[U38] What do a phone, robot, battery and wallet have in common?
Maybe Apple, Amazon, Tesla and Block can help us understand
Dear Readers,
In the last Update in Product | Strategy | Innovation I reviewed 3 core objectives to advance Tesla’s mission over the next 3 years. Tesla announced its 2022 3rd quarter earnings on October 19th. The 3 core objectives are still aligned with the guidance provided although Tesla CEO, Elon Musk committed to an even more specific key result to scale its EV production objective for 2030.
Elon announced Tesla will scale their own vertically-integrated battery manufacturing to produce 1,000 GWh (1TWh) of lithium-ion battery cells annually in the US alone. That is over 2x the entire world’s 2022 battery cell output. This is the scale required for Tesla to achieve 20 million EVs produced in 2030. Tesla has also committed previously to produce 3TWh globally by 2030 for both EVs and stationary battery storage. That is 6x the current world battery cell production.
For this Update, I was digging into an emerging ecosystem at Block (previously Square). As I investigated, I realized a similarity between Tesla and Block. And as I prepared to introduce the topic by looking more closely at Apple and Amazon, I realized a fundamental insight into innovation across all 4 of these companies. This validates the power of asking why until you can’t go any further!
Some common features of this insight into innovation are:
Vertical integration is already a norm within the organization
Organization introduces a new hardware technology/platform
Disruption happens by decentralizing external legacy systems
Customers access a new way to curate something they value
Horizontal integration scales a core capability to add even more value
And although this innovation doesn’t fit perfectly within the disruptive innovation model, it does share some aspects with the concept. The late Harvard Business School Professor Clayton Christensen pioneered the principles of disruptive innovation and his work continues through the Christensen Institute.
I will describe the innovation that follows as Decentralized Self-Curation and I will use Apple, Amazon, Tesla and Block as proxies to illustrate this concept. Apple and Amazon serve as backwards-looking proxies based on what has already happened. Tesla and Block are forward-looking proxies for what I speculate will happen in the future.
Some descriptions of Web3 mention decentralizing curation of music, graphic images and content, but I’m interested in something more fundamental and broad vs. the next generation of the internet.
1. Apple and its iPod/iPhone/iPad ecosystem
Apple was known in the 80s and 90s for innovations like early versions of the personal computer with the Apple IIe and Macintosh. When Steve Jobs returned to Apple in 1997, the iMac was an initial outcome from a more focused product scope and “Think Different” marketing campaigns. But the transformation of Apple was driven by the introduction of the iPod (hardware) and iTunes (software and licensed music).
Apple launched iTunes in early 2001. They launched the iPod later in 2001. I can’t remember the exact date Apple blitzed Boston with iPod ads on billboards, buses, subway stations and bus stops, but the ads were everywhere. Apple identified Boston as a key market due to all of its college students. I eventually bought an iPod and installed iTunes on my PC because Steve Jobs also made a decision to go beyond the closed Apple ecosystem to grab PC users.
Apple launched the original iPhone in 2007. I didn’t bite. I was already using a Palm handheld computer with my PC and a Motorola flip phone. I eventually upgraded to a Palm Treo to eliminate the flip phone. But when the iPhone 4 was launched, I switched to replace my iPod, Palm Treo, and to access the Apple’s growing mobile app ecosystem.
I was consolidating multiple device functions onto a single hardware/software platform. I was curating how I wanted to use a mobile device because Apple decentralized the design of applications to third parties on top of its closed ecosystem. And as each iPhone improved, I could replace more devices with the improving sensors, computing power and apps on my iPhone. Success for Apple came with the iPhone, but the trigger to adopt for me was the iPod. Today, I use the entire Apple ecosystem of products and services as millions of others do.
What is vertically integrated by Apple?
Apple designs all its products. This now includes core products (example: iPhone), core components (example: M1 microprocessor) and core accessories (example: AirPods, Watch).
Apple manages its supply chain including sensor/chip sets, components and manufacturing.
Apple developed its own operating system (OS X) for Macs and (iOS) for the iPhone to improve performance and to facilitate developing apps by third parties.
