The Future, This Week 13 April 2018

Disclaimer: We would like to advise that the following program may contain real news, occasional philosophy and ideas that may offend some listeners.

Intro: This is The Future, This Week on Sydney Business Insights. I'm Sandra Peter and I'm Kai Riemer. Every week we get together and look at the news of the week. We discuss technology, the future of business, the weird and the wonderful and things that change the world. Okay let's start. Let's start.

Sandra: Today on The Future, This Week: big ships, rockets vs cars, fake videos and Zuck's cushion in other news. I'm Sandra Peter, the director of Sydney Business Insights.

Kai: I'm Kai Riemer professor at the Business School and leader of the Digital Disruption Research Group.

Sandra: So Kai what happened in the future, this week?

Kai: While everyone is talking about Zuckerberg's testimonies in front of Senate and Congress, while we followed the news closely but we haven't actually learned anything new from him so far that would warrant making this a big story so we'll leave this one till the end for the short stories and do something else. So the first story this week comes from Jalopnik: The intricate economics of massive cruise ships are fascinating.

Sandra: So this is a story that caught both our attention because cruise ships is not something we normally talk about on this podcast. So we thought okay let's have a look at the economics of cruise ships and this comes at the point where the biggest cruise ship ever built is almost finished, it's the Symphony of the Sea. It's currently being completed in France and it will take off from Miami in 2018. And these things are the size of cities so imagine 9000 people.

Kai: Okay let's listen to this.

Audio: We're talking 18 decks, we're talking 230,000 tons, we're talking now get ready for this 6800 passengers about 2100 crew. That's nearly nine thousand people. Why do I want to go on vacation with 9000 people? Well I mean imagine a ship that's got a zip line, imagine a ship that's got a 10 story waterfall, two rock climbing walls, five pools, 20 separate restaurants. Oh my goodness. Yeah and an indoor park. That sounds like a neighbourhood. Well at 9000 people, it's more than a neighbourhood, it's a city. You know I used to like to joke that some of these ships are so large they have a high crime area onboard. But that's a joke. But the point is it's a big big place.

Sandra: So why is this interesting?

Kai: Now, first of all we could dwell on the fact that these ships are getting bigger and bigger with every iteration and they're building more and more outrageous features into these floating cities - external balconies that lift up and down the side of the ship, villas with infinity balconies where you can dine with the illusion of sitting on the ocean, huge entertainment spaces, sports facilities. But what is really interesting about cruise ships is the economics of operating a floating business the size of a city.

Sandra: So first of all as the Symphony of the Sea is being built these things are extremely expensive to build. So the cost of making one ranges from two hundred and fifty thousand dollars per cabin to about half a million dollars per cabin depending on how luxurious these things are. And then they only stay in play for about 25 years.

Kai: And that is 25 years in total. It's about 15 years in a high priced market and then they're being handed down to become more of a low end facility and these companies have to go to great lengths recovering those costs. And there's different models there.

Sandra: One of them relies on a lot of money upfront and then very little interference. And the other one is a lower cost more budget model where you pay a lot less for a cabin that might not have the nice balcony or the views or the infinite poll but then gives you access to a lot of facilities on board then recover additional costs. So think about going to a restaurant or watching a movie or gambling.

Kai: I call them the Facebook model and the Apple model so in the Facebook model they sell you a cheap ticket, they almost give away tickets sometimes so you've got to imagine that any room that is empty doesn't really add any value so the cruise companies would rather give away last minute tickets for almost nothing just to have people on board that can then consume services on board. So the Facebook model relies on cheap tickets but then they create a captive audience literally because you can't actually leave the boat and then they optimise the hell out of their passengers while they're on board. Everything costs extra. The whole ship is designed and optimised to extract value via gambling and dining options and entertainment. If you want to go on shore on a land trip that costs you extra.

Sandra: So that's one way to make money. But then there is another model.

Kai: Yeah. So the other model tries to recover most of the cost upfront and the facilities look very different. So we're talking premium facilities, highly styled, lots of interesting entertainment options that are reflected in a much higher upfront price but then people are left alone afterwards, the whole experience is not geared as much towards extracting value from the customers but it is much more expensive to actually pay for and go on the cruise. And those two models can coexist on the same ship but they also have purpose built mainstream ships where the cruise is cheap and the whole experience is geared towards on board services or luxurious ships with sometimes quite outrageous facilities for the very high end market. And then obviously premium ones that are catered especially to pensioners and seniors who go on these cruises, sometimes live on those ships instead of actually retiring into a retirement home and I also learned recently interesting fact that these big ships have morgues.

