IBM’s Acquisition of Red Hat Could Be Transformational

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Not only is its $34 billion acquisition of Red Hat the largest in IBM’s history, it is the biggest software acquisition in history. In our opinion, the scale of the deal reflects IBM’s dire strategic position: as enterprise workloads are migrating inexorably to the cloud, IBM’s current offerings are, at best, second rate.

Most software acquisitions plug product holes or scale distribution platforms. This deal does both. The current rage in cloud computing is Kubernetes, a portable, extensible open source platform for managing open source workloads and services with containerized applications. Red Hat’s OpenShift is one of the most well-regarded distribution platforms for Kubernetes. With OpenShift, IBM will be able to introduce a full public-private or hybrid-cloud solution to its massive distribution network, likely turbocharging Red Hat’s customer base and growth.

Large M&A deals often end badly, unless they are transformational. In the worst case, Red Hat will become a write-off. In the best case, it will be vital organ transplant that does for IBM what NEXT did for Apple.

What If Criminals Really Did Use Bitcoin?

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A prime criticism of bitcoin and other cryptocurrencies is that their primary use case is for illicit activity. This week, former Fed Chairman Janet Yellen spoke at a Canadian Fintech Forum and said that she is "not a fan of [bitcoin]" as "very few transactions occur on Bitcoin, and many of those that do take place…are illegal, illicit transactions."

Yellen’s statement encapsulates two widely held misconceptions. First, as ARK has described in the past, the Bitcoin blockchain processes $2-4 billion in transactions daily, or $1.3 trillion a year, on its base layer, more than PayPal and the Discover card networks. Second, bitcoin transactions are not anonymous but pseudonymous. Criminals have been disappointed to learn the hard way that bitcoin transactions are traceable and transparent at the base layer. As a result, the DEA estimates that criminal activity now accounts for just 10% of bitcoin transactions.

Recent development activity in the crypto space has focused on privacy features for bitcoin and more privacy-oriented cryptocurrencies like ZCash and Monero. Bitcoin's road map for privacy is well underway while ZCash and Monero have implemented upgrades to their protocols, Sapling and Bulletproofs, respectively.

So, what would the potential cryptocurrency network value be if most illicit activity involved truly anonymous privacy coins? Given estimates that 3.5% of global GDP are illicit, then roughly $3 trillion in activity would be attracted to privacy cryptocurrencies. If the velocity of those currencies, or the rate at which they turn over per year, was one third that of M1 in the US, or 1.5 times, then the monetary base necessary to support them would approximate $2 trillion.

During the next 10 years, if cryptocurrencies with full-fledged privacy features were to capture just 20% of the illicit market, their network value or market cap would approximate $500 billion (assuming a 3% GDP growth), more than the $200 billion network value today of all 2,000+ cryptoassets, most of which are not cryptocurrencies or privacy-focused.

Tesla Could Find Your Next Parking Spot

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This week Elon Musk tweeted that Summon, Tesla’s automatic parking feature, will allow cars to read and understand parking signs and park themselves within the next few months.

While Summon can park Tesla cars using ultrasonic sensors today, the new Autopilot neural net will use cameras and image classification to read parking signs and park legally in spots if Tesla cars have been manufactured within the last two years. No other automakers have released a parking feature as advanced, nor can they send performance-related software updates directly to consumers. Through its customer fleet, Tesla also is amassing a dataset on parking spaces which could prove valuable to logistics networks, as well as municipalities as they look to repurpose parking lots.

Volkswagen recently did sign a contract with its European dealer network to enable over-the-air updates. That said, the technology has yet to make its debut.

Waymo Is Beginning to Commercialize Its Autonomous Taxi Service

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On Google’s earnings call this week, Ruth Porat explained that Waymo already is charging for rides and experimenting with pricing models in its Early Rider Program in Phoenix. Porat also noted that Waymo is “intently focused on safety first”, echoing Mary Barra’s comments in GM’s call this week that Cruise Automation is “gated by safety”. This focus on safety could be an indication that Waymo and GM will be more cautious than Tesla in their autonomous rollout strategies. While safety is paramount, a more aggressive approach to the commercialization of autonomous ride-sharing could yield first mover advantages. 

Also this week, regulators in California gave Waymo the first shot at testing autonomous cars with no driver in the front seat. As a result, Waymo could target California for its next commercial autonomous taxi service.

ARK’s research suggests that autonomous taxis could add more than $2 trillion to GDP in the US by the early 2030s. As a result, California’s decision to encourage Waymo is not surprising.

Gigafactory 1 is Ahead of Tesla’s Original Schedule

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This week, Panasonic announced that battery production in Tesla’s Gigafactory will hit 35 GWh by the end of March. For context, Tesla’s original plans were for 35 GWh by 2020, putting the current production schedule roughly nine months ahead of schedule. While often criticized for aggressive production targets, Elon Musk, his team, and Panasonic soon may catapult Tesla above its original goal, supporting the production of up to 500,000 vehicles.  

In its 10Q filing for the third quarter, Tesla also projected that capital spending will approximate $2.5-3.0 billion in each of the next two years as it funds Gigafactories 1, 2, and 3. Gigafactory 3 in Shanghai should start producing 3,000 Model 3s per week sometime next year, compared to the 5,000-6,000 per week in production at Gigafactory 1 today.

Illumina’s Acquisition of Pacific Biosciences Will Enable a Comprehensive View of the Genome 

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This week, Illumina (ILMN) announced that it is acquiring Pacific Biosciences for $1.2 billion, the largest acquisition in its history. Solexa, its second largest acquisition, catapulted Illumina into the next-generation DNA sequencing (“NGS”) market. PacBio will provide it with complementary technology, perhaps resulting in more than the sum of their parts.

Illumina’s suite of NGS platforms specializes in short-read DNA sequencing, or shotgun sequencing that breaks the DNA into millions of fragments and sequences them quickly and cost-effectively.  Short-read platforms, however, are ill-suited to sequencing portions of the genome that are highly repetitive. Pacific Biosciences’ long-read platforms, like the Sequel system, can sequence single DNA molecules in a longer, more contiguous manner, unlocking sections of the genome previously inaccessible to short-read instruments. The following figure illustrates how short- and long-read systems differ in their interpretations of common mutations.

(A) Insertion, (B) Deletion, (C) Copy Number Variation, (D) Inversion; The short-read consensus is presented first, then the long-read consensus.

Thanks to declining costs, long-read platforms are developing applications in clinical diagnostics, agriculture, reference genomics, rare disease genetics, and immuno-oncology. As it combines short- and long-read sequencing technologies, Illumina will be able to provide researchers and genetic counselors with a comprehensive view of the genome for the first time in history.