Apple developed its own iTunes platform to distribute licensed music and App Store to distribute applications.
What new hardware did Apple introduce?
Apple introduced the original iPod in 2001 after it launched iTunes and negotiated music distribution contracts with the major recording labels. This allowed single songs to be downloaded for $0.99 and most records for $9.99. The iPod was discontinued in May 2022.
Apple launched the original iPhone in 2007 once it negotiated an exclusive cellular plan for the iPhone with AT&T in the US. Apple eventually expanded cellular plans to other carriers to increase the addressable market. Over 2.2 billion iPhones are estimated to have been sold since 2001.
Apple launched the original iPad in 2010. 500 million iPads were sold in 2020.
What disruption happened through decentralization?
Apple simultaneously disrupted the telecommunication, computer and software industries by consolidating a mobile phone, internet communication device and music player into one mobile device.
Apple decentralized how the telecommunication industry monetized voice, text and data. Initially, this required exclusivity with AT&T so they could build out the required telecommunication infrastructure, but eventually this expanded to all networks and all-inclusive plans for a fixed fee.
As iPhone/iPad technology and apps continue to evolve, centralized designs of stand-alone products like cameras, navigation devices and MP3 players are disrupted by the inclusion of features at no additional or minimal cost with an app and service. And most of these apps are developed by a decentralized network of third party app developers.
What curation could customers access?
Customers control what features and services they make available on their iPhone/iPad.
Customers curate and personalize the experience they want on their iPhone/iPad without the need for a Nikon camera, Garmin GPS system, or to carry a credit card.
Software developers and other third parties can use the App store to curate the apps they want to develop for the growing iOS/iPadOS ecosystem.
What is horizontally integrated to drive value for customers?
Apple opened the App store for third party developers to deploy apps to a growing ecosystem of iPhone/iPad customers.
This significantly scaled the number of apps available for customers to curate exactly what they wanted to personalize their iPhone experience to meet their needs.
The outcome of this innovation is exponential growth that results when markets consolidate onto a tech platform. Software is an accelerant, but the true catalyst usually requires a hardware transformation. But why hardware? This is likely due to Wright’s Law which states unit costs reduce by a constant percentage with each cumulative doubling of units produced. Scaling hardware production is hard, but provides competitive advantages when the same hardware differentiates a product or service to consolidate a market. And vertical integration allows a company to leverage Wright’s Law with more control on reducing costs.
Apple’s success building a closed hardware/software/services ecosystem around the iPod/iPhone/iPad and iTunes/App Store could also lead to failure if it limits innovation. Changes to privacy policies have negatively impacted how developers monetize their apps (Facebook ad optimization, NFTs, Sign-In with Ethereum). The open-source attributes of Android could eventually win if Apple pushes its closed hardware/software/services ecosystem too far.
2. Amazon and its Kiva robots
Amazon is known for direct to consumer online commerce with its founding in 1994, but it also sells services like Fulfillment by Amazon and Amazon Web Services (AWS) to businesses of all sizes. And Amazon has scaled customer acquisition and loyalty with Amazon Prime memberships. Each Amazon business and service provides a unique value proposition to their customers. Their services have scaled significantly over the years. Amazon has also added advertising and key technologies like the Kindle, Echo, and Prime Video.
But the technology that really transformed Amazon across its 3 primary Pillars (Prime, Marketplace and AWS) are the automated guided vehicles (AGVs) deployed in its fulfillment warehouses following the acquisition of Massachusetts-based Kiva Systems in 2012. These Kiva robots speed up stowing and picking inventory to fulfill orders with 2-day, 1-day and/or same-day shipping. This innovation has allowed Amazon to scale Prime to over 200 million members. That membership scale has also allowed Amazon to attract more sellers to the Marketplace to sell their products through Fulfillment by Amazon. And these Kiva robots are operated by systems built on AWS.
What is vertically integrated by Amazon?
Amazon has mastered taking an expense on its income statement and turning it into a business they both consume and sell to others to drive additional revenue and net income.
IT services to run the Amazon Marketplace became AWS.
