Tidbits #25 – The World Reminds the US They Exist

Happy holidays, and thanks for reading! 🎄🎁🦌

🗺 Geopolitics

Russia has hacked entities across the US, creating a historic mess…it will take time before the US realizes the full scope of the attack and what has been taken.

#1 How to Understand the Russia Hack Fallout

THIS WEEK NEWS broke that United States government agencies and corporations alike—as well as international targets—were victims of a massive nation-state espionage campaign. But as the revelations continue to pile up, and new targets are discovered by the day, it can be hard to get a handle on what exactly happened and what it all means.
The hackers, who have been widely reported as Russian, compromised high-profile targets like the US Commerce, Treasury, Homeland Security, and Energy Departments, as well as companies like the security firm FireEye. All of the attacks appear to stem from one initial compromise of the IT infrastructure and network-management firm SolarWinds. Hackers had breached the company as far back as October 2019, then planted malicious code in software updates to its network-monitoring tool, Orion. Any customer that installed an Orion patch released between March and June inadvertently planted a Russian backdoor on their own network.
In a statement on Thursday, the Department of Homeland Security’s Cybersecurity and Infrastructure Security Agency said it “has determined that this threat poses a grave risk to the Federal Government and state, local, tribal, and territorial governments as well as critical infrastructure entities and other private sector organizations.” CISA, the Federal Bureau of Investigation, and the Office of the Director of National Intelligence are all part of a “Cyber Unified Coordination Group” that is quarterbackingthe US government’s response to the widespread intrusions and working to get a handle on the scale and scope of the situation as quickly as possible.
Source: Wired

Unfortunately, there is no “navy” on the internet. What does exist are private companies that have some defensive capabilities, but unless these defensive capabilities are coordinate across the chain, we are pitting a motley group…a private army against nation-state aggressors.

Of course, some of these private players are quite good at what they do:

#2 Microsoft unleashes ‘Death Star’ on SolarWinds hackers in extraordinary response to breach

This week Microsoft took a series of dramatic steps against the recent SolarWinds supply chain attack. In the size, speed and scope of its actions, Microsoft has reminded the world that it can still muster firepower like no one else as a nearly-overwhelming force for good.
Through four steps over four days, Microsoft flexed the muscle of its legal team and its control of the Windows operating system to nearly obliterate the actions of some of the most sophisticated offensive hackers out there. In this case, the adversary is believed to be APT29, aka Cozy Bear, the group many believe to be associated with Russian intelligence, and best known for carrying out the 2016 hack against the Democratic National Committee (DNC).
Source: GeekWire

The shape of the internet is changing in more ways than I can count. The changes on the consumer side are often discussed, but hacks like this show why the current state of the internet on the supply side is untenable.

The internet is becoming the place where we all live. Yet, companies that effectively operate the internet have resisted the encroachment of the US government (and any government in general). However, there are nation-state aggressors like Russia that don’t even bother to ask.

Can private companies alone stand up to them?

Are we entering a phase where the dirty word “civil-military fusion” is going to be used more and more often? “Civil-military fusion” is what we dislike about how China does things, though…

Or do private companies continue to ramp up their capabilities until they become de facto “military / navy of the internet”? If so, we may be reverting back to the 18th Century in which private companies like the Dutch East India Company literally maintained armies and conquered countries. The internet companies of today won’t be conquering the physical world, but they certainly already control a lot of our digital world.

In other news…cybersecurity is becoming more and more important. There are a lot of ways to play this. Capital Flywheels’ preferred way is Cloudflare. While players like Crowdstrike were the real winners on this news (since the hacked company, SolarWinds, signed up for Crowdstrike to protect itself…probably the most positive advertisement any company can get), Capital Flywheels doesn’t want to get too bold and wade into the middle of the battlefield. Players like Crowdstrike and SolarWinds have targets on their backs. Cloudflare plays a different role and seems safer to my untrained eyes.

These issues will only get worse for everyone.

