#234: Cord Cutting Seems Disastrous for TV Advertising, & More

Typically, the disruption of entrenched technologies follows a pattern: slowly, then all at once. In our view, linear TV has hit the ‘all at once’ tipping point. Since peaking in 2011 at 103 million, the number of linear TV households in the US has slipped by 2.1% on average per year, a decline that probably accelerated this year in the absence of live sports. Recently, television advertisers have been disappointed by the dearth of viewers as Major League Baseball (MLB) and the National Basketball Association (NBA) returned to the airwaves. According to Roku’s annual cord-cutting survey, only 17% of recent cord cutters plan to re-subscribe to linear TV when live sports resume in force. Indeed, according to our research, during the next five years the number of US linear TV households will drop approximately 48%, from 86 million today to roughly 44 million in 2025.

If users cut the cord at the rate we anticipate, the $70 billion-dollar US TV ad market could collapse, shifting dollars to more efficient digital platforms. This week, Roku and The Trade Desk reported strong growth in their connected TV ad businesses, while most linear TV players like ViacomCBS posted double-digit declines. In other words, linear TV advertising seems to have hit the tipping point, with no return.

Bitcoin is beginning to infiltrate corporate balance sheets. In its most recent earnings call, for example, MicroStrategy – a business intelligence and cloud-based services company – announced a new capital allocation strategy involving bitcoin.

During the next 12 months, MicroStrategy will allocate $250 million, or half of its cash and cash equivalents, from USD into alternative assets including gold, silver, and bitcoin. In its earnings call, MicroStrategy CEO Michael Saylor explained that alternative assets have been appreciating as the dollar has weakened. With a relatively large reserve of excess cash, MicroStrategy is rethinking its treasury management strategy.

As Saylor noted, “It makes sense to shift our treasury assets into some investments that can’t be inflated away or are less likely to be inflated away including gold, silver, and bitcoin. As we pursue alternative investment strategies for our treasury assets, we expect that we will have more volatility, at least as measured in U.S. dollar terms, looking forward.”

If currencies continue to devalue relative to gold and bitcoin, MicroStrategy’s shift toward inflation hedges like gold and bitcoin could be the start of a larger trend, encouraging other companies to diversify their cash balances into bitcoin.

This week, Baidu unveiled its autonomous driving computing unit, or ACU, announcing Flex as its manufacturing partner with Xilinx and Infineon as its chip suppliers. Notably, Nvidia was absent, a departure from the autonomous driving partnership that Baidu announced in 2016.

Has Bidu broken its ACU ties with Nvidia, depriving it of the largest geographic market for autonomous ride-hailing? The Chinese government has designated Baidu as its national autonomous driving platform, suggesting that foreign companies must partner with it to compete for one of the largest transportation opportunities in the world.

Nvidia’s autonomous computers have not made the cut at Tesla or Waymo either, as both companies have broken away from the traditional four- to five-year auto design cycles and created in-house solutions. Although Nvidia has partnered with many other automakers and startups, if left out of the leading autonomous driving solutions, its future could dim relative to our expectations because autonomous ride-hailing is likely to be a winner-takes-most market with natural geographic monopolies.

Please share your thoughts on Nvidia’s positioning in the autonomous ride-hailing market. Tweet at us and follow ARK as we explore this story.

In a quarter of record revenue growth and new product launches, Personalis (PSNL) – a burgeoning deep genomics company – expanded on a new commercial opportunity: population genomics. Recently, many nations and health systems have begun sequencing large populations to unlock critical genomic information. Activated by machine learning, population genomic (“pop-gen”) data can provide health care experts and policymakers with information to help prevent the onset of disease, increase the efficiency of health systems, and improve the delivery of new therapies.

Using current projects as benchmarks, ARK estimates that the pop-gen market opportunity could scale to $4 billion during the next five years, though the barriers to launch such projects are formidable. While many countries have both the desire and the funding to get these ultra-high-throughput projects off the ground, they lack the genomics infrastructure and technological know-how. In other words, lower sequencing costs alone will not unlock the pop-gen market opportunity. As is the case with clinical sequencing workflows, the key barriers to widespread adoption include front-end sample preparation, laboratory process management, and back-end computation and storage.

Personalis is conducting the largest ongoing pop-gen project in the United States in collaboration with the US Department of Veterans Affairs (the “VA”). Already it has sequenced the 75,000 of the 116,000 whole human genomes in the VA contract, giving Personalis the experience in process optimization necessary to establish sequencing centers around the globe.

Presently, Personalis is building a sequencing subsidiary in China alongside Berry Genomics. With proprietary technology and a track record of execution, Personalis could win pop-gen contracts with nations and/or large health systems seeking genomic insights about their populations at scale. While Personalis currently is laser-focused on advanced cancer profiling tools for biopharma customers, population health could be another exciting opportunity to build a foundation based on molecular information and enable biological discoveries and medical interventions during the next five to ten years.

In 2016, Intercontinental Exchange entered the mortgage industry by acquiring the Mortgage Electronic Registry System (MERS), a database that tracks the ownership and servicing history of 80-85% of outstanding mortgages in the US. In May 2019, it bolstered its position by purchasing Simplifile which provides lenders with mortgage requirements on a county by county basis for ~2,200 out of the 3,143 counties in the US.

On Thursday, Intercontinental Exchange announced an $11 billion acquisition of Ellie Mae, a cloud-based provider serving various parties in the mortgage origination process including but not limited to borrowers, brokers, appraisers, and title insurers. Previously a public company, Ellie Mae went private when Thoma Bravo acquired it for $3.7 billion in April 2019. While the tripling in price in fewer than 18 months was steep, in our view the opportunity also is provocative given the fragmentation, inefficiencies, and expense involved in mortgage transactions. Mortgage financing is ripe for disruption.

Ellie Mae provides Intercontinental Exchange with pre-closing mortgage solutions, complementing its MERS and Simplifile post-closing solutions and providing vertically integrated, digital mortgage solutions. Vertical integration is a strategy that we believe will lead many businesses to success in the digital age. In this case, Intercontinental Exchange should be able to offer better, cheaper, and faster mortgage solutions by digitizing a paper and manual based process. To our knowledge, such an offering does not exist and is sorely needed.