Mad Hedge Technology Letter
October 22, 2018
Fiat Lux
Featured Trade:
(FACEBOOK’S DARPA DALLIANCE),
(FB), (GOOGL), (AAPL)
How far will society and government allow tech companies to adventure before there is some blowback?
Honestly, it’s hard to say when to put the shackles on these companies that are getting too powerful for their own good.
Tech companies have been pedal to the medal pushing the limitations of what the human world can offer.
The hoard of profits showered on the tech giants is one thing, but should they be held accountable for the unintended consequences that there robot-like profit-making operations dump on society?
Each company has chosen different ways to deploy the capital. Apple decided to reward shareholders by executing a $100 billion share buyback program.
The stock has performed great this year.
Apple (AAPL) and CEO Tim Cook have been keen to show a trustful face among a growing phalanx of data misusers.
Facebook (FB) has used the surplus capital to build a secretive research center modeled after the Defense Advanced Research Projects Agency (DARPA) called Building 8.
DARPA is an agency of the United States Department of Defense responsible for the development of emerging technologies for military use.
The division of the government was launched in 1958 by United States President Dwight D. Eisenhower to counteract the Soviet launching of Sputnik 1 in 1957.
DARPA smartly partnered together with America’s business leaders, academia, and other talents dotted around the government and military branches to develop projects that would broaden the frontiers of technology and science far beyond immediate U.S. military current needs.
Building 8 met the real world for the first time when its first product Portal, a vertically-shaped display screen attached to a smart camera, debuted with befuddlement.
How does a company that just announced a breach of 50 million accounts, after a torrid string of mishaps which made a mockery of Facebook’s use of big data, launch a device that gives Facebook unfettered access into the confines of one’s personal home?
A Facebook spokesman said that Facebook will “use this information to inform the ads we show you across our platforms. Other general usage data, such as aggregate usage of apps, etc., may also feed into the information that we use to serve ads.”
Executives at Facebook know that this product would be a commercial write-off, but the sunk cost associated with this project forced them to throw it on the market with reckless abandon.
And at the end of the day, some data is better than no data at all and that is what the earth’s existence is boiling down to.
So, if you thought that Facebook might finally decide to stop being your effective cyber-stalker, you are wrong.
And this is all just the beginning, it gets a lot worse than this, let me explain.
In fact, Facebook’s Building 8 was led by the former Director of the Defense Advanced Research Projects Agency Regina Dugan.
The more I sniff around, the more I see her pawprints everywhere she went.
Dugan used her elite role at DARPA to score a job at Google’s (GOOGL) Advanced Technology and Projects (ATAP) group before she jumped ship to Facebook’s secretive research center Building 8.
Dugan’s tenure at DARPA from 1996 to 2012 meant she was privy to the LifeLog project which was developed for just one year and subsequently shut down.
This program was cancelled after heavy criticism from activists advocating privacy and rightly so.
But, was this program really shut down?
Lifelog was a program with the mission to effectively record all of an individual’s physical movements, conversations and everything they listened to, ate, read and bought.
Everything!
The premise of this program was to cultivate a permanent searchable record of one’s life.
The daredevil program was light years ahead of its time predating the iPhone, tablet, and the current wave of populism engulfing the free world.
Back then, the weaponizing of consumer technology was largely absent from the world, and the top brass of DARPA surely wasn’t naïve enough to believe that this technology could only be applied to create an epic cyber-diary of one’s life.
In any case, Dugan conveniently was employed by Google and Facebook and her knowledge of Lifelog was fluid, deep and comprehensive.
Unintended consequences are rife and, if I connect the dots, it appears that DARPA’s Lifelog found new spawning grounds in Silicon Valley’s richest companies, or at least two of them.
There is no way to know for sure, but monetizing Lifelog’s cyber-record technology to harness it as a tool to collect personal information for the use of digital ad targeting has rained profits down on these two companies.
Building 8 is serving up round two of its DARPA-esque mission by announcing that they have built a prototype producing an armband that will facilitate the understanding of oral language “through a person’s skin.”
It was in January 2017 when Dugan took the stage in San Jose at a conference to announce this project.
It was mostly dismissed as fantasy and something out of science fiction.
Well, it’s one more step closer to being rolled out in mass market form.
The way the language process works is that vibrations allow for the roots of words to be transformed into silent speech.
If scientists manage to do this, it would give deaf people a new lifeline giving them the capability to understand what people are saying without the need for lip reading.
However, on the other side of the coin, the technology could be modified to aid spies in eavesdropping if the range of the vibrations allows them to.
The second project announced by Dugan that same night in San Jose was Facebook’s bold attempt of a noninvasive brain sensor designed to turn thoughts into text.