Sandra: So apparently they also die on these ships sometimes.

Kai: Yes absolutely, which actually happens quite frequently we've been told.

Sandra: There's quite a few other interesting bits around the economics of large cruise ships. The fact that they account for 20 to 30 percent of the GDP of some of the countries they end up in. The fact that they're the biggest buyer of eggs for instance in places like Sydney or New South Wales - one of these ships in a week consumes between 50 and 70000 eggs. So these cruise ships have wide ranging implications for a number of other industries and locations and the dynamics of this business are actually sat in laws that go back to the late 1800s.

Kai: So in the U.S. for example there's a law which states that no foreign owned ship can take passengers from one US city to another US city.

Sandra: Which means that if you start off in a US city you need to literally go overseas which meant that the whole ecosystem developed around the paths that these ships used to take that it is no longer U.S. law that governs the way for instance people are employed on these ships. They fall under various international jurisdictions. The flags that some of these ships fly have nothing to do with their origin or their ownership but rather the jurisdiction that gives them the most flexibility with regard to what they can and cannot do on their ships.

Kai: And it leads to weird phenomena such as a small Mexican port town becoming one of the most popular destinations for these cruise ships to circumvent having to pay a penalty under this law. And this town is only 50 kilometres from the US border or Norwegian cruise ships that go off the west coast of the US to Hawaii having to do a four day detour to a small uninhabited island that is part of a small island state just to circumvent having to pay a fine under this law so there's a whole bunch of very odd behaviours that these cruise ships show that are a result of how international law and specific country laws interact in this business.

Sandra: So this is where the future comes in because interestingly some of these regulations might end up affecting ships less in the future. For instance for a very long time so think back to the days of the titanic, these cruise ships were about where they could take you, were about ending up in a faraway destination or on an exotic island. But increasingly with the developments that we've been discussing previously these ships have become the destination. And this is also something that the article highlights that increasingly the time you spend on the ship is why you go there, not in order to reach exotic other places.

Kai: And the reason for this is again straight economics, so the particular nature of cruise ships as a business means that you can create the perfect captive audience. And while cruise ships are challenging because of the incredibly high upfront fixed cost that has to be recovered, they're all so perfect to extract all the value from your customers. And so let's talk about this a little bit. So first of all 70 percent of all the revenue that a cruise ship generates is from ticket sales and 30 percent is then from on board services but the margin of these on board services are much much higher so the on board spend actually contributes much more to revenue than the ticket sales with which you try to recover the majority of your fixed cost. But then it's really up to the services that you provide on board to make money from the cruise.

Sandra: And given that projected numbers for 2018 are close to 30 million passengers on these cruise ships you want to keep as much of that value as possible. Which brings us to another very interesting point - we talked about the demographics that these cruise ships attract but mostly this is a lifestyle choice or an entertainment choice that people make. Now given the large capacity of these cruise ships they have often been compared to large resorts that you would get in places like Hawaii or Orlando where people would not only use them for entertainment but where these places also serve a conference market. And this is not something that the cruise ships have captured so far. So interestingly this comes down to a very simple thing which has to do with connectivity. The fact that so far we have not been able to ensure not only reliable connectivity but cost effective connectivity for business people on these ships. But this is about to change. Once you are able to have affordable wi-fi, this is the perfect place to bring a captive large audience and now with capacity up to 9000 you could have large conferences on these ships. So a possible insight into the future of cruise ships might be a completely different market.

Sandra: And the idea of a captive audience has actually been taken to the next step. So you might imagine that you're on a cruise ship and you're in the Caribbean and you want to actually get off this boat and have an excursion on an island somewhere and it turns out you can do this but some of these islands are actually now owned and completely managed by the cruise ship company. So even when you go on land they are still extracting value that is part of the calculation of providing the cruise in the first place so this is a little bit like you're going on a bus tour and the bus operator colluding with the dodgy truck stop where they drop you for a meal and try to sell you some weird shit. Except that these tropical islands are obviously much less shady and much less dodgy.

Sandra: So fundamentally what the cruise ships are trying to do is keep the customer captive in an ecosystem that they control and where all the benefits are reaped by the company.

Kai: So in that respect cruise ships are really a metaphor for what every business wants to become and what companies like Facebook really have managed to create the captive audience that do not have any alternative than to spend their time or their money on the platform.

Sandra: So the interesting conversations around the future of such industries will never be about the new bionic arm bartender or about new augmented reality services on the ship, they do not do anything to fundamentally change the business model, but rather around aspects that would allow them to capture an additional markets such as the conference market.

