Why We Might Be Hitting Peak Smartphone

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In to this episode of MarketFoolery, analyst Simon Erickson kicks off South by Southwest week with some of the most exciting trends he's seen at the conference so far. Tune in to find out why investors and analysts need to evade the allure of simplicity and always ask what tech trends are playing off of each other; what Elon Musk had to say about the objectivity of investing; how Uber's new ICO offering might very well be related to competing in the Chinese market; why 2018 could be the year of peak smartphone, and what technology might soon take its place as the next mass disruptor; and more.

A full transcript follows the video.

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This video was recorded on March 12, 2018.

Chris Hill: For Monday, March 12th, it's MarketFoolery, coming to you from Austin, Texas. We are here, once again, for South by Southwest. I'm Chris Hill, and I'm so happy to be here in the Media Lounge at South by Southwest, joined by the one and only Mr. Texas himself, Simon Erickson. Good to see you, man!

Simon Erickson: Chris, welcome back to the Central Time Zone!

Hill: [laughs] Thank you. It's interesting to come to the Central Time Zone and then immediately deal with daylight savings. You have that whole thing. It basically cancels everything out.

Erickson: An hour less sleep, right in the middle of South by Southwest, almost unfair.

Hill: It is almost unfair. I want to get to some of the things that you've been experiencing so far. But, you love South by Southwest. You're a Texas native. You're living in Houston now. Speaking of sleep deprivation, you're looking good for a guy who has a two-month-old baby.

Erickson: [laughs] Thank you.

Hill: You're looking remarkably coherent. Kudos to you for that. Elon Musk. A very hot ticket, and somehow you were one of the people who got the hot ticket to go see Elon Musk. How was he?

Erickson: It was one of the most amazing presentations of my entire life. Everything you hear about Elon Musk being the smartest guy in the room ... he was in a very large room and he was the smartest guy. My overall takeaways are, he has a mind that can remember everything and immediate recall, and he makes very rational decisions that have led to his success. It's almost amazing to see everything that he's done. But when you see him speak in person, you realize why it was.

Hill: Did he take questions from the audience?

Erickson: Absolutely. Every question -- the entire presentation was really just bombarding Elon with questions from the audience. And in rapid succession, he answered every one of them almost perfectly, almost every word he said on stage with perfect. He also danced to The Three Amigos later in the presentation as well. It was quite entertaining.

Hill: [laughs] Did anyone stand up and ask some version of the following: "How far off from 500,000 vehicles per year are you guys going to be?"

Erickson: He did say that the Tesla (NASDAQ: TSLA) Model 3 was consuming the majority of his time right now. He did not answer the question specifically that you asked, which is on everyone's mind, of, can you actually pull this off? But, he did say that production of the Model 3, and interestingly, artificial intelligence, were the two topics keeping him up at night right now. So, we'll see. Musk is notoriously late on his deadlines. But, I think he has a pretty good track record of eventually getting there anyway.

Hill: Before we started taping, you were saying one of the things coming out of the session with Elon Musk was connecting the dots. And it sounds like, as investors, our job is going to be slightly more complicated in the future than it is right now.

Erickson: Sure. Actually, I have two big takeaways, Chris. One of them, actually, for Elon Musk, is the objectivity of investing. What I mean by that is, don't get too wrapped up in buzzwords and hype cycles and things that have giant addressable markets, but they haven't proven themselves yet. I think that Elon has been so successful because he just continues, milestone after milestone, to make progress, and he's objective the entire way. He actually said, one of his stories that he mentioned here today was, he didn't let his friends invest in Tesla or SpaceX at the very beginning, because he personally thought each of those businesses had less than a 10% chance of being successful.

