Curated Insights 2017.12.17

Disney and Fox

With an increasingly high-profile brand, large user base, and ever deeper pockets, Netflix moved into original programming that was orthogonal to traditional programming buyers: creators had full control and a guarantee that they could create entire seasons at a time Each of these intermediary steps was a necessary prerequisite to everything that followed, culminating in yesterday’s announcement: Netflix can credibly offer a service worth paying for in any country on Earth, thanks to all of the IP it itself owns. This is how a company accomplishes what, at the beginning, may seem impossible: a series of steps from here to there that build on each other. Moreover, it is not only an impressive accomplishment, it is also a powerful moat; whoever wishes to compete has to follow the same time-consuming process.

Another way to characterize Netflix’s increasing power is Aggregation Theory: Netflix started out by delivering a superior user experience of an existing product (DVDs) to a dedicated set of customers, leveraged that customer base to gain new kinds of supply (streaming content), gaining more customers and more supply, and ultimately leveraged those customers to modularize supply such that the streaming service now makes an increasing amount of its content directly. What Disney is seeking to prove, though, is that it can compete with Netflix directly by following a very different path.

The implication of Netflix’s shift to original programming, though, isn’t simply the fact that the streaming company is a full-on competitor for cable TV: it is a competitor for differentiated content as well. That gives Netflix far more leverage over content suppliers like Disney than the cable companies ever had.

Netflix isn’t simply adding customers, it is raising prices at the same time, the surest sign of market power. Therefore, the only way for Disney to avoid commoditization is to itself go vertical and connect directly with customers: thus the upcoming streaming service, the removal of its content from Netflix, and, presuming it is announced, this deal.

Whereas Netflix laddered-up to its vertical model and used its power as an aggregator of demand to gain power over supply, Disney is seeking to leverage — and augment — its supply to gain demand. The end result, though, would look awfully similar: a vertically integrated streaming offering that attracts and keeps customers with exclusive content, augmented with licensing deals.

In addition, Disney and 21st Century Fox combined for 40% of U.S. box office revenue in 2016; that probably isn’t enough to stop the deal, and as silly as it sounds, don’t underestimate the clamoring of fans for the unification of the Marvel Cinematic Universe in swaying popular opinion!

GM’s latest weapon in pickup truck wars: Carbon fiber

Pickup sales represent about 16% of the U.S. market, but delivered the bulk of the $25 billion in operating profit Detroit’s Big Three auto makers earned in North America last year, according to analysts. J.D. Power estimates GM’s large pickups fetch $43,220 on average, up about 30% from five years ago, but below the $45,000 transactions on Ford’s F-Series.

Trucks represent a unique challenge for Detroit. Buyers expect ample power to haul boats and construction gear, but regulators are demanding more efficient designs over the next seven years to reduce greenhouse-gas emissions and improve fuel economy. That thinking underpinned Ford’s use of aluminum for the market-leading F-Series, which Environmental Protection Agency officials have said they see as already nearly meeting 2025 fuel-economy standards.

Carbon fiber is at least 50-75% lighter than steel and 20-50% lighter than aluminum, depending on the type, according to Ducker Worldwide, a materials consultancy that works with auto makers. It would improve dent resistance and give GM a differentiating feature in the fierce realm of truck marketing, said Richard Schultz, a metals expert at Ducker.

Researchers train robots to see into the future

These robotic imaginations are still relatively simple for now – predictions made only several seconds into the future – but they are enough for the robot to figure out how to move objects around on a table without disturbing obstacles. Crucially, the robot can learn to perform these tasks without any help from humans or prior knowledge about physics, its environment or what the objects are. That’s because the visual imagination is learned entirely from scratch from unattended and unsupervised exploration, where the robot plays with objects on a table. After this play phase, the robot builds a predictive model of the world, and can use this model to manipulate new objects that it has not seen before.

The system uses convolutional recurrent video prediction to “predict how pixels in an image will move from one frame to the next based on the robot’s actions.” This means that it can play out scenarios before it begins touching or moving objects.

China has been building what it calls “the world’s biggest camera surveillance network”. Across the country, 170 million CCTV cameras are already in place and an estimated 400 million new ones will be installed in the next three years.

Many of the cameras are fitted with artificial intelligence, including facial recognition technology. The BBC’s John Sudworth has been given rare access to one of the new hi-tech police control rooms.

World’s largest water diversion plan won’t quench China’s thirst

It’s China’s age-old dilemma: a tug of war between the farms that help feed the nation, and the soaring demands of industry and city-dwellers in the parched northern plains.

Beijing, which gets about 70 percent of its water from the South-North diversion project, is expected to add another 2 million people before the government caps the city’s population at 23 million.

One way to stem the reduction in groundwater is taxes. Last month, the government expanded a water resource tax trial to cover nine municipalities and provinces, with duties ramping up if quotas are exceeded. Regular water tax rates were highest in Beijing and Tianjin, according to China’s finance ministry, and water from underground will be taxed at twice the rate or more than for surface water.

Another option is to import food that requires a lot of moisture to grow — nearly half of China’s farmland has no irrigation system. That’s not straightforward, as China also has a long-standing food-security policy that aims to be largely self-sufficient in staple grains.

