combined debt for an acquisition with NXP and 3.5% for an acquisition without NXP given larger debt levels needed if the acquisition includes NXP. We also assume $1.5B in F2019 synergies between Broadcom in Qualcomm and a combined company tax rate of 15%.


Beyond Tesla’s semi truck: The future of trucking and transportation

We are currently entering a period of a rapid change in our transportation systems. And as I see it, it’s the innovator’s dilemma playing out in the wild: Incumbents like General Motors are moving too slowly to adapt to an all-electric future—wasting billions of dollars on stock buybacks—while upstarts like Tesla, unencumbered by legacy business models, are forging a path into a clean, fully-electric, fully-autonomous future. (GM has spent almost $17 billion in the last several years buying back its stock, three times what Tesla has spent building Gigafactories.)

One is that the cost of trucking falls by at least 50%, if not more. No driver, double the passive productivity, and in essence, you eliminate most of the safety problems. And by the way, if you apply this [autonomous] technology, many of the concerns we have from a safety standpoint about large trucks go away and you can make the trucks bigger. So, the costs fall at least in half. Transit time falls at half too, because you’re not waiting.

Let’s look at it from a technical standpoint. There are two competencies that keep trucking firms alive. The first one is their ability to match demand and supply; which is very important, and the second is their ability to manage drivers. There’s a modest competency with respect to equipment, but it’s not that important. Well, in the first place, if you if you eliminate the drivers, you eliminate half of the value-added that the trucker provides. And second, if you go to integrated big data, the business of matching capacity to demand becomes much easier. So, what it does is it either eliminates, or dramatically changes the principal competencies of whatever we call this entity which we now call “trucker” provides to the marketplace. So it’s big, big changes.


Why Tesla’s fuel efficiency advantage won’t last

At the early part of the 2000’s trucks getting 5 mpg were common. Today’s fleet is more like 7 mpg. That two miles per gallon increase means diesel used falls from 20,000 gallons a year down to under 15,000 gallons. Best-in-class trucks today might approach 9-10 miles per gallon. That three mpg increase versus fleet average (presumably what Tesla used in its cost calculator) is another 30% drop in fuel use, down to 10,000 gallons. The SuperTruck programs that get 12 or more mpg, (using many of the same aero techniques that Tesla’s Semi uses) would use around 8,000 gallons of fuel. In other words the opportunity to lower the Tesla cost of ownership with fuel savings is currently 15,000 diesel gallons a year, but will soon enough be only half that, using current line-of-sight technologies. At current fleet average diesel costs the savings opportunity on 100,000 miles per year is $37,500 per truck. At current best-in-class the available pool of offset-able fuel cost is $25,000. On future trucks, perhaps not too far distant from Tesla’s launch, is only $20,000 per year. All this assumes you can run a truck 100,000 miles a year in 300 to 500 mile increments.

The future difference between Tesla’s astonishing 19 mpg equivalent and the SuperTruck 12 mpg is only 3,000 gallons a year of diesel equivalent. Compared with the 7,000 gallons per truck per year already in the diesel improvement pipeline, that 3,000 gallons doesn’t look as compelling.


Inside the revolution at Etsy

Inside Etsy, Mr. Silverman’s reorganization has upended parts of the company once considered sacrosanct. Last month, Etsy changed its mission statement. Gone was a verbose commitment “to reimagine commerce in ways that build a more fulfilling and lasting world.” Instead, the mission was reduced to just three words, “Keep commerce human,” accompanied by a spreadsheet outlining its goals for economic, social and ecological impact. And because remaining a B Corp would require the company to change its legal standing in Delaware, where it is incorporated, Etsy will let that certification lapse.


Paytm aims to become largest full-service digital bank

“Digital payments was our entry point, we want to become a vertically-integrated financial services company.”

Payments banks can accept deposits and remittances but cannot lend. Paytm is one of less than a dozen entities that got permits to start payments banks to bring financial services within easy reach of about a fifth of India’s 1.3 billion people who do not have access to organized financial services.

Paytm Payments Bank is majority-owned by Sharma. One97 Communications, which is backed by Alibaba Group Holding, Ant Financial Services and others, holds the remaining 49 percent. The payments bank morphed out of Paytm’s digital wallet which got a huge boost and amassed over a hundred million customers after India took its high currency bills, totaling nearly 90 percent of the value of cash, out of circulation last November.