Product procurement and inventory were outsourced to third parties with Fulfillment by Amazon for a fee.
Customer acquisition and loyalty were monetized with Prime memberships like Costco.
Amazon designs it fulfillment centers and the processes, jobs, robotics and software to operate them.
Amazon designs products like the Kindle and Alexa.
Amazon operates studios to film and produce its own award-winning TV shows and movies for Prime Video.
Amazon Logistics operates shipping containers, airplanes, trucks and vans to move products through the supply chain into inventory and out to customers including final delivery.
What new hardware did Amazon introduce?
Amazon sourced its original AGVs with the acquisition of Kiva Systems. Amazon then cancelled all contracts Kiva had with other companies and renamed the group Amazon Robotics. This group still operates in the Greater Boston area as part of Amazon.
Amazon has created other hardware devices like the Kindle, Echo and Fire TV Stick. These devices have played critical, but less transformational roles to date at Amazon compared to the Kiva AGVs across all 3 Pillars: Prime, Marketplace and AWS.
AWS operates its Kiva AGVs at scale across the entire Amazon Marketplace and Fulfillment Center network worldwide. This provides an operational incentive to continuously improve AWS services to generate over $50 billion in revenue per quarter for Amazon. Those improvements to AWS also benefit other customers who use AWS for their own IT needs.
What disruption happened through decentralization?
Amazon Robotics and its Kiva AGVs allowed Amazon to scale Fulfillment by Amazon and honor 2-day delivery for more products across the country to scale the number of Prime memberships.
Instead of businesses selling products to a retailer at a discount for markup and sales to consumers, Amazon provides these businesses direct access to consumers and Prime members on the Marketplace plus sales transactions and order fulfillment.
Even though Amazon centralizes operations onto the Marketplace, businesses that use Fulfillment by Amazon disrupt legacy processes that require resources to order products, store inventory, contract logistics, acquire customers, process/fulfill orders and handle returns.
Amazon only requires a business to have a Marketplace account and source products for deliver to Amazon for Fulfillment by Amazon. That might only require a mobile device with online accounts at Alibaba and Amazon to run a successful part-time business out of an apartment, home or office.
What curation could customers access?
Customers who are Prime members have access to more products with 2-day delivery through the Fulfillment by Amazon opportunity with third-party sellers.
Sellers have access to 200 million Prime members when products meet criteria to participate in the Prime program. These sellers can also research the Amazon Marketplace to identify trends to source and market test new products.
What is horizontally integrated to drive value for customers?
Amazon added Fulfillment by Amazon to cost-effectively expand the number of third party sellers sourcing products for sale on the Marketplace.
Customers gain access to more products that meet their needs through the Marketplace with a thriving network of third party sellers.
One challenge to Kiva AGVs serving as the hardware transformation at Amazon is the fact this technology scales stepwise with exponential growth of the core Fulfillment business operations vs. as an end-product that scales 1-to-1 with exponential growth. This limits the impact of Wright’s Law decreasing cost linearly with each doubling of cumulative unit production of the Kiva AGVs.
But the AGVs are so critical to growth across all 3 Pillars of Amazon that each operating AGV has a material impact on Amazon. So each step up in the number of Kiva AGVs with the launch of a new fulfillment center or fleet upgrade has a multiplier impact on Amazon.
The next 2 proxies are forward-looking, but align with what we have discussed so far. However, energy is a core attribute because these are forward-looking. And embracing open-source principles is another core attribute shared by these 2 companies. We’ll start with Tesla and then cover Block.
3. Tesla and its rechargeable 4680 lithium-ion battery cells
A key requirement for grid-scale energy provided by your utility company is a continuous supply of electricity whenever you need it. Rolling blackouts result when demand exceeds the ability to supply the required electricity with on-demand energy resources. But potential sources of sustainable energy like solar, wind and even hydropower can either vary (wind & hydropower) or totally shutdown (solar at night). The value of sustainable energy sources improves significantly with cost-effective energy storage that is repeatable for many charge-discharge cycles.
