Disruptive

Innovation
New Markets, New Metrics

Published: November 15, 2016

Author
Catherine D. Woo, CIO and CEO at ARK Invest

Co-Author
Dr. Arthur B. Laffer, CEO at Laffer Associates

Join the conversation on Twitter @ARKinvest www.ark-invest.com

2 DISRUPTIVE INNOVATION: NEW MARKETS, NEW METRICS
CATHERINE D. WOOD1 AND ARTHUR B. LAFFER

SUMMARY INTRODUCTION
• Disruptive technological innovations During the next few years, not only will disruptive
can have profound ramifications on
innovation continue to change the way the world
industries, as well as the entire economy.
works, but it could render traditional gauges of
A number of such nonlinear changes are
economic activity inaccurate. Just a gleam in the eye
in process today, set to increase wealth
and productivity dramatically.
of the bubble fifteen years ago, the convergence of
technological breakthroughs is in full force today.
• The automotive industry is approaching The combination of general purpose technology plat-
a profound inflection point. Soon the forms—the mobile cloud, robotics, batteries, DNA
demand for electric vehicles (EVs) will sequencing, and blockchain—is likely to increase
begin to outpace that for gasoline productivity and enhance wealth dramatically
powered cars. during the next five years. While the tech and telecom
bubble raised what now look like legacy stocks to
• Shared autonomous vehicles—via lower ridiculous heights, in many ways it actually under-
costs per mile, enhanced safety, and estimated how profoundly the world would change
great convenience—will put downward
and, with few exceptions, missed who would lead
pressure on annual new car sales.
the charge.
• As artificial intelligence solves
increasingly complex problems, higher
In this paper, we hope to illustrate how the digital
returns on investment will increase world will continue to permeate the physical world,
adoption of automation. While this will challenging the relevance of many economic
cause short-term dislocations, ultimately statistics. For example, with the help of autonomous
it will increase living standards electric vehicles, smarter robots, and the cloud,
substantially. “the sharing economy” will increase the utilization
of fixed assets, shrinking demand in some sectors
• Rapidly declining costs in DNA while boosting total factor productivity and returns
sequencing will change the course of on invested capital. At the same time, science and
health care and decrease costs in the technology will take the guesswork out of health
system.
care as DNA sequencing cracks the code of life,
driving quality up and costs per capita down, and
• Low cost and unable to be counterfeit,
potentially changing the slope of unfunded health
cryptocurrencies will become an
accepted means of payment, creating
care liabilities. Likewise, as competitive crypto-
upheaval in the financial intermediary currencies shake out, evolving as a means of
market and also exerting pressure on exchange and a store of value, they could pose a
central banks. serious challenge to the monetary policies and fiat
currencies that have lost their way in the aftermath
of the 2008 financial crisis.

1 Catherine Wood is Chief Executive Officer and Chief Investment Officer of ARK Investment Management, a money manager focused on investing in
promising areas of disruptive innovation and nonlinear change. Prior to founding ARK, Catherine was Chief Investment Officer of Global Thematic
Strategies at AllianceBernstein.
3 DISRUPTIVE INNOVATION: NEW MARKETS, NEW METRICS
CATHERINE D. WOOD AND ARTHUR B. LAFFER

AUTOS WILL GO ELECTRIC

The automotive industry is approaching a profound inflection point: by 2022 the demand for electric vehicles
(EVs) will begin to outpace that for gasoline powered cars.2 As the cost of lithium-ion cells falls faster than most
analysts have anticipated and the cost to manufacture traditional Internal Combustion Engine (ICE) powertrains
increases, ARK’s analysis suggests that 200-mile range EVs will cost less than the majority of ICE vehicles within
five to seven years. If 200-mile range EVs were to accommodate the travel needs of 80% of Americans,3 then the
current consensus forecasts of the demand for EVs will miss the mark considerably in 2020.