Sharma may have found a way around the regulatory hurdles that bar lending. One97 Communications will introduce a charge card and offer monthly installment-based loans, he said. “We will launch share trading and insurance products very soon,” said Sharma. “We want to become an Internet-age financial services company.”

Business lessons from Ben Thompson of Stratechery

“Zero distribution costs. Zero marginal costs. Zero transactions. This is what the Internet enables, and it is completely transforming not just technology companies but companies in every single industry.” “Aggregation Theory is a completely new way to understand business in the Internet age.”

“instead of some companies serving the high end of a market with a superior experience while others serve the low-end with a “good-enough” offering, one company can serve everyone…. it makes sense to start at the high-end with customers who have a greater willingness-to-pay, and from there scale downwards, decreasing your price along with the decrease in your per-customer cost base (because of scale) as you go (and again, without accruing material marginal costs). Many of the most important new companies, including Google, Facebook, Amazon, Netflix, Snapchat, Uber, Airbnb and more are winning not by giving good-enough solutions to over-served low-end customers, but rather by delivering a superior experience that begins at the top of a market and works its way down…”

“Apple and Amazon do have businesses that qualify as aggregators, at least to a degree: for Apple, it is the App Store (as well as the Google Play Store). Apple owns the user relationship, incurs zero marginal costs in serving that user, and has a network of App Developers continually improving supply in response to demand. Amazon, meanwhile, has Amazon Merchant Services, which is a two-sided network where Amazon owns the end user and passes all marginal costs to merchants (i.e. suppliers).”

“Once an aggregator has gained some number of end users, suppliers will come onto the aggregator’s platform on the aggregator’s terms, effectively commoditizing and modularizing themselves. Those additional suppliers then make the aggregator more attractive to more users, which in turn draws more suppliers, in a virtuous cycle. This means that for aggregators, customer acquisition costs decrease over time; marginal customers are attracted to the platform by virtue of the increasing number of suppliers.”

“Breaking up a formerly integrated system — commoditizing and modularizing it — destroys incumbent value while simultaneously allowing a new entrant to integrate a different part of the value chain and thus capture new value.”


Active vs. passive vs. Amazon et al.

“Sectors such as finance, information technology, media, and pharmaceuticals — which have the highest margins — are developing a winner-take-all dynamic, with a wide gap between the most profitable companies and everyone else.”

“I have long described Amazon as a Field of Dreams company, one that goes for higher revenues first and then thinks about ways of converting those revenues into profits; if you build it, they will come. In coining this description, I am not being derisive but arguing that the market’s willingness to be patient with the company is largely a result of the consistency with [which] Jeff Bezos has told the same story for the company, since 1997, and acted in accordance with it.”

“These models have an in-built structure where they are going to tip into winner-take-all areas. The cost of adding a new user gets smaller and smaller the bigger you get. [This starts] creating a competitive advantage that gets harder and harder to bridge.”

It’s not unusual for a few stocks to drive broader market performance in a given year, but we would be foolish to ignore that it has been the same several stocks quite frequently in recent years. Facebook, Apple, Amazon, Netflix, and Google are responsible for roughly 20% of the S&P 500’s performance this year, and generated more than the entire return of the index in 2015.


The secret to tech’s next big breakthroughs? Stacking chips

The advantage is simple physics: When electrons have to travel long distances through copper wires, it takes more power, produces heat and reduces bandwidth. Stacked chips are more efficient, run cooler and communicate across much shorter interconnections at lightning speed.

Chip stacking enables totally new capabilities too. Some phone cameras stack an image sensor directly on top of the chip that processes the image. The extra speed means they can grab multiple exposures of an image and fuse them together, capturing more light for dim scenes.

But Mr. Dixon-Warren says the spread of 3-D chips is rapid and their takeover inevitable. A decade ago, this technology was limited almost exclusively to university labs; five or six years ago, it was still hard to find commercial examples. But now it’s popping up all over, in applications like networking and high-performance computing and in high-end wearables like the Apple Watch.


How does Costco sell 18-year-old single malt Scotch for $38?

“Costco has a volume deal with [spirits] companies including Edrington and Diageo. They agree to buy a certain amount of product at a certain price, which is far lower than everyone else is paying. For products like Johnnie Walker Blue or Macallan, it’s virtually impossible to beat Costco on price.”