Kai: Or the onshore market.

Sandra: So in a way cruise ships really do what Facebook does in the digital space but only in the real world.

Kai: Yeah. So they found a way to create a physical service that acts as a captive winner takes all model that Facebook or Amazon have perfected in the digital channel.

Sandra: Let's have a look at our second story for today which comes from Quartz and asks "Why are electric cars so much harder to build than reusable rockets?".

Kai: The article talks about Tesla and SpaceX, two of Elon Musk's most successful companies, and it basically works off a statement that Musk made in a recent earnings call after the SpaceX rocket launched his Tesla Roadster into space and he said I'm hopeful that people think that if we can send a roadster to the asteroid belt we could probably solve Model 3 production. But the article goes on to say that if building a thousand electric cars every day was as easy as launching an orbiter rocket Tesla would already be doing it. So we really want to look at why it seems so much harder to create a successful car production system than it is to launch rockets into space so is it truly more difficult than rocket science?

Sandra: So let's look at what a rocket company needs to do. Their task is to launch a rocket into space and recover it. So the strategy that you employ to do this because you already know how to launch the rocket into space yes you can optimise a little bit on the technology that you have but your main task is to make this as cheap as possible. So your strategy is in a limited market with very few competitors and in the case of orbital launches we only have another startup that is Jeff Bezos' Blue Origin that actually hasn't yet launched its own orbital rocket but is working on it or rocket makers like Europe's Arianespace and United Launch Alliance which are also developing reusable system. And then a Chinese program which is off limits because of national security. So in a very limited space you are trying to make the cheapest one possible. And whilst there are not many competitors there are also not many customers in this space which also means that out of a total of 90 orbital launches this year, Tesla made about 18 of them and will need to just make them cheaper to capture a larger space. And surprisingly this business actually does not take a huge amount of financing to run either. So for a company like SpaceX it was about one point seven billion dollars in equity last year.

Kai: So while we often talk about rocket science as the pinnacle of achievements, it turns out that running a business like SpaceX is not actually all that complicated. A lot of the parts that go into building a rocket can be bought off the shelf, technology is well understood and even the vertical takeoff and landing technology that SpaceX demonstrated to great effect recently was actually created in the 1990s by McDonnell Douglas and NASA. So none of this is truly groundbreaking innovation, what is innovative is the aggressive approach to do this cheaply and because they're in a stagnant market SpaceX as a player has been quite successful. Now the car industry is a very different beast. It is competitive, there is lots of successful companies that have mastered building cars at scale and the price competition is pretty cut-throat and margins are thin.

Sandra: So whilst there have been only 90 orbital launches last year, we made 73 million cars and Tesla's only made 100,000 of those. So as you said this is a very very competitive market with extremely low margins.

Kai: And successful plans by the large established car manufacturers churn out about 5,000 cars every week, a number that Tesla wants to reach with its own Model 3 facility for producing what is supposed to be their cheap entry level mainstream car the car that is going to make electric cars a thing.

Sandra: Even though seemingly we are again talking about making something cheaper which is what he's trying to do with the Model 3, Tesla's success in the car industry is not fully dependent on making the car as cheap as possible. They have to not only compete on price but also compete on execution, on the capabilities that the car offers, how many miles you can drive in it, what kind of technology is on board. They have to compete on user experience. Remember there are many established competitors, many high end, many meatier car manufacturers that already offer fantastic driving, riding experiences. They also have to work on establishing electric vehicles as a mainstream choice for those who want to own a vehicle. So that means a much more complicated strategy at play. Remember Tesla also built 200 shops to make use of this because at the same time as competing with the car manufacturers, they also had to rethink what an eco-system would look like in an electric vehicle world. So whilst one point seven billion dollars will get you a reusable rocket, to make 100,000 electric vehicles Tesla needed twelve point five billion dollars in equity and debt.

Kai: So that's the point that we want to highlight here is that it is the complexity of building this large scale socio technical system of not only inventing and creating the car and the cutting edge technology that goes into a battery powered electric car but also the execution of creating a large scale global infrastructure for producing and then selling and distributing those cars. And remember not only has Tesla taken on the job to creating innovative electric cars, they are also building self driving autopilot technologies for these cars and they are innovating on the degree of automation that goes into its giga factories for producing both batteries and then later the cars.

So while they have to build a stable and very efficient execution system for producing the cars, they are at the same time still innovating on what they are building and how they are producing those cars.