Accounting for roughly 20% of the total cost of an EV, battery economics will be critical to future EV
adoption.4 As lithium-ion battery prices decline during the next few years, the cost of ICE powertrains — also
accounting for roughly 20% of an auto’s cost — will rise primarily because of more stringent efficiency and
emission regulations.5 Currently, EVs sell at a premium to comparable ICE vehicles, but ARK anticipates that
a 200-mile range EV with the same amenities as today’s best-selling Toyota Camry will sell at a lower price
point by 2022, as shown below.6

FIGURE 1
Projected Price Parity for 200-Mile Range EV and Toyota Camry

MSRP 200 Mile Range EV Toyota Camry MSRP

$60,000
$49,900
$50,000
$41,800
$40,000
$31,000
$30,000
$22,700 $23,100 $23,900 $22,400 $24,700
$20,000
$10,000
$-
2013 2016 2019 2022

Source: NADA Guides, ARK Investment Management LLC

2 ARK Investment Management LLC: https://ark-invest.com/research/electric-vehicles — Some EV forecasts will group hybrid electric vehicles, plug-in
hybrid electric vehicles, battery electric vehicles, and extended-range electric vehicles (or some combination of those). ARK uses EV to refer to battery
electric vehicles only.
3 Roughly 60% of the U.S. population does not travel long distance in an average year. Among those consumers who do, more than half travel fewer
than 200 miles per trip. U.S. Department of Transportation: https://www.rita.dot.gov/bts/sites/rita.dot.gov.bts/files/subject_areas/national_house-
hold_travel_survey/index.html
4 ARK Investment Management LLC. http://insideevs.com/tesla-battery-in-the-model-s-costs-less-than-a-quarter-of-the-car-in-most-cases/
5 The Future of the North American Automotive Supplier Industry: Evolution of Component Costs, Penetration, and Value Creation Potential Through 2020
http://www.mckinsey.com/~/media/mckinsey/dotcom/client_service/automotive%20and%20assembly/pdfs/the_future_of_the_north_american_auto-
motive_supplier.ashx
6 ARK Investment Management LLC. ARK’s expectation for EV MSRP parity is largely based on decreasing lithium-ion battery costs and increasing ICE
powertrain costs. Other factors could influence MSRP. The MSRP prices shown do not include any government subsidies.
4 DISRUPTIVE INNOVATION: NEW MARKETS, NEW METRICS
CATHERINE D. WOOD AND ARTHUR B. LAFFER

Incorporating the savings associated with lower maintenance and fuel costs, ARK anticipates that the cross-
over price point will occur even sooner, perhaps before 2020, as is illustrated below. Given a spike in gasoline
prices, the total ownership cost of an EV could drop below that of a Toyota Camry within two years.

FIGURE 2
Projected Price Parity Point for 200-Mile Range EV - Inclusive of Five Year Total Cost of Ownership

200 Mile Range EV MSRP + 5 Year Total Cost of Ownership

2014
Toyota Camry MSRP + 5 Year Total Cost of Ownership
$50,000 2016
MSRP + 5 Year Total Cost of Ownership

2017
2018
$40,000
2019
2020
2021
$30,000 2022

$20,000

$10,000

$-
180 175 170 165 160 155 150 145 140 135 130 125 120 115 110 105 100
$/kWh

Source: NADA Guides, ARK Investment Management LLC

Based on ARK’s research, a 200-mile range EV will be comparable in price and feature-set to a Toyota Cam-
ry by 2021, after which time EVs will extend their competitive pricing advantage. In 2022, ARK expects the
cost of a 200-mile EV to drop below $23,000 placing it at a lower price point than 50% of passenger cars
sold in the U.S., and just under 50% of those sold globally. Once EVs and ICE based cars approach price
parity, the adoption of EVs should accelerate rapidly.

Based on their forecasts, however, many well-known institutions are not anticipating price parity or broad
based EV adoption anytime soon. Not surprisingly, OPEC’s official forecast is that EV sales will drop to
100,000 units in ten years while the more objective Energy Information Administration (EIA) projects that
they will top 2,000,000 units. In stark contrast, ARK projects that annual EV sales will approach 17 million
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6 The EIA estimate is extrapolated from its U.S. estimate.

