Scott Galloway's Blog, page 10

Quitting Time

Few virtues are more celebrated in America than perseverance and grit. Commencement speakers offer a similar battle cry: “Never give up!” Jesus, what bullshit. Entrepreneurs aren’t voted into the hall of fame unless they have a story about mortgaging their house to make payroll or cleaning the first apartments rented on the platform. Sir James Dyson made 5,126 prototypes of his bagless vacuum cleaner, only to be rejected by every manufacturer in the U.K. Jack Ma was rejected by Harvard 10 times. Grit is great. Perseverance is a virtue. But, narratively, it’s overrated. Greatness is a function not just of grit, but of talent, luck, where and when you are born … and knowing when to quit.

Rebrand

Don’t quit, “reboot.” Quitting is “onwarding.” The point is that similar to not-quitting, quitting is also a virtue. In fact, it’s a necessity. The most successful prehistoric peoples were willing to leave a place when they observed a decline in prey or a change in the weather. Most CEOs have one thing in common: They are quitters. Specifically, your career trajectory will be steeper if every several years you switch jobs. Strangers, from a distance, find you more attractive than co-workers, who can’t help but look at you through the lens of when you joined the firm. Our Editor in Chief at Prof G is an übertalented young man straight out of Yale who needs guardrails. Except he isn’t, he’s (now) a 51-year-old seasoned exec with several master’s degrees. (We’ve been working together for 27 years.)

Nothing Ventured

Anything that offers substantial rewards comes with risk, a high likelihood of failure. Which means you’ll need to make several appearances at the plate before you connect with the ball. The top scorers in the Premier League miss half their shots. Great players, like great entrepreneurs and leaders, see the ball go wide, shake their head, and move on. If you want to be successful, you will likely need to quit the majority of your jobs, homes, friends, and investments. Your jobs, locale, investments, and relationships are commitments, not suicide pacts.

What get labeled ”overnight successes” rarely are, and the best way to become an overnight success is to work your ass off for 30 years. Most hugely successful entrepreneurs don’t hit it on their first venture. Mine was pushing a Rubbermaid service cart full of VHS tapes for rent to law firms and ad agencies in L.A.’s Century City. Ever see Cousins or Turner & Hooch and work in the Century Plaza Towers in 1989? If yes, we’ve met before. I quit when my inventory of 1,100 tapes was stolen from my Mom’s garage. A better frame/narrative: I “onwarded” my firm (“StressBusters Video”). It was acquired when I discovered my mother had homeowner’s insurance.

Grit

A big data study of 46 years of VC investments found prior failure to be “the essential prerequisite for success.” The key is learning from each mistake. Startups have a 1 in 10 chance of success. That sounds intimidating. But really it’s exciting, because if you have the emotional resilience to start seven companies, you’re likely to be the founder of a successful firm.

I’ve started nine businesses, and most didn’t work. But they all taught me something. My biggest professional failure was Red Envelope. Yes, we were backed by Sequoia Capital, Chanel, and Weston Presidio, and went public. But due to all that “success,” I didn’t quit soon enough — it took more than a decade to fail. Brand Farm, an e-commerce incubator, was much less successful than Red Envelope. It was a bigger success for me, though, as it started and ended in just nine months. I closed the Series A in November of 1999 (i.e., bad timing), saw the writing on the wall soon after, and shut it down. In 2010 I founded business intelligence firm L2, bootstrapped it at first, then sold it in 2017 for $158 million, 27 months after our first and only round of financing.

If success is the best thing, failing/quitting fast is the next best thing. Also, keep in mind that the market is bigger than any individual, and most of your success/failure is not your fault. Be humble when things work and willing to forgive yourself when they don’t. Again, I’m not disputing the importance of perseverance. Quitting isn’t the opposite of persevering, it’s the raw material. Dyson’s 5,126 failed prototypes were only possible because after each one, he shrugged, learned what he could, and put it aside to try again. That’s 5,126 little quits.

The Myth

We have a mythology where the hero never gives up. “Come back with your shield, or on it,” Spartan mothers told their sons. This attitude gets us in trouble, as people caught flailing have a map that only depicts one thing and one direction, the higher ground directly in front of them.

Elizabeth Holmes famously said there was “no plan B.” Well, turns out there was a plan C, as she couldn’t fathom B. Plan B was a bright future after starting a firm with a bold vision. Sadly, her prototype, like those of several hundred other tech firms, didn’t work out. In America, we’d rather you go to jail than come home without your shield. I’ve seen marriages fall apart under the stress of one partner chasing an unrealistic dream, and companies go under, unable to pay employees, suppliers, or the federal government (e.g., payroll taxes).

When to Walk Away

The challenge is knowing which part of the script you’re in. Are you at the moment where, if you dig in, your perseverance will pay off? Or are you somewhere in the first 100 minutes of the movie, experiencing just one of a string of failures? Math offers a hint: You’re likely to experience many more failures than successes, so if you know nothing else about your situation, be open to the notion (gasp) that this may be one of the failures. And, most important, that you and humanity will survive it.

Quitting often requires walking away from years of invested time and capital. Our brains aren’t wired for this — we’re unable to recognize that sunk costs are … sunk. One study asked participants to imagine they had bought nonrefundable tickets for two different weekend trips, one costing $100, the other $50, but they’d inadvertently bought them for the same date. The $50 trip would be more fun, they were told. Which trip would they take? Irrationally, 54% of people said they would go on the $100 trip. We hate walking away from an investment.

Semi-quitting (i.e., diversifying) is a critical skill in good times, as well. On the boards of startups, at every subsequent round of financing, I encourage management and employees to take some money off the table. And, increasingly, this is an option for small growth firms. It’s amazing how the power pendulum has swung from VCs to founders. When I was starting companies in the nineties, VCs and bankers wouldn’t tolerate this. “That would send the wrong signal — aren’t you in this to win?” Pro tip: If you have 80+% of your net worth in one asset and people try to stop you from diversifying, they do not have your best interests at heart.

The Alchemy of Success

It’s a useful exercise to assess the underpinnings of any success you’ve enjoyed. For me, it’s been three things: 1) Being born in America in the 1960s. The University of California, Pell grants, the microprocessor, capitalism, and a tolerance for failure. 2) My mother’s irrational passion for my well-being. Despite struggling with depression and anger, I’ve always been confident. I believe this is a function of an impressive person telling me every day, in a thousand ways, that I was wonderful. And 3) I inherited the “leaver” gene from my immigrant parents.

My dad left Glasgow and a household of violence and alcoholism. My mother left London when her two young sisters were still in the Jewish Orphanage in London. Among my close friends from college, I am not the most talented, and we all had similar credentials. I’m one of the most successful (professionally), as I was the only one willing to leave L.A.: Investment banking in New York, starting tech firms in SF, teaching in NYC, entrepreneur (again) living in Florida, now media (best description I can come up with) and living in London.

These moves felt risky at the time, but they pale in comparison to the courage it took my mother to board a steamship headed to Toronto at 24, armed with an 8th-grade education and 200 quid. Five years later, married and 7 months pregnant, she left Toronto for San Diego. My parents’ robust analysis of where to move? A: They read in the newspaper that San Diego had the best weather in America.

High Counsel

I’m not suggesting you be reckless, get divorced, and head for Key West. Even Cersei Lannister had a High Counsel and a Hand (senior adviser). Spoiler alert: She stopped listening to them. Everyone needs their own High Counsel, and you should not make any big decision without the benefit of their input. It’s difficult to read the label from inside the bottle. However, the thing that often holds back people who are emotionally strong and talented is their hesitancy to leave, to quit. It’s a vastly underrated strength.

I just purchased tickets for the Carabao Cup. Tickets increased in price by 20% when Liverpool manager Jürgen Klopp announced he was leaving the club. Liverpool’s manager is quitting with his team in first place, and his stature enhanced, because he didn’t feel he had the energy he owed the team — and the fans love him for his integrity. That’s a form of strength.

Shame

Nobody is paying as much attention to your failures as you are, so fear them but don’t let them paralyze you. When you do fail, don’t feel you need to excuse them or blame others. Being gracious in victory is admirable. What’s harder, but can pay greater dividends, is being gracious in failure. Express gratitude to everyone who believed in you, and demonstrate grace to those who didn’t.

Shame and fear of embarrassment often hold people back from leaving … and leading a better life. Carl Sagan’s insight helps liberate me from that angst: “We are mites on a plum on a planet circling an unremarkable star on the outskirts of an ordinary galaxy which contains 400 billion other stars and is one of 100 billion other galaxies.” Nobody you care about or who cares about you will be alive in 100 years. Nobody will remember your successes or failures. To let fear devour your short time here is to not understand the most basic law of the universe: your insignificance. Why would any of us not enjoy ourselves and not love others with abandon?

Walking Each Other Home

There’s a wonderful line in the film Men Up. The lead character believes he knows the meaning of life: We’re all just walking each other home. On your way home (i.e., success, reward, love) the key is not knowing or sticking to any one path — at 18 I was certain I was going to be a pediatrician living in Santa Monica — but investing in relationships so you’ll know, no matter the route, there will be people walking with you.

Life is so rich,

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Acktivism

Aftershocks — second-order effects — can shake the ground far beyond the original shift in tectonic plates. Few predicted that an unprecedented increase in interest rates would turn mortgages into handcuffs and send housing prices skyrocketing. Or that mobile phones could facilitate a bank run. The earthquake of the October 7 Hamas attack on Israel has caused devastating destruction and loss of life, on both sides. The aftershocks, including the presidents of Penn and Harvard resigning, may signal the beginning of the end of DEI on campuses. The media has focused on big and small issues, including antisemitism on campus and what qualifies as plagiarism. The real story? A: The steady shapeshifting of influence. An apex predator known as an activist investor has escaped its cage and is now attacking social issues. What happens to Harvard is a sideshow. Ackman’s billionaire tantrum represents a far more dangerous virus that has plagued humans throughout history: the concentration of power.