Maybe that’s why China is spending so much effort on quantum computing as it may be the solution to a lot of cybersecurity headaches:

#3 China Stakes Its Claim to Quantum Supremacy

LAST YEAR GOOGLE won international acclaim when its prototype quantum computer completed a calculation in minutes that its researchers estimated would have taken a supercomputer 10,000 years. That met the definition for quantum supremacy—the moment a quantum machine does something impractical for a conventional computer.
Thursday, China’s leading quantum research group made its own declaration of quantum supremacy, in the journal Science. A system called Jiuzhang produced results in minutes calculated to take more than 2 billion years of effort by the world’s third-most-powerful supercomputer.
The two systems work differently. Google builds quantum circuits using supercold, superconducting metal, while the team at University of Science and Technology of China, in Hefei, recorded its result by manipulating photons, particles of light.
Source: Wired

Speaking of changes…this essay was quite thought-provoking:

#4 Return of the city-state

If you’d been born 1,500 years ago in southern Europe, you’d have been convinced that the Roman empire would last forever. It had, after all, been around for 1,000 years. And yet, following a period of economic and military decline, it fell apart. By 476 CE it was gone. To the people living under the mighty empire, these events must have been unthinkable. Just as they must have been for those living through the collapse of the Pharaoh’s rule or Christendom or the Ancien Régime.
We are just as deluded that our model of living in ‘countries’ is inevitable and eternal. Yes, there are dictatorships and democracies, but the whole world is made up of nation-states. This means a blend of ‘nation’ (people with common attributes and characteristics) and ‘state’ (an organised political system with sovereignty over a defined space, with borders agreed by other nation-states). Try to imagine a world without countries – you can’t. Our sense of who we are, our loyalties, our rights and obligations, are bound up in them.
Which is all rather odd, since they’re not really that old. Until the mid-19th century, most of the world was a sprawl of empires, unclaimed land, city-states and principalities, which travellers crossed without checks or passports. As industrialisation made societies more complex, large centralised bureaucracies grew up to manage them. Those governments best able to unify their regions, store records, and coordinate action (especially war) grew more powerful vis-à-vis their neighbours. Revolutions – especially in the United States (1776) and France (1789) – helped to create the idea of a commonly defined ‘national interest’, while improved communications unified language, culture and identity. Imperialistic expansion spread the nation-state model worldwide, and by the middle of the 20th century it was the only game in town. There are now 193 nation-states ruling the world.
Source: Aeon

👨‍💻 Technology

#5 China rethinks the Jack Ma model

When China’s business regulator accused Alibaba Group Holding of selling counterfeit goods over the internet in a report five years ago, the e-commerce giant did not hesitate to fight back.
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The timing was crucial. The feud had broken out just a few months after Alibaba’s high-profile 2014 debut on the New York Stock Exchange — the biggest initial public offering ever at the time — which symbolized the arrival of China’s Big Tech era. In those days, Beijing balked at standing in the way of its internet champions, whose services have grown to reach hundreds of millions of users and boosted China’s prestige internationally.
But a half-decade later, the political winds have shifted. After years of bounding growth and shopping sprees for new assets, China’s biggest internet conglomerates now extend into most sectors of the economy, from transportation to finance. But while they used to enjoy a free pass on regulatory issues, they are now under unprecedented scrutiny, and the state is asserting its dominance once again.
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In antitrust enforcement in China, the government has often been uniquely tolerant of monopolies, which dominate industries from shipbuilding to telecoms. Previously, lax enforcement is seen as an expression of the Communist Party’s conventional wisdom: Domestically, monopolies are more manageable than a messily competitive market, and internationally, they are more competitive. But the vertiginous rise of China’s Big Tech companies has clearly spooked the government and triggered a rethink of its monopoly-friendly attitudes.
Source: Nikkei Asia

It’s all too easy to read this and assume this is just a “China thing” since the West has generally been much more proactive against monopolies already. And this may just be China “catching up”.

But it might not be. Because internet monopolies are very different from industrial monopolies. Industrial monopolies did not have network effects. Internet monopolies do. Industrial monopolies did not change the fabric of the world to the extent that internet monopolies are doing so now.

China might be ahead of the curve on this one…

What’s interesting is that, most of the pressure is concentrated on the consumer side.

As a result, there are likely much more interesting and less risky opportunities on the business side for the companies that can position themselves as “foundational technologies” that support businesses that touch the consumers.

Controlling the consumer is becoming harder and harder (and more risky from a regulatory perspective). Control on the consumer side is likely to fragment as we are seeing with e-commerce proliferation beyond Amazon and social media proliferation beyond Facebook.

Not only are business-facing “foundational technology” companies less risky, the proliferation of options on the consumer side also drastically expands the market for these business-facing “foundational technology” companies.