5 DISRUPTIVE INNOVATION: NEW MARKETS, NEW METRICS
CATHERINE D. WOOD AND ARTHUR B. LAFFER

FIGURE 3
Annual EV Sales Estimates

18,000,000 17,000,000
16,000,000

14,000,000

12,000,000

10,000,000

8,000,000

6,000,000

4,000,000
2,000,000
2,000,000
330,000 100,000
-
2015 Global EV Sales 2022 OPEC Annual EV Sales 2022 EIA Annual EV Sales 2022 ARK EV Sales Estimate

Source: Source: International Energy Agency, OPEC, Energy Information Administration, ARK Investment Management LLC

Given the significant demand that ARK anticipates, EV adoption is likely to be supply constrained. Based
on known battery factory expansion plans through 2020, ARK believes production will satisfy demand for
fewer than 1.3 million 200-mile EVs. As the magnitude of the opportunity becomes clear, ARK expects
companies like Tesla, Panasonic, Samsung, LG Chem, and GS Yuasa to invest aggressively and fill the void.

In a supply-constrained market, the winners are likely to be auto manufacturers with EV manufacturing and
design expertise, battery manufacturers able to scale and capitalize on the opportunity, and consumers who
will benefit from better performing cars at lower price points. Needless to say, in all likelihood oil and oil
service companies will be vulnerable to a substantial and prolonged decline in global oil demand.

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6 DISRUPTIVE INNOVATION: NEW MARKETS, NEW METRICS
CATHERINE D. WOOD AND ARTHUR B. LAFFER

AUTO SALES WILL FALL IN A VIBRANT “SHARING ECONOMY”

While auto sales have been one of the most important gauges of economic well-being historically, the sharing
economy and autonomous vehicles could strip them of that role during the next five to ten years. Thanks to
web-enabled services like Uber, Lyft, and Zipcar, household vehicles are beginning to feel like the stranded
assets they are: high in cost, but utilized roughly 5% of the time on average in a 24-hour day.7 Based on
various studies, 8 ARK estimates that sharing services could increase vehicle utilization by eight- to twelve-
fold,9 activating stranded assets and boosting the efficiency of the U.S. capital base.

“Mobility-as-a-service”10 looms as a significant challenge to the auto sector. Individuals who typically would
buy a car after landing a first job, or two cars after moving to the suburbs, are rethinking the economics of
those decisions given the burst in alternative means of transportation.11 ARK believes that shared car services
like Uber and Lyft already may have made a dent in auto sales volumes. According to ARK’s research, during
the past three years, ridesharing services have caused a cumulative loss of 100,000 in car sales in the US and
are on track to take another 190,000 from auto manufacturers this year.12

Autonomous taxis could push this trend into overdrive, especially if —regulation permitting— Google, Tesla or
other competitors deliver a fully autonomous vehicle by 2019.13 ARK estimates that US auto sales will be cut nearly
in half by 2025 as autonomous taxi services take off (Figure 4). Sales should level off in the late 2020s at roughly 11
million units at an annual rate compared to 17-18 million today. At that time, autonomous cars sold to fleet operators
could dominate urban auto sales. Further, the used car market will be flooded as owners shed truly stranded assets.

FIGURE 4
Annual US New Car Sales

Millions Introduction of
autonomoaus cars
20
...Then as autonomous taxis gain
16 share, urban auto sales will
Shared car services slowly drop to record low levels.
12 eat away at auto sales.

Autonomous car sales first drive

8 auto sales higher as the blind, Auto sales will level off as urban
the elderly, and young teens now auto sales are comprised primarily
4 have more transportation options. of autonomous taxis.