Each ton of imported wheat saves China about 500 cubic meters of water and 0.4 acres of farmland, Fang said. The country is already the world’s largest importer of soybeans, but could buy more, as well as meat and dairy products, she said. But an increase in grain imports would put a further strain on global food markets. China’s soybean demand has prompted farmers in Brazil to turn over some 13 million hectares of farmland and forest to growing the crop in the past 10 years, an area about the size of Germany.

Still, in many cases there’s little incentive for farmers to save water. Agriculture uses 62 percent of China’s water, but crops have a relatively low marginal value. So the government bans the sale of agricultural water to industry, which pays 10 times the price, to ensure food supply.


A caution from the world’s biggest shipping line

Decade-old oversupply issues swamped demand for containerized sea trade in the third quarter, a senior official at Maersk Line Ltd. said in an interview last week. Over 90 percent of trade is routed through ships, making the industry a bellwether for the worldwide economy.

Drewry Shipping Consultants expects the container-shipping freight growth rate to drop to less than 10 percent in 2018 from around 15 percent in 2017 as a supply glut hits home. CMA CGM, the No. 3 container shipping company, recently signaled slightly lower rates for 2018 in early negotiations of Asia-Europe contracts, analysts at Credit Suisse Group AG wrote in a Nov. 29 note.

In contrast, the air-freight market is buoyant after years in the doldrums, International Air Transport Association said last week. The development of e-commerce should mean growth rates remain ahead of the pace of expansion in world trade.


The world produces more than 3.5 million tons of waste a day – and that figure is growing

The world generates at least 3.5 million tons of solid waste a day, 10 times the amount a century ago, according to World Bank researchers. If nothing is done, that figure will grow to 11 million tons by the end of the century, the researchers estimate. On average, Americans throw away their own body weight in trash every month. In Japan, meanwhile, the typical person produces only two-thirds as much. It’s difficult to find comparable figures for the trash produced by mega-cities. But clearly, New York generates by far the most waste of the cities I visited: People in the broader metropolitan area throw away 33 million tons per year, according to a report by a global group of academics published in 2015 in the journal of the National Academy of Sciences. That’s 15 times the Lagos metropolitan area, their study found.


Salmon open flood gates for human consumption of GM animals

Engineered to grow at twice the rate of regular salmon, it is also believed to be the first example of a genetically engineered animal bred and sold for human consumption.


The main advantage of the salmon’s shorter lifespan is that the fish can be grown in tanks inland, vastly reducing the cost of transportation and the burden on the environment. “Demand for global protein is increasing,” he says. “We have to do a better job and we have to do it efficiently.”

One area Professor Muir regards as promising is the creation of genetically modified goats’ milk by scientists at the University of California, Davis, which carries a protein found in human breast milk that could, for example, help protect children in the developing world from bacterial infection.

More moats, more profits

Some businesses, however, have structural advantages that enable a stronger defense against competition, enabling high profits over an extended period. As competitive advantages have improved for the leading firms, we believe the ability to shield profits from normal competition has increased, enabling higher overall profits. The high concentration of wide and narrow moats among the largest 100 firms suggests that their elevated profit margins partly reflect the successful defense of competitive positions. In analysis looking at the past 10 years, wide-moat firms have generated more than triple the operating margins of no-moat firms, while narrow-moat firms have posted more than double the returns of no-moat companies. As the moat rating improves, the margins expand, supporting the importance of moats in protecting profits.

Beyond the global growth, the current phase of industrialization also supports more moats. As industrialization has moved from mechanical and mass production to information technology, we have seen an expansion in moats, especially in intangible assets and switching costs. Further, as we move into the next phase of industrialization focused on networking and the exchange of data between machines and humans,3 we expect more growth in profits supported by network effects. Several of the largest companies, including wide-moat firms with strong network effects Alphabet, Facebook, Amazon.com, Alibaba, and Tencent, didn’t exist 30 years ago and now represent more than 10% of the market capitalization of the top 100 firms.

The blockchain economy: A beginner’s guide to institutional cryptoeconomics

But a database still relies on trust; a digitised ledger is only as reliable as the organisation that maintains it (and the individuals they employ). It is this problem that the blockchain solves. The blockchain is a distributed ledgers that does not rely on a trusted central authority to maintain and validate the ledger.

A better metaphor for the blockchain is the invention of mechanical time. “The effect of the reduction in the variance of time measurement was felt everywhere”, Allen writes. Mechanical time opened up entirely new categories of economic organisation that had until then been not just impossible, but unimaginable. Mechanical time allowed trade and exchange to be synchronised across great distances. It allowed for production and transport to be coordinated. It allowed for the day to be structured, for work to be compensated according to the amount of time worked — and for workers to know that they were being compensated fairly. Both employers and employees could look at a standard, independent instrument to verify that a contract had been performed.

Complete contracts are impossible to execute, while incomplete contracts are expensive. The blockchain, though smart contracts, lowers the information costs and transactions costs associated with many incomplete contracts and so expands the scale and scope of economic activity that can be undertaken. It allows markets to operate where before only large firms could operate, and it allows business and markets to operate where before only government could operate.

The blockchain and associated technological changes will massively disrupt current economic conditions. The industrial revolution ushered in a world where business models were predicated on hierarchy and financial capitalism. The blockchain revolution will see an economy dominated by human capitalism and greater individual autonomy.

