Happy Monday! We’re back this week after a week’s break in Scotland where I hiked Ben Nevis and saw a lot of sheep. And enjoyed a couple of pints, of course.
And it’s not coming home, I guess. That’ll take a lot to digest.
But Novak is well on his way to becoming the GOAT 🐐.
It’s no joke to win 20 Slams in the face of competition by Federer and Nadal, and Nole has once again proven that he is, in the face of booing (and vaccinations), that he is inevitable.
Monday Musings
Yesterday, I finished a brilliant book about the rise of ByteDance and TikTok called Attention Factory: The Story of TikTok and China's ByteDance by Matthew Brennan. In the book, Brennan explores the ways in which information sharing in the internet age have evolved. The earliest period was portal websites, then search, then micro-blogging, and now, recommendation engines. The five sub-periods can be classified as Curation (1991 onwards), Search (1995 onwards), Subscription (1999 onwards), Social (2003 onwards) and Recommendation (2011 onwards), and all of these technologies build on top of each other. What TikTok has done brilliantly is to understand the power of personalised recommendation, removing friction from the consumer experience and creating products that are highly accessible and pertinent. Recommendation is highly technologically intensive, with the lack of any declaration of intent by the user meaning that the recommendation engine must be complex and fine-tuned enough to infer the user’s preferences based solely on their previous behaviour. Recommendation systems like those of TikTok rely on two key processes: content-based filtering, which recommends content to users that is similar to what they already like to consume, and collaborative filtering, which bases recommendations on finding groups of users who enjoy similar content. TikTok’s core strength comes from its understanding that recommendation engines are the best way to provide consumers with a seamless, highly personalised experience that is sticky and will keep them coming back for more.
Meanwhile, this week…
The cinema industry is on the brink of COVID-influenced disruption, China’s regulatory crackdown on its tech giants picks up pace, and the Pentagon has cancelled the $10 billion JEDI cloud computing contract it awarded to Microsoft in 2019. Also, Carbontech could be key in our efforts to battle climate change, and India’s startup ecosystem is booming and maturing.
#1 The Cinema Industry - On the Brink of Disruption
The last 16 months have been transformative. As COVID has ravaged the world, digital transformation has accelerated by at least half a decade, and as we have mostly sat indoors for the last year and a half, many habits that were ingrained into our lifestyles have evolved. A primary one is entertainment and our consumption of it – we are now accustomed to streaming everything, and Netflix, Amazon Prime and Disney+ have taken over our lives. The obvious effect of this has been to disrupt the traditional cinema experience, which over the past 10-15 years has consolidated into a few cinema chains like AMC owning portfolios of hundreds, and sometimes even thousands, of cinemas. The cinema experience itself, though, has been fairly standard – you go to a cinema, buy some overpriced popcorn, and watch a film. While 3D screens, sofas and reclining chairs have improved the experience, they have not truly transformed it – and this may turn out to be their Achilles Heel in a post-COVID world, where millennials heavily prefer experiences over material things. Most films can be streamed now and do not require the traditional experience, making it clear that the cinema experience will be increasingly geared towards blockbusters – and in effect, making revenues extremely sensitive to the movie slate going forward. Another nail in the coffin may be the Experience Economy – experiences like TopGolf, SoulCycle, and Secret Cinema that enable socialising, interaction, and immersion, all of which we missed during COVID and will be a cornerstone of the post-COVID revenge economy.
Cinemas won't disappear anytime soon, but their increased sensitivity to the movie slate will likely change their format going forward. For instance, megaplex cinemas may dwindle in favour of smaller formats geared towards blockbuster films. Studios may choose to skip the theatrical release window and opt for other channels - such as PVOD.
#2 China Targets Firms Listed Overseas After Launching Didi Probe
For a moment there, it seemed as if China’s regulatory crackdown against big tech was over, with some investors, like Hyomi Jie of Fidelity International, predicting that ‘we are closer to the end of the cycle’. That view, unfortunately, has been emphatically debunked over the last week, with the clampdown on Didi (the Chinese Uber) tanking shares of the newly-listed company by more than 20% in a few days. China has now said that it will tighten rules for companies listed overseas or seeking to sell shares abroad, further decoupling its tech sector from the US as it looks to maintain a tight grip over its most highly valued sector. In the case of Didi, Chinese officials suggested it delay its IPO amid concerns that the US government could use Didi’s audit documents to access data on Chinese citizens; Didi refused, and in response, the Cyberspace Administration of China (CAC) ordered the removal of Didi’s app from Chinese app stores. The response from the authorities highlights a structural problem in Chinese tech companies listing on US exchanges – the US is not likely to loosen reporting requirements for these companies, and Chinese regulators are not likely to pull back their punches either. China’s tech giants and their investors are caught right in the middle of the China-US Cold War, and, as a result, investment into Chinese companies is likely to crash for the foreseeable future.