One of them is Nvidia, which continues to do some really interesting things:

#6 AI at Your Fingertips: NVIDIA Launches Storefront in AWS Marketplace

AI is transforming businesses across every industry, but like any journey, the first steps can be the most important.
To help enterprises get a running start, we’re collaborating with Amazon Web Services to bring 21 NVIDIA NGC software resources directly to the AWS Marketplace. The AWS Marketplace is where customers find, buy and immediately start using software and services that run on AWS.
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To help data scientists and developers build and deploy AI-powered solutions, the NGC catalog offers hundreds of NVIDIA GPU-accelerated machine learning frameworks and industry-specific software development kits. Today’s launch of NGC on AWS Marketplace features many of NVIDIA’s most popular GPU-accelerated AI software in healthcare, recommender systems, conversational AI, computer vision, HPC, robotics, data science and machine learning
Source: Nvidia

What makes Nvidia an amazing company is that they are not only pushing the leading edge in terms of hardware and software, they are also one of the few companies that continue to spend on R&D to ensure that their technologies can be adopted by less sophisticated clients.

The storefront on AWS and the NGC software catalogue is one example of that. This will help many companies, even those not considered in “tech” to adopt sophisticated AI-driven tools like recommender systems, conversational AI, and computer vision.

In many ways, Nvidia is the AI-industry’s version of Shopify with the same ethos as Shopify’s “Arm the Rebels” mantra. Nvidia is allowing “normal” companies to adopt AI tools that would otherwise only be available to Amazon / Google / Facebook / Microsoft.

#7 Microsoft Designing Its Own Chips for Servers, Surface PCs

Microsoft Corp. is working on in-house processor designs for use in server computers that run the company’s cloud services, adding to an industrywide effort to reduce reliance on Intel Corp.’s chip technology.
The world’s largest software maker is using Arm Ltd. designs to produce a processor that will be used in its data centers, according to people familiar with the plans. It’s also exploring using another chip that would power some of its Surface line of personal computers. The people asked not to be identified discussing private initiatives. Intel’s stock dropped 6.3% to close at $47.46 in New York, leaving it down 21% this year.
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“Because silicon is a foundational building block for technology, we’re continuing to invest in our own capabilities in areas like design, manufacturing and tools, while also fostering and strengthening partnerships with a wide range of chip providers,” Microsoft spokesman Frank Shaw said.
Source: Bloomberg

Seems like Microsoft has been inspired by what Apple is doing. Or maybe motivated might be the better word since PC’s are largely preferred over Macs historically because of performance.

Macs do lack native software support for a lot of popular apps, but Macs are also capable of running Windows apps via Boot Camp / emulation. When Macs were at a performance dis-advantage, running apps this way further slows down software. But from all early indications, M1 Macs can run emulated software faster than native software written for Intel chips.

All this is to say the future looks pretty grim for Intel.

💬 Media

#8 50 Years of Gaming History, by Revenue Stream (1970-2020)

Source: Visual Capitalist

Very fun graphic and article.

Games are all around us. The common trope right now is that “everything is fintech”, but the real trend of the coming decades is more likely that “everything is going to be a game”…eventually, including even your work.

#9 Snapchat is releasing Bitmoji Paint, a massively multiplayer online painting game

Today, Snapchat is getting a new original game called Bitmoji Paint. As the name suggests, the game involves Bitmoji — those cutely grotesque customizable avatars — and painting. It’s Snap Inc.’s fourth title from its internal games studio, which began putting out games last year. “Our goal with Bitmoji has always been to be the world’s avatar, to give people a digital version of themselves that represents them and lets them be themselves online,” says Ba Blackstock, co-founder of Bitmoji. “And so now with games, it’s also letting people play together in a really new and fun and exciting way.”
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“A lot of the playability in the game is things like simple scribbles,” says John Imah, head of games and entertainment partnerships at Snap. “You can send fun messages, and also even [make] giant landscapes, all these things are all possible in Bitmoji Paint.”
Source: The Verge

Another interesting feature from Snap.

Snap continues to impress since it’s one of the few ecosystems that bring to together social, media, games, and AR / VR.

#10 Hinge is about to become The Bachelor

Hinge’s newest feature takes a cue from The Bachelor. In a new tab called Standouts, daters can preview potential matches’ responses to the dating app’s prompts and give anyone they’re interested in a “rose.” Users only receive one free rose per week, which refreshes on Sundays, so they’ll have to buy more to give them out.
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Roses can be sent from the new Standouts tab or from the usual Discover tab. The Standouts tab is refreshed daily with 10 new people, and only roses can be sent in this tab — not the usual likes. Roses can also be sent in the usual Discover tab.
Source: The Verge

Hinge is owned by Match (also owns Tinder). And they get their users. “The Bachelor” and Hinge are a perfect fit in terms of positioning and feel.

Match is up ~10x in the last 5 years (outperforming most of FANG…). $45 billion company today, but still seems to be killing it. Has better margins than Google. Has almost no competition.