Curated Insights 2017.11.12

(Guardian: Apple secretly moved parts of empire to Jersey after row over tax affairs)
(BBC: Paradise Papers: Apple’s secret tax bolthole revealed)
(Apple: The facts about Apple’s tax payments)

“US multinational firms are the global grandmasters of tax avoidance schemes that deplete not just US tax collection, but the tax collection of almost every large economy in the world.”

“Apple claims to be the largest US corporate taxpayer, but by sheer size and scale it is also among America’s largest tax avoiders … [It] should not be shifting its profits overseas to avoid the payment of US tax, purposefully depriving the American people of revenue.”

One theory is that AOE “bought” the rights owned by ASI taking advantage of an incentive called capital allowance. This means that if a multinational buys its own intellectual property through an Irish subsidiary, the cost of that purchase will generate many years of tax write-offs in Ireland.


This is how Amazon could invade the pharmacy business

Drug delivery would also add to the value of Amazon Prime membership. Customers who pay the $99-per-year price for Prime membership are its most loyal customers, and Amazon is constantly looking for ways to increase the value of membership to keep shoppers from using competitors.

In generics especially, there are numerous markups along the way that Amazon could eliminate or pare back to capture market share.

Amazon already owns wholesale distribution licenses in at least 13 states and could build its own pharmacy business from scratch, restructuring the drug supply chain in the process. For now, these wholesale licenses may be part of Amazon’s business-to-business sales effort, which would focus on hospitals, doctors’ offices and dentists. In the longer term, however, the drug-distribution licenses could be the first step in building a hub-and-spoke model for drugs that could eventually serve consumers.

There are thousands of different drugs and dosages with prices that vary widely among drugstores and insurance plans. This makes it hard for patients to know when they are getting the best deal.


Tesla hits bumps in pursuit of mass market

Potential problems uncovered include workers in its Fremont plant manually operating robots that should be automated, several cost overruns and delays from suppliers because of late changes to design specifications, and difficulties sequencing parts once they arrive at the plant leading to a large number of unfinished vehicles coming off the line.

 

In multiple instances, the company shipped cars from the factory that lacked key parts such as computer modules, digital displays, or even seats. These parts were flown to Tesla-owned dealers, who then assembled them into the vehicle before completing the shipments to customers, according to several people familiar with the practice.


 

Apple acquired InVisage with well over 100 patents on quantum dot technology for advanced cameras and beyond

Apple’s acquisition of InVisage is very exciting as iPhone cameras are becoming a key feature to keep their smartphones ahead of the pack. Advancing video will be very exciting to see come to the iPhone and beyond. Between the advances in Quantum Dot technology and depth cameras, they have expertise in many markets that Apple could tap into over time.

Why AI is the ‘new electricity’

The U.S. and China lead the world in investments in AI, according to James Manyika, chairman and director of the McKinsey Global Institute. Last year, AI investment in North America ranged from $15 billion to $23 billion, Asia (mainly China) was $8 billion to $12 billion, and Europe lagged at $3 billion to $4 billion. Tech giants are the primary investors in AI, pouring in between $20 billion and $30 billion, with another $6 billion to $9 billion from others, such as venture capitalists and private equity firms.

Where did they put their money? Machine learning took 56% of the investments with computer vision second at 28%. Natural language garnered 7%, autonomous vehicles was at 6% and virtual assistants made up the rest. But despite the level of investment, actual business adoption of AI remains limited, even among firms that know its capabilities, Manyika said. Around 40% of firms are thinking about it, 40% experiment with it and only 20% actually adopt AI in a few areas.

The reason for such reticence is that 41% of companies surveyed are not convinced they can see a return on their investment, 30% said the business case isn’t quite there and the rest said they don’t have the skills to handle AI. However, McKinsey believes that AI can more than double the impact of other analytics and has the potential to materially raise corporate performance.


Why multi-cloud is the next big thing in technology

Why has cloud become so indispensable to so many companies? Because pretty much every company has become a software company, and they all need to deliver their software faster and to more people than ever before.

Avoiding lock-in and saving cost; Differentiation; responding to cloud vendor pressure; resiliency, redundancy, performance and data sovereignty; M&A and consolidation; access to resources.

A recent survey by RightScale found that 85% of enterprises now have a multi-cloud strategy, up from 82% in 2016. This creates immense opportunities for startups that can help companies work seamlessly across various different cloud providers. Startups that promise cloud neutrality – not being locked into one particular vendor – will have significant advantage in this new battlefield.


A decade after DARPA: Our view on the state of the art in self-driving cars

Developing a system that can be manufactured and deployed at scale with cost-effective, maintainable hardware is even more challenging. We are innovating across the sensing hardware and software stack to lower costs, reduce sensor count, and improve range and resolution. There remains significant work to be done to accomplish these conflicting objectives and get the technology to reliably scale.

Testing stochastic systems requires a significant number of repetitions generated by real-world data for it to be representative. That means we must gather millions of miles of road experience to teach the software to drive with confidence. (Imagine needing to drive millions of miles to get your driver’s license!) But not all miles are created equal, so “accumulated miles” is not an expressive enough metric to track progress. Think of it this way: The skills you acquired learning to drive in a quiet Midwestern town will not translate should you find yourself driving in the heart of Manhattan.