Grid-scale stationary battery projects, residential stationary battery systems and electric vehicle battery packs are critical to scale sustainable energy in a world addicted to fossil fuels and unwilling to scale nuclear energy. Lithium-ion battery cells provided a critical component to scale the iPhone starting in the late 2000s. Panasonic, LG Energy, Samsung, CATL and other companies manufacture these battery cells. The most common format historically is the 1865-type which is 18 mm in diameter and 65 mm in length. But this format provides a challenge for electric vehicles because of the number of cells required to reach a target energy storage capacity. But Tesla still launched the original Roadster, Model S and Model X with the 1865-type lithium-ion battery cell.
Tesla partnered with Panasonic to build gigafactory 1 in Nevada to produce and scale a 2170-type battery cell for the Model 3 and Model Y. This larger format requires fewer cells to achieve the same energy storage capacity. Tesla announced in 2020 that it had designed an even larger, new 4680-type format plus developed a pilot production facility in Fremont, CA to improve both the lithium-ion battery cell design and the process to scale its production. The 4680-type format also included some design enhancements to eliminate steps in production, decrease cost, decrease the time to charge these battery cells and increase the number of charge/discharge cycles.
But a fundamental improvement between the 4680-type format and prior formats is to also use the larger size with a rigid case as a structural component in a structural battery pack as part of the vehicle underbody chassis. This reduces weight from structural frame metal that would be needed if the battery cells could not be used as a structural component. Reducing weight increases vehicle range for the same battery capacity.
Tesla has challenges scaling production of the 4680-type format, but has expanded 4680 production from the pilot line in Fremont to Giga Texas. Tesla has also reported battery cell manufacturers like Panasonic and LG Energy would be able to manufacture the 4680-type format and have built pilot lines to produce prototype 4680-type cells to compete for Tesla contracts for additional capacity beyond what Tesla can produce within its own operations.
Tesla has announced it will buy every battery cell that can be produced at a favorable price since it is battery constrained across vehicles, desired chemistries and stationary storage. BMW has also announced it would adopt the 4680-type format and will invest to build out production capacity. This will likely happen through a partnership with one or more of the battery manufacturers.
So Tesla can drive demand with advanced technology and manufacturing, but it needs to supply battery cells to scale production of its products to end-users to accelerate the transition to sustainable energy. Tesla is vertically integrating its own production battery cells, but is appears to also be developing a horizontal platform to scale access to target battery cell-types and chemistries to meet the needs of it full product lines. This will also benefit other EV brands looking for battery cell supplies in the future to meet the anticipated scale as EV adoption ramps exponentially. Tesla shares most of its IP with the entire global automotive industry to accelerate its mission. Tesla files patents to keep other companies from blocking it from what it intends to commercialize.
Abundant battery cell supplies will not only enable EV production to scale, but will enable energy generation and storage to become more decentralized within an area, neighborhood and individual homes. This decreases the need for rolling blackouts when grid energy cannot meet demand and empowers individuals to take more control over their own energy needs and costs. Many other features like the Supercharger network and autonomous navigation will accelerate the demand for Tesla EVs, but Tesla will only be able to scale EV production as fast as it can source battery cells.
And scaling battery cell production drives 2 supply chain requirements. The first is the upstream need to source and purify raw materials at scale like nickel, iron and lithium and then manufacture key components like cathodes and anodes to produce the final battery cell. These upstream processes will also benefit as they are co-located near the source of key raw materials. The second is the downstream need to source and purify raw materials by recycling used lithium-ion batteries at the end of their service life. Sustainable energy by definition requires recycling to create a circular economy for the raw materials in lithium-ion batteries.
What is vertically integrated by Tesla?
Tesla also designs all of its products, core components and even manufacturing processes.
Tesla stamps aluminum sheets into panels on-site for most of its vehicles and builds its own car seats.
Tesla sources the largest die-cast machines made to-date to cast large parts in one shot with an aluminum alloy it also developed for this unique application. These casted parts eliminate the need for 300 robots to spot-weld about 70 pieces into the same part.
Tesla has developed its own Tesla-branded Supercharger network to charge EVs away from home.