Plagiapalooza

After October 7, university responses to pro-Palestinian activity angered wealthy donors, including a hedge fund manager, Bill Ackman. Disastrous congressional testimony and revelations about citation inaccuracies by Harvard President Claudine Gay in her academic work led to her ouster. A few days later, Business Insider reported that Ackman’s wife, Neri Oxman, a former MIT professor, had similar citational inaccuracies in her dissertation. Oxman admitted to the mistakes and apologized. Business Insider then followed up with more examples, including 15 passages lifted from Wikipedia. Ackman demanded a retraction from fellow billionaire Mathias Döpfner, the CEO of Business Insider’s parent company, and threatened a lawsuit. “Business Insider is toast,” he announced.

Shareholder Activism

Bill Ackman is an “activist investor.” Activist investing is what it sounds like: An investor acquires a stake in a company and gets “active,” i.e. influences the direction and strategy of the business, seeking to generate greater returns. A modern phenomenon that flowered in the 1980s is now an enduring force in the public markets.

A successful activist play can net billions of dollars, and an industry has evolved around the tactic. Lawyers specialize in the laws governing share purchase and disclosure, proxy solicitation (asking other shareholders to vote a certain way), and anti-takeover provisions (e.g. poison pills). PR firms specialize in the management of activist campaigns — a company called Institutional Shareholder Services (founded in 1985) makes recommendations on director slates. There are even private investigators who dig up dirt on management or activists, depending on who’s paying.

Successfully rattling the cage of a public company board and CEO requires a specific set of skills and attributes. Most activist investors possess three key traits. 1) Intelligence: Good activists see strengths/weaknesses the market is missing. After amassing a short position, Hindenburg revealed that Nikola was a fraud. Elliott is building a position in the underperforming Match Group, as it has a monopoly in online dating, minus the monopoly-like valuation. 2) Leadership: Every activist bid is a battle that requires significant financial and psychological commitment from the activist and their investors. And 3) Narcissism: Like influencers, activist investors crave attention. They know their actions make headlines, because takeover bids are corporate violence.

I have some domain expertise/insight here as from 2003 to 2008 I raised over $1 billion and spearheaded several activist campaigns. My investors and I became large shareholders at United Retail, Sharper Image, Gateway Computer, and The New York Times Company, securing board seats at Gateway and NYT. I just read the last sentence and may be guilty of the weakest flex in the history of activism. But I digress.

Invasive Species

Activists assemble and deploy resources and skills to go directly to the consumer (i.e., the shareholder), bypassing the board. I believe Ackman sees the same opportunity with social issues. He’s trying to bypass lawmakers and university governance, going straight to the media and other donors to “unlock” change. University management has been an interest of his throughout his life — his undergraduate thesis was about Ivy League admissions — but despite two degrees from and millions in donations to Harvard, he’s never had the kind of influence there that he’s experienced over the past few months, when he brought down the president herself. At some point during that fight, it dawned on him that what he was doing on evenings and weekends is what he does during the day.

Twitterhea

In addition, he’s eaten from the same rancid fruit plate as another billionaire and has also come down with severe Twitterhea. It’s likely most everything you know about Ackman you learned against your will. He also missed this verse in the Bible, Matthew 7:1-3: For in the same way you judge others, you will be judged, and with the measure you use, it will be measured to you. And Business Insider highlighting Oxman’s citation inaccuracies was no more antisemitic than Claudine Gay’s firing was racist. Ackman and Gay’s reactions reveal a surprising lack of self-awareness; they’re more focused on their egos than the causes they claim to be waging war against. Their hollow bellows of bigotry are a distraction from real injustice. Ackman, Gay, and Elon Musk are the same person: entitled rich kids who look out the window and see themselves, crediting their character and grit for their success and bad actors for their shortcomings.

Step One: Attack the Media

Ackman isn’t the first billionaire to go after a media organization he dislikes. The go-to when advocating for a transfer of power from an institution is to fulminate against any check on (your) power or hypocrisy. Can’t answer the question? No problem — mis-direct and attack the organization holding you accountable. Also, don’t trust scientists, academics, or even data. Urge people to trust their feelings, unencumbered by logic or data, as that’s where they’ll find “your” truth.

Tech venture capitalist Peter Thiel put Gawker out of business for outing him as gay, and Musk bought Twitter when he disagreed with the platform’s moderation policies. Trump started his own social media platform, and Andreessen Horowitz cosplays media with the sole charge of protecting the firm’s virtuous portfolio from other media.

Ackman’s Midtown jihad against Business Insider is doomed and foolish. He has not disputed any facts in the stories about his wife; rather, his complaint is that BI’s reporters had improper “motivations.” There’s no First Amendment carve-out for “bad intentions” where the facts are accurate. The activist playbook is based on applying pressure in excess of any objective measure of power through public condemnation, lawfare, and the judicious use of allies.

We are seeing in real time an ecological transition — predators are breaking free from the enclosures of decorum, media scrutiny, and even law, and scaring the shit out of institutions. Institutions who believed boards or decorum would save them from this aggression. CEOs, and now institutions, were wrong.

Direct to Consumer

The very wealthy have always had more influence over the world than other people, but it’s typically been exercised indirectly through intermediaries — taking politicians and Supreme Court justices on hunting trips, hiring lobbyists, or paying for ad campaigns to influence political races or referendums. Even Thiel’s attack on Gawker was a proxy war, funding another celebrity’s lawsuit (Hulk Hogan).

As our political institutions have become ineffectual (the current Congress is setting records for inaction), billionaires are filling the void, bypassing the middleman. In the 1990s major consumer brands were frustrated with poor execution and tired strategy in the retail channel, so they went direct to consumer and built their own stores, catalogs, and e-commerce sites. Ackman represents the same trend in policymaking: taking his campaign public, demanding resignations or policy changes, and now asking independent media to bend the knee.

We will witness evermore brazen displays of wealth power as skills and experience drawn from activist investing are applied to other areas. Controlling a university will be the next step for the billionaire who has everything. Why settle for having your name on the side of a building when you can control what happens inside? If you can take over a company, against the current management’s will (once unthinkable), or intimidate a media outlet, what’s to stop you from seizing Dartmouth, the First Amendment, an election board, or even the DOJ? Musk’s takeover of Twitter isn’t the pursuit of free speech, but its defenestration.

Mammoth

The emergence of activist billionaires is a function of our decreasing support for public institutions and the mammoth shift in wealth (power) from public to private hands. When the top tax bracket was 90%, private wealth was limited, and government was empowered to put people on the moon and cure smallpox. As we’ve freed the mega wealthy from the obligation to fund the state, the state has withered. When we next set foot on the moon, the feat will be accomplished mainly via privately funded infrastructure, likely built by two of the wealthiest men in history, Musk and Jeff Bezos.

Innovators

There’s a silver lining here. Private enterprises are generally more entrepreneurial, efficient, and agile, so they move faster than public projects. A private SpaceX rocket can blow up and spray debris over protected wetlands with little consequence other than bad PR and maybe a trivial fine — the price of progress. If a NASA astronaut takes an unauthorized souvenir on a mission, they face Senate hearings. Planting the Stars and Stripes on our Luna is meaningful, but it required close to 5% of our national budget. Now space spending has plummeted to 0.5%, and billionaires have filled the void. In theory that means we have more funds for roads and defense, while Bezos bets on the moonshots.

Clotting

But that silver lining highlights a large, dark cloud. It’s great that Jeff Bezos wants to use his Amazon “winnings” to build the next generation of space infrastructure, but should the wealthiest nation be dependent on the vision and generosity of its strangest billionaires to determine our priorities? An odd, drug-addled billionaire could just as easily decide his cash is better spent building a social media network to platform white supremacists or people who traffic in the misery of murdered children’s parents.

Ackman claims to be a warrior fighting antisemitism, but he’s gazed into the ketamine heart of another billionaire and decided his antisemitism is … not antisemitism. Billionaire owners of media companies stand behind their outlets until another billionaire doesn’t like an article and demands a review of the journalism. As with blood clots, like people and ideas cluster — and nothing clots faster than billionaires.

Billionaires are humans, and thus, not to be trusted. Humans need guardrails, because we are temperamental, short-sighted creatures. We are irrationally suspicious of those different from us, and far too trusting of those like us. Daenerys Targaryen wanted to free the enslaved from their shackles. However, once armed with weapons of mass destruction (Drogon, Rhaegal, and Viserion), she became the oppressor. It’s the natural order — power corrupts. When in history has one person’s unchecked, unilateral control of a large army not ended poorly?

Democracy is fundamentally a recognition of the weaknesses of the individual. It is a system designed to take power out of any one person’s hands. By shifting wealth to individuals, we have shifted nation-state power to individuals, which is undemocratic and dangerous. The cause is pedestrian: low taxes. We need a different nomenclature. We should rebrand “taxes” as “guardrails.” A progressive tax structure is a healthy dispersion of power. The massive reduction in the top tax rate is a concerted decision to clot power.

What If?

What’s next feels obvious to me. We have a man who could soon be a trillionaire as he builds powerful enterprises with weak governance (e.g., publicly demanding his board give him an additional $70 billion or he will abscond with the firm’s IP). What if he garnered a 9% return on this capital, and decided to assemble a militia that would be better resourced than the Russian army ($84 billion in 2022 spend). What if this army was buttressed by 51% of the world’s satellites, an army of tens of millions of sycophants, and control of a global media platform? What if this person had already demonstrated a willingness to turn on/off key battlefield technologies and developed an addiction to a dissociative anesthetic that has hallucinogenic effects? What if?

Life is so rich,

P.S. We discussed my investing strategy for 2024 on Prof G Markets this week. Listen here.

P.P.S. Section has released a series of custom GPT bots in the GPT Store. Check out the Executive Feedback Simulator, then read their post on how to build one yourself.

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Peak Hollywood

You are where you spend time. And my boys, like the rest of America’s youth, are TikTok. When asked whether they’d prefer TikTok or all other streaming platforms, tomorrow’s business/civic/military leaders pick the former. TikTok is the most consequential Asian import since … Datsun. Datsun was the first Japanese car to register success in the United States. Initially derided as “small” and “cheap,” Datsun, and then Honda and Toyota, did to America economically what the Empire of the Sun could not do militarily.

