- The latest method of manufacturing cars…
- A VR headset with real-world consequences…
- The world’s first digital bond issuance…
Dear Reader,
Meta’s (Facebook’s) latest announcement for a reduction in force (RIF) makes Twitter’s restructuring look small in comparison.
Yesterday, Mark Zuckerberg informed the company that 11,000 jobs would be cut – amounting to about 13% of its workforce.
The scale of the announcement came as a shock to many considering that Meta is still an extraordinary business. It operates its business at 80% gross margins, sits on $41 billion in cash, and will generate $15 billion in free cash flow this year… And this is a “tough” year for the company.
But just like every other growth business, it too has been impacted by the weak economic environment. And Wall Street wants to see improved operating margins and free cash flow.
Zuckerberg went big investing in Metaverse technology. He correctly sees it as an eventuality as a next-generation environment for social interactions. He’s been playing the long game, which works well in a high-growth environment.
But when times are tough, big investments with longer time horizons are always the ones to be heavily scrutinized by institutional investors.
At a time like this, it’s best to cut once, take the accounting write-off in one big chunk, and focus on the most important parts of your business. And that’s exactly what Meta is doing.
Aside from the restructuring itself, Zuckerberg’s announcement to the company provided an interesting insight into what’s happening right now in the economy. And it’s not a message that’s being parroted by the media:
At the start of Covid, the world rapidly moved online, and the surge of e-commerce led to outsized revenue growth. Many people predicted this would be a permanent acceleration that would continue even after the pandemic ended. I did too, so I made the decision to significantly increase our investments.
Unfortunately, this did not play out the way I expected. Not only has online commerce returned to prior trends, but the macroeconomic downturn, increased competition, and ads signal loss have caused our revenue to be much lower than I’d expected. I got this wrong, and I take responsibility for that.
There’s been a belief in Silicon Valley – for some a zealous belief – that once the transition toward heavier adoption of digital technologies was made during the pandemic, it would only continue.
As Zuckerberg acknowledged above, that isn’t the case. Consumers didn’t want to further increase their screen time even more than they had during the pandemic. If anything, we all wanted a break.
While the pace of technological advancement continues to accelerate with each month that passes, our human behaviors simply don’t change that quickly. We’re creatures of habit and we have a lot of muscle memory. And there are only so many hours in a day that we have to give to everything and everyone that needs our attention.
I was happy to see society snap back to personal interactions similar to pre-pandemic levels. While the workplace hasn’t exactly returned to “normal,” it’s great to see everyone out and about, traveling like before without restrictions. In the absence of this, we’ll almost certainly devolve.
Meta’s announcement is a real turning point in the tech industry. The pandemic disproportionately benefited high tech, and now reality has set in.
So many companies over-hired and overspent believing that the party would continue despite the destructive monetary and economic policies that cast a dark shroud over us today.
Many more companies will follow before the end of this year. 2022 is a write-off, a year that I think most will be happy to put behind them. So they may as well make the tough decisions now and get on with it.
This is all part of an economic cycle. Restructurings are never fun, and they’re always hard. But what comes next is always worth it… a return to growth.
And anyone with a two- to three-year time horizon who invests in Meta today will have something to celebrate when the time comes.
Cars are becoming a kind of consumer electronic…
Over the last decade, there’s been a major shift underway in the automotive industry. Yes, we have electric vehicles (EVs) now, but that’s not it. It’s a more interesting change that started with Tesla…
Historically, carmakers have designed and manufactured their own cars in their own factories. Fundamentally, they were hardware manufacturers. Software design and user interface was almost an afterthought.
Car companies would take their finished products, market them to the general public, and ultimately sell them through their dealership networks around the world.
Tesla’s approach was quite different. It’s a technology company that developed the operating system for cars and then built the cars upon which the software would run. This resulted in Tesla becoming the most successful artificial intelligence (AI) company in the world.
Its cars are like sophisticated computers that can think, adapt, and even drive themselves. And they upgrade their software sent from Tesla overnight while we sleep. No trips to a dealership required.
Yes, Tesla still manufactures its own cars and batteries – just like traditional carmakers. But Tesla sells directly to consumers. It bypassed the dealership model entirely.
So Tesla’s approach looks a lot more like the consumer electronics industry – Apple is a good analog with its iPhones, watches, and iPads. That’s a big shift in the industry.
And now that shift is taking the next step…
Contract manufacturer Foxconn just invested $170 million into electric truck start-up Lordstown Motors. And the two announced that Foxconn will manufacture Lordstown’s first electric truck model, the Endurance.
Here it is:
The Endurance Electric Truck
Source: Lordstown
What’s interesting here is that Lordstown is following Apple’s model. Foxconn has manufactured Apple’s consumer electronics products for well over a decade now.
This means Lordstown won’t build or manage its own factories. Nor will it make its own trucks.