So, it just shows you, then he would realize, why is this? Why can't anyone else figure out this rockets problem, where the cost of rockets is not significantly a percentage of the total finished cost of a rocket? What's the delta in there? And he went in and looked, and he said, the problem is that they're not reusable, and ultimately, that should be what's guiding my decisions going forward. That's why you see SpaceX spending so much time on reusable rockets. Of course, the Falcon Heavy just launched the largest payload that we've ever seen out of a spacecraft. And then the rockets land in exactly the same spots that he wants to back on Earth. And now that he's solved that problem, it's changed the entire economics of that industry. Being objective in his approach is one of the key things that I have taken away from Elon Musk, and what has made his so successful.

The other takeaway, which is the one that you just alluded to, is that there are a lot of interdependencies that we need to be watching as investors, too. I say this makes the job of the Foolish analyst significantly, if not exponentially, harder. But, you can't just go into a trend and say, "I'm just going to look at artificial intelligence, or machine learning, or computing power, or blockchains," or any of these themes that were seeing emerge, in isolation. You have to look at them interdependent. They affect each other. The example that was given this morning is, now, Uber wants to launch their own cryptocurrency. They're doing an ICO.

Hill: Are you kidding?

Erickson: Not kidding. Kodak is doing the same thing. Not traditionally thought of as a very innovative company, by the way.

Hill: No. Not for a good 25-30 years or so.

Erickson: But it's a buzzword. Everyone wants to have an ICO right now. Maybe we can have Chris Hill Coin.

Hill: No. [laughs]

Erickson: [laughs] But, you have to think about in terms of, how is this all interconnected to everything else? If Uber really wants to do this, they're challenging an established leader, Didi Chuxing, in China, who is backed by Alibaba, who's doing a lot of work in machine learning and in artificial intelligence, which ties back to the blockchain. That's something that's not considered typically when you say, "They're doing an ICO." It's pretty interesting. There's interdependencies that affect the outcomes that we need to start really focusing on as investors.

Hill: I know you're going to be talking with Kristine Harjes on Wednesday for the Healthcare edition of Industry Focus, so I won't ask you about healthcare. I will say, though, at some point, you need to get to the trade show floor, because there is once again a pretty sizable presence on the trade show floor of all manner of healthcare. Although, I will say, one of the big differences between this year and last year is that last year, there was a lot of presence of marijuana. Not actually in use, but in the booths themselves. And most of it was tied to the medical marijuana side of industry, much more biotech -- it's a hopping time here in the Media Lounge.

Erickson: There's cheering in the background. I think they must have heard what you were talking about.

Hill: Yeah. So, that's basically gone away this year, from what I can tell. But, anyway, definitely check that out. So, we won't talk about healthcare, because you're going to talk to Kristine about that. But, you saw not just Elon Musk, you went to a couple of tech breakouts this morning. What are one or two tech trends that you saw this morning in action that caught your attention?

Erickson: Sure. And again, when we say trends, steering away from flashy, hype-y headlines, but, something that's really here to stay long-term. Trend is something that has legs to it. I think one of the interesting ones that we saw was that 2018 might be the beginning of the end for the smartphone. We've kind of collapsed a lot of utility into this supercomputing processor that's in our pocket now that can take pictures, that can make phone calls and text, a lot of these things that were using it for. But there's nothing really super radical being developed anymore. There are incremental improvements.

So, the pace of innovation for the smartphone is slowing, and you're starting to see global sales of smartphones plateau and even decrease year over year. Which, we might be at the year of the peak smartphone right now, because you're starting to see other, more radical technologies taking the forefront now. What I mean by that is, it might not be us typing into our smartphone for text messaging anymore. By the way, I hate doing that. I always type the wrong one, and then people have to figure out what I'm sending.

But, now you're starting to see digital assistants. Alexa is something you can communicate with using your voice, you don't need to type anything in at a much slower rate. It just communicates with you. And we're seeing digital assistants get smarter, using their own algorithms to figure out what you're actually asking it, that can replace a whole lot of functionality that we've seen in a smartphone. And it doesn't even need to be something in your pocket anymore, because it could just be a wearable device. We could finally be at the point that internet connections and latencies are low enough, and the processing is fast enough, that we can really have something like smart glasses or a smart device that can respond to what we're doing.