Detroit’s Big Three automakers, arguably the most formidable manufacturing troika in history, had their backs broken, and toggled in and out of bankruptcy for the next few decades, becoming symbols of American decline. Today a similar shit-kicking is taking place. Hollywood’s dominance over film and TV is at risk from another Asian marauder. ByteDance is the Datsun/Honda of the era. Will Hollywood be the next Detroit, an abandoned shell of its former glory? Probably not. In-N-Out Burger, the Hollywood Bowl, and the weather are formidable moats. However, it’s beginning to smell like teen spirit. If teen spirit is an industry that’s coming off a sugar high of cheap capital. The coming withdrawal will feel more like trying to kick an opioid addiction.

1903

The “modern” world began in 1903. The Wright brothers flew the Wright Flyer on December 17, 1903. Henry Ford founded the Ford Motor Company in Detroit on June 16, and the city of Hollywood was incorporated just north of Los Angeles on November 14. The airplane industry expanded slowly, but autos and movies exploded culturally and economically. Both were, for a time, dominated by a small number of companies based in Detroit and Hollywood.

Detroit’s Highland Park, with its own power plant, steel mill, and integrated executive offices, was the model for manufacturing in the 20th century. “Fordism” spread everywhere, in buildings designed by the Highland Park draftsman, Albert Kahn. In the 1920s the USSR hired Kahn to train the country’s industrial architect corps, and the Soviets maintained a formal office at Ford from 1929 to 1935 to learn the ways of Fordism.

By 1930, Detroit was the 4th-largest city in America and its fastest-growing metropolis. After World War II, the Big Three benefitted from years of pent-up demand and massive government investment in the middle class and roads/highways. Also, Detroit had an effective global monopoly, as we had carpet-bombed any German or Japanese region that possessed modern manufacturing capabilities.

Through the 1950s, Detroit was the wealthiest city in the U.S., likely the world. The Big Three (Ford, Chrysler, and GM, all headquartered there) dominated the global auto industry, with over 90% share. They erected one huge plant after another in the Detroit area, surrounding them with suburban developments housing auto workers and their families.

By the 1970s, however, the Big Three, and Detroit, were flailing. American cars had become bloated, dangerous, and unreliable. The Japanese turned rice into sake: Their decimated infrastructure let them start over, build modern facilities, and experiment with new methods. The Big Three, once innovators, had no catalyst for creativity. Industry analysts refer to this as the “Malaise Era.” Think Chevy Citation or Ford Pinto. Japanese cars weren’t just smaller, but faster, safer, and cooler. Five decades of decline followed: Chrysler is now a subsidiary of Stellantis, GM declared bankruptcy in 2009, and the combined market cap of the Big Three ($163B) is half of Toyota ($316B), and a quarter of Tesla’s ($733B).

Golden Age

The first chapters of Hollywood’s story parallel Detroit’s. The City of Angels was Detroit West in many ways. Alongside automobiles, movies were icons of cultural and economic relevance through the 1930s. The industry pivoted to support the war effort in the 1940s, producing propaganda films and newsreels and selling war bonds. The industry reaped the benefits of the Allied victory, as Baywatch and Iron Man are essentially selling the American dream, built on the premier victory of the twentieth century.

Hollywood also faced challenges at midcentury. Again, a smaller car showed up. Television was more accessible, more varied, and cheaper. By the 1960s, Hollywood films were increasingly out of step with the culture — projecting 1950s imagery of white people as biblical characters or shooting savage Native Americans onto a world of race riots and sexual revolution. Audiences turned to James Bond, the Beatles, French New Wave cinema, and anything Brigitte Bardot.

Studios faced economic troubles, and many were taken over by financial buyers and conglomerates. Hollywood was on the precipice of the same foreign dismantling the Detroit automakers were about to experience. Sidenote: I bought my first stocks, 12 shares of Columbia Pictures (NYSE: CPS) at $16/share, when I was 13 years old living in Westwood, CA. I thought Close Encounters of The Third Kind was AWESOME (#truth). Ironically, Columbia was sold to Sony 12 years later. CPS didn’t get me to economic security, but four decades of investing in stocks have. But I digress.

Fork in the Road

This is where the stories diverge. Unlike the Big Three, Hollywood did not experience a generation of collapse. What did it do differently? In a word: quality. The industry adapted and started making better movies. They turned the keys of the kingdom over to young filmmakers and actors who weren’t squeamish about sex or violence and had something to say about the crises and traumas of the time. Midnight Cowboy, The Godfather, and Jaws were the Datsun 240Zs of their time, but produced by American studios. In the 1980s the studios discovered the power of the “blockbuster,” the special-effects-driven dramatic film tied into fast food marketing campaigns and action figures. These film-based enterprises were the first zero-to-a-billion-dollars businesses to be built in 24 months, or less. The Hollywood ecosystem didn’t just survive, it thrived.

Hollywood remains the economic and cultural capital of entertainment, and the “Hollywood” studios are still the major players. In 2023 the top eight studios by U.S. box office receipts were all based in L.A. (though several are owned by out-of-state companies), and enjoy a combined 86% market share.

Sequel

Storm clouds are gathering, again. The most obvious issue is the movie theater, which, despite analyst predictions of an explosive post-pandemic rebound, has underwhelmed. One out of every five moviegoers has disappeared since the pandemic, and, last year, U.S. box office revenue amounted to just $9 billion. Hollywood was happy to report that number was up 20% from 2022. The fine print: It’s down 20% from 2019. As in the 1960s, the battle in entertainment is between screens — the big screen is struggling to fight off challenges from TVs and now, phones.

Of that $9 billion, Greta Gerwig and Christopher Nolan accounted for 10%. Barbenheimer’s success has been widely recognized as the saving grace of Hollywood, scooping up 17 nominations and seven awards at the Golden Globes. People think this is a good thing. In reality, the industry is becoming more concentrated as the big-budget, high-production-value projects collect an increasingly greater share of dollars and the rest of Hollywood is left behind. In 2003 the highest-grossing movie (Finding Nemo) made up 3.5% of domestic box office revenue — this year that number doubled, to 7%. Put another way, movie inequality is mimicking income inequality … getting worse.

The apparent strength of the Hollywood “studios” masks the international nature of their operations and the decreasing importance of the L.A. basin to moviemaking. Netflix has led the way. The company is based in California’s other industrial crèche, Silicon Valley. But it’s part of the Hollywood ecosystem nonetheless, with a quarter of its employees in L.A. and a flagship office on Sunset Blvd. It also understands the future is not in California, but everywhere else. The company will spend $2.5 billion on Korean content over the next four years, and it’s increasing investment in Brazil, Spain, Italy, and other countries, while “pulling back” on overall spend. (Translation: It’s reducing budgets for U.S. content.) There are now five Netflix offices in the U.S. and 24 internationally. Of its subscriber base, 69% resides abroad, up from 45% in 2016. The ecosystem is evolving to accommodate this shift. A third major film studio is opening in New York City this year, Wildflower Studios, but with a twist. The brainchild of Hollywood royalty and NYC native Robert De Niro, Wildflower plans to offer the entire production ecosystem under one roof, a “Hollywood in box” that can be replicated globally. Globalization means fewer jobs in L.A., not just for actors, but also for prop masters, makeup artists, and film editors.

Bangkok-based directors aren’t the only ones coming for Hollywood’s jobs — so is AI. The industry is a cornucopia of AI use cases. You could spend $80,000 on a good sound designer, or you could spend $1,000 for an annual subscription to an AI tool that does slightly inferior work. Slightly. With production budgets tightening, producers will select the latter, not because they want to but because they have to. Six months ago we thought it was the writers who’d be affected by AI. We now know it’s everyone. Even the National Association of Voice Actors is bracing for impact.

Who’s the Boss?

Hollywood’s real boss, however, is Big Tech. Apple and Amazon have become studios themselves, but the bigger threat is from substitution, not competition. While Warner Bros. Discovery reported a net loss of 700,000 subscribers across its streaming platforms in its latest earnings report, Mark Zuckerberg casually dropped that Reels has increased Instagram usage more than 40% since launch. Forty percent engagement growth in less than three years on a platform with more than 2 billion users. This would be headline news for WBD or Disney — for Meta it’s a footnote. The ascendance of Instagram, TikTok, YouTube, and the talent pools they’ve inspired, is hard evidence that the future of entertainment will be user-generated. YouTuber MrBeast collected 4 billion views from his videos in 2023. At an average video length of 16 minutes, that’s 1 billion hours of viewing time generated by one man — 30% more than what Netflix captured this year on its most watched show, The Night Agent — filmed in Vancouver.

The ROI on entertainment investment is increasingly the inverse of the screen size it’s produced for. Theaters are dying, streaming to televisions is maturing, and user-produced 45-second videos on phones are crowning new royalty. This week’s Golden Globes felt like a retirement dinner for Pan Am pilots in the seventies, basking in their fading relevance.

Bite-size content has inherent advantages: It’s cheap to produce and easy to consume, with platforms such as TikTok offering a frictionless lack of choice. Netflix watchers spend 78 hours per year just deciding what to watch — TikTok lets you spend that time watching. And its staggering signal liquidity makes it better than you are at deciding what you want to watch.

Survival

The species that survive are not the smartest, strongest, or fastest … but the most adaptable. Hollywood and its biggest players will survive, because they’re demonstrating remarkable agility. In sum, there are too many players spending too much money, and their business is under attack from players that better foot to a younger consumer’s tastes. However, in just 24 months, we may witness a historic consolidation that halves the number of streaming options. The industry used the strike(s) as an armistice to cease the arms race of spending. Amazon’s streaming group announced layoffs, and Netflix, for the first time, has not increased its content budget in two years. 

Look for Warner Brothers Discovery (WBD) and Disney (DIS) stocks to outperform the market. The champagne and cocaine of cost-cutting and pricing power, as a function of consolidation and cloud cover from NFLX, which raised prices earlier in the year, will result in long-absent earnings growth. Both equities, priced at decade-long lows, are springs wound tightly from a stream of bad news that will jump on any signs of renewed growth.

