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September 25, 2018
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Mad Hedge Technology Letter
September 25, 2018
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In another resplendent display of corporate expertise, Amazon (AMZN) debuted its stunning new lineup of smart home products aiming to dominate your inside walls.
In total, Amazon gave consumers 15 new devices to dabble with – an unprecedented amount.
Amazon Echo, Amazon’s smart speaker, also received a software update.
Jeff Bezos’ company is traversing where they have never been before, infiltrating the car with the Echo Auto, executing location-based routines such as directing drivers running on a brand-new operating system.
Other products in the shop window were smart devices related to security, a clock, an upgraded Echo Dot, and a microwave.
The biggest nugget delivered in this release event was the advent of the Amazon Echo-on-a-chip – Amazon Connect Kit.
Essentially, it would allow any third-party manufacturer that vies for smart home supremacy to embed an Amazon produced chip into its product and design the architecture around it.
This foray has already turned heads with appliance companies already raving about this new development.
Consumer product companies such as Hamilton Beach (HBB) and Procter & Gamble (PG) are in the midst of engineering its own products centered around the Amazon connect kit.
North America sales and marketing senior vice president at Hamilton Beach Scott Tidey said his company has been “surprised at how easy it is to use the Alexa Connect Kit to prototype devices and create Alexa commands with just a few lines of code.”
In the near future, consumers could be maneuvering around their homes with products possessing a legion of these new Amazon proprietary chips.
Amazon is bent on penetrating your home and turning it into the smart home you always dreamed of, and this is one of the in-roads that will take them to the holy grail.
This hard-charging approach has been effective.
Wait to see which products go viral, then go after market share like crazy.
This approach made the Amazon Kindle a favorite of many tablet goers.
It helps that Amazon products are crafted with intense precision and great attention to detail.
As more consumers devour new Amazon devices, the synergistic effects benefit its comprehensive eco-system.
Once a customer becomes entirely drenched in Amazon products, it becomes the backbone to a customer’s existence.
Ask the millennial generation, and a good portion of them entirely depend on Amazon to fuel their daily routine.
Any replacement services would waste them hours and be a whole lot pricier.
As the voice assistants become widely adopted, it could blow a hole in Google (GOOGL) search.
Google search is still reliant on its desktop search, even though more and more people are migrating to its mobile search platform.
But if Amazon can stay ahead of Google in the voice assistant race, it could supplant Google as the premier search engine.
It might be an existential crisis for Google search and the minions of Google ad tech engineers.
Google is still wholeheartedly reliant on advertisement revenue, which is its profit engine.
Although, the cash cow digital advertisement business has made the company famously rich, regulation is a ticking time bomb, as the government has a bull’s-eye marked at this Silicon Valley mainstay.
Amazon has smartly moved up the value chain of search, and believes voice-activated search will be the revolutionary search function in the next few years.
It’s hard to argue with its prognosis.
Providing enough high-caliber accoutrements that mesh with its voice supported portfolio will expedite adoption and put strenuous pressure on Google to evolve faster.
Even worse, the golden years for digital advertisement have passed and the pressure on margins could exacerbate.
Fighting Amazon would provoke the margin bears and in one fell swoop, Alphabet, which is waiting on Waymo to take off, could get hip-checked by the Seattle-based company.
As the FANGs start to bleed over into each other’s business, these new product events take on a more important meaning.
The Amazon-effect has the tendency to destroy smaller company’s stocks, but going forward, large companies will be just as badly affected as Amazon branches off into new spheres spearheading revolutionary initiatives.
This speaks volumes to the innovation of Amazon, and why the best innovators will always stay one step ahead.
Amazon is rated the No. 1 company by the Mad Hedge Technology Letter and after this stellar debut of various IoT products, it’s hard not to like them even more.
And if Amazon’s connect kit catches fire and Google is forced to concede this hardware to Amazon, it would be a kick in the midsection to Google whose IoT strategy is not sticking as strongly as it would like.
Amazon does not want to co-exist with other companies. However, it smartly concedes certain segments until it is confident in taking that segment over.
