Doodles, Entropy & Warfare

Change is the only constant. Hear me and fund manager and tech visionary Pip Coburn talk about change and why traditional equity research analysts are doomed (link to the complete video).

But before you watch that, read this. In recent years, investors have picked up on the Kelly Criterion, developed by John Kelly of Bell Labs after interpreting Claude Shannon’s information theory. Known as “Fortune’s Formula”, in short it tells you how much to bet based on when you believe the odds are in your favor. The simple math is 2p-1, where p is your confidence level--which tells you to never bet unless the odds favor you. If you have 60% edge, you’d bet 20% of your bankroll.

Now, Shannon’s information theory is proving as useful in warfare as it is in wagering. It was George Gilder who succinctly described that information is news, when it’s a surprise. And surprise is by definition a message with high entropy (that is, low predictability). Shannon’s calculus showed that a high-entropy message needs a low entropy carrier. Otherwise the signal gets lost in the noise. In analog terms writing a message on a clean crisp blank sheet of paper is way better than one with doodles and scribbles. In digital terms, sending a message (information) by glass and light is the best of all. As Gilder put it, a high entropy message needs a low entropy carrier.

In this new month’s issue we’ll have an exclusive sit-down with a Pentagon insider on the future of war. Notably, it’s been predicted the US will use one-tenth the force, yet 100 times the bandwidth, of prior wars. One company enabling that is Luxtera. Below is an exclusive excerpt from our premium monthly report with Greg Young, CEO of Lux Capital portfolio company, Luxtera who is delivering data at the speed of light.

Greg Young serves as president and CEO of Luxtera [full disclosure: My venture firm, Lux Capital, is an equity investor]. Prior to Luxtera, he was vice president and general manager of the High Speed Ethernet Controller and High Definition Media PC Video business units at Broadcom. While there, Greg led the growth of the Ethernet Controller business unit from concept to hundreds of millions in revenue and the No. 1 market share position. Prior to joining Broadcom, Greg was with Intel, where he held several engineering marketing and leadership positions.

Josh Wolfe: What career path led you to Luxtera?

Greg Young: After trying some startups out of school I joined Intel in the mid-90s, beginning as an engineer and then transitioning over to marketing and running product lines. I worked at Intel until 1999, when I joined Broadcom. I spent eight years at Broadcom helping to pioneer the company's participation in the Ethernet market for the network interface controller business. Ultimately, I helped grow that business to about $350 million dollars a year in semiconductor revenue. Most of my career has been spent building businesses off of advanced transceiver technology (devices that both transmit and receive information), so when I recognized the opportunity within Luxtera, it was easy for me to see how the technology could be built into a large-scale enterprise.

What excited you about the company?

First, some market backdrop here: It's getting harder and harder to send fast signals over copper wires. The world of optics has been sitting out there for a long time as the performance leader, but it has been a very expensive way to get the performance that you need for the same kind of input/output speeds. When I recognized that Luxtera had the ability to create a complete optical transceiver in CMOS technology to take performance to 10 gigabits and well beyond 10 gigabits at a cost point that was previously unachievable, I saw the same kind of opportunity I was given at both Intel and Broadcom.

Put it in perspective--how fast is 10 gigabits?

If you use a cable modem at home, that's about a 1 megabit connection--a million bits per second. We're talking about ultimately transitioning people to the point where they can readily transmit 10 billion bits a second. That's the equivalent of downloading more than 300 songs every second.

Why do photons trump electrons when it comes to broadcasting bits?

When you send an electronic signal over copper wires, there is a relationship between speed, distance, and signal integrity. As you get faster and faster over the same distance of wire, your signal integrity gets worse, and you see distortion in the signal that starts to dominate the signal quality at higher speeds. Because of that relationship, there is a natural limit for how fast and far you can push a signal over a copper wire.

At 10 gigabit speeds, electrical interconnects over copper wires really start to break down--it's hard to transmit the signal even 10 meters. Alternatively, you can send a burst of photonic energy down a low-cost fiber optic waveguide, and you can easily send a 10 gigabit signal over 10 kilometers. You can do it with less power, less complexity, and with Luxtera's technology--lower cost.

An inclusive version of the interview is available on the Forbes website, click here to be linked to the article.