“If Costco can control the importation of the whisky, get someone to distribute it to them at cost (or at very slim single-digit margins due to high volume) and then sell it at very low margins, then they’re golden.”

Finally, one reason rarely considered for why Costco might be able to offer better pricing is proof. Typically, whisky connoisseurs would want that 25-year-old Scotch to have some decent heft after all those years of concentrating in barrel. Alcohol is a conduit for flavor, after all. But all Kirkland Signature Scotches are sold at 80 proof, meaning that these whiskies are watered down to the absolute lowest legal limit and, thus, Costco is able to empty barrels into way more bottles.


Big oil and auto makers throw a lifeline to the combustion engine

The new lubricants are meant to help auto makers build smaller, turbocharged engines that are still quite powerful, resulting in efficiency gains close to 15% compared with older models. Optimizing internal combustion engines could boost efficiency by an additional 25%—a calculation that might tempt auto makers from spending more on electric-vehicle technology. Other efforts to enhance performance include adding gears to transmissions and making vehicles more aerodynamic.

The gains from engine oil alone are limited, however. Industry experts say the latest lubricants typically boost fuel economy by less than 1%, primarily by reducing the amount of energy needed to pump a piston. Even so, it is a highly cost-effective solution that adds up when spread across millions of vehicles.


‘It’s beautiful’: This Toronto startup is investors’ secret weapon to beating the market

Legal experts say investors may be risking more than their capital when using such alternative data since case law hasn’t yet determined what crosses the line into privacy violations or insider trading, but it’s a risk a growing number of financial institutions are willing to take, especially since in Apache’s case, and many others, it has paid off.

“That is the original alpha source, knowing something the market doesn’t know. It’s beautiful,” he said. “If you can come to them with a genuine information advantage, where they can know something their peers in the market do not know that’s tradable, that’s hugely valuable.”

Quandl is particularly interested in companies that produce what it calls “exhaust” data, or data collected as part of a company’s normal operations without intending to turn it into a revenue source. For example, insurance companies keep records of how many new car insurance policies they sell, as well as which vehicle manufacturer’s model is being insured, which happens to be a great predictor of new car sales before the automakers release the data themselves.

But Quandl faces a dilemma after convincing suppliers to sell their data: the more clients the company sells the data to, the less of an investing edge it provides, making it less valuable. To solve that problem, Quandl uses the data to build a predictive model to make an educated guess about how much money could be invested before the data loses its advantage and then sells it to a limited number of clients accordingly.


About 11% of land in Japan is unclaimed

That’s about 41,000 square kilometers (16,000 square miles), which is equivalent to the size of Japan’s southwestern island of Kyushu, or almost as large as Denmark. By 2040, land equivalent to Japan’s second-largest island of Hokkaido will be unclaimed or abandoned, according to a panel of experts and government representatives. This will cost the nation roughly 6 trillion yen ($54 billion) over the period 2017-2040, including lost development opportunities and uncollected taxes, the panel says.

“Land prices are falling in the depopulating regions,” Yamanome said. “Not only is it impossible to make money by owning some land, but also you can’t get rid of it because regional real estate markets are stale.”


Great products vs. great businesses

A product is something that solves someone’s problem. A business is a product that works so well that people will pay more than it costs to produce.

But losses come in different flavors. There is a difference between a company that loses money because it’s investing in the infrastructure needed to become a profitable company, and a company that loses money because it can’t charge customers a price that reflects what it costs to run the business. But we often conflate the two, treating all loss-making startups with a sense of, “It’s OK, they’re growing.”

Companies are staying private longer than they used to. So venture investors that specialize in the early phase of big-losses-because-we’re-investing-in-what-it-takes-to-build-a-profitable-business have found themselves holding mature companies that in a different era would have been passed onto investors who demanded a sustainable business model with profits. In any other era, Uber, Airbnb, Pinterest, and others all would have been public companies by now. And public markets almost certainly wouldn’t let losses pile up for as long as they have. We’ve seen this with Blue Apron and Snap, whose shares have fallen between 50% and 70% since going public just months ago. Both make amazing products that attracted armies of users, which VC investors oogled over. But public investors took one look at their business models and said, “What the hell is this?!” Who knows what that means for their future as standalone companies.