This would require brain surgery to install a sensor, and the plan for this technology is for people to access devices from their brain without the need to physically or orally communicate with it.
I suspect that Facebook would collect the data from this brain sensor and the sensor would be in contact with the Facebook infrastructure sharing the performance and state of operations.
If the sushi hits the fan and a person dies from the sensor, Facebook would need to analyze the specific details in the malfunction.
What a scary thought.
Facebook adopting the DARPA blueprint from its halted project of Lifelog to respawn similar technology that painstakingly retrieves as much data about our lives as possible is the first step to something substantially bigger.
However, the digital ad business has made Facebook and Google insanely rich and they want an encore.
I am surprised that other Silicon Valley cash-rich companies avoid tapping up the offspring of other military-grade technology to join the profit parade.
Apparently, there has been zero backlash from it.
If Facebook somehow manages to roll-out a commercialized brain sensor giving Mark Zuckerberg access to our minds, I wonder what on earth could round three entail for Zuckerberg…
Nothing is impossible.
Facebook’s Building 8 - First Product
“What’s dangerous is not to evolve.” – Said Founder and CEO of Amazon Jeff Bezos
Mad Hedge Technology Letter
October 18, 2018
Fiat Lux
Featured Trade:
(UNDERSTANDING THE REAL COMPETITION),
(SPOT), (AAPL), (GOOGL), (MSFT), (HUAWEI)
Microsoft sells computers?
That was the bizarre look I got after telling my friend that Microsoft (MSFT) is in the business of selling laptops, desktop computers, and tablets that convert into laptops from a product line called Microsoft Surface.
This is not your father’s Microsoft.
Things are different now.
Everything changed once they got rid of Steve Ballmer whose inertia prevented Microsoft from taking advantage of the huge influence they culled in the tech sector from being the universal operating system for PCs.
Ballmer’s lack of technical expertise was his own downfall stemming from his terrible decision to buy Nokia’s handset business for $7.6 billion.
The board of directors forced him out and was a blessing in disguise.
Thousands were laid off in the Nokia handset division and a massive write-down was taken.
As big tech spread out their wings and branch off into various businesses they never imagined before, they have reinvented the former images of themselves.
This goes for Microsoft who’s taking their legacy business of Microsoft Office and Windows and leveraging it with the cloud to create a stellar product.
And with the cash hoard, not only are they creating new products by fusing together old products with new technologies, they are overlapping into other big tech companies’ turf.
The overlapping products can be seen in hardware products made by this software behemoth and their neighbors.
The Microsoft Surface division is up 25% YOY speaking volumes to the quality hardware Microsoft produce now even if you didn’t know about it.
Apple (AAPL) has attracted most of the conversation in the "smart" headphones space because of the AirPods.
The sleek white earbuds are becoming ubiquitous with the headphone space trending to a smaller and "true" wireless.
A schism has formed as the AirPods don’t satisfy the entire spectrum of smart headphone fans.
The retro ear-muff shaped headphone with more immersive sound is what I am talking about, and I do recognize that Beats has been in the market for a decade.
Microsoft chose to go this route with their smart headphones and this is their answer to the iconic AirPods and the Google (GOOGL) Pixel Buds.
This smart headphone comes with an embedded digital assistant and integrates noise cancellation.
I tried out the Microsoft's Surface Headphones before they came on the market, and I only had positive things to say about the quality and experience.
They sound impressive, the controls are easy to use, and the modern design is definitely a plus.
The color could use a little reimagination but all in all, I was pleased.
Microsoft Cortana, Microsoft’s digital assistant, for all who don’t know, is also slipped into the experience and a tap on the right earcup will summon Cortana.
It seems that Microsoft still needs a few kinks to work out with Cortana, but voice activation and smart assistants like Siri and Google Assistant can be found in almost every hardware and software product now.
Headphones are city workers’ second most important smart device because of its functionality.
Have you ever been on the New York metro and seen how many people are wearing smart headphones?
Quality headphones shut off the outside world and warm up the insides with the user’s favorites on Spotify (SPOT) or Apple Music.
Stressing out on the commute into work in an Uber is common and calming the frayed nerves before workers enter into the office of dungeons and dragons has a type of value that can never be replicated.
Urban dwellers need high-quality smart headphones and these big tech companies are acutely aware of this.
Google has made an audacious attempt to integrate real-time foreign translation into the Pixel Buds. It only works with Google’s Pixel phones, is hard to operate, and needs the Google Translate app on the phone.
It’s a good first step but the applications using smart headphones are endless.
Smart assistants are the key.
As they become more adept at processing the real world, they streamline and better a human’s life.