We’re still very much in the early days of making self-driving cars a reality. Those who think fully self-driving vehicles will be ubiquitous on city streets months from now or even in a few years are not well connected to the state of the art or committed to the safe deployment of the technology. For those of us who have been working on the technology for a long time, we’re going to tell you the issue is still really hard, as the systems are as complex as ever.


How many robots does it take to fill a grocery order?

The U.K.’s biggest online grocer hit a milestone this year: Ocado Group Plc put together an order of 50 items, including produce, meat and dairy, in five minutes. Fulfilling a similar order at one of the company’s older facilities takes an average of about two hours. The secret: a fleet of 1,000 robots that scurry about a warehouse snatching up products and delivering them to human packers.


Thanks to Wall St., there may be too many restaurants

There are now more than 620,000 eating and drinking places in the United States, according to the Bureau of Labor Statistics, and the number of restaurants is growing at about twice the rate of the population.

“Everybody thinks their brand has what it takes to succeed in the marketplace. You look at a location that looks good, but everybody is looking at the same place and they all come in, and the result is you get oversaturation.”

Sales at individual chain restaurants, compared with a year earlier, began dropping in early 2016, analysts reported. A majority of restaurants reported sales growth in just four of the last 22 monthly surveys from the National Restaurant Association. Before that, most restaurants had reported growth for 20 consecutive months, from March 2014 through October 2015, the survey found. As Americans work longer hours and confront an ever-growing array of food options, they are spending a growing share of their food budget — about 44 cents per dollar — on restaurants.

The shuttering of restaurants could have a major impact on the labor market. Since 2010, restaurants have accounted for one out of every seven new jobs, and many restaurateurs complain that it has become increasingly difficult to hire and retain workers.


Menu prices will tell the future of inflation

Take a company like the Cheesecake Factory. In its third-quarter earnings report back in 2013, when the labor market was looser, labor costs represented 32.1 percent of revenue. Operating margins were 8.2 percent. Fast forward to the third-quarter earnings report this year. Labor costs had risen to 34.9 percent of revenue, and operating margins had shrunk to 6.2 percent. In its conference call, the company guided wage growth in 2018 to 5 percent, in line with many of its peers. As labor pressures have eaten into margins and profits, perhaps not surprisingly, the company’s stock is flat over the past four years.

Lucky for the restaurant industry, even while labor costs have been rising, food costs have been falling. Cheesecake Factory’s cost of sales as a percentage of revenue has fallen to 22.9 percent, from 24.0 percent in the third quarter of 2013. Without this, margins would be even lower.

The cost of eating out has been going up at a rate of only 2.4 percent per year, less than wage growth in the industry.

Jeff Bezos’s guide to life

On raising kids: Jeff and his wife let their kids use sharp knives since they were four and soon had them wielding power tools, because if they hurt themselves, they’d learn. Jeff says his wife’s perspective is “I’d much rather have a kid with nine fingers than a resourceless kid.”

…decided “the best way to think about it was to project my life forward to age 80” and make the decision that “minimized my regrets. You don’t want to be cataloguing your regrets.” And while you might feel remorse for things you did wrong, he said more often regrets stem from the “path not taken” like loving someone but never telling them. “Then it was immediately obvious” that he should leave to start Amazon. “If it failed, I would be very proud when I was 80 that I tried.”

On space entrepreneurship: The key to opening the opportunities of space is reducing the price of getting objects out of Earth’s gravity. “We have to lower the cost of admission so thousands of entrepreneurs can have startups in space, like we saw with the Internet”, noting how web companies exploded in popularity as infrastructure costs came down.


Peak farmland, peak timber, peak car travel, peak child

About 1970 a great reversal began in America’s use of resources. Contrary to the expectations of many professors and preachers, America began to spare more resources for the rest of nature, first in relative and more recently in absolute amounts. A series of decouplings is occurring, so that our economy no longer advances in tandem with exploitation of land, forests, water, and minerals. American use of almost everything except information seems to be peaking, not because the resources are exhausted, but because consumers changed consumption and producers changed production. Changes in behavior and technology liberate the environment. – Nature Rebounds, Jesse Ausubel

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 2017.10.29

How Intuitive Surgical turned medical sci-fi into reality

Intuitive’s devices are now used at all of the top-ranked U.S. hospitals for cancer, urology, gynecology, or gastroenterology—including venerable institutions like New York’s Memorial Sloan Kettering Cancer Center, the Mayo Clinic, Johns Hopkins, and the Cleveland Clinic. More than 4,100 da Vinci base units have been installed worldwide as of June 30, including 2,703 in the U.S., 698 in Europe, 538 in Asia, and 210 in the rest of the world.

The systems aren’t cheap: The list price for the fourth-generation da Vinci Xi is $1.9 million, and that doesn’t include the cost of various surgical appendages, which can add tens of thousands of dollars more to the price tag. Still, the robots keep selling—and surgeons are increasingly adopting them in their practices.