NetVibe

The most agile player is the company that used to mail DVDs and pulled off one of business history’s great pivots to become the most valuable studio in history. I don’t know Ted Sarandos well, but I do know he reads this, so …

Ted, 

I hope this message finds you well. 

NFLX should partner with a deep-pocketed AI firm (e.g., Anthropic), horny to demonstrate differentiation in an increasingly crowded field, and launch a TikTok competitor (e.g., NetVibe, NetBeat, NetReal). When you acquire content, negotiate the rights to parse it into bite-size clips. Your business has the largest block of cheese (i.e., content) in history. Slice it more thinly and charge 10x for it. The deft use of your technology and capital could create a viable competitor to TikTok that has tangible differentiation. I want to watch The Crown, just not all of it. You tried this before but were too early and too timid. Think remixes, not highlights. TikTok is an evolutionary platypus of snippets and retakes — Netflix should be the king of that jungle. This is, in my view, the ripest opportunity in media, and tech.

Ties That Bond

I bond with my boys (13 and 16) over Premier League Football and original scripted television. We just finished Squid Game (I know … late) and are on the first season of The Last of Us. Zombie apocalypses are not my cup of tea, but I think Pedro Pascal is a movie star (Narcos … trust me), and my sons were excited about it. Episode 3 of Season 1 is a formidable piece of content that accomplishes what all media attempts: It made us feel something. The episode, telling the story of a survivalist/prepper who takes in a wanderer, depicts (powerfully) their unexpected romantic relationship. Nick Offerman (Parks and Recreation) and Murray Bartlett (The White Lotus) are outstanding. The prepper (Offerman) is incredibly talented, assembling a compound that not only electrocutes wayward zombies, but also has running water and a working farm that provides the foodstuffs for the gourmet meals he prepares.

Stay with me here.

Author Richard Reeves introduced me to the concept of surplus value. In sum, a boy becomes a man when he provides more value than he consumes. I love this. Young men who are experiencing suicidal ideation repeatedly use the word “useless” when describing themselves. Offerman’s character is the definition of surplus value. But here’s the thing, that’s just half of what it means to be a man. Offerman, in a powerful scene, says he is finally satisfied because his partnership, and caring for his partner, gave him purpose. I’m writing a book on masculinity and have struggled with a decent definition that’s aspirational and doesn’t present gender roles and stereotypes as a zero-sum game. And this helped. I’d offer that being a man is acquiring the skills and strength so we can take care of, and advocate for, others. Our purpose is to protect and love others. That’s what men do.

Life is so rich,

P.S. I kick off 2024 on the Prof G Pod with my Yoda and a true-blue-flame thinker, Ian Bremmer. Listen here.

P.P.S. Section just launched a new Essential Mini-MBA — sign up if you want to be indispensable at work this year. Early-bird pricing ends next week. Enroll for 20% off.

The post Peak Hollywood appeared first on No Mercy / No Malice.

2024 Predictions

Each year, we review/make predictions re the past/coming year. Most years, we hit more than we miss. But we do miss — if we made 10 predictions that all came true, that wouldn’t be predicting but stating the obvious. The caliber of a prediction is a function of what it reveals about the subject, how it frames or reframes a familiar topic, and whether it inspires a productive dialogue. Here’s how we did in 2023, followed by our predictions for 2024.

 

And our predictions for 2024…

U.S. Inflation Drops Below the Fed’s Target of 2.5%

One year ago, Bloomberg’s economic model calculated the probability of a recession at 100%. At Prof G, we predicted inflation would come down as fast as it had accelerated. Our thesis was simple: When the world predicts a disaster, it doesn’t materialize, because we make a concerted effort to prevent it. Call it the Y2K Theory.

I thought this was a no-brainer. Dartmouth economist Danny Blanchflower has highlighted that well-run modern economies don’t experience sustained inflation, as inflation cures itself … so to speak. (High prices quell demand, which lowers prices.) In addition, the supply chain is getting un-gunked, and we have a gangster Fed chairman who took pleasure in ignoring pressure from Senator Warren and others to keep rates low. Finally, I believe AI — like most technologies — is deflationary, as it helps firms do more with less. In a little over a year, inflation has gone from 9% to 3%. Look for this downward momentum to continue. Time’s Person of the year was Taylor Swift, but the most consequential person of the year was Chairman Powell.

Housing Sales Boom

When tectonic plates shift, the main shock is followed by aftershocks in outlying areas. The tectonic shift of the past two years was interest rates, which climbed faster than in any period in U.S. history. Now that the fight appears to be (almost) over, the plates are readjusting: Last month the Fed signaled it would cut rates in 2024.

We’re in for a series of aftershocks, and the most consequential will occur in housing. In the past 40 years, we’ve experienced a doubling in housing prices, while household income has risen just 20%. In 2024 expect to see a boom in housing sales volume.

The runup in housing prices has been a perfect storm of choked volume: Low interest rates on existing mortgages have locked people in, people are living longer, Nimbyism has restricted new construction, and household earnings aren’t keeping pace with housing prices. The result: Home ownership is increasingly sequestered to the olds. Housing in America over the past four decades has been a proxy for economic policies writ large, a concerted transfer of wealth from young to old. Reduced interest rates, coupled with pent-up demand (new jobs, kids, life events), will drop like prunes through the colon of housing in 2024.

State legislatures and zoning boards have (sort of) gotten the memo that more housing is desperately needed. Unemployment is low, and young workers are facing historically strong prospects. A sweetener? The real estate agent cartel might finally break, reducing transaction costs for buyers and sellers.

Paramount Consolidated, Disney Consolidator

We presented this in our Predictions livestream on December 12, and, less than a month later, it’s already happening. News broke before Christmas that Warner Bros. Discovery CEO David Zaslav had met with Paramount CEO Bob Bakish regarding a merger. This trend will continue — watch for any streaming service that isn’t owned by WBD, Netflix, or Disney to be acquired in the coming year. Continued viability in streaming will be a function of scale: In the midst of a writers’ strike, which you’d think would put pressure on studios, Netflix raised prices. The strike was a transfer of wealth from the traditional studios to NFLX, and it has expedited market dynamics: consolidation and rationalization across the number of players and spend, respectively.

Two Stock Picks: Streaming Laggards

Every year I make stock picks — a bad idea, but it’s fun. Last year I picked Airbnb, Meta, and Chinese internet stocks, which rose 60%,180%, and -15% respectively. My thesis wasn’t that these companies would do anything extraordinary. Rather, the market had soured on them (especially Meta), forgetting that the existing businesses are cash volcanoes.

My stock picks this year are Warner Brothers Discovery and Disney, because the tech sector, in my view, is fully valued (Latin for overvalued). Tech’s P/E multiples look frighteningly similar to 1999 and 2007. This year I like distressed assets, and DIS and WBD could reasonably qualify, as they are trading at decade lows. Disney’s EBITDA multiple is 16.3 — significantly lower than its five-year historical average of 34. This is a presidential election year, and the likely opponent was engineered in a lab to foment the outrage and attention that sell TV ads. In addition, WBD is slowly but surely paying down its debt — once the balance sheet looks cleaner, the Street will turn, and Netflix has provided cloud cover to raise prices. Disney benefits from moats that are singular: its parks business and a streaming network that is differentiated (with its family-friendly slant and unique IP) enough to be able to compete with NFLX and WBD.

TikTok Comes for Netflix and Spotify

Bar one door, and the wolf shows up at the next. We tend to focus on competition between similar products, i.e. Netflix vs. Disney, Spotify vs. Apple Music. But entertainment is one market, the market for attention, and one platform is ahead of everyone else in harvesting the commodity: TikTok. The Chinese (and it is Chinese) company had the most ascendant platform in history until OpenAI, and it remains the frame through which Western youth perceive the world. If the last sentence sounds like a description of an existential threat to democracy and liberal values, trust your instincts. 2024 is the year we’ll see TikTok take share from streamers.

Peak AI

Last year we said AI would be the tech of the year. This year the AI bubble won’t burst, but it will deflate. This is inevitable because of overinvestment: More than a quarter of U.S. venture funding went to AI startups last year, and 4 in 5 American unicorns are now AI-related. The biggest AI startups, OpenAI and Anthropic, are valued at 180 and 200 times sales, respectively. Compare that to, say, Uber: 3.

This isn’t to say AI won’t create immense value in 2024 — it will. However, that value is already reflected in the equities of the seven companies (Microsoft, Alphabet, Apple, Tesla, Amazon, Meta, and the newcomer to the club, Nvidia) that drove the majority of the run-up in equities in 2023. The markets will need to look elsewhere for inspiration.

We’re already seeing it in corporate PR, as the rate of AI mentions in S&P 500 earnings calls dropped from 35% to 29%. Expect that number to sink lower.

Big Tech Stock Pick: Alphabet

Last year we speculated that Meta would best the other Big Tech stocks; this year we believe it will be Alphabet. In this case, large language models are the refineries and proprietary content is the fossil fuel. And Google Search, Gmail, and YouTube are the Orinoco River basin. As Reuters obsesses over whom the New York Times licenses its content to, Alphabet will build a thick layer of AI on top of your email, search habits, and YouTube viewing to make life more efficient and entertaining. OpenAI is Star Wars; Alphabet is The Empire Strikes Back. BTW, I watched Alien and Aliens with my son last night. I still think Aliens is the best sequel ever produced, and Lieutenant First Class Ellen Louise Ripley is the premier sci-fi protagonist of the 20th century. But I digress.

Tech of the Year: GLP-1

If 2023 was the year of GPT-4, 2024 will be the year of GLP-1. That is, Ozempic, Mounjaro, and all GLP-1-related weight loss technology. The market is massive and ripe for disruption. More than 70% of our nation is obese or overweight. The prevalence of obesity has tripled in the past 50 years, and the cost of obesity in the U.S. — including indirect costs and productivity losses — is estimated to be $1.7 trillion. We’ve written about this before. America is the land of the free and the home of the plus-sized. A huge swath of our economy is run on a lie — that obesity is finding “your truth” — that enables the industrial food complex to addict you to shitty, unhealthy food and then hand you off to the Diabetes Industrial Complex. Bill Maher ribbed me for saying GLP would have a greater impact on the real economy than AI. I stand by it.