Microsoft’s smart headphones have embedded Skype, one of Ballmer’s positive acquisitions during his tenure. And with Cortana integration, it could morph into a natural extension of the Windows 10 experience.
Microsoft’s smart headphones morph into a point of conversion for more of Microsoft’s hardware products as they start to construct an expanding moat.
Headphones used to be more or less the same.
Plug it into the jack and you’re on your merry way.
The headphones of today are looking more different from each other with every iteration.
This was glaringly evident when Apple chose to no longer sell any phones with a 3.5mm headphone jack.
Ironically enough, Google dumped the headphone jack with its Pixel 2 phones a year later even though they bashed Apple for it a few months earlier.
The reason was mainly functional as Google said, “We want the display to go closer and closer to the edge.”
Gradually, smartphones will get rid of everything except a razor-thin screen. All the other clunky business in and around it needs to go. This is the first step and home buttons have been chopped off smartphones as well.
It is fine to get consumed in the battle of smart products between Silicon Valley companies, but there is a larger threat.
Chinese smart products are rapidly catching up to what American companies can produce.
The Middle Kingdom hasn’t surpassed American tech expertise yet but they are debuting devices relative to the competition that could only be dreamed about a few years ago.
Huawei's flagship smartphone Mate 20 and Mate 20 Pro pack a lot of punch and this must be frightening to the FANGs.
The timing of the phone debut is a big victory for American smartphone companies because this phone is good enough to grab market share from existing American companies but aren’t allowed to sell inside America.
Congress putting the kibosh on any sliver of a chance to partner with an American carrier means that there will be no chance of Chinese phones gutting the American smartphone market.
What it does mean is that they will invade and dominate other markets such as South East Asia, Eastern Europe, and Russia.
The same will go for any Chinese smart device.
Huawei has given up trying to circumvent the government blockade.
The Huawei Mate 20 is priced around $800 and the Mate 20 Pro at $1140. They are probably two of the best smartphones ever made and are a direct threat to any American company’s revenue that manufactures smartphones and smart devices.
"The idea of Twitter started with me working in dispatch since I was 15 years old, where taxi cabs or firetrucks would broadcast where they were and what they were doing." - Said CEO of Twitter and Square Jack Dorsey
Mad Hedge Technology Letter
October 17, 2018
Fiat Lux
Featured Trade:
(THE SPOTIFY REGIME),
(SPOT), (AAPL), (NFLX), (MSFT), (AMZN), (GS)
It’s not earth-shattering to concede that our attention spans have shrunk and as a result, there are unintended consequences.
The various smart devices and other technology vying for a slice of your precious attention have been accepted as the new normal.
Whether it’s binging on Netflix (NFLX) or gaming on a Microsoft Xbox (MSFT), consumers are absorbed obsessively staring into a screen most of the day.
As tech penetrates the core of our existence, the music industry has been the recipient of changes that were hard to fathom just a few years ago.
And as all businesses morph into pseudo-tech enterprises supported by data analytic teams, management is able to unearth some compelling data and utilize it to commercialize the audience.
Spotify (SPOT), the world’s leading music streaming platform, doesn’t monetarily reward music artists unless a stream surpasses a minimum of 30 seconds.
This is just one way that Spotify’s founder and CEO Daniel Ek has changed the music industry.
Think about the implications.
Gone are the elaborate instrumentals to warm listeners up before a catchy chorus hooks you forever.
Songs are entirely front loaded now with the end goal of persuading listeners to not swipe until the 30-second barrier is passed.
Whatever happens after that doesn’t matter – the song might as well go silent because Spotify will pay the artist.
According to Spotify data, Ed Sheeran’s “The Shape of You” is Spotify’s most-streamed song with 1.94 billion listens.
This is just one scant nugget of data in Spotify’s treasure trove of global music data that finely chronicles the state of the music industry and how consumers devour music.
Spotify CFO Barry McCarthy promptly explained the Spotify’s relationship with data and music at the Goldman Sachs’ (GS) Communacopia conference by saying, “The company with the most data wins. The company with the most data insights wins. The company with the engineering culture, software-driven business wins. And that’s the play we’re making.”
In the current tech climate, I will take software over hardware any day of the week.
Hardware sales are a one-off event until the next cycles bring an upgraded iteration which could take years to execute.
Software sales are an annual recurring revenue stream that is as sticky as the software's quality giving hope to company CFO’s of a perpetual income stream.
It doesn’t matter that Spotify isn’t profitable. The end goal isn’t to make money in an industry that is notoriously difficult to combat the royalty expenses eroding 70% of every $1 of revenue.