This is why Amazon’s in-house brands are starting to wreak havoc on the third-party sellers on its e-commerce platform.
Amazon ingenuously chose to make a microwave because the technology hadn’t changed much in a generation, yet it was in dire need of simplification.
Seize the low-hanging fruit before you tackle the more difficult challenges.
Once Amazon masters the simpler devices in the home, watch out!
The rest of the home will be up for grabs too because of the same reason many companies heed way to Amazon – it does it way better than any other company for a fraction of the cost.
The multiplier effect will be in full force when Amazon finally constructs its shiny new headquarter somewhere outside of Seattle giving Amazon more manpower to fulfill Bezos’ vision.
My bet is that it will be placed smack dab in the middle of Washington D.C. – a stone’s throw away from the White House where Bezos has been increasingly active adding to his army of lobbyists.
With regulation on the verge of breaking social media’s back, Bezos is acutely aware of protecting his assets as if his life depended on it.
Bezos also has a house in Washington and owns the Washington Post.
Amazon doesn’t rest on its laurels because it doesn’t dominate 80% of the Android market, and it must be the aggressor and the disruptor at the same time.
Rolling out 15 smart products blew away the drooling audience and left them befuddled and craving for more.
Amazon must do it another way than Google and its way; the Amazon way, is the winning strategy.
It’s hard to imagine that Google is still reliant on a legacy business to print them money. And as the digital ad industry sinks, Google will sink, too.
Google still hasn’t found the next answer that can marshal it to safe waters.
Its eggs are still in one basket – unlike Amazon.
As Amazon steamrolls the little companies that never had a chance, the threat of them taking out a Google- or a Facebook-size company grows exponentially.
Ironically, Amazon’s digital ad business is set to surpass $4 billion by the end of the year, and it’s not even the main aim for Bezos.
The digital ad business is a side business for Bezos.
His visions are grander and awe-inspiring, and this product rollout affirms this vision.
This is the beginning of something much more powerful. Any investor who thinks Amazon shares are expensive is crazy.
The report of bribery in Amazon’s system and the subsequent short-term weakness in the shares is a great chance to buy Amazon on the dip because this stock is going higher.
Anybody would be a fool to short Amazon.
This company exudes quality, and many would agree with me.
Just The Beginning And More Smart Products On The Way
Last quarter’s earnings report sent Netflix shares nosediving to the depths of the ocean floor, and the wreckage saw Netflix’s stock down 24% in 5 weeks.
The short-term weakness in shares was justified after Netflix miscalculated on their quarterly subscriber numbers.
Netflix is still a buy because the wreckage can be salvaged.
In fact, it was never a wreckage to begin with because Netflix boasts the highest grade online streaming product in the industry.
An industry that is benefitting from massive secular tailwinds at its back, from cord cutters and the widespread pivot to mobile platforms.
Netflix has the best product on the market because they have the best strategy – throw $8 billion on content alone and hire the best production team money can buy to churn out content.
The method to their madness has worked and the haul of 23 Emmy’s was a result of this winning formula.
The 23 Emmy’s tied HBO, whose premier series Game of Thrones is still captivating audiences with its mix of graphic sexual exploits and violent tropes.
Several of Netflix’s award winners saluted Netflix’s hands-off approach, who allow these highly paid production specialists the creative freedom to inspire audiences.
For all of Hollywood’s razzmatazz, director’s and actor’s number one major gripe has been that the leash is tight with minimal wiggle room.
It’s not straightforward to change a culture that has developed over a century.
Cross-pollinating Silicon Valley’s lean business model with Hollywood top-grade content was the trick that removed the shackles from the director’s ankles.
The end-product has been the main beneficiary.
Scoping out Netflix’s end of year lineup has viewers drooling.
The tail end of the year sees Netflix reintroduce some hard-hitting content from Orange Is The New Black, Ozark, Daredevil, Narcos, and Making a Murderer, side by side with fresh content involving Simpsons creator Matt Groening and blockbuster names like Jonah Hill and Emma Stone.
As well as shelling out $8 billion for original content, Netflix upped its marketing budget from $1.28 billion to $2 billion in 2018.