0
16

17

18

19

20

21

22

23

24

26

27

28

29

30

31

32

33

34
15

25

35
20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20
20

20

20

Sources: ARK Investment Management LLC, Kleiner Perkins Caufield Byers

7 Source: http://www.reinventingparking.org/2013/02/cars-are-parked-95-of-time-lets-check.html
8 Sources: http://onlinepubs.trb.org/onlinepubs/tcrp/tcrp_rpt_108.pdf ; http://sustainablemobility.ei.columbia.edu/files/2012/12/Transforming-Person-
al-Mobility-Jan-27-20132.pdf
9 We get this factor of 8 from comparing that 4% calculated above to the rented time per vehicle in Zipcar’s last quarterly report. This method will somewhat
overstate the utilization of shared cars, but since other studies have given ratios more like 15:1, we are still confident that this is a conservative estimate.
10 Mobility as a service can be defined as transportation modes that are consumed as a service as opposed to personally owned vehicles. For example,
taxis fit this category.
11 Examples: http://www.businessinsider.com/how-using-uber-and-lyft-saves-me-money-2015-2; http://www.geekwire.com/2016/ditched-car-went-full-uber/;
http://www.nytimes.com/2014/06/12/technology/personaltech/with-ubers-cars-maybe-we-dont-need-our-own.html
Notes: The number of cars per US household peaked in 2007 at 2.07, and is now less than 2. Source: http://greatergreaterwashington.org/
post/21444/the-american-cities-with-the-most-growth-in-car-free-households/
12 Assumes half of the miles driven in mobility as a service today account for incremental forgone auto sales.
 DISRUPTIVE INNOVATION: NEW MARKETS, NEW METRICS
7
CATHERINE D. WOOD AND ARTHUR B. LAFFER

The catalyst for this trend will be the unbeatable cost and convenience of autonomous taxis, or shared
autonomous vehicles (SAVs). As shown in Figure 5, the current cost to own and operate a personal car is $0.70
per mile driven, including depreciation, gas, parking, financing, insurance, maintenance, registration, taxes
and tire replacement. For many people, parking and speeding tickets add regularly to these costs.

While SAVs still have a few years of technological and regulatory hurdles to jump, if on the road today
we believe SAVs would be far more economical than taxis, not to mention cost competitive with personal
vehicles, thanks to much higher utilization rates, as shown in the Figure 6. When they do hit the road, given
their high technology content and the declining cost curves which typify technology, SAVs will become
more compelling over time. By the end of the decade, costs could be cut in half to $0.35 per mile.14

FIGURE 5 FIGURE 6
Cost Per Mile of a Personally Owned Car ($ per mile) Costs Per Mile of Taxis, Personal Cars,
and Shared Autonomous Vehicles ($ per mile)

$0.70 3.47
Tires
Registration & Taxes
$0.60 Maintenance & Repair
Insurance
$0.50
Financing
$0.40
Parking

$0.30 Fuel (gas)

$0.20

Depreciation
$0.10
0.70
0.35
$0.00
Personal Car Average US Taxi Personal Car Shared Autonomous
Car 2020

SOURCE: ARK Investment Management LLC, Bankrate, Edmunds, AAA, Turbotax, IHS, the Earth Institute at Columbia University, Love to Know Cars, USA
Today, Small Business Taxes and Management, CNET, About.com, Wisegeek, Transforming Personal Mobility Report, A/N Group, Inc.

Yet, cost is just one of the benefits of shared autonomous vehicles. Others, such as safety, convenience, and
discretionary time may cement the case for SAVs after they pass regulatory scrutiny. Safety is the most serious
of these considerations. Human error contributes to 90% of all auto accidents in the United States today.15
Consequently, U.S. regulators may be swayed sooner than most analysts believe by arguments that autonomous
vehicles could prevent more than 27,000 deaths per year.16 ARK believes the value proposition here is clear, and
it will become clearer as regulators pave the way and as SAV costs decline.
13 Given the published improvement rate of the Google car, ARK’s analysis shows that autonomous technology will be ready in 2-3 years. ARK believes
regulation will not be a impediment. Note that NHTSA has said that it agrees with Google that cars in the future will not have human drivers. Sources:
vcom/cars/2016/02/googles-self-driving-car-ai-can-be-the-vehicles-legal-driver-us-government-says/14 Since the original publication, ARK has updated
its price per mile estimate for an autonomous vehicle from $0.25 to $0.35 after factoring in the cost of remote human operators that could guide
vehicles in emergencies.
14 Since the original publication, ARK has updated its price per mile estimate for an autonomous vehicle from $0.25 to $0.35 after factoring in the cost
of remote human operators that could guide vehicles in emergencies
15 Bryant Walker Smith, “Human Error as a Cause of Vehicle Crashes”, Stanford Law School, The Center for Internet and Society, December 18, 2013.
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16 Source: ARK Investment Management LLC https://ark-invest.com/research/autonomous-vehicle-safety#fn-7907-5

