It's Monday, May 25th, 2020. Please enjoy ARK's weekly newsletter curated by our thematic analysts and designed to keep you engaged with disruptive innovation.
Podcasting Becomes Big Business as Spotify Signs Joe Rogan For $100 Million
A cottage industry until recently, podcasting is growing up. Joe Rogan, perhaps the world’s most popular podcast host, just signed a $100 million exclusive deal with Spotify, debuting in September.
We believe Spotify’s aim is to enhance its business model. The Joe Rogan deal compares to Netflix’s decision to create and distribute “House of Cards”, pivoting from a platform repackaging third-party content to one creating and distributing exclusive content. Today, Spotify’s gross margins are capped by the fixed percent of revenues paid to music labels and song writers. Commissioned content - like a podcast - is a fixed cost, giving Spotify the opportunity to improve margins as it scales.
Spotify’s partnership with Joe Rogan could upend the “open” era for the podcast industry. Today, podcasts are distributed on the open internet and can be accessed by any player or browser. Exclusive deals put podcasts behind platform walls, requiring users to download specific software like Spotify to play them. While monetization might improve and grow the podcast industry, exclusive deals might cause more fragmentation and platform wars between and among large internet companies.
‘Facebook Shops’ Could Enable the US and Other Countries to Follow China into Social Commerce
Reaching roughly a third of the world’s population daily, Facebook’s family of apps now wants to sell goods and services to them. Facebook and Instagram already support limited e-commerce activity, but neither has an end-to-end solution. We believe Facebook’s new e-commerce tool, ‘Facebook Shops’, solves that problem.
Social commerce combines the stickiness of online shopping with the network effects of social media and can be a powerful growth driver. In China, for example, Pinduoduo offers steep discounts to encourage a user’s friends and family to buy products and services. Founded only five years ago, Pinduoduo is now the second-largest e-commerce company in China, with 600 million annual active buyers.
Based on ARK’s research, now that Facebook and others are making aggressive moves, social commerce is likely to scale from roughly 5% of the $4.5 trillion global e-commerce market last year to 19% of a roughly $15 trillion market in 2025. In other words, if we are right, it will increase nearly 15-fold from $200 billion to $2.8 trillion during the next five years.
This week GM announced its next generation driver assistance software, Ultra Cruise. Initially targeting this market in 2018, it released Cruise Automation’s Super Cruise which functions only on highways and is available today only on the Cadillac CT6. Now Ultra Cruise will address city streets, though GM has not announced any other details.
Interestingly and surprisingly, a team separate from Cruise Automation - GM's autonomous driving unit - designed the Ultra Cruise, suggesting significant inefficiencies since GM acquired Cruise more than 4 years ago. Indeed, in the face of the COVID-19 crisis, this week GM laid off 8% of Cruise’s workforce after reiterating recently its “unwavering” commitment to its fully autonomous effort. Although it noted that the reduction in force (RIF) did not include core engineering talent, GM does seem to be addressing a stretched balance sheet that is demanding more light duty truck sales than R&D in autonomous electric cars.
COVID-19 Could Accelerate the Approval of DNA and RNA Vaccines
COVID-19 could accelerate the development and approval of nucleic acid vaccine technology. If all goes well, the FDA could approve an mRNA vaccine against COVID-19 in roughly six months, or in record time, breaking the four-year record set by the mumps vaccine in 1967.
Nucleic acid vaccines are based either on DNA or on mRNA. MRNA-based vaccines appear to have better efficacy and safety profiles, perhaps because they do not interfere with a patient’s DNA. Moreover, self-replicating mRNA vaccines require exceedingly small microgram-scale doses, enabling single-dose regimens, faster clinical trials, improved patient compliance, expedited approval, and rapid manufacturing scale to meet demand.
That said, mRNA vaccines also require chemical delivery vectors, increasing the risk of toxicity, and must be frozen for transportation prior to injection. In geographic regions lacking infrastructure, DNA-based vaccines could be the better solution, though they do have difficulty penetrating the cell nucleus and can require electroporation, or electric pulses to shock cell membranes into opening.
While nucleic acid vaccines promise important benefits and face some challenges, they could be transformational in preventative medicine.
In the first quarter of 2020, the number of net new brokerage accounts at Schwab, Interactive Brokers, and E*Trade surged 39%, 76%, and 119%, respectively, relative to 2019 as a whole. An increasingly popular explanation is that sports bettors have turned to the equity markets now that the coronavirus has shut down live sports. Lowering the barriers to entry for such a move, most brokers eliminated trading commissions last fall.
Another plausible explanation is investors’ search for yield in the face of cash and US government bonds yields below 1%. In response to the coronavirus, the personal saving rate in the US increased from an elevated level of 7.7% in January to 13.1% in March, with estimates at a record-breaking 20% for April. As they are sheltering in place, perhaps for the first time consumers are allocating a portion of their burgeoning savings into equity markets.
The Antminer S9 Has Returned Since the Bitcoin Halving
A recent report released by Coin Metrics suggests that bitcoin miners activated old mining hardware after the Bitcoin halving nearly two weeks ago, perhaps because mining with legacy Antminers S7 and S9 has become profitable once again.
Unlike newer hardware, the Antminer S7 and S9 compute nonces in a non-uniformly distributed way. At a high level, a nonce is a special piece of data that miners insert in a block header, enabling them to compute the hash of a block without rebuilding the block header, as discussed here. Based on this observation, Coin Metrics backed into an estimate of the mining hardware market share captured by the S7 and S7, as shown below.
As shown above, the proportion of blocks mined by S7s and S9s peaked in May 2016 and May 2018, respectively, but the S9 has rebounded since the halving. Apparently, the combination of rock bottom hardware costs in the secondary market and a drop in hash rate have made mining with the S9 profitable enough to capture roughly 32% of blocks mined. ARK’s research suggests that not until hash rate recovers or more efficient hardware comes back online is the S9 likely to cede its new-found share.
We hope you find this information useful and please stay safe.
ARK's statements are not an endorsement of any company or a recommendation to buy, sell or hold any security. For a list of all purchases and sales made by ARK for client accounts during the past year that could be considered by the SEC as recommendations, click here. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. For full disclosures, click here.
You received this email because you are subscribed to Research NewslettersfromARK Investment Management LLC. Unsubscribe from ARK emails or choose the types of emails you want to receive. Unsubscribe from all.
This Newsletter is for informational purposes only and does not constitute, either explicitly or implicitly, any provision of services or products by ARK Investment Management LLC (“ARK”). Investors should determine for themselves whether a particular service or product is suitable for their investment needs or should seek such professional advice for their particular situation. All content is original and has been researched and produced by ARK unless otherwise stated therein. No part of the content may be reproduced in any form, or referred to in any other publication, without the express written permission of ARK. All statements made regarding companies, securities or other financial information contained in the content or articles relating to ARK are strictly beliefs and points of view held by ARK and are not endorsements of any company or security or recommendations to buy or sell any security. By visiting and/or otherwise using the ARK website in any way, you indicate that you understand and accept the terms of use as set forth on the website and agree to be bound by them. If you do not agree to the terms of use of the website, please do no access the website or any pages thereof. Any descriptions of, references to, or links to other products, publications or services does not constitute an endorsement, authorization, sponsorship by or affiliation with ARK with respect to any linked site or its sponsor, unless expressly stated by ARK. Any such information, products or sites have not necessarily been reviewed by ARK and are provided or maintained by third parties over whom ARK exercises no control. ARK expressly disclaims any responsibility for the content, the accuracy of the information, and/or quality of products or services provided by or advertised on these third-party sites.