Right now, the New York City neighborhood with the greatest penetration of GLP-1 prescriptions is also the thinnest (the Upper East Side) as the drug is mostly being given to wealthy ladies who lunch looking to lose that last stubborn 15 pounds. As investment in GLP-1s increases, their cost will come down and access will expand. This will have a ripple effect beyond pharma — fast food companies, including McDonald’s and Pepsi, will be affected as consumers reduce consumption. The biggest query for the consumer economy: What would America look like if it were thinner and less diabetic?

India Is the New China

In 2023, India became the world’s most populous country. In 2024 that population growth will register in economic terms. The transition is two-sided: India is investing in infrastructure and courting foreign investment, while China is investing in aircraft carriers and turning its gaze inward to deal with youth unemployment and sectors crashing. Evidence of the baton transfer: Apple is aggressively shifting iPhone production to the other side of the Himalayas.

Geopolitics: U.S.-China Relations Thaw

Expect China to dial down the brinkmanship in an attempt to stanch the bleeding of foreign capital. The Chinese economy is the sickest it’s been in generations, and the only treatment with proven efficacy is foreign investment flowing through local manufacturing. Eventually, China will have to figure out how to build housing and luxury cars for its own market without incurring massive debt. The West has an inflation problem; China a growth problem. Feels as if the two largest economies need to kiss and make up. They will.

Geopolitics: Saudi Arabia and Israel Normalize Relations

This was on the horizon before October 7, but the conventional wisdom is that the Hamas attacks and Israeli response have torpedoed normalization. Short of a broader regional war, the logic of a tie-up remains inescapable. The Saudi strategy in a world less reliant on oil is to be the swing vote, the nation that garners outsize power by getting along just well enough with everyone to have a seat at every table, a vote in every majority. My gut on this is based on an observation I made during my arrested adolescence tour to Mykonos last summer. In sum, nearly every table at the nightclubs was populated by young men from the Gulf. The Saudis are pivoting from Islamism to capitalism. They have the largest economy in the region and have said little about the Israel-Gaza war.

Musk Loses Control of Twitter (Or Sells It)

We need to stop talking about Musk as if he’s a runaway teen. In two years he’ll be eligible to live in most senior communities and people are tired of childlike behavior from a near-senior citizen. Musk’s wealth is largely tied up in Tesla and SpaceX, holdings he does not want to sell. He has borrowed heavily against both, and even the world’s wealthiest man can have cash-flow issues.

Even after Elon fired 80% of Twitter, it’s still an expensive hobby, and he’s continuing to drive away his blackmailers (i.e.,advertisers). Plus the company, and by extension Elon, face years of payments on the debt used to fund the acquisition. Elon’s ambitions are bigger than social media, and in 2024 he’ll prioritize Tesla and SpaceX over platforming people like Alex Jones, who monetize misery. Spoiler alert: None of this has anything to do with free speech.

Meta’s 2024 Growth Vehicle: WhatsApp

Facebook and Instagram are still huge, profitable businesses, but we don’t talk about them much, because what drives Big Tech valuations is growth. Meta has been keeping its third horse in the barn for years, but there’s dormant upside in a platform with 3 billion users that will soon stir. Zuck has been hinting at a monetization strategy for years and nibbling at services associated with WhatsApp. 2024 is the year the Xenomorph Internecivus Raptus bursts from Meta’s abdomen. (See above: Alien.)

Political Prediction: Biden Gets Reelected, and Trump Gets Sentenced

The truth of presidential politics is that the voters who actually decide elections — swing voters, independents, etc. — don’t pay attention to politics. That’s why they are swing voters, because they don’t spend three and a half years in a hermetically sealed echo chamber. It’s likely when they head to their polling place we’ll have low inflation, high employment, a strong economy, conflicts around the globe that don’t involve U.S. troops, and a GOP nominee who’s been convicted by a jury of his peers for crimes against the United States.

The evidence for that last prediction will be submitted at three separate trials, and the odds of beating all three are terrible: Defendants accused of federal felonies have only a 30% chance of avoiding prison time in just one trial — beating the rap in three trials comes in at a 2.7% probability (30% * 30% * 30%). In 2024 we’ll be channel-surfing between a reality show, watching a criminal attempt to mug a senior citizen, and a game show where the player’s job is to delay court cases until after he’s elected president so he can pardon himself. Jesus, we feel so fucked up right now.

Learner’s Permit

I ended ’23 with several days in the passenger seat of a car, forcing myself not to scream “slow down!” or “speed up!”  My son is learning to drive. In 1980 my mom, after coming home from nine hours at her job as a secretary at an insurance company in the San Fernando Valley, would spend an hour teaching me to drive a manual transmission Opel Manta. My daily sojourns through the 7th ring of Learner’s Permit hell made me feel closer to my future and past. I wish the same for you in 2024: stress, joy, and a  grasp of time’s (in)finite nature. All in the presence of people you love.

Life is so rich,

P.S. If you received this email from a friend and would like to sign up, you can subscribe here.

P.P.S. Section’s AI for Business Mini-MBA closes enrollment on Monday. Join us to make AI a strategic advantage in 2024. Sign up here.

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What We Leave Behind

The full scope of how the Covid pandemic changed our world may not be clear for another generation. The deluge of official inquiries, political brawls, think pieces, and books (I wrote one) that have come out in the past few years are first drafts. They’re also reminders of how complex the pandemic was to live through, and how intense experiences can generate powerful insights. I periodically revisit this post I wrote in May 2020, because it puts me back in that strange time and reminds me what we could potentially learn from it. I hope we never go through another world crisis like the Covid pandemic, but even more, I hope we don’t forget its lessons. Some of which I discuss here. Best wishes for a safe and happy close to 2023 and a joyful 2024.

[The following was originally published on May 22, 2020.]

An Etch A Sketch is a mechanical drawing toy invented by André Cassagnes of France. Two knobs move a stylus that displaces aluminum powder on the back of the screen, leaving a solid line. The genius of the toy is aluminum powder. A child only needs to flip the toy and shake, redistributing the powder over the screen.

Covid-19 has presented an opportunity to envision our lives when turned upside down, powder redistributed. We can start over. We hoard relationships and the accoutrements of a life others have fashioned for us. We often don’t know any better, or don’t have the confidence to draw outside the lines until we’re older. My colleague professor Adam Alter has done research on the regrets of the dying. One of the biggest: not living the life they wanted to lead, but the life others chose for them.

In 2000 I left my marriage, my career in e-commerce, and San Francisco. I hit the restart button and left a lot behind. The period was lonely, rife with collateral damage, and the right decisions. Covid-19 presents society, and each of us, with the opportunity to design a better life with … less.

What do we leave behind? Some thoughts:

Emissions. Or at least, a lot of them. I’m not an environmentalist, and mostly believe after the last human draws her final breath, the Earth will register a 20-year belch and feel fine again. To be clear, I do believe climate change is man-made, as I don’t have my head up my ass, but I also believe the move to renewables will be expensive. Just as trickle-down economics is a lie, so is the notion that the Green New Deal will pay for itself.

In Florida, like many places, the water has been so clear, the sky so blue that I wonder if this is a time to move away from coal, cars, commutes … even if it’s really expensive. The last several weeks have convinced me it’s worth it. A spectacular home is worth a ton of money. Why wouldn’t we decide that a spectacular backyard (sea, sky, land), for all of us and our children, is also worth a huge investment?

Essential workers. The term essential means we’re going to treat you like chumps but run commercials calling you heroes. Just stop it. We lean out our windows and applaud health-care workers, as we should. We don’t, however, lean out our windows to salute other front-line workers — the guy or gal delivering your groceries or dropping Indian food through the window into your back seat.

Why? Because, deep down, we’ve been taught to believe that we live in a meritocracy and that billionaires and minimum wage workers all deserve what they got. We’ve conflated luck and talent, and it’s had a disastrous outcome — a lack of empathy.

There is so much that’s jarring about American exceptionalism. Thus far, a very American image from the pandemic is a makeshift morgue in a refrigerated tractor-trailer in Queens. Even worse? We idolize the founder of Amazon, who has added the GDP of Estonia to his wealth (all tax-free/deferred) during this pandemic, even as we discover that 25% of New Yorkers are at risk for becoming food insecure. This isn’t a United States, it’s The Hunger Games.

This country was built by titans of industry even wealthier than billionaires today — Vanderbilt, Rockefeller, Carnegie, and J.P. Morgan. But 1 in 11 steel workers didn’t need to die for bridges and skyscrapers to happen. We are a country that rewards genius. Yet no one person needs to hold enough cash to end homelessness ($20 billion), eradicate malaria worldwide ($90 billion), and have enough left over for 700,000 teachers’ salaries. Bezos makes the average Amazon employee’s salary in 10 seconds. This paints us as a feudal state and not a democracy.

Our lack of empathy for our fellow Americans is vulgar and un-American. We can and should replace the hollow tributes with a federally mandated $20/hour minimum wage. This “outrageous” lift in the minimum wage would vault us from the 1960s to the present. As of 2018, the federal minimum wage was worth 29% less than in 1968.

Howling in the Money Storm

Money is a vehicle for the transfer of time and work from one entity to another. So, if we spend less money on one thing, we can invest more time on another. Could we invest less in stuff, less in commuting, and more in relationships? I’ve been howling in the money storm for so long. Believing my worth to others was a function of the stuff I had, or didn’t have.

We proffer admiration, affection, and a sense of awe to people who aggregate wealth. But that affection is often misplaced, as wealth can lead to greed and lack of empathy. This is an opportunity to spend less on stuff, spend less time commuting, and reallocate that capital and time to our partners and children.

On my podcast, the Prof G Pod, I interviewed philosopher and neuroscientist Sam Harris. I asked him for one piece of advice on how to be a better man. He offered that rather than trying to parent, cajole, discipline, or guide your children, your real purpose is just … to love them. My 9-year-old has been having a hard time with corona. I’m spending less time correcting, explaining, arguing, and more just loving … sitting in his room when he’s doing homework, engaging in conversation, and watching The Simpsons together. We’re on season 5. There are 31.