The $2 billion budget is a classy touch but at this point, this product more or less sells itself.
The brand awareness is that far-reaching.
The platform is optimized by tweaking Netflix’s proprietary recommendation algorithm herding the audience into viewing more content that the algorithm deems likely viewable.
The man who is in charge of this is Greg Peters - Netflix chief product officer.
Kelly Bennett, Netflix chief marketing officer, will work with Peters to wield the massive $2 billion marketing budget in the most effective way possible.
To insulate the company from any potential Facebook-like data slipups, Netflix poached Rachel Whetstone from Facebook to head up the public relations division.
Who said there were no winners from Facebook’s PR disaster?
Whetstone’s professional year of hell offers valuable insight into how not to pull another Facebook (FB) stinker.
She previously worked for Google and Uber and is a veteran PR spinner.
Earlier this year CEO Reed Hastings detailed the possibility of using ads in Netflix’s ad-less platform by saying this about why Netflix has no ads:
“It is a core differentiator and again we're having great success on the commercial-free path. That's what our brand is about. So we're going to continue to expand the relevance of a commercial free service around the world and make that so popular that consumers are very used to it and appreciate Netflix.”
The relevancy of his statement is more meaningful now after a recently released report confirming that Netflix is testing the usage of ads to promote its content.
This would be a huge shift in the company’s ethos, and if the algorithms give Hastings the green light, this could alienate a big chunk of their subscriber base.
In a survey conducted about the implementation of ads, 23% said they would quit the service if ads are rolled out onto Netflix’s platform.
Only 41% said they would “definitely” or “probably” keep Netflix if ads are introduced.
In the same survey, if Netflix lowers the monthly cost by $3 while integrating ads, the cancellation rate falls from 23% to 16%, and half said they would keep Netflix.
The most important number of the survey was that only 8% would cancel if they increased monthly prices by $2, but if it went up by $5, 23% would say goodbye to the streaming service.
All signs point to an incremental price increase in the near future, partly helping to offset the mind-boggling amount of content spend this year.
Netflix subscribers are still willing to absorb price increases which is a great sign for future profitability.
But it is also worth mentioning that Netflix is a profitable company now, and margins have been slowly creeping up for the past few years.
The tests demonstrate that Hastings is serious about profitability at a time when the premier profit machines in tech are Apple (AAPL) and Alphabet (GOOGL).
These two behemoths blaze the trail for the tech sector and offer important lessons on the potential future profitability of Netflix.
It will take time for Netflix to reach that level of profitability, but the pillars are in place to ramp up the monetization drive.
The treasure trove of data will surely help decision making for the management, but to make their platform more like Facebook (FB) would be a huge error of epic proportions.
It’s proven that digital ads are annoying like a swath of mosquitoes trapped in your bedroom at 2am.
To dilute the quality of their product would fly in the face of what the company represents.
So how on earth will Netflix’s shares go from the mid-$300’s and reach the glorious heights of $400-plus and stay there?
One word – India.
It’s no secret that Netflix has been charging hard to rev up international business.
India is the trump card.
India boasts around 78 million middle class dwellers who can afford Netflix’s service.
In the next two years, it’s feasible that 10% of this socioeconomic class could be tuning into Netflix.
That foothold into India could mushroom, and potentially expand with an audience whose DNA is comprised of a strong film culture.
As broad-brand broadband expansion and smartphone penetration heating up in India, Netflix’s timely arrival could make Netflix look genius.
Their arrival coincides with a slew of American tech companies looking to tap revenue out of the largest democracy in Asia.
The unrealized potential cannot be ignored.
Netflix has primed their strategy by focusing on locally-produced content that will resonate with the Indian viewer.
Netflix’s India strategy started red hot with crime thriller Sacred Games imbued with a level of unfiltered, real filmmaking unseen in India.
The dark crime drama is already facing a legal battle concerning its lusty, foul-mouthed content that presses on the outer limits of what modern Indian society can handle.
The stereotype breaking series directed by Vikramaditya Motwane and Anurag Kashyap is Netflix’s first Indian feather in their cap as Netflix looks to accelerate the momentum.