Pricing power: Delighting customers vs mortgaging your moat

The problem with this source of pricing power is that it comes with an off balance sheet liability. A sort of “negative goodwill” that grows every time you increase prices. While the profits might roll in for awhile, one day the customers will revolt. At the very least, the perceived excessive pricing of the well water will create a huge incentive for customers to try any new competitor that comes to town. While the high pricing makes it look like the company has a competitive advantage, in fact the excess returns are being created by a process that increases the likelihood of a successful competitive assault sometime in the future.


Lessons from a legendary short seller

“Because I never wanted to get up in the morning hoping that things would be getting worse. All intellectuals I think — and I don’t use that as a particularly flattering term — but all intellectuals tend to have a pessimistic streak.”

“I would forget the shorting. I think it’s over. It’s over for one simple reason: If shorts start working, that is, stocks go down for any sustained period of time, a great many people who are not now shorting will start shorting. There is a limited supply of stocks to borrow to sell short. Those stocks that are good shorts tend to be very obvious. As I’ve often said, I can predict with confidence that you’ll die. I cannot predict that you’ll be born, and so failure is analytically obvious and everybody piles into the same short. . . . I do believe if shorting really becomes profitable again, it’s going to become so crowded that most people won’t be able to borrow stock.”

Pulling iron from brain may offer hope in Alzheimer’s fight

The familiar metal is key to numerous brain functions, but too much of it is toxic. Researchers in Melbourne showed two years ago that iron levels in the brain can predict when people will get Alzheimer’s disease. Now, the team aims to show how removing excessive amounts with a drug called deferiprone can stave off the memory-robbing disorder.


Laptops are great. But not during a lecture or a meeting.

Laptops distract from learning, both for users and for those around them. It’s not much of a leap to expect that electronics also undermine learning in high school classrooms or that they hurt productivity in meetings in all kinds of workplaces.


Curated Insights 2017.11.05

This company’s robots are making everything and reshaping the world

Earlier this year, during one of Fanuc’s rare open houses, Vice President Kenji Yamaguchi told investors that about 80 percent of the company’s assembly work is automated. “Only the wiring is done by engineers,” he said. And when you have lots of efficient robots making your other robots, you can sell those robots more cheaply—about $25,500 for a new Robodrill. (You can find a well-used older model on EBay for $8,500.) Volkswagen Group, for instance, pays about 10 percent less for Fanuc robots than it paid for ones it previously purchased from Kuka AG, a German company.

Fanuc manages to offer these savings while maintaining 40 percent operating profit margins, a success that Yamaguchi also traced to the company’s centralized production in Japan, which is made possible, even though most of its products are sold outside the country, by the 243 global service centers that keep its robots operational. The company even profits from its competitors’ sales, because more than half of all industrial robots are directed by its numerical-control software. Between the almost 4 million CNC systems and half-million or so industrial robots it has installed around the world, Fanuc has captured about one-quarter of the global market, making it the industry leader over competitors such as Yaskawa Motoman and ABB Robotics in Germany, each of which has about 300,000 industrial robots installed globally. Fanuc’s Robodrills now command an 80 percent share of the market for smartphone manufacturing robots.

Orders from the U.S., though, are dwarfed by those from China—some 90,000 units, almost a third of the world’s total industrial robot orders last year. Sales to China amounted to about 55 percent of the $5 billion Fanuc’s automation unit generated in the fiscal year ended March 2017. The International Federation of Robotics estimates that, by 2019, China’s annual industrial robot orders will rise to 160,000 units, suggesting Fanuc will be insulated from any slowdown in the world’s second-largest economy. Yoshiharu told investors at his most recent Q&A session in April that the company expects demand in China to outstrip supply even after Fanuc opens a factory next August in Japan’s Ibaraki prefecture. The facility will be dedicated solely to keeping up with Chinese demand.

The result of Nishikawa’s insight was the Fanuc Intelligent Edge Link and Drive, or Field. The system, introduced in 2016, is an open, cloud-based platform that allows Fanuc to collect global manufacturing data in real time on a previously unimaginable scale and funnel it to self-teaching robots.


Apple should shrink its finance arm before it goes bananas

Apple does not organise its financial activities into one subsidiary, but Schumpeter has lumped them together. The result—call it “Apple Capital”—has $262bn of assets, $108bn of debt, and has traded $1.6trn of securities since 2011.