And … we’ll get there.

Steve Jobs, Donald Trump, and Jeff Bezos have 13 kids by 6 women. One denied his blood under oath to avoid child-support payments, another mocks the disabled, and the third steals from school districts (demand tax/budget cuts) to cling to power and wealth. We need a generation of men who emerge from this crisis with a commitment to being better fathers, husbands, and citizens.

The fastest path to a better life is regularly assessing what we’re leaving behind. The fastest blue-line path to a better world is more engaged fathers, not a better fu*king phone.

Life is so rich,

P.S. Join me and Mustafa Suleyman for a free talk on “Can AI Be Contained?” on January 9. Sign up here.

 

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Prof G Person of the Year

After a disastrous day of congressional testimony, Penn’s president and board chair resigned, and the presidents of Harvard and M.I.T. are under intense pressure. The cause is easier to diagnose than the mechanics of the firing. Over the past several decades, universities have morphed from centers of excellence into self-appointed arbiters of political and social engineering. I’ve experienced this firsthand, watching as faculty who can’t teach or pen relevant research create a weapon of mass distraction from their mediocrity: DEI. But that’s not what this post is about.

The more surprising, and illuminating, feature of this chapter in history is who actually fired President Magill. Sidenote: Before clutching your pearls too tightly, remember she wasn’t actually fired; she will just return to the law school as a tenured faculty member … who can’t be fired. Anyway, Congress didn’t ax  Magill, nor did the governing board of trustees: She was fired by the billionaire alum and donor Marc Rowan. His official role at Penn is chair of the business school advisory board. Rowan’s unofficial role is that he gives tens of millions, and that, as CEO of Apollo Global Management, he has “half of Wall Street” on speed dial. He and other billionaire donors have been challenging Magill over speech and culture issues for months.

In order to fund unproductive departments, administrators and faculty at universities have created a new class of shareholder: donors. It may be a good thing, bringing some private sector accountability and common sense to an insular culture. When donors speak, the university may choose to listen, but when they “close their checkbooks,” as Rowan urged them to do, they have to. As Bob Dylan sang, “Money doesn’t talk, it swears.”

Person of the Year

Time’s 2023 Person of the Year is Taylor Swift. Time has never selected an artist for their work before, and I’m not sure it did this year either. The article opens with a story from early in Swift’s career, when she received a check for “more money than I’d ever seen in my life.” That sets the stage for a description of her $1 billion “empire,” and the “mini economic boom” generated by her current tour (projected to gross over $1 billion). Before we read anything about Swift’s music, we learn that tickets in the secondary market reached “more than $22,000,” and that in Glendale, Arizona, the tour “generated more revenue for its businesses than the 2023 Super Bowl.” The impact of her artistry is measured in craft store sales, not cultural resonance. The reporter saw fit to interview a Duke finance professor.  Were Joni Mitchell, John Lennon, Billie Holiday, Bob Dylan, or Maya Angelou less relevant, or less wealthy?

Time’s “Athlete of the Year” is Lionel Messi. Not for winning his first World Cup — that was last year. Time gave him the nod for his megacontract. The year Messi did win the Cup, the Athlete of the Year was Aaron Judge, who did not break baseball’s home run record that year (he was 11 short) but did “sign the richest free-agent contract in the game’s history.”

The real Person of the Year in 2023? A: Money.

War and Peace

Last year’s Person of the Year was Volodymyr Zelensky (along with “the Spirit of Ukraine”), which was a) an obvious choice and b) not about money. In 2022, that is. In 2023, however, it’s becoming clear that Zelensky’s heroic stand against Russia is, like it or not, going to be decided by money. In that Ukraine’s ultimate victory/defeat hinges on money from the U.S. and Western Europe. Zelensky was in D.C. this week — his third trip since Time put him on the cover a year ago — trying to save his country’s economic lifeline. If his fundraising efforts fail … Russia is going to be a bigger country.

Economic power has always been central to war: America’s rise to global dominance in the first half of the 20th century was a function of assembly lines and shipyards. Great powers have long manipulated events at a distance by funding client states and rebellions. Persia funded the building of the Spartan fleet that won the Peloponnesian War. But money — pure capital, distinct from infrastructure and economic output — is the fuel of modern warfare. Putin’s most effective fighters aren’t in the Russian Army; they are a mercenary force who prop up African autocrats. He’s only been able to prosecute his criminal misadventure in Ukraine thanks to the hard cash Russian oil commands on the international market. His victory does not hang on valor or strategy, but cauterizing Ukraine’s flow of American money.

Vacuum

Congressional inaction isn’t limited to Ukraine. This session will go down as one of the least productive in history. Americans may not like one another, but our elected representatives flat out refuse to work together. Into the void has rushed money. Lobbying spending is increasing; at midyear 2023, it was well ahead of 2022. And lobbying money is mainly spent lobbying about money. More lobbying money is spent on appropriations than any other subject, and taxes are in third place. Why don’t we we have a stronger social safety net, universal health care, tuition-free college, a $15 federal minimum wage, more government action on climate change, and higher taxes on corporations and the wealthy to fund all of it? It’s not because those proposals aren’t popular — all enjoy large majority support. But corporations and wealthy people invest in the instrument whose returns outpace those of Nvidia or beachfront real estate: giving money to our elected representatives. I began giving money to campaigns about a decade ago.  I’m not surprised at the access it affords me, but how cheap it is.

Maybe it’s good that campaign spending sets new records every cycle, so buying Washington gets more expensive. Spending for 2022 was up 33% from 2018, the last non-presidential-year cycle. Candidates spent almost $6.5 billion on the 2020 presidential race (aka 6.5 Taylor Swift Eras Tours), and that’s projected to grow by a third in 2024. The candidate who spends the most money wins their House or Senate race around 90% of the time, and in this year’s presidential cycle the three leading candidates are the three leading spenders: Trump, Biden, and DeSantis have together spent $130 million on ads thus far — more than the rest of the candidates combined. Meanwhile, in the U.K., Boris Johnson cut out the middleman, selling peerages for £3 million. The steam engine, radar, Premier League relegation/promotion, and direct-to-donor prestige. Who says the English can’t innovate?

$peech

Last year, perhaps the most influential global communications platform was purchased by one man who didn’t even need to appoint fiduciaries (i.e., a board) to represent stakeholders or check his power. By virtue of unprecedented concentration of wealth, one person influences the global flow of information without guardrails. Nothing better highlights our idolatry of innovators and money than people deciding Musk is a victim, being “blackmailed” by advertisers who don’t want their logo next to a swastika. Every person reading this newsletter has had clients or customers decide to take their business elsewhere. Maybe we’re being blackmailed, too, and my employees who demand raises are terrorists.

Across the pond, a UAE billionaire is attempting to take over the Telegraph, the U.K.’s paper of record, over the protests of establishment Britons. The English are sensitive about the creeping influence of foreign wealth after discovering they let Russian oligarchs burrow into London’s wealthiest and most powerful enclaves. Sensitive, in this case, means there will be a lot of hand waving and faux concern before the deal goes through.

$port

In June, Saudi Arabia bought an entire sport, “merging” LIV golf with the PGA Tour. The terms of that deal are to be finalized by the end of the year; in a flex, LIV signed the reigning Masters champ, Jon Rahm, to dispel the PGA of any notion it’s not on bottom.

$chool

Sixty years ago the academic gap between Black and White students was double the gap between rich and poor. Fast-forward to today, and the ratios have reversed, signaling a type of progress, and decline. America is becoming more like itself every day: Money is the arbiter of … everything.

The premier indicator of a child’s success is how much money their parents have. A 2023 study provided the most detailed look yet at how parental income drives student success. It concludes: “In the last five decades, as the country has become more unequal by income, the gap in children’s academic achievement, as measured by test scores throughout schooling, has widened.” What the latest data show is that this isn’t just a rich vs. poor distinction, but an advantage that accrues as one climbs the income ladder. Children of parents in the 0.1% (average income: $11.3 million) get “far better scores than even the children of families just below them.” It’s not the schools (or inherited smarts), but the prep programs, tutors, contacts, and extracurriculars that make the difference.

Old $chool

If 2023 showed us all the new stuff money can buy, it also reminded us of all the old stuff money can buy. Turns out rich people still like cars, yachts, mansions — only we’re now reaching a cosmic scale. Last month the most expensive car in U.S. auction history was sold for $51 million. A week later, Jeff Bezos’ 610-foot megayacht docked at Port Everglades in a special section reserved for industrial oil tankers. (The same yacht for which the authorities in Rotterdam agreed to dismantle a historic bridge to let it pass through.) Ken Griffin set the record for world’s most expensive house this year: $1 billion. It’s often said that Mansa Musa, the 14th century king of Timbuktu, was the richest man of all time. Historians say he was “richer than anyone could describe,” citing ancient depictions of golden scepters, golden thrones, golden crowns, and a 200,000-person army. Maybe it’s just me, but I’ve seen how the Kings of Silicon Valley live. Mr. Musa sounds poor.

$o What?

There’s a view that the rise of money is a good thing. Or at least not all bad. Human society has never been fair, and as long as people are status-seeking, competitive animals in a world of scarce resources, it won’t ever be. Historically, many of the lines that divided society traced innate characteristics like race or sex, were based on inheritance, or were determined by the exertion of physical strength. Money doesn’t care about any of these things, and it has washed away barriers in ways that potentially make institutions more accessible. There are now nine Black American billionaires. Good news — and their rise is correlated to an increase in civil rights.

Taylor Swift, in the Person of the Year article, made this very point about the commodification of her art, and the way the music industry treats female artists: “What has existed since the dawn of time? A patriarchal society. What fuels a patriarchal society? Money, flow of revenue, the economy. So actually, if we’re going to look at this in the most cynical way possible, feminine ideas becoming lucrative means that more female art will get made. It’s extremely heartening.” Women control most consumer spending, and as we are seeing with university politics right now, the hand that holds the checkbook is the Iron Bank — it rules the world.