Netflix has not produced back to back quarters where they failed to meet subscriber growth forecasts since 2012.
I firmly believe Netflix will continue this successful streak and beat subscriber estimates in the third quarter.
Initial indications show that Indians have gravitated towards Netflix’s original content, and with the 2018 Russian World Cup in the history books, the path has opened up for some nice surprises to the upside.
NETFLIX’S FUTURE - INDIA
________________________________________________________________________________________________
Quote of the Day
"Health care and education, in my view, are next up for fundamental software-based transformation." – Said Silicon Valley Venture Capitalist Marc Andreessen
Mad Hedge Technology Letter
September 13, 2018
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Not all tech will survive.
Come hell or high water, chatbots are not going away today but have an ugly fate with the tech graveyard of past technologies in the near future.
The rise of pervasive technology has brought consumers a wave of modern technology – some useful and some that go straight rogue.
Microsoft (MSFT) was on the receiving end of tech gone bad when its Tay bot was duped into spewing anti-Semitic and racist blather.
Bill Gate’s brainchild allowed Tay to behave according to what it learned from fellow users with which it interacted.
The developers forgot that not all Internet speak is nice and bubbly.
In another humiliating episode, cyberhackers wielded a chatbot to masquerade as a woman asking men to hand over credit card information in order to become verified on the raunchy dating app Tinder.
Manipulating an app platform has been a favorite of cyberhackers where users blindly trust these brands with which they have become familiar, and barely question the motives behind these strange developments.
As cybercriminals endlessly hunt for monetization and opportunities ramp up, chatbots represent a critical vehicle to pillage prospective victims.
These examples are just two that were publicly reported.
In reality, flashpoints are widespread, and users are usually completely unaware that they are being victimized.
Some chatbots are even out just for data harvesting among other targeted activity.
The dark web is the perfect marketplace to sell hijacked data.
Many Internet users believe they can feel safe and secure behind the auspices of end-to-end encryption.
However, users seem to forget that this type of foolproof security has its limitations.
The easiest way to become exposed is by the other person on the other end of the message.
They can turn you in.
Paul Manafort found this out the hard way when the FBI seized messages from the people he sent them too.
WhatsApp, owned by Facebook, along with chat app Signal are the best ways to keep chats confidential if you trust the other party. This is where the conversation disappears in about ten seconds.
However, just because WhatsApp is secure now, does not mean it will be secure tomorrow.
WhatsApp co-founder and CEO Jan Koum quit in a vicious row against Facebook’s upper management flipping off the rogue ad-seller as the relationship came to a screeching halt.
He later said he was quitting to collect “rare air-cooled Porsches” and play “ultimate frisbee.”
Facebook plans to weaken WhatsApp’s encryption levels and is intent on harvesting the data to eventually install a digital ad business to this ad-less messenger.
Facebook has shown a blatant disregard to privacy. Plan on everything you have ever sent on WhatsApp being privy to all the workers in the Facebook office at some point in the near future.
In some eerie way, Facebook mimics the hackers that maneuvered around Tinder’s developers, but in a completely legal way showing zero concern for its end user.
That is a scary thing.
Facebook has become borderline criminal in the court of public opinion in Europe. And that sentiment has seeped into the hearts of minds of Americans as well, and rightly so.
In short, the tidal wave of junk tech such as chatbots and Facebook spinning your information to the hills will end badly.
The public has smartened up and cannot be misled by Facebook’s privileged management spouting out that its “values” are different as an excuse for obvious debacles.
The global chatbot market was $369.79 million in 2017, and by 2024, this industry will balloon to $2.17 billion.
Chatbots will have a ubiquitous presence in work and daily life.
Companies desire to curtail rising costs, and are doubling down on the chatbot revolution.
The current obstacle is that artificial intelligence (A.I.) is just not good enough yet for chatbots to comprehensively serve customers and never will be.
The chatbots rely on the data in their systems to solve problems to difficult questions, but humans need to receive answers on the fly in the case of multi-part complications.
Chatbots spectacularly fail at this endeavor.