Instead, Lordstown simply designs the vehicles and hands it off to Foxconn. Then Lordstown markets and sells the final product.
This contract manufacturing model was an inevitability for the next generation of car companies, specifically EVs. And the fact that Foxconn is investing heavily in Lordstown shows us that it sees a tremendous opportunity with this.
If Lordstown is successful, Foxconn stands to break into the auto industry in a big way. And if it does, we’ll gradually see contract manufacturing of cars become the norm.
The benefit here is that it lowers the barrier to entry to new start-ups.
They won’t need to raise the capital and take on the risk to build out their own manufacturing capacity to compete with the legacy incumbents. All they’ll need is a great design. Then Foxconn, and others, will make it a reality.
Lose in VR, and that’s the end of you…
Next, we have to talk about a bizarre development in the metaverse and virtual reality (VR) space.
Fair warning: This one is unsettling. But there are still some important insights in here…
As regular readers know well, Facebook rebranded itself as “Meta” last year. That corresponds with the company’s new focus on developing a metaverse as a next generation of social interaction. This refers to virtual worlds in which consumers can interact with objects and each other through digital avatars.
This is an ideal that has evolved from Facebook’s acquisition of Oculus VR back in 2014. It was a $2 billion deal. And still to this day, the Oculus is the most successful VR headset on the market.
Oculus was founded by Palmer Luckey. But he had a falling-out with Facebook CEO Mark Zuckerberg after the acquisition. This prompted Luckey to leave the company in 2017.
Luckey went on to found a defense technology company called Anduril. It’s been developing drones capable of AI-powered perimeter security, as well as offensive capabilities like delivering explosive charges carried by drones.
And in a strange twist, Luckey is bringing this technology to the virtual reality space.
Luckey just announced that he’s working on a new VR headset. It’s called NerveGear. And it’s unlike anything we’ve seen before.
Luckey’s vision for NerveGear is to blur the lines between a metaverse and the real world. And you won’t believe how he plans to do this.
Equipped with explosive charges, NerveGear is being designed to kill its user if their digital avatar dies in a metaverse environment. And here’s the kicker – there’s a mechanism that will prevent users from taking the headset off once engaged.
The idea is that this will make consequences in the metaverse real. No kidding.
Of course, this is absolutely insane. I can’t think of a better way to stall metaverse adoption than to produce a headset that will intentionally kill people. And while it’s only a concept device, the idea is an extreme example of the direction the industry is going in.
There’s a strong interest in making metaverses more immersive for consumers. And that makes perfect sense… the more real and stimulating an environment is, the more likely consumers will want to participate.
And this idea that there can be real-world consequences for successes or failures in a virtual world has been a theme in science fiction for decades. If there are stakes involved, a game is so much more compelling… but hopefully they don’t risk death.
Haptic technology is, of course, the key to making this happen. This is technology that simulates real feeling. It can be incorporated into gloves or even a body suit that syncs up with VR games and applications.
Those companies that can design and produce the best, most life-like haptics gear are going to be massively successful. Adoption will grow hand in hand with popular metaverses.
The bottom line is that while it’s an interesting thought project, Mr. Luckey is way off the mark with his NerveGear.
But remove the explosives and focus on less-lethal forms of haptics, and he could develop something transformational for the industry.
Another hint that governments are moving toward digital assets…
Yesterday, we had a look at JPMorgan’s recent decentralized finance (DeFi) trade, which is a sign that government and legacy financial institutions are gearing up to adopt blockchain technology for financial transactions.
Within days of each other, Swiss banking giant UBS just publicly traded a digital bond that settled on the SIX Digital Exchange blockchain. We can think of this as a “tokenized” bond offering. That’s certainly a first.
And it wasn’t just any bond. This was a three-year, 375 million Swiss franc bond (worth $272 million) with a 2.33% coupon. This wasn’t some small pilot with $10,000, but a real bond offering.
To me, this is a perfect application for blockchain technology.
The bond market has historically been murky and hard to access. And bond offerings have to flow through trusted intermediaries who take a cut of each transaction. For financial instruments that tend to have small yields, it’s best to keep fees to a minimum.
While the industry functions, it makes the legacy system inefficient. Typically, it takes bonds several days to settle. And the transaction fees are relatively high.
With blockchain tech, digital bonds can settle nearly instantly with miniscule transaction fees. That’s because there are no intermediaries standing in between transactions.
So tokenizing bonds makes a whole lot of sense.
And if this catches on, look out. The bond market is massive.
If we look at just the municipal bond market in the U.S., it’s a half trillion-dollar market. And sovereign bonds represent more than a $20 trillion market just in the U.S. alone.
This is a massive market just waiting to be disrupted, and this is the technology that will do it.
Regards,
Jeff Brown
Editor, The Bleeding Edge