What stops this from being a Hallmark channel version of capitalism is that money, when not reinvested/redistributed (pick your word) quickly pools and concentrates, and innovation and competition decline. “Competition is for losers,” is how Peter Thiel puts it. And he’s following through, buying Senate seats (his protégé, J.D. Vance, is leading the charge to defund Ukraine) to secure the influence of his money. We aren’t going to end the power of money any time soon. In an economy increasingly run on financialization, with so much wealth in circulation, our objective should be to ensure that it keeps circulating. Money = power, and power should be distributed as widely as possible.

The Sexiest Man Alive: Benjamin

I read that, on dating apps, a 5-foot-7 man needs to make $60,000 per annum more than a man who is 6-foot-2 to achieve parity in attractiveness to potential romantic partners. The data was meant to highlight how looksist our society is. What struck me was that money can replace physical stature. Two in three women under the age of 30 have a romantic partner, vs. 1 in 3 men. In sum, women are dating older. TikTok will tell you that’s a function of emotional viability, which makes sense, as our nation is producing too many men who, for a variety of economic, biological, and societal factors, are still boys. However, there’s no denying that women can do math. And the math says the quickest way to get a house five years before your peers is to date someone 10 years older.

Love Me

In America, to have money is to be more interesting. People are drawn to you, give you the benefit of doubt, laugh at your jokes, and are apt to want to help you and your family. In sum, to be rich in America is to be loved. If America is a family, the household has never been more prosperous and full of love. However, like the future, it’s not distributed equally.

As we’ve written before, ground zero for America’s problems boils down to one thing: For the first time in our history, a 30-year-old is not doing as well as his/her parents were at 30. This is a fundamental break and, more disturbing, a function of deliberate decisions (i.e. social and economic policies that transfer wealth from young to old). Nimbyism, rejectionism, seniors voting themselves more money and bailouts, financed by future generations, to preserve the wealth of incumbents are generational theft, full stop. A 70-year-old is, on average, 72% wealthier than four decades ago; a citizen under 40 is 24% less wealthy.

Mom and Dad are on Crystal cruises with Nana and Pop Pop. The oldest (boomer and Gen X) kids will drive home for Xmas in new Audis wearing Panerais. However, the youngest boys and girls are wearing hand-me-downs, and household debt is so enormous, the youngest will only inherit liabilities, they cannot attend the same schools as their older siblings, much less buy a home. America’s youngest are more depressed and anxious than any previous generation. And why wouldn’t they be? Their family doesn’t love them.

Life is so rich,

 

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Firewater

Humans have been writing for five thousand years — and drinking longer. Archeologists recently discovered a 13,000-year-old beer in a cave near modern-day Haifa, Israel, and there is archaeological evidence of alcohol consumption around the globe by 5000 BCE. Alcohol’s draw is a cocktail of biology, psychology, and social norms. Among other things, it lights up the brain’s dopamine reward system. For much of history it was safer to drink something fermented than water — if TikTok had been around before Christ, there’d likely have been fitness influencers encouraging us to drink less water and more Modelo. Through the modern era, we’ve integrated the firewater into some of our most enduring rituals. Humanity has a deep-rooted affair with fermentation.

But the data suggests that Western culture is undergoing a structural shift away from alcohol as entertainment, social lubricant, self-medicament, or ritual. Everyone but the liquor industry views this as a positive development, as alcohol is the third-leading cause of death in the U.S. and the No. 1 risk factor for premature death among young men. Like our relationship with alcohol itself though, the story isn’t that simple.

Halved

Between 2002 and 2018, the share of college students who don’t drink alcohol jumped from 20% to 28%, and, overall, Gen Z drinks 20% less alcohol per capita than millennials did at the same age — which was, in turn, 20% less than Gen X consumed. Among high school students, 39% drank alcohol in 2011; just 23% drink today. Think about that: In just a decade the number of high school students who drink has been almost halved. Youth drinking is declining despite another broad shift, the shrinking gender gap — older Americans are drinking more as a cohort, as a generation of women who grew up when drinking was more acceptable for them ages. The trend is global: In Japan, where drinking binges are ingrained in the work culture, as a means of establishing trust, 60% of the population now believes that after-work drinking is “no longer necessary.” Youth drinking in the U.K. has been falling for two decades.

Drinking hasn’t vanished from youth experience in the same fashion as mix tapes or call waiting, but the cultural impact of the shift is greater than the numbers suggest. Concert promoters report dramatic declines in alcohol sales at shows with younger audiences, and they’ve started stocking more no- and low-alcohol options at concessions. Alcohol giant AB InBev projects no/low brands (variants of traditionally alcoholic beverages without alcohol) will make up 20% of sales by 2025. High-end mocktails and dry bars are on trend, and millions of people participate in Dry January every year.

Toxic

This generation’s wariness toward alcohol is not unmerited. It can be toxic. Long before it destroys your liver or gives you cancer, it can destroy your life, or someone else’s. Thirty million Americans are in a clinically unsafe relationship with alcohol, and in addition to killing over 80,000 people per year through chronic illness, alcohol leads to nearly 60,000 acute deaths (drunk driving, overdoses, suicide) — including more than 4,000 among people between 18 and 24. When I was in high school in Los Angeles it felt as if there was a picture and flowers every month for a kid killed in a drunk driving accident.

Our understanding of alcohol’s dangers has evolved, and recently. We’ve known for millennia that alcohol has serious negatives: Plato believed in a drinking age of 18. But we’ve mainly worried about excessive drinking and dependence, especially after Prohibition, when scientists wanted to avoid being associated with the perceived overreach of the temperance movement. Moderate drinking was deemed harmless, even beneficial. The first director of the National Institute on Alcohol Abuse and Alcoholism, Morris Chafetz — who championed treating alcoholism as a medical rather than moral issue — wrote books about the virtues of alcohol, claiming in the 1960s, “there is no sound evidence whatsoever that alcohol causes permanent direct damage to the body.”

Dr. Chafetz was wrong. We now know even light drinking can increase your risk of cancer — alcohol is a Group 1 carcinogen, the highest risk group, which also includes asbestos and tobacco. Research in Europe has found that half of all alcohol-attributable cancers are caused by light or moderate drinking. It’s not just cancer risk: Moderate drinking shrinks your brain. Older studies finding that light drinking could have health benefits have been reevaluated, and their conclusions called into serious doubt. In 2022 the World Heart Federation stated: “Contrary to popular opinion, alcohol is not good for the heart.” And in January 2023 the World Health Organization said what researchers had known for years: “No level of alcohol consumption is safe for our health.”

Today’s youth don’t need to read scientific journals to stay up on the latest science re alcohol, because it’s a hot topic on social media. TikToks and Reels about the dangers and downsides of drinking are a genre, and a skit about “hang-xiety” was a recent SNL hit. Alcohol companies spend nearly $2 billion per year in the U.S. on advertising featuring society’s most attractive people and opulent production values. But on social, a Swedish doctor in cool glasses can reach millions with the shitty news that women are six times more likely to develop cirrhosis of the liver with equivalent alcohol consumption (adjusted for weight) as men. A doctor with a cool beard can reach even more people. Social media has many harms, and even on drinking it’s not great (Google #BORG for more), but it is giving voice to messages that don’t have corporate power behind them.

Despite my experience at Summit at Sea, the turn away from alcohol does not appear to be substituting one chemical for another. The use of marijuana (which gets no free ride on health, either) is increasing as legalization brings weed into the mainstream. Psychedelic drugs, used as party drugs or “microdosed” for creativity or productivity, are experiencing a resurgence. But these increases are dwarfed by the overall decline in the consumption of substances. Marijuana use among teens is actually down over the past decade, and opioid abuse is flat.

Something more is at play. The science of alcohol’s harms is the science of statistics: odds and long-term chances. Not typically winning arguments against youthful energy. Why is this generation so amenable to abstinence?

No/Low … Risk

Drinking isn’t the only vice young people are turning away from. Risky behaviors are down across the board. Young people are much less likely to drive: Between 1995 and 2021, the share of teenagers with driver’s licenses declined from 64% to less than 40%. As someone who got his driver’s license on his 16th birthday and spent 200% of his disposable income on a 1980 Renault Le Car, this seems insane to me. Also, fewer young people are having sex. In 2011, 47% of high school students said they had had sex. By 2021, that number had fallen to 30%. Note: In (un)related news, I lost my virginity at 19. (See above: Renault Le Car. Before I had access to a Discover Card or Android phone, I’d found an equally powerful prophylactic: a french lawnmower with doors that screamed “don’t procreate with this person.”) Similar declines have been observed in other measures of sexual activity, such as numbers of partners. Lawbreaking has been on the decline since the mid-nineties, and the rate of decline accelerated after 2010.

But there’s one risky behavior young people are increasingly engaging in: suicide. Between 2007 and 2021, the suicide rate among Americans age 10 to 24 rose from 6.8 (per 100k) to 11.

This is the tragic tip of an iceberg, the teen mental health crisis Jonathan Haidt predicted a decade ago. Since 2011 the share of high school students reporting “persistent feelings of sadness or hopelessness” has risen from 28% to 42%. A recent study of rising suicide rates found that “the increase in the prevalence of depression among young people during the 2010s was so large it could explain nearly all the increase in suicide mortality among those under 25.” Take a pause.  What’s the fucking point of any of “this” if 50% more of our children feel hopeless?

Gen Zers tell us why they feel so bad. They face insecurity on every front: Their careers will be gigs on Zoom calls with low pay and no health care. They’ll struggle to pay off their student loans or buy a house or have children.  Mating and sexual dynamics have become increasingly risky, if not plain demoralizing; over a third of Gen Z identifes climate change as their biggest single worry. And, always in the background, is the knowledge that their life has a permanent, public record: 49% of Gen Zers say their online image is in the back of their mind when they are socializing … or drinking.

It’s tempting to write all this off as teen angst and the struggles of young adulthood, but these are fears that didn’t exist 30 years ago. How would you have handled any of this? Were you a thoughtful model of grace at 18?

Snowplows

The irony — and in part, the answer — is that no generation has ever had more support and protection. We used to joke about “helicopter parents” who hovered above their kids, but now we have “snowplow parents” who carve a path for their offspring, clearing life’s obstacles. Parents are closer than ever with their young adult children, thanks to technology that tracks their every movement.