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8 DISRUPTIVE INNOVATION: NEW MARKETS, NEW METRICS
CATHERINE D. WOOD AND ARTHUR B. LAFFER

SHARED AUTONOMOUS VEHICLES WILL FREE RESIDENTIAL,

COMMERCIAL AND MUNICIPAL REAL ESTATE FOR HIGHER RETURN

Parking lots occupy a lot of otherwise productive space around the world, a problem that SAVs will solve in
large part. Spending eight- to twelve-fold more time on the road than traditional cars, SAVs would require only
one parking space in reserve per car, compared to the five in place today. If SAVs were to replace 60% of the
personal vehicles in the U.S., they would free up roughly 740 million parking spaces worth $13 trillion at today’s
values, more than 85% accruing to commercial real estate owners and municipalities. Repurposing the land and
buildings would deliver significant incremental returns on invested capital. Homeowners could turn garages into
rooms or larger yards, while commercial real estate owners might build out more offices, retail storefronts, or
apartments. Municipalities will lose parking fees but could sell off their parking lots to compensate, ultimately
turning parking fees into real estate taxes. By our estimates, as shown below, converting parking lots would add
roughly $1 trillion, or 7.7%, per year to homeowner, commercial, and municipal real estate returns.

FIGURE 7
Annual Returns from Freed Parking Spaces in the U.S.

Commercial
$514 billion

Municipal
$383 billion

Residential
$117 billion

Annual Returns

Source: ARK Investment Management LLC, The Earth Institute at Columbia University, Transforming Personal Mobility Report
9 DISRUPTIVE INNOVATION: NEW MARKETS, NEW METRICS
CATHERINE D. WOOD AND ARTHUR B. LAFFER

ROBOTS WILL MORE THAN DOUBLE GDP PER WORKER IN THE

U.S. DURING THE NEXT TWENTY YEARS

According to an Oxford University study published in 2013 and updated this year, roughly 47% of all jobs
in the U.S. labor force today will be automated during the next 10 to 20 years.17 While that trend sounds
ominous for the U.S. workforce, a deeper dive into the study suggests automation will spur productivity and
add enormously to GDP per worker as higher value-add jobs displace lower skilled positions. Education and
retraining will be important bridges for students and workers if they are to adapt successfully to the changes
in automation during the next twenty years.

If the Oxford study is correct in assessing the probability of automation in each of the 702 job classifications
it analyzed, the impact on real domestic output of goods and services (GDP) will be transformative. As shown
below, thanks to the incremental productivity from automation, real GDP per U.S. worker will more than
double from $113,000 this past year to $236,000, compounding at an annualized growth rate of 3.4% through
2035. In the absence of automation, productivity would increase at roughly half that rate, or 1.8%, and real
GDP per worker would reach only $167,000. In other words, in twenty years, real GDP per worker will be
42% higher and real GDP $12 trillion higher with automation than without it. As always, automation is a
game changer.

FIGURE 8
GDP per U.S. Employee, With and Without Automation ($ thousands)

GDP per Worker with Automation GDP per Worker without Automation
$250

$200

$150

$100
2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034

Source: Bureau of Labor Statistics, Energy Information Administration, Oxford Study

17 Carl Benedikt Frey and Michael A. Osborne, “The Future of Employment: How Susceptible Are Jobs to Computerization”, University of Oxford, Septem-
ber 17, 2013. http://www.oxfordmartin.ox.ac.uk/downloads/academic/The_Future_of_Employment.pdf; and January 2016. http://www.oxfordmar-
tin.ox.ac.uk/downloads/reports/Citi_GPS_Technology_Work_2.pdf
10 DISRUPTIVE INNOVATION: NEW MARKETS, NEW METRICS
CATHERINE D. WOOD AND ARTHUR B. LAFFER