The company says that more than 4 million minimally invasive surgeries have been performed with da Vinci systems since 2000—a new one begins every 42 seconds somewhere around the globe, Intuitive CEO Gary Guthart tells Fortune. The number of those procedures done worldwide spiked 15% in 2016 compared with the previous year, and Intuitive pro­jects an additional 14% to 15% rise in the number by the end of 2017. Indeed, for certain more complicated procedures, such as radical prostate removal, robotic-assisted surgeries now account for nearly 90% of operations.

The boom has driven Intuitive to $2.7 billion in 2016 global revenue, with more than 70% of sales being recurring in nature—a fact that underscores the advantage that comes from being the first major player in a rapidly growing market.

It isn’t clear whether robotic surgery uniformly leads to better outcomes. (Don’t look to the extensive medical literature for a clear-cut answer; conclusions differ from study to study.) But surgeons who swear by their robotic arms tend to return to the same words of praise: They tout the “speed of recovery” for patients, who typically don’t need to spend days or weeks in a hospital as they might after traditional open surgery. They speak of the “clarity” of its camera, the “flexibility” of its instruments.

A survey by investment and research group RBC Capital last year found that American surgeons think that within five years, 35% of operations will involve robots in some form, compared with 15% today.

 

Shake Shack founder on changing the way restaurants do business

And I think what fine-casual is doing is, “If you’re willing to give up waiters and waitresses and bartenders and reservations and table cloths and flowers, we’re gonna s– we’re gonna give you about 80 percent of the quality that you would have gotten in a fine-dining restaurant. We’re gonna save you about 80 percent of the money you’d spend in a fine-dining restaurant. And we’re gonna save you about 60 percent of the time.”

So by saying, “Hospitality included,” it’s basically saying, “You see that price that it costs to get the chicken? That includes everything. That includes not only the guy that bought the chicken and the guy that cooked the chicken, but it also includes the person who served it to you and how they made you feel.”

 

AlphaGo Zero: Learning from scratch

Previous versions of AlphaGo initially trained on thousands of human amateur and professional games to learn how to play Go. AlphaGo Zero skips this step and learns to play simply by playing games against itself, starting from completely random play. In doing so, it quickly surpassed human level of play and defeated the previously published champion-defeating version of AlphaGo by 100 games to 0.

It is able to do this by using a novel form of reinforcement learning, in which AlphaGo Zero becomes its own teacher. The system starts off with a neural network that knows nothing about the game of Go. It then plays games against itself, by combining this neural network with a powerful search algorithm. As it plays, the neural network is tuned and updated to predict moves, as well as the eventual winner of the games.

 

Nike’s focus on robotics threatens Asia’s low-cost workforce

For Nike, the shift to greater automation has two huge attractions. By driving down costs, it could lead to a dramatic improvement in profit margins. It would also allow the company to deliver new designs more quickly to fickle, fashion-conscious customers at a premium. A pair of Nike Roshe shoes costs $75 without Flyknit uppers, compared to as much as $130 with Flyknit.

The potential upside for Nike of greater automation is immense. Analysts at Citibank estimate that by using the Flex manufacturing process to produce Nike’s 2017 Air Max shoes, one of its top-selling lines, the cost of labour would decrease 50 per cent and materials costs would fall 20 per cent. That would equate to a 12.5 percentage point increase in gross margins to 55.5 per cent, according to analysts Jim Suva and Kate McShane. If Flex were to produce 30 per cent of Nike’s North American footwear sales, Nike could save $400m in labour and material costs, representing a 5 per cent benefit to earnings per share, according to Citibank estimates.

Traditional shoe production has required as many as 200 different pieces across 10 sizes, often cut and glued together by hand. The new manufacturing process being developed by Flex has introduced two ideas once thought impossible: the gluing process has been automated and lasers are used to cut the Flyknit material. Lead times in the shoe industry once ran to several months: Flex has promised to help Nike speed up lead times, which can be three to four weeks for a customised pair of sneakers.

Nike has reduced its supply chain by nearly 200 factories in the past five years to focus on fewer “quality, long-term partnerships”. However, the process of closing a factory, including those with compliance issues, can be a long and costly process for “brand-sensitive companies like Nike” to mitigate the disruption to local economies.


Birth of a Hidden Champion: TSMC & Morris Chang

Morris Chang said Intel’s advantage lies in its robust technological power and strong business operation foundation, having maintained No. 1 in the global semiconductor for decades. But its biggest drawback rests with its inexperience in the wafer foundry sector that highlights a service-oriented corporate culture, as Intel’s technology departments have long served the company’s own needs, totally different from the core culture of serving others seen in the pure-play foundry sector. With his 25-year experience at Texas Instruments before founding TSMC, Chang said he realized very well what kind of corporate culture was needed for the foundry sector. He said when establishing TSMC 30 years ago, he was able to easily inject the service-oriented culture into the TSMC at the very beginning.


Apple’s COO Jeff Williams recounts how business with TSMC began with a dinner at the founder’s home

Williams said that in the next 10 years, the biggest problem lies not in computing performance, but in the lack of sufficient visions to apply new advanced technologies such as AI (artificial intelligence) as well as how to safeguard privacy.

He said Apple has many expectations for AI applications, but what the company needs is neither to make chips with faster computing performance or to make cars able to fly, but to utilize advanced technologies to change the world, such as making use of semiconductors to achieve medical technology innovations.”