Even worse, chatbots cannot empathize with a furious customer and feel out customers’ emotions to properly optimize the perfect solution.
And in some instances, humans do not feel at ease to discuss certain topics with software code.
Then there is the generational difference of age groups preferring to use what they are familiar with.
For older generations, this absolutely means speaking to a real human who lives, breathes, and sleeps at night.
Younger generations who grew up never going outside but instead addicted to a screen have an easier time routing their lives through technology.
Granted, chatbots are effective when answering rudimentary questions to direct the customer to a department where they will soon be talking to a human. But chatbots are not the solution to every customer service problem.
Then there is the question of whether a rogue chatbot is going to disperse your data to a nefarious hacker or even behave like Microsoft’s Tay chatbot.
Facebook is already a legal entity that disperses personal data for money.
As the tech sector advances, the weak technology will crash and burn.
Low-quality social media platforms such as Facebook and inferior technology-like chatbots will succumb to the same fate as the woolly mammoth.
Investors are experiencing this massive migration up in quality as the public and investors are doing everything to insulate themselves from the dark side of technology.
In a further blow to user-generated platforms Facebook and Alphabet’s Google (GOOGL), Brussels voted in favor of a law that would force tech companies to actively filter out copyrighted content uploaded to their platforms.
This will crimp profitability for the two giants, as the data and content received for free is being put under a stronger microscope.
Europe is doing everything it can to disrupt these two companies from their free lunch, and they are fed up with the negligence and arrogance in which they run their platforms.
This was evident when Europe slapped Alphabet on the wrist with a $5 billion antitrust penalty earlier this year.
Chatbots will eventually face the public opinion death squad, as fatigued Internet users will completely avoid chatting with software code and move their businesses to the competitor.
The ultimate problem tying chatbots and Facebook together is the utter lack of attention to the customers’ needs.
These two phenomena exist to make more corporate money in a myopic fashion.
Every shortcut available will be taken and has been taken.
Facebook will never be able to monetize its website like the pre-Cambridge Analytica scandal days. It will take a sweeping reset, most importantly dethroning Mark Zuckerberg from his perch in Menlo Park, California, to reinvigorate this lost firm.
Chatbots will not exist in a few years and technology will move on to more effective solutions.
It is the end of bad tech as we know it, as technology is evolving so fast, yesterday’s conquerors become todays pariah’s in just a few years.
Chatbots – A Flash in The Pan Tech
________________________________________________________________________________________________
Quote of the Day
"Our goal has never been to make the most. It's always been to make the best,” said CEO of Apple Tim Cook.
Mad Hedge Technology Letter
September 12, 2018
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If you have read any of our content in the first year of the Mad Hedge Technology Letter, the content is distinctly bullish technology stocks.
A fundamental driver propelling this cogent argument is the dominant Software-as-a-Service (SaaS) industry booming inside the confines of Silicon Valley.
If you want to boil down your tech investment thesis to one indispensable rule – only invest in tech companies that carve out prominent SaaS businesses.
If you stick with this nostrum, you will be delivered profits in spades.
We have recently taken in a swarm of new tech letter subscribers and understanding the panacea that is SaaS will entrench your portfolio in a glorious position to reap untold profits.
What is SaaS?
SaaS is a distribution method in which software is diffused to paid subscribers, usually on an annual, reoccurring payment plan, and the software is remotely stored on a centralized cloud platform awaiting use.
Unsurprisingly, SaaS remains the most lucrative segment of the cloud market.
In 2017, the tech industry did $60.2 billion in annual SaaS sales, that number is poised to explode to $117.1 billion in 2021.
The near doubling of sales underscores the robust nature of these tech firms setting up businesses of this ilk, and the positive effects dripping down to the bottom line.
Simply put, no SaaS business, no reason to invest.
SaaS isn’t the only cloud revenue companies can carve out. Tech firms also offer platform-as-a-service (PaaS) and infrastructure-as-a-service (IaaS).
However, SaaS is by far the prominent growth lever in the high-margin cloud industry.
The indomitable presence inside the SaaS industry is Bill Gates’ creation Microsoft (MSFT).