FIGURE 9
Percentage Increase in Real GDP with Automation

$11.6 trillion added to GDP, yielding a GDP of $39.4 trillion in 2035

45%

40%

35%

30%

25%

20%

15%

10%

5%

0%
2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2035

Source: ARK Investment Management LLC

FIGURE 10
Net Margins, With and Without Automation

Grocery and Food General Merchandise

4.0%

3.5%

3.0%

2.5%

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2.0%
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1.5%
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1.0%

0.5%

0.0%
Net Margin Net Margin with Automation

Source: ARK Investment Management LLC, NYU Stern, LP Magazine

11 DISRUPTIVE INNOVATION: NEW MARKETS, NEW METRICS
CATHERINE D. WOOD AND ARTHUR B. LAFFER

While automation sounds like an ominous prospect for labor, the “bigger pie” seems to fly in the face of that
argument. Where will the $12 trillion in incremental real GDP associated with automation surface by 2035?
A good question... with several answers.

Some of it could drop to the bottom line of corporate America in the form of higher profits. The food services
industry could be one of the biggest beneficiaries given its labor intensity and low margin structure. As
shown in Figure 10, grocery store margins could more than double from less than 1% to 2.1%, while general
merchandise margins could increase more than 20% from nearly 3% to 3.7%. In both industries, shrinkage
provides a large part of the explanation. Robots don’t steal, at least not yet!

For competitive reasons, though, companies may choose to reinvest some of the windfall from automation,
accelerating growth in capital spending. As artificial intelligence begins to solve increasingly complex
problems, the return on investment from “smarter” robots, drones, autonomous vehicles, and other devices
will drive their adoption. Therefore, between 2015 and 2025, as is illustrated in Figure 11, annual investment
in all forms of automation could escalate from $11 billion to $185 billion, or at a compound annual growth
rate of 33%, and from 2015 to 2035 at a compound annual rate of 17%. Unit growth rates could be higher,
given the declining cost curves in technology. This rate of growth would be exceptional, providing a glimpse
into the upside to the economy associated with automation.

Competitive dynamics could turn the gains from automation into benefits for the consumer, in the form of
higher wages and/or lower prices. Already today, as illustrated in Figure 12, about 5.4 million jobs in the U.S.
go unfilled because of skill-set mismatches. Clearly, companies will have to invest in training to attain more
technologically sophisticated and skilled labor.

Corporate-sponsored training and retraining programs should deliver high returns on investment, as should
vocational school programs. As technology continues to permeate the cost structures of most industries, well
run companies should enjoy flat to declining cost curves, giving them more ammunition to compete on price
– another boost to consumer purchasing power. As has been the case historically, automation may cause short-
term dislocations but ultimately it will increase the value of labor per dollar of output, create a virtuous cycle,
and increase living standards meaningfully in the U.S.
12 DISRUPTIVE INNOVATION: NEW MARKETS, NEW METRICS
CATHERINE D. WOOD AND ARTHUR B. LAFFER

FIGURE 11
Annual Investment in Automation, Select Years ($ in billions)

300

$242
250

$185
200

150
GR
CA

100
%
33

50
$11

0
2015 2025 2035

Source: ARK Investment Management LLC

FIGURE 12
Total U.S. Nonfarm Job Openings

Total U.S. nonfarm job openings (monthly, seasaonally adjusted, thousands)

6000

5000

4000

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3000
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2000 Color = RGB 90,90,90

1000
01

02

03

04

05

06

08

09

10

11

12

13

14

15

16
07
20

20

20

20

20

20

20

20

20

20

20

20

20

20

20
20

Source: Bureau of Labor Statistics

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CATHERINE D. WOOD AND ARTHUR B. LAFFER

AS SCIENCE AND TECHNOLOGY PARTNER WITH HEALTH CARE,

PROJECTIONS OF UNFUNDED LIABILITIES WILL DECLINE

The old adage in advertising was, “I know that half of my advertising works. I just don’t know which half!”
Technology solved that problem thanks to algorithms developed by companies like Google, Facebook, and
Twitter, each of which calculates and analyzes returns on investment per advertising dollar spent.