Lux Research on China Solar and Mexico Water

From the brilliant global emerging technology team at Lux Research here are a few choice nuggets for you. First on Solar (remember my call that this will be a flight of Icarus with most US investors getting badly burned) and China’s deflationary forces. Then on Mexico’s water infrastructure woes.

**New entrants put on a brave face at Intersolar North America:

We recently attended the Intersolar North America Conference in San Francisco, CA. The conference was notable as much for the companies that did not attend as for those that did. Most major Japanese manufacturers – including Sharp, Sanyo, Kaneka, and Kyocera – did not present, while other industry heavyweights – including First Solar and Suntech Power – were also absent. The buzz remained focused on the size of the U.S. market, with all eyes set on the anticipated announcement of the Department of Energy loan guarantee program. Due to the slow drag of the stimulus package announcements in the U.S., module vendors and suppliers we spoke with were already focused on the U.S. market in 2H 2010. We wrote in the February 2009 report “Finding the Solar Market’s Nadir” that, for the U.S. market, “it’s unlikely that 2009 will be a breakout year.” Our outlook of 495 MW in the U.S. in 2010 continues to look accurate, while the greatest potential upside in the global market will come from China.

In contrast to the largely absent Japanese manufacturers, a host of Chinese firms – JA Solar, Canadian Solar, ENN Solar Energy, Best Solar, Trina Solar, and more – showed up in grand style, boasting huge displays. However, these large shells echoed with talk of still-slipping prices, with top-tier Chinese crystalline silicon manufacturers now selling at $2.30/W to $2.40/W according to our network. What’s more, one Chinese firm we spoke with expected prices to fall below $2.00/W by the end of 2009.

Chinese thin-film entrant ENN Solar Energy was on hand with a full 5.7 m2 tandem junction (microcrystalline silicon/amorphous silicon, or “micromorph”) thin-film panel on display. Since we last briefed the company in April 2009, ENN Solar received TÜV certification for its full panels, but the ramp-up has fallen behind schedule. According to the company, the ramp-up of its 60 MW Applied Materials line has been pushed out from the end of Q2 2009 to the end of Q4 2009 or Q1 2010, implying that full micromorph production with AMAT tools continues to drag down customers’ roadmaps. Nevertheless, the company, like many of its compatriots, was out to put on a bold and brave face throughout the show.

**Mexico City attempts to save water to avert sinking into the abyss:

On July 26, Mexico City authorities announced an emergency, 10-month water rationing plan in response to severe shortages resulting from an extended drought that has gripped the region since 1994. The National Water Commission, Conagua, warned in recent days that the seven reservoirs that make up the Cutzamala System, which supplies 24% of the Mexican capital were at dangerously low levels. (Over 70% is supplied by ground water, and the reservoirs are the sole source of water for 10 municipalities on the city’s outskirts.) Conagua, in response, plans to reduce the water flowing from Cutzamala’s dams in the southwestern state of Michoacan to 13 municipalities of Greater Mexico City by between up to 10% during the weekdays to 50% on the weekends; the goals is to reduce water use by 6.7 million m3/month, representing 3.5% of consumption. The 20 million residents of the giant metropolis were already hit with partial stoppages earlier this year, including a cutoff in April that affected roughly a quarter of Mexico City’s population.

Although the city’s mayor blames the crisis on global warming, demographics and ill-conceived management have played a far greater role in the local crisis – one that is now far too severe for temporary austerity measures to solve. The inhabitants of Mexico use on average 300 liters per day, roughly double that used in some water-conserving cities of Europe. Because the population is growing by 4% annually, water demand is expected to jump by 20% in the next four years to five years. The problem is further compounded by a self-reinforcing water withdrawal/leak cycle. Overdrawing groundwater has led to the land’s surface dropping by 10 centimeters per year. This causes the water distribution system to crack, which in turn has led to the loss of more than 40% of the water from water mains, yielding an equivalent demand for more groundwater.