And the more amazing part is that Match has the potential to build a 1 billion+ user social network around the world in an area where almost no other social media companies touch.

#11 Roku Torments Entertainment Giants in Quest to Dominate Streaming

Roku was long viewed as the scrappy startup that invented the streaming-media player. Now, it is a $40 billion juggernaut increasingly comfortable throwing around its weight.
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Consumers can get access to streaming apps in a variety of ways, most commonly through set-top devices like Roku, Apple Inc.’s Apple TV and Amazon.com Inc.’s FireTV. They can also get small “sticks” that plug into their screens. And many new TVs now come with preset operating software, from Roku or other providers, that offers built-in access to streaming apps.
Roku, based in San Jose, Calif., leads the pack across those categories with 38% of the total U.S. market, according to research firm Parks Associates, with some 46 million active accounts globally.
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Although Roku built its business selling streaming devices, these days it barely makes any profit off that hardware, and instead focuses on selling ads in the streaming apps it carries. Roku has more than 10,000 apps in its Channel Store, both free and paid. It generally gets a percentage of the ad space, based on an arrangement with the app’s owner. Ads were the greatest contributor to Roku’s $1.1 billion in revenue last year. Roku also generally gets a percentage of subscription revenue from partners.
Source: WSJ

Interesting read on how the home entertainment landscape is changing and how dominant Roku has become.

I never paid much attention to Roku before, which seems to be a mistake given how well it has done.

💰 Fintech

#12 WhatsApp to roll out health insurance and micro-pension products in India

A month and a half after receiving regulatory approval from the National Payment Council of India (NPCI) to roll out payments on its messaging platform, WhatsApp has unveiled plans to offer financial services like health insurance and micro-pension products in India.
Source: KR Asia

Facebook / WhatsApp seems to be picking up the pace on their fintech efforts now that their mind is set on it.

The overall strategy seems to be quite similar to what Alipay and WeChat pay have pioneered in China. Start first with payments and then add on financial services.

#13 Pinduoduo unveils payment service Duoduo Pay for its 731 million users

Pinduoduo (NASDAQ: PDD) has quietly launched its own payment channel Duoduo Zhifu, or Duoduo Pay, providing its 731.3 million users another option beyond WeChat Pay and Alipay. This comes as gross merchandise volume on Pinduoduo has reached nearly RMB 1.5 trillion (USD 214.7 billion) in the twelve-month period that ended on September 30, up 73% year-on-year.
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Large Chinese tech firms, including e-commerce giant JD.com, food delivery app Meituan, and ride-hailing service Didi, have been trying to persuade their users to ditch Tencent’s WeChat Pay, or Alipay for their own payment options. Short-video platforms Kuaishou and ByteDance gained licenses, a necessary step to roll out in-house payment channels, KrASIA reported in November.
Source: KR Asia

PDD is quite a young company…only started about 5 years ago. Yet in just 5 short years it has become one of the largest e-commerce companies in the world.

The move into payments is an interesting one because Alipay / WeChat Pay are so dominant in China already.

However, PDD now has an e-commerce user base that rivals Alibaba and just a bit shy of Tencent / WeChat. If PDD is successful in muscling in on payments, it will say a lot about how much weaker the network effects are when it comes to payment assets.

As Capital Flywheels wrote recently, payments / fintech increasingly looks like it will migrate to and become controlled by the players that control the verticals. Standalone fintech assets look fairly weak to me.

#14 FDIC Eases Path for Amazon and Facebook to Become Lenders

Amazon.com, Facebook Inc., Walmart Inc. and other corporate giants may soon give Wall Street a run for its money as a key U.S. regulator smooths the path for nonbanks to get into lending.
The Federal Deposit Insurance Corp. on Tuesday approved a final rule governing so-called industrial loan companies that will allow major businesses to seek banking charters while escaping capital and liquidity demands faced by dedicated financial firms.
The measure will “provide transparency to market participants regarding the FDIC’s minimum expectations for parent companies of industrial banks,” said Chairman Jelena McWilliams. The new rule formalizes years of agency practice with the ILC charters, which were created to let commercial firms make small loans to workers but have morphed to become a back door into big-time banking.
Source: Bloomberg

Hmm…yeah…not sure the traditional banking model will survive that much longer.