Health care has been facing the same question: what is the efficacy and efficiency of each dollar spent on
health care? In the absence of scientific evidence, doctors and others have relied on trial and error, guesswork,
intuition, instinct, and experience. Thanks to breakthroughs in DNA sequencing, however, guesswork will
diminish significantly, and the cost curve associated with treatment should flatten and, in some cases, decline
over time. Consequently, projections of unfunded retirement medical liabilities could be too high and might
surprise on the low side of expectations.

DNA sequencing is unlocking some of the secrets of life and death, changing the course of health care. Increasingly,
doctors are learning what disease risks and drug-related side effect profiles their patients face, and which drugs
are likely to work, thanks to molecular diagnostic tests derived from genomic research.

FIGURE 13
Cost to Sequence a Whole Human Genome (monthly, USD, log scale)

Historic Cost Per Genome Moore's Law Moore's Law Forecast Historic Rate Forecast Step-Change Forecast

$100,000,000

$10,000,000

$1,000,000

$100,000

$10,000
Cost (US$)

$1,000

$100

$10

$1

Source: National Human Genome Research Institute (NHGRI), ARK Investment Management LLC
2001 2003 2006 2009 2011 2014 2017 2020 2023
14 DISRUPTIVE INNOVATION: NEW MARKETS, NEW METRICS
CATHERINE D. WOOD AND ARTHUR B. LAFFER

FIGURE 14
The Number of Human Genomes Sequenced (log scale)

Genomes Sequenced Moore's Law Forecast Historic Rate Forecast

100,000,000,000 Tens of billions

10,000,000,000 4 BILLION
500
1,000,000,000 MILLION
GR
100,000,000 CA 50
0% MILLION
20
10,000,000

1,000,000 600,000
200,000
100,000 40,000

10,000
Human Genomes Human Genomes Human Genomes Human Genomes Human Genomes
Sequenced 2001-2013 Sequenced in 2014 Sequenced in 2015 Sequenced in 2020 Sequenced in 2025
(Estimate)

Source: National Human Genome Research Institute (NHGRI), ARK Investment Management LLC

Both the cost and time to sequence a human genome are collapsing. In fact, the rate of decline is three to four
times as fast as Moore’s Law in the microprocessor world. Fewer than 10 years ago, sequencing one human ge-
nome cost $10 million and took several months of computing power to complete. Today, the cost is approximately
$1,000, including less than a day of computing power. Within a few years, it will drop to $100 and take minutes.

The number of human genomes being sequenced is soaring, thanks to the price elasticity of demand. Given
how prohibitive the costs have been to date, only 268,000 human genomes had been sequenced globally
between the time that the first whole human genome was sequenced in 2000 and year end 2014. Thanks to
breakthroughs associated with Illumina’s Hi-Seq X-10, capacity is now in place to sequence 684,000 human
genomes in a single year. From that base, even if the rate of growth were to slow down to Moore’s Law, with
costs halving every eighteen months to two years, the number of human genomes likely to be sequenced in
2020 would hit 165 million, compounding at a 200% annualized rate of growth. As shown in Figure 17, in
10 years that number could top four billion, suggesting either that the majority of human genomes around
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Historically in health care, the slope of cost curves has been steeply positive, so much so that it now accounts for
18% of gross domestic product (GDP). Now that technology and science are partnering, the trajectory of health
care costs is likely to surprise on the low side of expectations during the next decade, potentially lowering the
size of what are perceived as intractable unfunded medical liabilities. The outlook for fiscal policy may not be as
bleak as is projected now that the technology is penetrating the health care space, introducing explosive volume
growth possibilities at lower costs.
15 DISRUPTIVE INNOVATION: NEW MARKETS, NEW METRICS
CATHERINE D. WOOD AND ARTHUR B. LAFFER

CRYPTOCURRENCIES WILL CHALLENGE TRADITIONAL

TRANSACTION PL ATFORMS AND MONETARY POLICIES

Until cryptocurrencies surfaced as a digital payments option, merchants and consumers were resigned to a
1.5-3% transaction toll with each credit or debit card purchase, while lower income individuals accepted the
8-9% remittance fee charged by companies like Western Union. Now, those payment platforms are facing the
threat that cryptocurrencies could usurp their roles as intermediaries. Historically, cryptocurrencies such as
bitcoin have charged 0.01% on a dollar basis,18 as shown below. While they are in early and unstable days, they
are developing some credibility as companies like Dell, DirectTV, Overstock, Microsoft, and Expedia begin
to include them as an accepted means of payment. The intermediary payments role that cryptocurrencies are
attempting to displace is meaningful—roughly $400 billion19 in market value.

