Sunday, January 15, 2017

The Next Computer Revolution and Its Investment Implications

Begin with two facts.  One: computers continue to evolve and improve at an astonishing rate.  Two: people are not getting any smarter.  These two facts have driven and will drive much of the success in the computer, software and social media industries, among others.  Consider, for example, the move from DOS and UNIX to windows based interfaces in the 1980s.  The more intuitive, easy to use windows interface, had a dramatic impact on how, and how much, people used computers.  That translated into increased demand for a host of new services and products.  But even windows computing is far from natural.  People don’t communicate by moving things across screens – they watch and talk.
Like the last revolution the next one will be based on a fundamental change in the human-machine interface.  People want to interact with machines the way they interact with other people.  Amazon’s Alexa is the tip of the iceberg. 
Developing an interface that is natural and “human” will require not only new devices, like virtual reality headsets, but immense improvement in software.  That means, no doubt, a good deal of trial and error.  In that context, investors should not see “failures” like Google glass as a reason to forego investment.  The long-term race to a new interface will be won by companies that are creative experimenters.  By its nature, creative experimentation requires failure.  In my view, investors should avoid companies that have not had some significant failures.  It means that are not pushing the envelope.  Given the complexities involved in AI, future failures are likely to be even more spectacular, but staying the course and failing to fail is likely to lead to the most spectacular failure of all.
The bottom line question is what this all means for investment decision making.  Of course, if I knew (which I don’t), I would be placing my orders not writing this article.  Nonetheless, there are two points worth making.  First, the development of effective AI interface will almost certainly require a collaborate effort.  Creative, technically gifted people, like the students I teach at Caltech, will want to be part of that collaboration by sharing their ideas and insights with others.  That cannot be done within the confines of companies that requires strict secrecy.  Yes, I have Apple in mind.  Apple has walls of secrecy preventing the exchange of information within the company, let alone with researchers in the outside world.  In my view, such a policy will be a disaster for Apple as we move into the world of AI.  Because of it, Apple will lose the gifted, creative people who will lead the next revolution.  If that happens, Apple’s products will fall behind those of its premier competitors.  Therefore, given its current market value of almost $650 billion, Apple is not a company you want to own as long as it clings to this policy. 
One company to watch is Essential, Andy Rubin’s latest start-up.  Andy has been one the tech industry’s most innovative people for close to three decades.  He was a developer of some of the first digital assistants, but is best known as the father of Android.  Essential plans to release new cell phones based on what is described as a breakthrough AI interface.  While some of that may be hype, Essential is certainly on the right track and Andy’s talents are undeniable.  Even if Essential does not succeed itself, the company could have a big impact on both the mobile technology and social media.

1 comment:

Everett Gong said...

Interesting commentary. I would love to hear your take on the impact of AI/Big Data/Machine Learning (pick your buzzword) on the asset management industry and implications for fundamental investment professionals that still do things the "classic" way (read SEC filings, interview management teams, forecast earnings, etc etc). Should we feel threatened? How should we adapt?