Apple supplier TSMC says Moore’s Law is no longer valid

Chang said that the time frame set in Moore’s Law is no longer applicable. He said TSMC has kept increasing transistor density, but not at a pace according to the law. Chang continued by noting that discussions about the applicability of Moore’s Law in recent years have often focused on ASML, a leading semiconductor lithography equipment supplier, because the company is now the world’s only supplier of EUV (extreme ultraviolet) lithography equipment and EUV technology bears a great responsibility of keeping Moore’s Law valid. Chang said major semiconductor firms have been keen to incorporate EUV technology into their 7nm process.


ChowNow, a GrubHub competitor, raises $20 million Series B round

ChowNow prides itself on being different from the likes of GrubHub and Seamless. ChowNow’s flagship service offers restaurants a white-label platform that enables restaurants to own their customer data, and feel confident their customers aren’t constantly fending off menus and discounts from competitors. Unlike its competitors, ChowNow charges an upfront monthly cost of $150/month per location instead of taking a commission on all orders.

“Yes, our software supports delivery but we have a unique place in the restaurant where we don’t play in the delivery space outright,” Webb said. “We’re also not a traditional marketplace either. Shopify for restaurants is an accurate way to describe us. Restaurants can plug in to our system and integrate it into their delivery backend.”

In charts: has the US shale drilling revolution peaked?

Throughout its existence, the shale oil industry has consumed cash. Companies have been unable to cover their drilling costs from their incomes, and have needed constant infusions of debt and equity financing. They have had little difficulty in raising that money, in part because investors wanted to share in the productivity miracle that the companies represented. If the miraculous days are over, and a more humdrum reality is setting in, will investors still be prepared to back the industry so willingly? Already equity raising by US exploration and production companies has slowed sharply this year. Plenty of attractive investment opportunities still exist in shale: internal rates of return of 30 per cent and higher are available in the Permian Basin, according to S&P Global Platts Well Economic Analyzer. Will there be enough of those attractive opportunities to keep US oil production rising, as the government’s Energy Information Administration and others expect? The industry says yes, but the drilling and productivity numbers will be worth watching closely over the months to come.

 

Australia’s got a lock on supply of the metal used for EV batteries

“Australia’s importance has been cemented by offtake deals and equity investments in mines,” Alice Yu, a Hong Kong-based consultant at CRU, said by phone. Backing from major battery manufacturers and auto producers could also see the nation add processing facilities to develop exports of higher-value lithium chemicals, she said.

Still, Macquarie Group Ltd. has warned there’s a bearish outlook for lithium prices in the short-to-medium term as “too many Australian rock producers are crowding in” with new projects. The surge is threatening to create a period of oversupply before rising demand for electric vehicles clears the surplus from about 2021, the bank said in a note this month.

Even with a wave of new supply, including from Australia, the lithium market is likely to remain tight with a stronger demand outlook than anticipated, according to Melbourne-based UBS Group AG analyst Lachlan Shaw. “We have had increased supply this year, and all the while lithium prices have kept going up,” he said. “The market is probably underestimating demand.”

How Saudi Arabia is building its $2 trillion fund

The kingdom plans to transfer ownership of Saudi Aramco, the state-owned oil company, to the PIF. An initial public offering of a small Aramco stake — probably just under 5 percent — will provide investment cash. That sale could raise about $106 billion, according to the Sovereign Wealth Fund Institute. Transferring Aramco to the PIF would allow the government to get its revenue from investments, rather than oil, according to the Prince, and along the way transform the PIF into the world’s biggest sovereign fund.

 

Bogle: Vanguard’s Size a Worry

The economies of scale just can’t keep going on much longer. We’ve only got 12 basis points to go, and let me say it: There’s an irreducible minimum, no matter how big you are, just for the fun of it, 8 basis points, cost a lot of money to run this business. We’re now talking about a 4 basis point improvement in cost. I just don’t think it’s worthwhile, hyping and trying to bring in more and more money.

The David Rubenstein Show: Masayoshi Son

On his US$100bn Vision Fund: He thinks that machines will become more intelligent than humans across a wide range of subjects within the next 30 years, an event referred to as the singularity. This will have a profound and largely positive impact on humankind. The fund will invest in companies that underpin the global shifts brought on by artificial intelligence.

On the Alibaba investment: Invested US$20m early on in the company’s history. He met with Jack Ma, who at the time had no business plan, zero revenue and only 35-40 employees. Still, he could tell from the way he talked (with “strong, shining eyes”) that he had a vision and impressive leadership skills. Similar story with Jerry Yang and the Yahoo! investment.

On his recent investment in ARM: Biggest investment to date. UK-based semiconductor company that has an overwhelming market share for semiconductor designs used in mobile phones and other mobile devices. He says they will ship more than 1 trillion IoT chips in the next 20 years.

Chinese women are getting rich by simply livestreaming their days

In China, young women like 23-year-old Huan Huan can earn up to $20,000 a month livestreaming themselves just doing regular things. That’s about 30 times more than the average college graduate makes at their first job.

In China, which banned online porn in 2000, PG-rated livestreaming has become a $4 billion-a-year industry with nearly 350 million followers — more than the entire population of the United States.


How do I get my daughter interested in computers?