Since Jobs died, its assets have risen by 221%, twice as fast as the company’s sales, reflecting Apple’s huge build-up of profits. Its investments are worth 32% of Apple’s market value, and its profits (investment income, plus gains on derivatives, less interest costs) have been 7% of Apple’s pre-tax profits so far this year. It is also sizeable compared with other financial firms. Consider four measures: assets, debt, credit exposure and profits.

In 2011 a majority of its assets were “risk-free”: cash or government bonds. Today 68% are invested in other kinds of securities, mainly corporate bonds, which Apple says are generally investment grade. The shift may explain why Apple’s annual interest rate earned on its portfolio (2%) is now higher than that of the four other Silicon Valley firms with money mountains, Microsoft, Alphabet, Cisco and Oracle. In total, they still have 66% of their portfolios squirrelled away in risk-free assets.

Its foreign operation swims in cash while its domestic one drowns in debt. Profits made abroad are kept in foreign subsidiaries. That way Apple does not pay the 35% levy America charges when earnings are repatriated. Some 94% of Apple Capital’s assets are “offshore” and cannot be tapped for ordinary purposes. The domestic business must do the hard work of paying for dividends and buy-backs. Its profits are not big enough to cover these, so it borrows. Domestic net debts have risen to $92bn, or five times domestic gross operating profits. Each year Apple must issue $30bn of bonds (including refinancing), similar to the average of Wall Street’s five largest firms.


To understand the benefits of tax reform, start by understanding Apple’s taxes

Now we have the numbers that answer the basic question: What accounts for the difference between what Apple pays and the official 35% rate? Page 56 of its 10K shows the numbers. Once again, if Apple had faced the full 35% rate, it would have paid $21.46 billion in federal taxes (as well as another $990 million to the states). Instead, it paid $10.444 billion in cash, and accrued $5.241 billion in U.S. tax owed on foreign profits, but deferred to be paid later. That’s the total of $15.685 billion that it booked in tax expense on its income statement. The difference between that number and the approximately $21.5 billion it would have paid at the 35% rate is the almost $5.6 billion exclusion for “indefinitely invested foreign earnings.”

Surprisingly, companies such as Apple with an extremely large proportion of foreign sales, could actually pay more U.S. taxes in cash each year under the current proposals. That’s because elimination of deferrals and the exception for reinvested earnings would sent more money to the Treasury even at the far lower minimum rate.

 

Google’s profits are exploding because the web is massive

The bigger the web grows, the more valuable Google becomes. And, with more than one billion websites in the world and more than 4 billion people with regular access to the Internet, finding your needle in that haystack is the fundamental problem of Internet use. As the tech writer Ben Thompson wrote, “Google is the king of aggregators because, when information shifted from scarcity to abundance, discovery became the point of leverage, and Google was better at discovery than anyone.”

Second, the migration of attention from print and television to the internet—both desktop and mobile—has created a advertising duopoly for Google and Facebook. As these slides from the last Kleiner Perkins internet presentation show clearly, mobile is the future of media attention and Facebook and Google’s share of digital ad revenue is growing faster than the rest of the industry combined.


How Google’s quantum computer could change the world

Early next year, Google’s quantum computer will face its acid test in the form of an obscure computational problem that would take a classical computer billions of years to complete. Success would mark “quantum supremacy,” the tipping point where a quantum computer accomplishes something previously impossible. It’s a milestone computer scientists say will mark a new era of computing, and the end of what you might call the classical age.

That potential is a result of exponential growth. Adding one bit negligibly increases a classical chip’s computing power, but adding one qubit doubles the power of a quantum chip. A 300-bit classical chip could power (roughly) a basic calculator, but a 300-qubit chip has the computing power of two novemvigintillion bits—a two followed by 90 zeros—a number that exceeds the atoms in the universe.

Volkswagen AG is testing quantum computers made by Canadian firm D-Wave Systems Inc. In March, the companies said that, using GPS data from 10,000 taxis in Beijing, they created an algorithm to calculate the fastest routes to the airport while also minimizing traffic. A classical computer would have taken 45 minutes to complete that task, D-Wave said, but its quantum computer did it in a fraction of a second.