The scrutiny is particularly targeted at companies heading to the U.S. for listings, said Bruce Pang, head of macro and strategy research at China Renaissance Securities. He said the move adds pressure “not only on listed tech companies but also the valuation of pre-IPO companies.”
#3 Pentagon Cancels a Disputed $10 Billion Technology Contract
In a massive blow to Microsoft, the US Defense Department said that it would not go forward with the $10 billion, 10-year cloud computing contract that Microsoft won amidst stiff competition from Amazon in 2019. The Pentagon said that the contract for the ‘Joint Enterprise Defense Infrastructure’ (JEDI) no longer met its needs since the costly arguments over JEDI had been so lengthy that the system would be outdated as soon as it was deployed. This decision highlights how rapid the pace of change and innovation has been in the cloud computing industry, when a contract that is less than 2 years old has had to be ripped up due to ‘legacy’ issues. The Pentagon has now said that a contract for a new cloud architecture capability called the Joint Warfighter Cloud Capability will be awarded to both Microsoft and Amazon Web Services, allaying potential security issues that could arise from dependencies on one company as a single point of failure. Amazon’s court battle was also influenced by the fact that once a company transitions to a cloud service, it is hard to move off because of high switching costs – and if the Pentagon adopted Microsoft as its only cloud provider, Amazon would face an incontrovertible challenge to its leadership of the global cloud computing industry. The trade-off for the Pentagon is simple – speed and seamlessness versus tight security – and for the world’s most complex national security apparatus, the answer will invariably lean towards security.
As the Biden administration examined the yearslong effort to build a computing cloud, officials said they came to two conclusions: The legal challenges to JEDI could stretch on for years, and the technological concept was already outdated.
#4 Has the Carbontech Revolution Begun?
In his book ‘How to Avoid a Climate Disaster’, Bill Gates says that a serious climate plan has to encompass all carbon-spewing processes, including transportation and concrete and steel production, in order to develop green alternatives. Clean tech, such as solar power and battery technologies, is only one part of the solution. Another solution that could prove to be vital is Carbontech, where large amounts of carbon is ‘embedded’ into commercial merchandise. A number of startups have begun developing products that aim to fold in carbon dioxide captured from smokestacks and other sources of pollution in order to repurpose greenhouse gas molecules. An essential aspect of this circular carbon economy would involve using renewable, emissions-free energy to put CO2 into products, and would not necessarily involve a high-tech makeover for everything we use currently. The primary utility of this technology would be to make the things we use today and cannot do without (like concrete, which accounts for ~7% of global CO2 emissions) environmentally friendly. It would help the energy transition for products like jet planes and cement that are difficult to decarbonise and electrify. A thriving CO2 market could furthermore spur demand and drive down prices for technologies like direct air capture, which can further accelerate the energy transition. However, there is a potential negative side-effect to consider as well – an expanded carbon economy could extend the influence of fossil-fuel purveyors and delay a switch to electrification and renewable sources of energy, and cause some of the problems we are trying to get rid of to linger.
Noah Deich, a founder of a nonprofit think tank called Carbon180, told me that he sees the market for carbontech products potentially reaching $6 trillion globally. By far the largest part of that economy, should it become a reality, would derive from the refashioning of commodities like building materials, concrete, fuels and plastics.
India’s startup ecosystem is booming and maturing. In the first half of 2021, Indian startups raised a record $10.46 billion, up more than 150% from $4 billion during H1 2020, and almost double of the $5.4 billion raised H1 2019. India has produced 16 unicorns this year, and there is an almighty scrap between startups for tech talent, with newly turned unicorns, fueled by the vast amount of private capital from the likes of Tiger Global, Falcon Edge, and SoftBank, increasing the pool on their cap tables for employee stock options. Early-stage startups are also at the centre of attraction, with the average size of a seed round increasing to $1.1 million up from $800k last year, and $740k in 2019. The dry powder in the market has caused the dynamics of the industry to mirror those in the US – founders are gaining more power, and are now negotiating from a place of strength to hold on the rights and preferential treatments from investors. An example of massive valuations in the Indian market is Bangalore-based EdTech Brightchamps, which has raised $140k to date, being in talks to raise at a $500 million valuation. There is, of course, a potential negative to the hype as well; many of these startups have raised funds at such high valuations that if they are not able to hit the metrics they have told their existing lead investors, they may not be able to raise further, significantly hampering their development.
On a call recently, two founders discussed what many would consider a first-world dilemma: Dozens of investors had agreed to invest in them, but they no longer had so much stake to offer. So they strategize what stake to give whom and how to politely get others to reduce the size of their committed check size.
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