Sandra: And that includes the entire supply chain upstream and downstream. They are not making use of any dealerships, they are using over the air updates - we've discussed this previously on the podcast which actually puts them in a position where scaling such a company becomes a very different proposition. We often think about Tesla as a typical digitally enabled Silicon Valley company and these cars certainly look and feel like gadgets but what Tesla is learning is that scaling a physical production business is a much harder proposition than scaling a typical Silicon Valley digital platform based business such as Facebook, Google, or any other app and indeed the best company to compare Tesla to would probably be Apple because of the way in which Apple is not only able to design and innovate on the actual products they create but have also mastered a highly efficient and often impeccably executed global supply chain but that has taken Apple many years and the collaboration with a lot of partners. While Tesla is actually trying to execute much of what they do themselves because not only are they designing the cars they're also executing on producing the batteries and the cars themselves, complexity that Apple has outsourced to overseas partners.

Sandra: So let's have a look at our third story which takes us back to a topic that we said we will revisit for sure this year which is that of fake videos. And our last story comes from The Atlantic and it's titled "The era of fake video begins - the digital manipulation of video may make the current era of fake news seem quaint". This story is trying to highlight that whilst we have all these conversations in the media around fake news and their effects on our society, we are actually trying to just play catch up with things that have already happened and in the background of these conversations fake videos are already happening. The article makes reference to 'deepfake' something that we've touched on in this podcast before where the faces of famous actresses from movies like Harry Potter are superimposed on to pornographic video footage. And this is important because hackers developing this technology actually intend to democratise their work. The article reports on how automating and making this technology freely available would then allow anyone to transpose disembodied heads of people or co-workers or politicians on to clips with really just a few simple clicks and no technical ability at all.

Kai: And so the democratisation of technology as much as we might appreciate it, in this case could have dangerous consequences when it comes to the phenomenon of revenge porn for example. But the implications of this are much larger when in fact any kind of video can now be manipulated. And we have previously highlighted examples such as by the University of Washington which have shown this video footage of former President Barack Obama that you can manipulate existing video footage and have people in those videos say different things. Stanford has shown that you can do real time face capture to re-enact videos of celebrities such as US presidents...

Sandra: And make them say things that they have never said in a completely realistic way and this is becoming increasingly a service available to everyone. We quite often tend to think of these things as technologies that only exist in an academic lab or in a commercial lab with huge funding but very soon such technology will be widely available.

Kai: Which brings us to the main point the article makes - the author and I'm quoting from the article makes the point that "unedited video has acquired an outsized authority in our culture". So the idea that for a long time if you wanted to prove a point and you had video footage you were in a much better position to actually rally people because once you have video footage people are much more ready to believe a story and also get behind a cause and that's the article says because the public has developed a "blinding irrational cynicism toward reporting and other material that the media have handled and processed, an overreaction to a century of advertising propaganda and hyperbolic TV news". So unedited video has been the last holdout for reporting reality and this is now under threat and up for grabs.

Sandra: And let's remember that the opportunity to manipulate not only people's mental states or emotions but also behaviours comes not only from trying to convince them that certain videos are necessarily real which is one way you could influence public opinion or stock prices or voting habits or commercial behaviours or political leanings. But the opportunity also comes from the quantity of videos that could be produced that will compete for attention. So for instance in politics it is not only that you could manipulate what politicians could say but you could also manipulate what constituents would say. In which case having a few thousand videos of constituents asking for something would compete with the real voices of people trying to have a conversation.

So with fake videos I think we're actually at the time when we need to start figuring out how we will be able to sort fakes from truth and how we will keep a functioning Internet once these things are done at scale. Obviously a first solution would be that perhaps individuals will have the ability to tell which is a road I think we don't necessarily want to explore. There is virtually no chance that people will have either the time or even the capacity to sort truth from fiction in this space. Consider the fact that we watch a video for 10/15 seconds when we are on our Facebook feed or on our LinkedIn feed and these things look completely real so the fact that individuals would have this capacity is not even worth exploring. Another option would be technology companies actually stepping in.

Kai: And this is where the article makes a really interesting observation in that the author says that Silicon Valley has never been in the business of preserving and representing reality and the author draws a straight line from the mind altering and reality denying effects of drugs like LSD in the 1970s where the early cyberpunk and technology movement and computer science has its roots to new developments in virtual reality where the next big step in redefining the Internet is precisely in creating alternative realities that will captivate and entertain people and where the whole technology is based on the idea that we are not representing a reality by creating entirely new and potentially completely weird experiences which you know is a straight reminder of the recent movie Ready Player One a future in which people are being plugged in to these virtual worlds which help them forget their real lives but who are then at the whim again of technology companies that shape realities for their own purposes. And this is the warning that the article sounds that as we are messing with the mediums that have allowed us to represent and actually know reality and what actually happened, we're moving to a space where we're deliberately creating new realities and virtual worlds where the idea of what is actually real becomes completely obsolete.