Such a complex and expensive setup means that Google and its peers will likely sell quantum computing via the cloud, possibly charging by the second.


Google has a new plan for China (and it’s not about search)

Rather than another splashy product launch, Google’s latest China strategy is a grassroots effort focused on getting developers in the country trained and hooked on its AI building blocks. It’s similar to the way business software startups get employees using their services before corporate IT departments notice. Once the tools become popular, companies often accept the technology and sign up for full service.

It’s hard to find a place as fertile for AI as China. The country has one of the fastest growing TensorFlow developer communities in Asia, despite the fact that Google’s cloud services are unavailable there. The Chinese government has made AI a national priority. Scores of Chinese companies are deploying machine-learning systems — AI software that automatically adjusts to data — to update banking services, identify faces in crowds and control drones.

Beijing-based Wang Xiaoyu said TensorFlow was a vital tool for her podcast startup CastBox.FM. Developing her own tools would’ve required a team of 20 expensive machine-learning specialists. Instead, she turned to TensorFlow and hired a single Chinese PhD graduate with TensorFlow experience capable of producing the same results. Her company is now worth about $60 million with more than 8 million users downloading her app.

Ricky Wong, an investor who often works in China, analyzed the location of the first 5,000 developers to access the tools and found more came from Beijing than all of Silicon Valley.


Tech goes to Washington

I still believe that, on balance, blaming tech companies for the last election is, more than anything, a convenient way to avoid larger questions about what drove the outcome. And, as I noted, the fact is that tech companies remain popular with the broader public.

What this hearing highlighted, though, is the degree to which the position of Facebook in particular has become more tenuous. The fact of the matter is that Facebook (and Google) is more powerful than any entity we have seen before. Magnifying the problem is that, over the last year, Facebook has decided to “take responsibility”, and what is that but a commitment to exercise their control over what people see?

More broadly, it is hard to escape the conclusion that tech companies have been unable to resist the ring of power: the end game of aggregation is unprecedented control over what people see; the only way to handle that power without risking the abuse of it is a commitment to true neutrality. That Facebook, Twitter, and Google — which, by the way, holds just as much if not more power than Facebook, but without the attendant media scrutiny — have committed to fixing the Russian problem is itself more problematic than those urging they do just that may realize.

Inside Fort Botox, where a deadly toxin yields $2.8 billion drug

Scientists differ over how much of the toxin would be required to inflict massive damage. Data on the topic is scarce, and that may be intentional. But a study published in 2001 in the Journal of the American Medical Association said that a single gram in crystallized form, “evenly dispersed and inhaled, would kill more than 1 million people.” Experts are divided over what it would take to effectively weaponize the toxin, but the mere possibility of a botulism bomb has the U.S. government on edge. That puts Allergan in a remarkable position. The government’s vigilance enhances the company’s own secrecy, and together they give Botox a near-monopoly that is almost unassailable. Allergan says Botox has more than 90 percent of the market for medical uses of neurotoxins and 75 percent of the market for cosmetic uses.


Gene therapy helped these children see. Can it transform medicine?

Spark’s product, named Luxturna, is designed to help a subset of LCA sufferers with a mutation in a gene known as RPE65 — who number about 6,000 in northern America, Europe and the other developed markets the company hopes to enter. But its approval would have much broader implications for the way we fight sickness and disease. 

Drugs are designed to fight illnesses by cajoling the body, opening up one biological pathway or closing down another. Gene therapy takes a different approach, replacing the faulty or missing DNA that is causing the disease in the first place and helping the body fix itself. Because it tackles the illness at its biological root, it could offer a one-time treatment for an array of genetically driven conditions that have either had poor options or none at all, from haemophilia and Parkinson’s to Huntington’s disease, cystic fibrosis and myriad rare diseases. It opens up the possibility of that thing still so elusive in modern medicine: a cure. 


Patient deaths show darker side of modernized Chinese medicine

Having struggled for decades to rein in the sector, regulators have recently begun pushing for an overhaul of Chinese medicine injections, seeking to weed out unsafe and ineffective products. But the process could take up to a decade, given the complexity of these intravenous pharmaceuticals.

Still, due to the history of lax regulation, many injectables based on Chinese medicine haven’t been evaluated in strict scientific clinical trials. That means the reactions they set off in the body aren’t fully known. Chinese medicine is based on centuries of practical experience. But it is traditionally taken orally, which gives the digestive system a chance to shield patients from harmful chemicals. Injecting the concoctions into the bloodstream can heighten side effects.