The self-reinforcing nature of the problem makes it one that is particularly challenging and expensive to solve. Although the citizens of the city use a lot of water, nearly half of the “consumption” is in the form of leaks, so water restrictions on end use will be doubly painful. Those same leaks will also blunt the efficacy of water recycling. And because water withdrawal causes stresses that result in leaks, a slow piecemeal effort to replace pipes will not work. It seems that the only solution is to replace the entire distribution system within a few years; however, the Mexico City government has only allocated 770 million pesos ($57.8 million) to substitute water networks and capture systems and fix leaky pipes – a number orders of magnitude smaller than what’s required to rectify the problem. Given the political finger-pointing and token responses seen to date, it unfortunately seems unlikely that the needed investment will materialize. The city may very well have reached a tipping point where its only future is one of depopulation and decline.

Malone and Hayes: Ten-Year Century, Faster, Quicker, Shorter

This week’s essay comes from tech pundit pair Michael Malone and Tom Hayes published in this weeks’ WSJ, “The Ten-Year Century”, as the pace of change accelerates—trust becomes vital currency:

“In computer jargon, when your hard drive becomes overwhelmed with too much information it is said to be fragmented—or “fragged.” Today, the rapid and unsettling pace of change has left us all more than a little, well, fragged.

We watch 60-second television commercials that have been sped up to fit into 30-second spots, even as we multitask our way through emails, text messages and tweets. We assume that these small time compressions are part of the price of modern living. But it is more profound than that.

Changes that used to take generations—economic cycles, cultural shifts, mass migrations, changes in the structures of families and institutions—now unfurl in a span of years. Since 2000, we have experienced three economic bubbles (dot-com, real estate, and credit), three market crashes, a devastating terrorist attack, two wars and a global influenza pandemic."

To read the full essay please click here and you will be linked to the WSJ website.

Green Plastics, Water & Carbon

This week again, I’m able to share two more exclusive tidbits from the stellar team at Lux Research on two additional breakthrough areas of technology: water’s role in the carbon debate and growth to watch in so-called green plastics.

1. ENERGY’S THIRST FOR WATER CHALLENGES CARBON DEBATE

Water usage will influence the business of future energy production as much as carbon output, according to Lux Research.

The immediate need to reduce carbon emissions has dominated public debate around clean energy production. But the singular focus on carbon has distracted from energy’s growing impact on the planet’s dwindling water sources, according to the latest report from Lux Research.

The report, titled “Global Energy: Unshackling Carbon from Water,” observes that while new energy sources and extraction methods may reduce carbon intensity – kilograms of CO2 emitted per kilowatt-hour (kWh) of useful energy – they often impose increased water usage.
“On a planet where only 0.008% of the water is renewable, such trade-offs will become an increasingly important consideration for executives and policymakers,” said Michael LoCascio, a Senior Analyst at Lux Research, and the report’s lead author. “Fortunately, many of the technologies and approaches needed to reduce water intensity are here today, or on the horizon.”

Lux Research’s report provides the most comprehensive analysis to date of how all the major conventional and alternative fuel and electricity sources balance their CO2 and water intensity, as well as other important factors like cost and scalability. It also rigorously analyzes how alternative energy sources, improved extraction and efficiency, water recycling technologies, and improved energy distribution could help increase the environmental and economic viability for given energy technologies.

2. GREENER PLASTICS TO GROW AT DOUBLE-DIGITS

Biopolymers are breaking the mold of environmentally unfriendly plastic materials and fueling future growth, says Lux Research.

Petroleum-based plastics have helped create thousands of products from personal care to automotive to packaging. In the process, however, they’ve depended on petroleum, shown risks of toxicity, and become a burden on the environment.

Now, according to a new report from Lux Research, a new generation of biologically derived materials and processes promises to break that mold by delivering many of the traditional benefits of plastic materials while closing the ecological loop. “Where conventional plastics come from nonrenewable feedstocks and end as pollution, we’re now seeing polymers that derive from a sustainable source and end as a biodegradable material,” said Mark Bünger, Research Director at Lux Research and the report’s lead author. “Biopolymers are turning the lifecycle for conventional plastic products into a true lifecycle: from dirt to dirt.”

“Growing Tomorrow's Green Materials” is part of the Lux Biosciences Intelligence service. Clients subscribing to this service receive ongoing research on market and technology trends, continuous technology scouting reports and proprietary data points in the weekly Lux Research Biosciences Journal, and on-demand inquiry with Lux Research analysts.