Microsoft leads all companies with a 17% global share of the SaaS market.
The Redmond, Washington, outfit blew past stalwart Salesforce (CRM) nine quarters ago.
Microsoft’s sizzling SaaS business is an oversized contributor to its 45% revenue growth rate, which is head-and-shoulders above the industry average.
Salesforce (CRM), Adobe (ADBE), Oracle (ORCL) and SAP (SAP) fill out the top five largest global SaaS businesses, but it is really a tale of two stories.
Oracle and SAP, which are competing in the same market, are grappling with legacy database businesses and legacy tech, which are punished by investors.
John Dinsdale, a chief analyst at Synergy Research Group, mentioned two outliers of “Cisco (CSCO) and Google too who are making ever-bigger inroads into the SaaS market” leveraging Cisco’s multitude of software assets and Google’s G Suite.
The thing that makes SaaS the x-factor for tech companies is that inevitably every company from every walk of life will adopt this mode of software, giving legs to this distribution model.
Vendors are scrambling to put together some resemblance of a SaaS product together, and this trend is a vital contributor to an industry that is growing 32% YOY worldwide.
Kevin Cochrane, chief marketing officer of SAP Customer Experience lay bare his thoughts about this type of service describing it as the “Golden Age of SaaS.”
Companies are becoming digital first from end to end, explaining the sharp rise in IT professional salaries and rise in quality software products.
As we look around the corner to the IaaS part of the cloud industry, which is growing at around 30% YOY, there is one dominant player, and everybody knows its name.
Amazon (AMZN) is the No. 1 vendor with Microsoft, Alibaba (BABA), Google, and International Business Machines Corporation (IBM) trailing behind.
The top four IaaS players have carved out a total of 73% of the global market ravaging any resemblance of competition.
Amazon is the industry standard with the best record of customer success.
If Amazon branched off into the SaaS industry, it could unlock an additional $100 billion in annual revenue.
A shift into this direction could pad Amazon’s margin’s even more after successfully boosting North American e-commerce margins from 2.4% to 4.7%.
It’s not entirely inconceivable that Amazon could break the $2 trillion valuation in three to five years, as its revved up digital ad business registered growth of 129% YOY last quarter.
Microsoft seized the runner-up position in the IaaS market to Amazon by growing 98% YOY with sales eclipsing $3.1 billion in 2017.
Wherever you turn, whether toward the cloud business or gaming, investors can find Microsoft making sales.
Microsoft has been a favorite of the Mad Hedge Technology Letter and it’s hard pressed to find a better public tech company in operation now.
The SaaS industry is not a one-size-fits-all proposition.
Thus, there is abundant room for niche offerings that quench companies’ demand for specific services.
This is the reason why cloud companies have participated in a non-stop buying binge of smaller companies that fit their needs.
Microsoft purchased developer favorite GitHub for $7.5 billion earlier this year, and similar examples are scattered all over the tech ecosphere.
Artificial Intelligence (AI) will be the kicker that powers SaaS performance to new heights because incorporating this groundbreaking technology will enhance functionality and, in return, raise profits for all involved.
The scalability of SaaS products has allowed companies to offer software for affordable prices allowing the smallest of firms to adopt a digital-first strategy.
This software connects with other software seamlessly integrating an array of productive apps that help teams overperform and overdeliver.
In the American workplace, 73% of companies will be exclusively using SaaS to function by 2020.
American companies are using 16 apps on average per day, a 33% jump in the number of apps they were using just two years ago.
The migration to mobile has swallowed up SaaS products as well with more mobile-specific software rolling out to mobile devices.
The meteoric rise of SaaS offerings has cut IT security budgets substantially as security has been delegated to the cloud instead of in expensive in-house security teams.
No longer do tech firms need to beef up guarding their own gates.
Protection is provided on a centralized cloud with a third-party company ensuring safety.
This development has helped a new industry rise – cloud security.
Whether people realize it or not, the SaaS industry is here to stay and will become more prevalent in every industry going forward.
This is incredibly bullish for companies that sell SaaS products as revenue will continue to rise.