🛍 Commerce

#15 Jeff Bezos and Amazon execs have discussed launching a rival to Shopify, whose meteoric rise has increasingly intruded on the online giant’s turf

There’s been a scramble among Amazon executives to assess Shopify’s growing threat as a competitor, including talks of launching a competing service, Business Insider has learned.
Amazon CEO Jeff Bezos has been directly involved in the discussions, which took place in recent months, according to people familiar with the matter. It’s one of the many here-and-now issues Bezos has addressed this year as the CEO has become much more engaged in the daily oversight of Amazon since the pandemic started, Business Insider previously reported.
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For Amazon, it would be a return to a market it once entered and failed in. Amazon shut down a service called Webstore in 2015 that effectively competed with Shopify.
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Some Amazon executives have pushed back at the idea of starting another competitor as there’s a sense of having already conceded the market to Shopify, one of the people said. In any case, Bezos appears to be aware of Shopify’s growing competitive threat, as he publicly mentioned the company as a competitor for the first time in his July letter to the House antitrust subcommittee.
Source: Business Insider

Didn’t know that Amazon once had a Shopify-like service before…seems a bit late to the game now. And I’m not sure what they can do now that would make them more successful than before.

But Amazon is right about one thing – Shopify is a threat to Amazon, especially if Shopify continues to invest in the Shopify Fulfillment Network (SFN) and narrow the gap with Amazon.

#16 Facebook Sees WhatsApp As Its Future, Antitrust Suit or Not

WhatsApp doesn’t loom especially large in Facebook’s home market, but it’s huge almost everywhere else—especially in India, where it says it has more than 400 million unique users a month. Chief Executive Officer Mark Zuckerberg sees potential to transform that user base into a profit center by enticing retailers to sell goods and services inside WhatsApp, or use the app to handle customer service issues that might otherwise require an email or phone call.
For Facebook, a company that makes 99% of its revenue from advertising, WhatsApp presents a chance to diversify its business and protect itself from erosion in enthusiasm for its core social networking apps. Eventually, Facebook believes, it can control the entire exchange between a brand and its customer, starting with an ad on Facebook or Instagram and leading to an interaction or product sale on WhatsApp or Messenger. “Instagram and Facebook are the storefront,” says WhatsApp Chief Operating Officer Matt Idema. “WhatsApp is the cash register.”
Source: Bloomberg

Apologies for another WhatsApp article, but this one does a good job highlighting the pivot that is going on at WhatsApp.

Zuckerberg has damaged core Facebook over the last decade, but when all is said and done, history will likely remember his tenure as an unparalleled one. I have never seen another executive successfully pivot a company that many times, especially when it comes to a business model pivot. People should never forget that Facebook’s original business model was as a web-app platform. Those platform dreams were shattered when smartphones took off. Facebook somehow successfully pivoted to become an advertiser and is now one of the most dominant. And the current pivot is to transform Facebook from a pure advertiser to a complete end-to-end commerce platform. Advertising will still be a part of the business, but it will only be one part of the whole machine.

🤔 Hmm…

I come across articles sometimes that don’t fit anywhere. Add this new section for that stuff.

Not necessarily related to near-term investing, but something tells me these articles could matter, especially the longer out you look.

#17 How mRNA went from a scientific backwater to a pandemic crusher

Artificial mRNA, designed and created in a petri dish and then delivered to the cells of sick patients through tiny packages called nanoparticles, offered a way of instructing the body to heal itself. Research groups around the world began looking into whether mRNA could be used to create the vaccines of the future by delivering messages to cells, teaching them to create specific antibodies to fight off a viral infection. Others started investigating whether mRNA could help the immune system recognise and destroy cancerous tissue.
Source: Wired

I know we’re all focused on COVID and wondering when it is over. And the focus around the vaccine is overwhelming about just that.

However, MRNA vaccines are a new way of doing things that could revolutionize our lives. Well worth reading about.

I have never felt this excited about the medical potential of a new technology since I first read about CRISPR in 2013.

#18 Former Israeli space security chief says extraterrestrials exist, and Trump knows about it

A former Israeli space security chief has sent eyebrows shooting heavenward by saying that earthlings have been in contact with extraterrestrials from a “galactic federation.”
“The Unidentified Flying Objects have asked not to publish that they are here, humanity is not ready yet,” Haim Eshed, former head of Israel’s Defense Ministry’s space directorate, told Israel’s Yediot Aharonot newspaper. The interview in Hebrew ran on Friday, and gained traction after parts were published in English by the Jerusalem Post on Tuesday.
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Eshed, who oversaw the launch of numerous Israeli satellites into space, said he was only speaking out now because attitudes were changing and people seemed more receptive.
Source: NBC

Hmmm….

👽🛸👾

I don’t know the context, but after some digging, I can confirm that this interview did indeed happen and the words did indeed come out of Haim Eshed’s mouth.