Tesla designed its own Full-Self Driving chip and computer for on vehicle autonomous navigation. Tesla has also developed its own AI software to enable a beta-version of autonomous navigation.
Tesla developed its own Enterprise Resource Planning software to run its operations instead of deploying SAP or Oracle like most other large corporations. Larry Ellison who founded Oracle and acted as its CEO for many years is one of the largest shareholders of Tesla and previously served on Tesla’s Board.
What new hardware did Tesla introduce?
Tesla initially sourced battery cells from other battery manufacturers like other car companies. It then partnered with Panasonic to build the 2170-type lithium ion battery cell in a new gigafactory built in Nevada that also assembled these cells into battery packs for final assembly into Model 3 and then the Model Y.
Tesla designed its own 4680-type battery cell to eliminate production steps, decrease costs, extend range, decrease charging time and increase the number of charge/discharge cycles during the life of this battery cell. Current 4680-type battery cell production appears to be enough to produce about 1,000 EVs per week, but will need to scale significantly across all Tesla gigafactories and battery suppliers to meet 2030 objectives.
What disruption happened through decentralization?
Tesla is onshoring battery cell production to produce 1 TWh of battery cell capacity in the US to meet the requirements for the new Inflation Reduction Act signed into law. This results in energy storage produced and widely distributed across the US to scale sustainable energy.
Tesla disrupted the legacy battery cell manufacturers with its own design of the 4680-type battery cell and its own cell production technology and process.
Tesla disrupted the other vehicle manufacturers by announcing to the legacy battery cell manufacturers it would also buy as many cells as they can produce as long as the battery cells are fairly priced.
Tesla is planning to scale battery cell production by vertically integrating the whole process including mining and purifying raw materials if required. This will likely result in partnerships and joint ventures with mining companies around the world.
What curation could customers access?
Customers will be able to choose more EV models and services to meet their needs and price point with abundant battery cell production.
Customers will be able to add affordable stationary battery storage and generate electricity with solar or wind with abundant battery cell production to equip their homes and EVs.
Thus, customers will be able to curate how they help accelerate the transition to sustainable energy. In the future, Tesla wants to provide options for EV robotaxi ride-sharing, renting EVs, purchasing different EV models, installing stationary residential batteries for back-up power and installing solar to generate a portion of all electricity for the home and vehicles.
What is horizontally integrated to drive value for customers?
Tesla intends to open-source its 4680-type battery cell IP with other manufacturers to improve and scale the processes to further scale battery cell production. There is evidence Panasonic, LG Energy, Samsung and BMW are early adopters for the 4680-type format.
Battery recyclers like Redwood Materials have successfully accessed the capital markets to fund their ventures. For now, it looks like Tesla will horizontally integrate sourcing raw materials from a growing supply of used batteries from these third parties to deploy Tesla’s capital where needed most.
Tesla will face significant challenges scaling lithium-ion battery production to meet its 2030 EV production goals. The current supply chain for raw materials is not expected to serve that scale and mines take years to build and scale production. Tesla is using the future addressable market size for these raw material to negotiate accelerated terms for permits to help build new mines in countries around the world.
Another challenge is potentially replacing the environmental impact of drilling for fossil fuels with a similar negative environmental impact from mining base metals like nickel for batteries. Tesla aims to limit the environmental impact of these mines and purification of the mined base metals. But the battery cell end-product is at least sustainable with energy-efficient, high-yield base metal recycling.
I’ll also add even though battery cells are the primary constraint to scale EV production, Tesla’s edge computing hardware in its vehicle to enable computer vision and autonomous navigation with its rapidly evolving neural networks are key to drive the demand to transition away from internal combustion engine (ICE) vehicles. Once Tesla EV robotaxis provide transportation-as-a-service at 10-20% of the cost of using an ICE vehicle, the transition to sustainable energy will accelerate significantly. And a robotaxi operating within an EV fleet 20 hours a day will displace the need for an estimated 5 ICE vehicles that remain parked most of the time.