________________________________________________________________________________________________
Quote of the Day
“Growth and comfort do not coexist,” – said CEO of IBM Ginni Rometty.
Mad Hedge Technology Letter
September 10, 2018
Fiat Lux
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In a recent interview Google CEO Sundar Pichai admitted he is “not a morning person” and maybe that was his argument for skipping out on the grilling that his contemporaries Facebook (FB) COO Sheryl Sandberg and CEO of Twitter (TWTR) Jack Dorsey received in front of Congress.
Or maybe Pichai managed to down a rotten egg that morning when eating his favorite staple breakfast “omelet with toast," because his decision to abort his date with Congress was a shocking error of judgment for a CEO that has had a flair for controversy lately.
With the whole world watching, the empty chair with a simple name tag with Google plastered over it represents the arrogance and excesses of Silicon Valley all mixed into one incongruous mixture.
This rookie move will open a can of worms for the company made famous by its search algorithm that dominates the developed world.
Google will have a target on its back going forward while creating a massive public relations backlash for a company that must fiercely defend its ad-laden profit engine going forward.
Instead of taking it on the chin like Facebook and Twitter, Google has voluntarily veered into a sticky situation, and all to avoid a few stomach wrenching questions from Congress.
How did this all happen?
In the beginning of June, Google decided to scrap its relationship with the U.S. Department of Defense.
Project Maven, as it was known, provided Google’s artificial intelligence (A.I.) technology to systematically analyze drone footage for the U.S. government.
Pichai chose to avoid renewing the contract, and Google Cloud CEO Diane Greene agreed it was a black eye for the company that applied its own technology to conspire against damaging human life.
Throwing fat on the fire, Pichai followed up by dismantling Project Maven and giving the thumbs up for code-name Dragonfly. This was a secret project aimed at the mainland Chinese market and rolling out a censored version of Google’s search engine by altering its construction of unique search algorithms for a mainland Chinese audience.
This incensed the higher-ups on Capitol Hill, as this move was largely viewed as pandering toward the Chinese communist government for monetary purposes at an uber-sensitive time between the two powerhouse nations, which remain mired in a tumultuous trade war.
The timing couldn’t be worse for Pichai.
Dragonfly is already in beta mode and could be rolled out in the near future. However, I see it as dead on arrival, because there is no hope that Google can penetrate the fortress that is the Chinese business world.
Naturally, Google employees were dismayed and shocked by these startling revelations.
Pichai’s conspicuous no-show was in part driven by the potential wrath he would have faced by these recent reckless decisions that seemed to put the American government’s interests below the Chinese communist government.
The circus was there for everyone to see.
Sheryl Sandberg put on her bravest face.
It was obvious she had rehearsed every word to the utmost precision while Dorsey vehemently guarded his brainchild with honesty and zeal.
The testimonies made social media look perceivably criminal with a congressman even hinting the reason they aren’t allowed to do business in China was mainly a business model issue, and more specifically a legal issue.
Another congressman from West Virginia suggested Facebook’s Instagram was the source of the opioid epidemic ripping apart his state.
The only thing getting ripped apart during the intense grilling was Sheryl Sandberg’s well-practiced smile.
Dorsey and Sandberg were visibly uncomfortable with the line of questioning and rightly so.
Google would have looked worse if it showed up. But it managed to look 10 times worse than that by stonewalling the government’s invitation.
In a recent Pew Survey, data revealed 44% of youth between 18 to 29 last year deleted Facebook on their mobile phones.
Facebook is already a legacy platform in the throes of disruption cannibalized by its own asset - Instagram.
Instagram will be the sole survivor of Facebook by taking out Facebook itself, and that is bearish for overall business.
And that is if social media can hang on that long before it’s taken down by the hawks circling above in Washington.
When Facebook’s Cambridge Analytica scandal broke, the government was at sixes and sevens at attempting to figure out what on earth was going on behind the smoke and mirrors of the big data theatrics.
CEO Mark Zuckerberg was let off the hook with questions he wriggled out of, and Facebook shares powered on unabated.
This time it’s different.