This budget airline is buying seaplanes to reach areas others can’t

SpiceJet Ltd. is in talks with Japan’s Setouchi Holdings Inc. to buy about 100 amphibious Kodiak planes that can land anywhere, including on water, gravel or in an open field. The deal, valued at about $400 million, would help SpiceJet capitalize on Prime Minister Narendra Modi’s ambitious plan to connect the vast nation by air without waiting for billions of dollars in upgrades to colonial-era infrastructure.

India’s airlines handled 100 million domestic passengers last year, making it the No. 3 market behind China and the U.S. To handle growth, India will need at least 2,100 new planes worth $290 billion in the next 20 years, Boeing Co. estimates.

“The basic logic for this is that in India, we need last-mile connectivity,” Singh said. “The amphibian plane opens up a lot of areas, creates a lot of flexibility.”

“High-end tourists use amphibious aircraft at exotic locations all over the world,” said Amber Dubey, a New Delhi-based partner and India head of aerospace and defense at KPMG. “There’s no reason why it can’t be successful in India.”


This doctor turned $15,000 into a $1.6 billion beauty empire

“We focus on mid-end customers because they’re the biggest group of people,” said Suwin, who trained as a doctor before becoming an entrepreneur. “The high-end segment is small and very competitive.”

In mainland China, Beauty Community sells through online channels including Alibaba Group Holding Ltd.’s Tmall platform. The country’s beauty market is forecast to grow at an average of 9 percent a year until 2020, outpacing the 5 percent expansion expected in Thailand, according to Euromonitor.

Beauty Community is the ninth biggest company in Thailand’s cosmetics industry, with a 3.1 percent share of a fragmented market, according to Euromonitor. L’Oreal leads, with 12 percent, followed by direct sales company Better Way (Thailand) Co. and Estee Lauder Cos. The firm aims to have 450 shops domestically in the next three years, under brands such as Beauty Cottage and Beauty Buffet.


Debating where tech is going to take finance

The point of most innovations in consumer finance has been precisely to reduce its presence in our lives: Instead of talking to a bank teller to get money, you use an ATM. Instead of physically walking into a broker’s office to talk about which stocks to buy, you buy index funds through a web page. Or, now, you click to enroll in an app and it does all of your asset-allocating and stock-picking and tax-harvesting and so forth for you. I think that a lot of financial technology is heading in the direction of perfecting that vanishing act, so that in 20 years you’ll just think about financial things less than you do now.

The EU’s definitive defeat: digital tax plans and a declaration of surrender to Silicon Valley

The EU has a huge competitiveness issue already, and due to the eurozone’s lack of innovation, especially in its Mediterranean member states, the sovereign-debt crisis is never going to be resolved. The European Central Bank is, in some ways unlawfully, keeping Europe’s south afloat and will do so for some more time, but at some point there will be a crisis of unprecedented proportions–either an acute and dramatic crisis or an extended depression from which the eurozone as an economic area won’t really recover.

By now the EU appears to have given up on its ambitions for the digital economy. Instead, its focus is on a new tax that could lead to a full-blown trade war with the U.S. and would definitely harm European companies and consumers in the end.

There are structural reasons for which the EU not only lacks major players like Apple and Google but why it’s highly unlikely that any of its startups will, as an independent company, ever reach that level.

Unfortunately, the Commission’s tax initiative has drawn support even from normally libertarian, free-market and fiscally conservative parties such as Germany’s FDP, whose secretary-general said last week that she wants to impose higher taxes on the likes of “Apple, Google, and Facebook.”


China’s critical role in technology and geopolitics

There are 214 private companies in the world valued at $1 billion or more, known as unicorns. Slightly more than half (108) are,as you would expect, based in the United States, but 55 are in China, with the remaining 51 located in other countries throughout the world. Of the top ten unicorns, China has four (including numbers two and three) and the U.S. has six. China’s innovation has been engineering-based rather than science-based and it is consumer-focused and efficiency-driven. Baidu, Alibaba and Tencent together represent 16% of world net digital advertising revenue and 20% of world net mobile Internet ad revenue. Google and Facebook are the leaders with a combined 43% of net digital and 51% net mobile ad revenue.