What has happened is that Spotify is too big to fail and it loves every second of it.
The music industry needs Spotify just as much as Spotify needs the music industry and this awkward partnership is far from a match made in heaven, but it works for the foreseeable future.
It helps that artists, for the most part, have bought into the data-based streaming model.
Music artists have turned into tech-like firms themselves.
Their new goal is to compile an audience then monetize like Spotify itself.
It speaks volumes of how the tech model has penetrated every corner of the world.
Apple (AAPL) is acutely aware of the potency a music streaming service offers and has been investing in Apple Music, its music streaming arm.
Rumors have been swirling that Apple absorbed the entire staff of a music analytics firm called Asaii including the owners, for a tad under $100 million.
This talent grab on the heels of the Shazam purchase indicates that Apple seeks a better understanding of how to curate music playlists and better serve music fans who own Apple devices.
Even though Apple has the second leading music streaming service, they have ceded the battle to Spotify.
CEO of Apple Time Cook is on record saying, “We’re not in it for the money.”
Indirectly, Cook means Apple Music is a loss-making division and he doesn’t care because it is just a small fragment of what makes Apple one of the best companies in the world.
Apple has also commissioned 24 television shows and 2 films costing them $1 billion.
A single billion is peanuts considering the eye-popping amount of Apple’s cash hoard. They can afford to take the long-term view and slowly enhance the ecosystem instead of Spotify whose eggs are all in one basket.
Apple is more concerned about offering iOS users the best experience possible and in return Cook hopes to count on them to use iOS devices for a lifetime.
Apple Music’s biggest weakness is its biggest strength.
In short, Apple music is tailored to the iOS operating system.
If you sign up, the app directs users to sign up for an Apple ID if you do not already have one.
Android lovers have little interest in signing up for Apple Music considering they do not have an Apple device and then must pay $9.99 per month after the introductory 3-month offer expires when Spotify is free. It’s not worth the extra hassle.
It is almost certain that Spotify will enact an Android operating system pivot to build a moat around its business and that is something Apple cannot do.
Spotify will start partnering with Samsung, Microsoft, and the Android-based Asian manufacturers to focus on monetizing the Android audience and make it even more inconvenient for listeners to access Apple Music.
Signing up for Spotify and listening to its ad-free subscription without creating an Apple ID is more appealing.
And after three months, users have the option to continue a free version of Spotify, albeit with digital ads popping up.
This leads me to the belief that there is definitely space for more than one player in the music streaming industry.
Amazon is another tech firm who has a music streaming service but are more concerned if they convert users into prime memberships.
If compiling the most music data wins out, then Spotify is in the lead with its 83 million paid users and 101 million free users.
Apple trails in second place with 50 million users which is still an extraordinary number of listeners and easily monetizable.
The way music streaming platforms works is that users are more likely to listen to the most popular artists and songs and not look for an adventure.
The app is merely there to locate the songs they already like or click on a recommendation produced by an algorithm.
It’s not like going out on a Friday night to experience some unknown singer in a grunge basement and becoming a new fan. Users know what they want, and they desire to access it. Such is the nature of internet search.
Spotify’s data shows that out of 3 million artists on the platform, 200,000 artists receive 70% of the music streams, clearly segmenting the haves and have-nots.
The rest of the 2.8 million are struggling to be discovered and cannot cut a wage off of Spotify’s platform.
Online music streaming products also align perfectly well with artificial intelligence-based voice activation technology.
These services will deeply integrate this technology into its services as they desire to ramp up the quality of services.
As for the music streaming business hopefuls, it's game over as the three major players have the leverage to put out any fires that crop up.
When you break it down, Spotify has a 180 million user audience growing at 30% YOY and is hellbent on becoming profitable.
As they enhance the platform’s tools and services, gradually expect more subscription-based products to entertain users.
And even if Spotify doesn’t become profitable as soon as they would like, the aggregate hoard of data will multiply in value.
Spotify is already the most prized music asset in the world with a market cap of $26 billion, about $10 billion higher than all global music revenues.
Yes, Spotify destroyed album artwork and its audio quality of 320 kilobits per second is no match for CD-quality audio. But this is the world we live in today and Daniel Ek’s Spotify is the 800-pound gorilla in the room.
Spotify is a great long-term buy-and-hold asset. Take the latest weakness to add to your position.
“I was born in Sweden, and in Sweden, we are known for the piracy services.” – Said Founder and CEO of Spotify Daniel Ek
Mad Hedge Technology Letter
October 16, 2018
Fiat Lux
Featured Trade:
(IS IT REALLY ESSENTIAL OR NOT?),
(AAPL), (GOOGL), (MSFT), (AMZN)