I think the next evolution for this, Chris, isn't just responding the way that we're used to Google responding when we ask it a question. You say, "Google, what is artificial intelligence?" And it gives you 10 links of websites that will explain to you what artificial intelligence is. The more interesting answer is a direct answer that understands your question, where it says, "Artificial intelligence is ____. I've completely answered your question, I understand the intent of what you're doing." That's what a lot of artificial intelligence is really focusing on today. The next five years, we're going to see a radical shift from not only how we're searching the internet for information, but what we're carrying around with us.

Hill: You just reminded me, when you were talking about the smart speakers, on the flight out here, I printed out the latest report from Edison Research. They do their annual report on, essentially, audio programming. It's called the Share of the Ear. And they go through radio consumption, podcast consumption, social media, all sorts of things. It's a very comprehensive survey that they do. So, it's one of these PowerPoints that has 65 slides. And their No. 1 headline was about smart speakers, and how quickly they're being adopted in the United States. It was interesting to read. It wasn't the biggest surprise. It was a little surprising, the numbers that they had. But to go back to your thing about interdependencies, I had never really put it together with, "If this happens, then one potential ripple effect is less dependency on the smartphone."

Erickson: Right, Chris. And, so much of technology is hidden behind the stage, it's the thing you're not looking at that, all of the sudden, because of these trends developing, is a really big deal. And Chris, I remember a couple years ago, people were laughing about Bitcoin. They thought this was a fad. They thought this was some goofy thing--

Hill: I was one of them. [laughs]

Erickson: --that people were developing, a bunch of techies were developing. Now, this year, everyone is talking about blockchains. There's entire tracks of South by Southwest here focusing just on blockchains. Again, something that was a laughing joke not more than two or three years ago is now at the forefront because of those interdependencies in the trends happening at the same time.

Hill: You have a more packed schedule than just about anyone here. Anything else you're either excited about or looking forward to, in terms of breakout sessions?

Erickson: Oh, my gosh. I've somehow collapsed three weeks into three days for this session. There's a couple of them that I think will be really interesting. We have the global premiere of Ready Player One tonight, happening right here at South by Southwest.

Hill: You didn't get a ticket to that, did you?

Erickson: I'm trying, Chris. I'm going to be there waiting in line. It starts at 9:30, so we have a couple of hours. I think that's going to be great. I'm talking with an expert about quantum computing, which is changing the way that information is encrypted on the internet. All of our credit card information, financial information, is built upon encryption, email, a whole bunch of other things. But now that you have faster and faster computing, a lot of those standards are going to have to evolve. It'll be interesting to see how that changes things in the next couple of years. And then, like you said earlier, the healthcare space is fascinating to me. I think genomics is an industry that's going to be experiencing some very rapid changes in the next couple of years. And later today, I'm going to go to a buddy of mine who started a virtual reality company and play around with the newest toys that he has out there.

Hill: Again, Simon is going to be on Industry Focus on Wednesday digging into the healthcare scene here at South by Southwest. I'll just say, if you get over to the trade show floor, I'm just going to tease you with two words. It has nothing to do with healthcare, but it could radically transform not just a couple of different industries, but also our lives. Let me just say two words to you: sushi teleportation. Again: sushi teleportation. I'm not making this up. Check it out on trade show floor.

Erickson: I will be there.

Hill: Always good to see you, my friend.

Erickson: The pleasure is mine. Thanks for having me, Chris.

Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening, we'll see you tomorrow.

[Flying by Jackie Venson]

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Chris Hill has no position in any of the stocks mentioned. Simon Erickson owns shares of Tesla. The Motley Fool owns shares of and recommends GOOG, GOOGL, and Tesla. The Motley Fool has a disclosure policy.