4. Block and its hardware wallet to self-custody Bitcoin
When we think of energy, we usually think of recharging our mobile devices to keep it operating and cooling our homes on a hot day. We don’t really think about energy as a key input to validate financial transactions and mine scarce, reliable stores of value like physical gold and Bitcoin. We also don’t think about the economic energy transferred if a scarce, reliable store of value can be instantly moved from New York to Tokyo for little if any cost compared to the alternative with gold. A reserve currency like the US Dollar is the most common method used to transfer funds.
Banks use a global network to clear transactions between their customers. And these banks are an extension of a central bank that controls the money supply in one country vs. a central bank and its network of banks in another country. This is a rather centralized way to store, transfer and use economic energy in the form of money with its inherent costs and fees to carry out our daily lives. We still need these banks to extend critical services, but we need to innovate entirely new products and services that are more decentralized.
But replacing centralized banks with centralized exchanges to custody assets is not real progress. We need viable options to self-custody a portion of assets to decentralize more products and services. Block (previously known as Square) has developed an Ecosystem of ecosystems with products and services for sellers (Square), creators (Tidal), consumers (Cash App) and developers (Bitcoin).
Block recently partnered with Circle to collaborate on incorporating the USDC stable-coin into products and services offered by both companies. And Block acquired AfterPay in 2021 in an all-stock transaction valued at $28 billion at the time to offer new payment options to its customers using the buy now, pay later model.
As Block expands its primary Cash App and Square ecosystems for consumers and sellers globally, it is working to unlock value for customers through more connections between its core ecosystems. Block created its newest ecosystem around Bitcoin to facilitate transactions, products and services within and between its core ecosystems.
Open-source software and hardware are common features for this Bitcoin ecosystem. But one of the most important projects is a decentralized hardware wallet to self-custody Bitcoin for consumers, creators, developers and seller businesses. Products and services linked to the hardware wallet (base layer) will be able to drive transactions between these ecosystems (secondary layer).
Of all the companies covered so far in this Update, Block has the potential to be the most disruptive to legacy systems while also driving the most value for its customers at scale. It operates within what is a global financial services addressable market that is estimated at $28 trillion. Right now it defines its total addressable market for Cash App at $70 billion and Square at $120 billion, but those keep expanding as new products, services and global markets are added.
What is vertically integrated by Block?
Block designs products across all of its ecosystems. This includes Square POS hardware products for sellers to transact business with customers, Square software products for restaurants and retailers to operate their businesses, Cash App for consumers to send, receive and store money, stocks and Bitcoin, and Tidal for creators to stream high-fidelity music and access their fans.
Block also vertically integrates its hardware and software to unlock user experiences and use cases to solve unique problems for its customers.
Block’s hacker culture solves problems it identifies with its own internal teams.
What new hardware will Block introduce?
Block announced it will build a hardware wallet to self-custody a private key for Bitcoin with a design for mainstream adoption. 2nd private key is held by a software wallet. 3rd private key is held by Block in its cloud.
The hardware wallet design requires 2 out of 3 private key “signatures” for all transactions. This is usually satisfied for most transactions with just the software wallet connected to the Block cloud to authenticate the transaction on something like the layer 2 Lightning Network.
The hardware wallet private key is needed to transfer amounts that exceed a daily limit and require 3 keys to authenticate the transaction that may require this base Bitcoin layer.
What disruption will happen through decentralization?
Although Block’s hardware wallet has not launched yet, other hardware wallets validate the use case for self-custody of Bitcoin directly by the user vs. keeping Bitcoin centralized on an exchange like Coinbase or FTX as a customer. This hardware wallet is designed for mainstream adoption to scale.
As layer 2 services are added with the companion software wallet, more digital transactions can move away from banks and debit cards with wallet-to-wallet transactions to reduce costs. Square has the advantage of connecting its seller POS systems to a wallet needed to realize this solution.
What curation could customers access?
Customers are able to curate the financial products and services they want as they match the Bitcoin requirements to make each product or service possible.