Nobody becomes a software engineer because they love writing code; they become a software engineer because it allows them to build out ideas. This is a useful skill to have. Except that most software engineers aren’t realizing their own ideas. They’re getting paid to build someone else’s pet project. Software engineers are the wage labourers of the tech industry.

The most important tech skill, then, isn’t computers or engineering — It’s the art of getting paid to control vast amounts of money. Then you can make programmers build out whatever dumb ideas you like. Parents who want their daughters to succeed in Silicon Valley need not worry about teaching their girls to code: Teach them about capitalism instead.

Curated Insights 2017.07.23

The limitations of deep learning

…the only real success of deep learning so far has been the ability to map space X to space Y using a continuous geometric transform, given large amounts of human-annotated data. Doing this well is a game-changer for essentially every industry, but it is still a very long way from human-level AI.

To lift some of these limitations and start competing with human brains, we need to move away from straightforward input-to-output mappings, and on to reasoning and abstraction. A likely appropriate substrate for abstract modeling of various situations and concepts is that of computer programs.


Machines poised to take over 30% of work at banks, McKinsey says

Cognitive technologies — applications or machines that perform tasks once requiring human thought — are now cheap enough that banks can deploy them across operations facilitating trades or other capital-markets business. Automating tasks will “free up capacity” for staff to focus on higher-value work, such as research, generating new ideas or tending to clients.

Machine learning — which uses algorithms to identify patterns in large sets of data — can help sales and trading staffs understand positions faster and predict what flows will look like.

Natural language processing can perform legal and regulatory tasks by scanning through records, emails and recordings to translate them into structured data.

Cognitive agents can act as in-house personal assistants or service centers; think of help desks for trading staffs that have issues with their systems.

Robotic process automation — in which machines handle repetitive tasks — is particularly effective in banks’ middle offices, where it can help with end-of-day valuations and extract data.

Smart workflow tools — including document scanning and automated data entry — can speed the process of signing up new clients.

Netflix provided a new set of documentation, along with its customary earnings report, discussing how it accounts for its spending on content

Netflix surges 11%: sub adds crush estimates; discloses ‘content accounting’

“In continued success, we will deploy increased capital in content, particularly in owned originals, and, as we have said before, we expect to be FCF negative for many years. Since our FCF is driven by our content investment, particularly in self-produced originals, we wanted to provide some additional context on our content accounting at our investor relations website.”

Amazon Prime and other subscription businesses: How do you value a subscriber?

“[Understanding] the actual unit economics in the underlying business…requires analyzing the ‘true’ contribution margin of the business; not simply looking at gross or net revenue and the proper contra-revenue treatment, and not even looking just at gross margin as defined by the company. Many companies embed costs that are truly variable (for instance customer support, marketing, credit card processing) below the gross margin line. If you want to know if the business model truly hunts, you must pay careful attention. Otherwise, you may have simply found a company that is simply selling dollars for $0.85.”


Amazon is buying products from some US retailers at full price to build global inventory

The new program, which follows a similar rollout in Europe, is the latest move by Jeff Bezos to build up a complete catalog, even if Amazon can’t make much money on the products in question. In some cases, Amazon is approaching these third-party merchants after the manufacturer has declined to distribute the products through Amazon.

“When items are unavailable in a particular geography, we provide customers with selection from another marketplace. This offers customers a wider selection of great brands and helps sellers increase sales.”


Vanguard, the Amazon of asset management

What Vanguard’s founder, Jack Bogle, and company do have going for them is a unique ownership structure. Fund investors double as the shareholders. This allows Vanguard to essentially operate at cost, spending incremental profit on lower fees.

Vanguard has benefitted from a killer combination in recent years—low cost and quality performance. This is because although the firm distributes ETFs and actively managed funds, they specialize in passive, index-based investing—a style which has surged in popularity amid widespread underperformance across the active manager community.

Investing is a game of probability. Why would anyone want to pay 6x more for a product with a 90% likelihood of being inferior? The average actively managed mutual fund fee is 0.72%—6x higher than Vanguard’s 0.12% annual fee. And roughly 90% of those funds are underperforming Vanguard’s ultra-cheap option.


In urban China, cash is rapidly becoming obsolete

Ant Financial and Tencent were set to surpass credit card companies like Visa and Mastercard in total global transactions per day in the coming year. The key is that both companies are able to provide payments on the cheap, partly by allowing smaller vendors to make use of a simple printout of a QR code or their phone, instead of an expensive card reader. A back-end system that stores a record of user accounts, instead of having to communicate with a bank, also keeps costs down.

As the country builds its entire consumer economy around two private smartphone payment platforms, it is slowly locking out people unable to get onto those networks, and locking itself into those companies.

Curated Insights 2017.07.09

Massive Chinese Brainpower Is the Next Really Big Thing

The large scale and low cost of Chinese brainpower is another game changer. Suddenly thousands of engineers can be ramped up in a matter of days. And this phenomenon is starting to ripple through industry after industry. What is the impact on the pharmaceutical industry if companies can now access tens of thousands of scientists cheaply? If your competitor is opening a research and development center in China with 10,000 technical specialists, how big of a problem is that for you? Chinese brainpower is starting to impact many industries – often in unexpected ways.”