China’s investment in research goes beyond information technology. Prior to 2010, the country committed almost $10 billion to research with biotechnology a focal point. The Chinese biotech industry has been growing at 30% and is valued at over $10 billion today. There are more than 580 biopharma companies. Chinese scientists have transformed normal adult cells into embryonic stem cells and produced live mice from these lab-produced cells. There are two major state funding sources – the State High-Tech Development Program and the Basic Research Program. China is the third largest filer of patents, after the United States and Japan.

An issue of concern for many investors is the level of Chinese debt, which has risen from 149% to 269% of GDP over the past decade. Increasing debt has accounted for two percentage points of China’s 7.25% growth from 2012 to 2016. There is also the worry that there are a number of non-performing loans on the books of the banks and “shadow” banks, but the adverse effects of these has been deferred by the country’s growth.


The conventional view of China’s problems may be all wrong: Q&A

If migrants are allowed to live and settle in cities and they spend as much as normal Chinese, the savings rate would fall. Consumption would increase by 2 or 3 percentage points of GDP, which is the entirety of the trade surplus.

What’s unique in China and doesn’t happen anywhere else is this migrant worker phenomenon. In any other country, you don’t have a hukou policy. Hukou is a link to savings, and then links to global trade surpluses. That’s a real strange link. This never would have been a logical way of thinking about it in any other country.

If you liberalize hukou, it reduces pressure to save. It increases your incentive or opportunity to consume. This increases demand for resources. It doesn’t require credit expansion or generation or stimulus. Therefore, you have GDP growth without debt buildup, which is exactly what you need. It’s a simple reform with tremendous impact. Allow people to live in Beijing and Shanghai where jobs pay more, and productivity will be higher.


Backlash against Chinese products ramps up in India

Two-way trade statistics tell the tale. India’s deficit with China has ballooned nine-fold over a decade to $49 billion in 2016 as China’s manufacturing edge stacks the odds against Prime Minister Narendra Modi’s three-year-old ‘Make-in-India’ program. The result: India’s current account deficit is worsening again, threatening the outlook for an economy already straining under the fallout of a snap ban on high-value notes a year ago and a new sales tax.

“The imbalanced trade relationship reflects the fact that India’s manufacturing sector remains strongly underdeveloped. Unless it is able to develop its manufacturing sector so that it can produce a large share of the growing demand for goods in its economy, India’s economic growth will be constrained by rising current account deficits and/or inflation and their consequences.”

“No one is capable of competing with the Chinese.”


Abandoned land in Japan will be the size of Austria by 2040

A private research group headed by a former government minister today warned that the area (link in Japanese) of vacant land and homes could by 2040 be as big as Japan’s northernmost island of Hokkaido—about 83,000 sq km (32,000 sq miles), or the size of Austria. The area is currently about 41,000 sq km, slightly bigger than Japan’s southern island of Kyushu.

Hiroya Masuda, the former minister who chaired the group, warned in a 2014 book that about 900 cities, towns, and villages in Japan would be extinct by 2040.

Singapore is finding it harder to grow, literally

By filling the sea along its coasts with imported sand, the tiny island nation has expanded its physical size by about 24 percent since 1960, according to data from the Singapore Land Authority.

The government has plans to continue expanding its land size and said in a 2013 proposal that it expects to increase its land size to 296 square miles by 2030 to further support economic and population growth.

Supersized family farms are gobbling up American agriculture

Farms with $1 million or more in annual sales—only 4% of the total—now produce two-thirds of the country’s agricultural output, the largest portion since the U.S. Agriculture Department’s census began tracking the statistic in the ’80s.

Three-quarters of America’s farmed cropland is controlled by 12% of farms, USDA data show. The number of million-dollar-plus revenue farms more than doubled between 1992 and 2015, while the ranks of smaller farms, with revenue between $350,000 and $999,999, fell by 5%, as farmers get older and have a hard time making consistent profits. USDA researchers, in a December report, said consolidation is likely to continue.

An average farm household in the Colby area needs income of at least $50,000 annually to get by, said Mr. Wood, the agricultural economist, which has become harder to generate from a smaller farm. “The big guys can cover their costs and have money left over to grow,” Mr. Wood said. Smaller farms, he said, “are going to struggle.”

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.