Sandra: And yet there is one more way we could tackle this because unlike other crises that have snuck up on us this one is one that we can foresee and that we are at the very beginning of and we could reconsider for instance, and the article makes a good suggestion in its final paragraph, we could reconsider the place of trusted validators in our society and this place would not be a space for technology companies but rather for institutions that have previously had cultural authority as trusted validators. So think about well respected newspapers or academic institutions such as universities or new institutions that we would bring into this space where we would outsource the problem of validating content. We have previously had this issue at a much smaller scale and we have established cultural institutions that have fulfilled that role in society so maybe a good point to also have those debates about how we want to handle this.

Kai: So we'll leave it here as we're not solving this problem today but we want to move on to a couple of quick future bites/short stories. So Sandra what is one thing you have learned this week?

Sandra: My most surprising insight for the week has been a story from Associated Press that reported on a study observing that global warming is weakening key ocean circulation. Isn't that what has always been predicted in models? Yes indeed and we can actually now observe it. This study is reporting on the Atlantic Ocean current circulation which has plunged to its weakest level on record and actually the team indicate that the circulation is the weakest it's been in fifteen hundred years. So this Atlantic current is really a conveyor belt for ocean water and air and this creates weather. So think of the movie The Day After Tomorrow - if it stops we will have catastrophic consequences, if it slows down we will also experience severe consequences in terms of weather in Europe and North America to begin with. And what struck me with this news story was that this should be the biggest story we are talking about this year, that all these models have predicted a slowing down this is likely to affect all of us and yet this hasn't made the front page of any newspapers. It hasn't made the first three news items on any news broadcast. Why is that?

Kai: Because the world is currently enthralled with Facebook and Mark Zuckerberg's hearings in Washington.

Sandra: And potentially also because stories like the ones associated with climate change have very far off consequences that are not directly traceable to one thing or to one aspect or to one cause or one institution who owns the problem. So it becomes nobody's problem and even though this is affecting all of us it's affecting all of us in the future and in a way that we can't directly observe as part of our everyday work and life. And even though we've been talking about climate change for so many years now and we have consensus around so many aspects of it, we seem unable to find ways to get mass public activation around the topic in the same way we talk about our next short bite.

Kai: Yeah so we're coming back to Facebook and Zuckerberg as we promised at the beginning. Now Sandra and I have kept an eye on all the stories coming out in the wake of the Zuckerberg testimony in front of Senate.

Sandra: And we have looked really hard for something new in there, for something that moves the conversation forward, for new insight into the story and I think we've found one.

Kai: Absolutely. So while Zuckerberg hasn't actually said anything new on the topic and people have noted that he has dodged most of the difficult questions, we found an article in Inverse who actually report an interesting new angle on the story and that is that Mark Zuckerberg was sitting on a four inch thick testimony cushion during his five hour hearing. The Washingtonian tweeted a photo of the booster seat on Mark Zuckerberg's arm chair that he was sitting in during the testimony and Inverse goes on to discussing how this cushion will have helped the billionaire Facebook CEO sitting tall and that it would probably boost his confidence and help his testimony as he goes along answering all those difficult questions about as the article notes the little difficulty that he is having in his day job. So it's well-known that Mark Zuckerberg is only five feet seven inches tall and that he has his photographs that he posts on his own Facebook carefully taken so that he always appears taller than he is in photographs so the cushion's probably there to bring him on level eyeline with the senators during the hearing and as far as Sandra and I can discern this is the only actual news that was coming out of the hearings so far.

Sandra: But we will keep you posted as this story continues to develop. For now that's all we have time for this week. Thank you for listening.

Kai: Thanks for listening.

Outro: This was The Future, This Week. Made awesome by the Sydney Business Insights team and members of the Digital Disruption Research Group. And every week right here with us our sound editor Megan Wedge who makes us sound good and keeps us honest. Our theme music is composed and played live from a set of garden hoses by Linsey Pollak. You can subscribe to this podcast on iTunes, or Spotify SoundCloud or wherever you get your podcast. You can follow us online on Flipboard, Twitter or sbi.sydney.edu.au. If you have any news you want us to discuss please send them to us at sbi@sydney.edu.au.

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