Sellers and creators could incentivize consumers to use supported digital wallets for transactions to save costs. This may require the hardware wallet as transaction sizes exceed the spending limits of a software wallet that isn’t connected to a bank account or credit card.
As the Block Ecosystem of ecosystems scales and more transactions happen with software/hardware wallets, the need for banks and debit cards is reduced. This provides more of the unbanked to participate in the economy.
What is horizontally integrated to drive value for customers?
Block is developing all of its hardware and software products for its Bitcoin ecosystem as open-source technologies.
This allows other companies to use these designs to manufacture their own products and services to support Block’s ecosystems beyond what Block can do alone.
As the open-source nature of Block’s products and services scales, it provides a target market for engineers and software developers to build products, services, their skills and careers. Over time this builds more quality in the products and services Block’s customers use.
Block has built and is continuing to scale significant ecosystems around consumers, creators, developers and sellers. The consumer and seller ecosystems have large addressable markets Block continues to expand with new products, services and global markets it serves. Block is also connecting their ecosystems to drive additional value for their customers with unique services like AfterPay between Cash App users and Square sellers to innovate payment services.
Bitcoin is still a relatively new concept over the last decade, but transactions on its blockchain are validated reliably every 10 minutes. The Bitcoin base blockchain transaction layer will not adequately scale to take over payments between consumers and sellers, but solutions built on top of that base layer can handle the required volume of payments up to a spending limit. Once that limit is reached, then payments will need some level of guarantee and authentication. That is the role Bitcoin and a hardware wallet can play.
To truly decentralize financial services, we need to be able to self-custody a scarce, secure, portable store of value like Bitcoin in addition to holding other assets like real estate, stocks, bonds, cash and cash-equivalents. Institutions will also eventually self-custody Bitcoin once regulations catch up to the technology to help clear transactions more efficiently by staking adequate reserves of Bitcoin and other stores of value.
Conclusion
First of all, the innovations I covered in this Update happened or are happening within established corporations versus through the creation of new ventures. Vertical integration was fundamental to the culture for all these corporations to design and engineer products, processes and cost reductions. This appears critical to leverage the full potential of a new hardware platform. And this new hardware unlocks transformation when it reaches adequate scale. And then the impact or economic value of the resulting transformation likely becomes proportional to the incremental scale.
Apple started with the iPod and that led to the iPhone and iPad. Amazon acquired the Kiva robots through the acquisition of Kiva Systems. Tesla partnered with Panasonic on the 2170-type battery cell before Tesla designed the 4680-type battery cell to advance this critical technology to transition to sustainable energy. Block developed Cash App for direct access to consumers. They then added the ability to buy, sell, receive and send Bitcoin with Cash App before designing a hardware wallet to self-custody Bitcoin for mainstream use.
Transformation enabled with the new hardware platform decentralizes the curation of something of value to customers. The baseline before the transformation is other corporations and ventures curating what they prioritize, capitalize and develop for us with their own products and services. Retailers or some other distribution network may also add a degree of curation for us based on understanding our needs. But this centralized model of curation comes with significant costs and inefficiencies passed on to us in the products and services we utilize. Our true needs are likely underserved, too.
But another critical attribute of these innovations even with vertical integration is open-source or horizontal integration of a key component to facilitate scaling. In some cases like apps on the iPhone and products on the Amazon Marketplace, curation is available through a network of entrepreneurs and businesses who are identifying trends or problems to solve with unique products and services made available through the App Store or Marketplace. Tesla is sharing its proprietary 4680-type battery cell design and manufacturing processes with other companies to help advance and scale the technology. And Block is developing open-source hardware and software for its Bitcoin wallet to benefit the entire Bitcoin community.
Success results in Decentralized Self-Curation of what we value. This appears to have contributed significantly to the success of Apple and Amazon. We will have to see what develops with Tesla and Block and what the next chapters look like for Apple and Amazon.
Best,
Stephen
I’m long AMZN, SQ and TSLA mentioned in this post. Nothing in this post is intended to serve as financial advice. Do your own research. The opinions and views expressed in this newsletter are those of the author. They do not purport to reflect the opinions, views or policies of any other organization, company or employer.