FIGURE 15
Fee Comparison Between Transactions Types

10%
Percent of Transaction

8%

6%

4%

2%

0%
Bitcoin (Sender) Credit Card (Merchant) PayPal (Merchant) Remittances (Consumer)

Source: ARK Investment Management LLC, Quandl, PayPal, IMF, Goldman Sachs

A cryptocurrency is a digital cash system that uses a distributed computing network and consensus algo-
rithms to verify payments and control the supply of monetary units. Unlike other digital objects, units of a
cryptocurrency cannot be duplicated or counterfeited, because every coin is tracked in a distributed public
ledger accessible to every computer (“miner”) participating in the cryptocurrency’s network. In the case of
bitcoin, new coins are created on a pre-determined schedule as an incentive for users to devote processing
power to maintain and secure the public ledger in the “mining” process. Other cryptocurrencies are mined
or minted in different ways, depending on their software.

18 While we have translated the Bitcoin network fee to a percent of dollar volume, the network itself charges on a per kilobyte size of transaction for
incorporation into blocks.
19 https://www.worldpaymentsreport.com/sites/all/themes/wpr_theme/frontend/dist/images/other/infograph.jpg

DEFAULT for axis and labels:

16 DISRUPTIVE INNOVATION: NEW MARKETS, NEW METRICS
CATHERINE D. WOOD AND ARTHUR B. LAFFER

FIGURE 16
U.S. Monetary Base vs. Bitcoin Supply
(annual, semi-log scale, U.S. Monetary Base in $ Billions, Bitcoin Supply in Millions of Units)

U.S. Monetary Base Bitcoin Supply

$8,000

Bitcoin Outstanding (Millions of units)

U.S. Monetary Base (Billions)

$6,000 30
?
$4,000 20

$2,000 10

$0 0
2000 2004 2008 2012 2016 2020 2024

Source: ARK Investment Management LLC, Blockchain, FRED

Perhaps as provocative as their intermediary potential is the role that cryptocurrencies could play in monetary
policy. As illustrated in Figure 16, bitcoin was created at the same time as the Federal Reserve Board was turbo-
charging the monetary base during the financial crisis in 2008-2009. The supply of both had similar trajectories,
until recently. As shown above, while the monetary base is governed by the Fed and has soared from less than
$1 trillion in 2007 to about $4 trillion today, 20 bitcoin’s supply will be capped at 21 million units unless a
majority of miners agrees to an increase or decrease. Consequently, its growth will level out, decelerating to
a 4% inflationary rate in mid-2016 and just under 2% in mid-2020, 21 according to the open-source software
underpinning it.

The U.S. monetary base has no such discipline governing it. Could it be that technology and science have
combined to present the first serious challenge to monetary policy since the demise of the gold-exchange standard
in 1971, or perhaps since the Federal Reserve Board was created in 1913? Cryptocurrencies are still in their early
days... but stay tuned!

0
CONCLUSION 2008 2012 2016 2020 2024 2028

DEFAULT for axis and labels:

Twtech
The CenandMT, Regular,
telecom bubble 7-8pt
got one big idea right: general purpose technology platforms were going to
“converge” and have a major impact on every economic sector, changing the way the world works. The idea was
Axis Color = RGB 90,90,90
right, but capital raced into it 10 to 15 years too early, destroying returns on investment in the interim. The
broadband build-out was egregious, but the concomitant collapse in broadband pricing laid the foundation
for cloud computing and an explosion in innovation. Not only will these disruptions change the relevance and
meaning of economic statistics that policymakers use as guides, but they might change the course of government
policy. What the bubble mindset did not contemplate was the potentially profound impact that declining cost
curves and algorithms might have on fiscal and monetary policies around the world.

20 https://research.stlouisfed.org/fred2/series/BASE
21 https://en.bitcoin.it/wiki/Controlled_supply
17

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