Regulation is an imminent threat to social media revenues and could hurt earnings this quarter.
Investors need to migrate to higher tide, meaning Amazon (AMZN) and Microsoft (MSFT), because the waves still aren’t yet reaching those levels.
Amazon and Microsoft need to send a thank you note to Alphabet for screwing the pooch.
The administration has felt it convenient to barrage Silicon Valley to solidify the Republican base, and this tactic has resonated with the administration’s diehards.
A smorgasbord of FANG-bashing was the recipe to this madness. But now sights will be zoned in on dismantling Google, and Microsoft and Amazon will benefit from avoiding nasty, gut-churning headlines that turn up in the form of Twitter blitzkrieg.
Yes, Sheryl Sandberg, Facebook was “too slow” to react to foreign interference in the elections. But it is more accurate to characterize the battle social media faces against outside nefarious forces as impossible.
It is impossible for these social media platforms to police themselves while policing the whole world.
The incessant whack-a-mole scenario is the best-case outcome for the self-policing prospects of social media.
Once social media algorithms figure out how to stopgap one method of circumvention, the bad actors will move on to a more advanced way to manipulate the algorithmic police.
What does this mean for social media?
Costs are going up and will seep into profit margins.
Highlighting the upward trend of rising expenses for social media platforms is the daily cost of keeping CEO Mark Zuckerberg safe.
And remember, he lives in Palo Alto, California, one of the safest places on planet earth with a medium household income of $137,000.
In 2017, Facebook divvied up $7.3 million for Zuckerberg’s security detail and costs associated to it.
In 2018, shareholders approved a $10 million security package to keep Facebook’s head honcho safe. This underscored the ballooning risk of leading this controversial technology forum littered with conflict of interests, and on the verge of potentially perverting western democracy.
By the end of 2018, Facebook will increase its security division from 10,000 employees to 20,000.
And that is just the beginning.
Facebook’s security division is the fastest-growing division of fresh hires at Facebook.
Before Facebook and Twitter can ring in the profits, they face an exorbitant war against foreign “bot armies” intent on muddying the free flow of accurate information on domestic shores that target individuals deemed unaligned to the foreign actor’s interests.
There will be collateral damage and lots of it.
This does not sound like an easy road to profits, and it is not.
As midterm elections creep closer and closer, Facebook and Twitter must confront elevated headline risk, and any trading day could see shares wacked with a 10% haircut.
Following the government question-and-answer period, Twitter and Facebook will be designing a new resistance to stymie villainous foreign infiltration.
Ultimately, spending the bulk of employees’ work days realigning their business models to protect democracy, instead of creating new growth drivers, is not bullish for the stock price.
It is hard to breed much confidence in social media stock’s long-term narrative after listening to Dorsey and Sandberg speak.
They kept touching on needing help from government intelligence sources to aid them in catching the miscreants.
It makes sense to gradually nationalize social media platforms to unite the disconnect between social media’s war against foreign forces and the intelligence communities war against them.
It is clear hackers are exploiting the dislocation in cohesiveness between the cracks in social media and government intelligence.
But if that ever happens, it would be the end of Facebook and Twitter as we know it, as normal users would be averse to providing free content on a government-enabled platform as well as a strong blow to democracy itself.
It all makes sense now why Dorsey and Sandberg gave the answers they gave.
Their answers were akin to a faint plea for help while appearing contrite, hoping to persuade Congress to give them more time to figure it out.
This thinly veiled attempt to elongate the profit-making process and find a solution for a problem with no solution could end badly for these two companies.
Migrate to higher quality tech names in the short-term.
The resilient American economy powers on with the heavy lifting done by Silicon Valley albeit it with fewer lifters.
If social media stocks can get through the midterm elections unscathed, there is a trade on the table for these beleaguered companies rounding out a tumultuous year.
But getting to that point will be volatile, as this group of stocks have a rocky road ahead of them for the rest of the year.
I’m Not A Morning Person
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Quote of the Day
“I'm not a regular smoker of weed. Almost never,” – said CEO of Tesla Elon Musk on The Joe Rogan Experience podcast.