Could India become the best-performing stock market of the next ten years?

India’s estimated domestic consumption growth of 12 percent y-o-y through 2025 is forecast at more than double the global average of 5 percent — poised to triple to $4 trillion by 2025.

India will have the largest middle class globally by 2027. Currently, only 5% (27 million) of the 519 million strong workforce is classified as “urban middle,” earning more than $11,000 per year.

A structural shift of household savings into equities is helping propel Indian stock markets. A Morgan Stanley analysis concludes that domestic equity savings are on-track to rise by $525 billion over the next decade. The government is also taking steps to increase public-equity exposure.


We are still waiting for the robot revolution

Our chief economic problem right now isn’t that the robots are taking our jobs, it’s that the robots are slacking off. We suffer from slow productivity growth; the symptoms are not lay-offs but slow-growing economies and stagnant wages.

…Imagine an economy that was the exact opposite of one where the robots took over, and it would look very much like ours.

…productivity growth stalled before the financial crisis, not afterwards: the promised benefits of the IT revolution petered out by around 2006.


Could Amazon Spur a CapEx Boom Rather Than Disinflation?

Younger investors haven’t yet seen a Capital Expenditure bubble. What went in the mid-aught’s was a debt and real estate bubble and what’s going on now is a buyback bubble. (Yes, everything is a bubble).

But in the mid- to late 1990’s, we had the CapEx bubble to end all CapEx bubbles (involving computers and wireless telephony), and it was good for the economy (for awhile). The 1950’s featured an infrastructure CapEx bubble (the Interstate Highway System), the 1960’s had its “Space Age” CapEx bubble and the late 1800’s enjoyed a railroad CapEx bubble.

These spending sprees were unlike the debt bubble of the 2003-2007 period in that, when the dust settled, at the very least they had left something useful behind (roads, rails, fiber optics, jets and rocket technologies). The last bubble we had only left behind unpaid loans and financial losses.


Watch Out, Intel. New Types of Chips Are Gaining Ground

“If I look at the latest generation of microprocessors, this year, performance only went up by 3%.”

While Intel’s microprocessor is broadly useful, running everything from scientific computing to spreadsheets, the TPU focuses on a specific problem such as speech recognition so it has power where it counts. It has 3.5 times as much memory as a comparable Intel part in a chip half the size. “We threw out a lot of stuff that was not needed. Instead of the Honda for everyone, we are making these Formula One race cars for some things.”

…the TPU went from sketch to finished chip in just 15 months whereas the latest Intel processors take years to develop. “We are at a paradigm shift in computing architecture. This is a big revolution in terms of the technology approach. Intel is working for two years to squeeze out 10% improvements in performance, and this can get you 10 times the performance, while being less expensive than Intel’s most complex parts.”


Tencent Dominates in China. Next Challenge Is Rest of the World

…the company was also learning how to cut its losses and play to its strengths. In 2013, Tencent gave up on its floundering search business, turned it over to a competitor, Sogou Inc., and invested $448 million in Sogou instead. The following year it sold its equally unsuccessful e-commerce initiative to JD.com Inc. and invested $214 million in JD for a 15 percent stake. Before these deals, Tencent “was involved in everything.” After the deals, “it only focused on what it did best and entrusted other sectors to partners.” Zhang gives much of the credit for these moves to Lau. “Martin is first and foremost a great business analyst. He knows what wars to fight.”

“It’s a little bit like the Godfather Don Corleone saying, ‘I’m going to make you an offer you can’t refuse.’ If you don’t take their money, and they invest in a competitor, it can be deadly.”

Beyond Bitcoin: How Blockchain Is Changing Banking

The government, for its part, hasn’t even settled on what Bitcoin is. The Internal Revenue Service considers it an asset; the Commodity Futures Trading Commission says it’s a commodity; and Treasury Department regulators have described it as a “virtual currency.” Fed Chair Janet Yellen has said the agency has no authority to oversee Bitcoin, but has encouraged central bankers to study it.

“…half of the people in the group are looking for a solution; the other half are there uniquely to obstruct progress.”

Moats & Knights, Part Deux

1. Has management been forthcoming about competitive challenges or do they downplay the threat of new entrants?

2. Does management have the right financial incentives in place or has the board set up low hurdles to make sure large bonuses are realized, regardless of performance?

3. Does management know what the company’s advantages are and have plans in place to extend and strengthen those advantages?

4. Does management have meaningful personal ownership in the business (and thus have skin in the game) or are they akin to mercenaries? 

5. Does management have a track record of sacrificing short-term results for long-term results or do they seem to play the quarterly earnings game?


What I Believe Most

Incentives are the strongest force in the world. They cause otherwise good people to do awful things, and vice versa. They’re also the most misunderstood and counterintuitive force in business. Brent Beshore: “I want to know what motivates people. The problem is not that they won’t tell me, because they will. The problem is that none of us know the truth, even about ourselves. The only thing to do is watch someone over a very long period of time and try to piece it together.”

There are five sources of edge: 1) Learn faster than your competition, 2) empathize with stakeholders more than your competition, 3) communicate more effectively than your competition, 4) be willing to fail more than your competition, and 5) wait longer than your competition.

 

Twitter Snacks 2017.6.28