As a member of Gen X, I’d leave home Saturday morning with my Bahne skateboard, 35¢, and an Abba-Zaba bar, not to be seen or heard from for 12+ hours. If my kid is more than 15 minutes late, the Navy Seals and MI6 are activated. Kids’ lives are programmed, pre-planned, and packaged — leaving them with 50% less unstructured time than earlier generations enjoyed. The result is lower resilience and greater anxiety. We use so many sanitary wipes on our kids’ lives, they don’t develop their own immunities.

Once they’re out of the physical nest (but often still tethered electronically), young people respond to this combination of coddling and fear in various ways. Rising anxiety is paired with an obsessive need for control. “Optimization bros” have taken to tracking every glass of water, “hacking” their sleep cycles, and pushing evermore elaborate diet and wellness regimes on their cohort. Tech companies are happy to facilitate this, building tracking of all kinds into our devices and encouraging us to wear them constantly. Clearly, there’s no room for beer in that schedule.

Take a Chance

Every generation inherits the assets and liabilities of previous generations.  However, we are maturing an immature generation less capable of dealing with some of the real challenges, and opportunities, we’re leaving them. Instead, we shield them from dangers that likely make them stronger — rejection, a B-, hangovers, the unknown — while letting technology exploit their fears of real or perceived dangers. My mom worried I’d get into too much trouble. Now, I worry my kids won’t get into enough.

The decline in youth drinking is not just about drinking. It’s about a generation that fears the consequences of the slightest slip of impulse control — which could be a spark in a world with a permanent gas leak (social media) ready to ignite a firestorm of shame.

The decline in alcohol consumption has many positives. But it also means a decline in the rites of passage and communal bonding that alcohol historically facilitated. It means a decline in drunken hugs and slurred “I love yous,” fewer first dances, first kisses, first dates. Drinking comes with a lot of risk, but it also opens us to new experiences. It doesn’t have to be via substances, but sometimes, you need to lower your inhibitions.

Better

The phases of my life correspond with an evolution of my favored intoxicants: high school, nothing (I hung out w/Mormons); college, beer and THC; early career, vodka; mid-career, bourbon and rum; present, less bourbon and rum and more THC. I love alcohol and THC and believe I’ve gotten more out of them than them me.  Intoxicants have been a social and professional weapon, as integrated into my life as exercise and eating.

I’m a better version of me a bit fucked up. The very definition of a “good” drunk. Funnier, more affectionate, and more in touch with my emotions. Every romantic partner I’ve had has, in a variety of ways, encouraged me to drink more. It’s a bug, not a feature. Some fucked-up sense of masculinity still inhibits my ability to express how much friends/colleagues mean to me unless I have that rush of euphoria inspired by alcohol.

Often, when writing this newsletter, I’ll have a Zacapa and Coke and text people to tell them how much they mean to me. The next day, after reviewing the texts, I feel embarrassed … but no regret. My problem isn’t saying things I don’t mean when drunk, but not saying things I do mean when sober. Hemingway said he drank to make other people more interesting. I drink to make myself more interesting. If the previous sentence sounds a bit pathetic or like a form of alcoholism, trust your instincts.

 

Life is so rich,

 

 

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Mammon

I just paused my Hulu subscription — pretty sure that means I’m blackmailing Bob Iger. The real tragedy of Andrew Ross Sorkin’s interview with a co-founder of OpenAI is that ketamine addicts deserve a better spokesperson. But that’s another post.

The collapse and rebirth of the Valley’s preeminent private company was the most bewildering business story of 2023 and an object lesson in a truth that’s hiding in plain sight: When capital and ideals clash, capital smothers ideals in their sleep. The end of the charade that OpenAI was a nonprofit signals the beginning of the end of ESG.

We are always ready, and want, to believe that this time it’s different, we will do good while making billions. The last big corporate jazz hands was the ESG movement, purporting to prioritize environmental, social, and governance concerns over shareholder returns. Succumbing to this siren call, we abdicated our responsibility to discipline corporations and curb the externalities wrought by the pursuit of profit, believing instead that one profit-seeking entity could cajole another profit-seeking entity to seek something else.

Mission Aborted

Elon Musk and Sam Altman founded OpenAI eight years ago with a specific, altruistic mission: to invent the most transformative technology ever known and then … give it away for free. They had amassed vast wealth from private enterprise and didn’t believe a for-profit company could be a responsible steward of the AI tech they planned to build. Fast forward: One box was checked with a pen the size of the Hercules–Corona Borealis Great Wall. OpenAI is likely the most important private company in the world, and it’s already one of the most valuable. But the tsunami of private capital washed over its founding ideals. Once the water receded, one house of worship, the pursuit of shareholder value, stood unblemished. Note: In this instance, “shareholder” should not be confused with “stakeholder.”

Drawn & Quartered

OpenAI’s founding mission was drawn and quartered the moment the company took its first billion-dollar investment from Microsoft, in 2019. Four years in, the company determined it would need billions to build the team and computing infrastructure that advanced AI would require. It’s possible they always knew this, and expected Elon to foot the bill. But he severed ties in 2018, either because of conflicts or because he lost a power struggle. Regardless, the company needed capital. It raised a billion dollars from Microsoft and restructured itself as a for-profit “controlled” by the original nonprofit. When a “nonprofit” takes a billion dollar investment from a for-profit, it has been bitten by the dead and is now also a profit-seeking White Walker.

Don’t Be Evil

OpenAI was not the first company whose founders thought they could breathe and swallow at the same time. Tech in particular is a museum of grandiose mission statements, eventually cast aside in the pursuit of profit. Google, from which Sam and Elon poached some of the first OpenAI hires, famously espoused the mantra “Don’t be evil,” putting the motto in its 2004 IPO prospectus. Steven Levy used the phrase as a thematic touchstone in his history of the company, In the Plex. The book highlights the crisis the company faced balancing principles against profit. Over and over, it asked itself, “Is this evil?” … and chose evil: building its own browser (page 210), tracking users to sell ads (338), building AI for weapons (405), and, most famously, agreeing to censor search results on behalf of the Chinese government (284). (Not to mention radicalizing young men and undermining the business of journalism.)  In 2018 the company passively acknowledged what it had become, relegating “don’t be evil” to an HR scold at the end of its Code of Conduct.

Gravity

Sports analysts refer to the impact of a great player as their “gravity” — they pull defensive players toward them, leaving other players open. Messi, Steph Curry, everyone in Man City’s attack has gravity. Capital bests them all (see Ronaldo’s Al Nassr contract). Everything you want to do at a company, including hiring employees, buying raw materials, and renting space, requires capital. Your shareholders demand a return on theirs, i.e. profits. A manager’s task is difficult, but simple: Allocate finite capital to generate a greater return than their peer group gets. And when the ROI-maximizing decision isn’t one that “benefits humanity,” capital wins. Sam may have his hands on the wheel, but he’s sitting on Satya’s lap as he drives. Capital is in charge.

Beginning of the End of ESG

The saga at OpenAI is playing out at macro scale in the markets, with the decline of the ESG movement. ESG stands for “Environment, Social, Governance,” and it’s what fashionable multinationals are wearing this season. It comes in a few styles — a management strategy, an investment thesis, a product offering — but they’re all the same masquerade: that for-profit corporations and the markets can police themselves. The question of whether they can is bested by the evidence. They don’t.

Over the past decade, a crop of funds has surfaced offering to invest your money in sustainable ways while still delivering competitive returns. The experiment has been a failure. ESG is neither an investment strategy nor altruism; it’s branding. As my colleague at NYU, Aswath Damodaran, highlights, corporate ESG scores increase every year. Is that because corporations are becoming “better”? Or is it because the bar is getting lower? When a company like American Airlines, which emits 49 million metric tons of CO2 per year, makes the , it’s the latter.

The hollowness of ESG investing is reflected in its returns, which are neither good nor bad — but average. So average that the S&P 500 and the S&P 500 ESG indexes’ returns are nearly identical every year. And that’s by design: The top five weighted companies in the S&P 500 ESG Index are Microsoft, Apple, Amazon, Nvidia, and Google. It’s no coincidence these are also the five most valuable companies in the U.S. Meanwhile, investors pay a greater expense ratio on the ESG ETF (0.10%). And by ESG standards, even that’s low. The iShares ESG Aware ETF charges 0.15%, and the FlexShares ESG ETF almost trebles that to 0.42%. It’s the definition of branding: Create intangible associations that evoke emotion vs. product benefit, resulting in pricing power. Or, more simply, slap a green label on your fund, marginally adjust your weightings, and charge more.

The ESG movement is waning. Investors withdrew $14 billion from sustainable funds this year. The shift is partly structural — traditional funds have also seen net withdrawals (aka negative organic growth) — but ESG funds are facing steeper declines, likely because people are catching on to their sleight of hand.

Weaponization

We wrote about a greenwasher extraordinaire two years ago, Aspiration, which promised to save the planet with a debit card. The planet is still under threat, and the company fired its founder-CEO, laid off hundreds of staff, and pivoted toward selling carbon credits to corporations. Aspiration is a case study in the deeper cost of buying into the mythology of do-gooder capitalism: Capitalists weaponize it for profit.

Two months ago, Deutsche Bank agreed to pay a $19 million settlement for claiming it made investment decisions based on ESG but not actually doing that. Which is fraud, but also dumb, as being labeled “ESG” is not a big lift. (See above: American Airlines.) Before that, oil giant Shell was accused of misleading investors on its green credentials. In the past year, corporate greenwashing incidents have risen 70%.

Misdirect

The danger bigger than usurious fees is that we don’t invest in the democratic institutions focused on preventing a tragedy of the commons, because we believe “market solutions” can handle carbon emissions and forced labor. It’s not the fault of the businesses but the citizenry, which continues to engage in a consensual hallucination that tech innovators can cosplay world leaders and solve our most pressing problems, all while making us/them rich. I don’t know if/how climate change is remedied, but I’m certain the solutions will cost money before they make any.

Corporations are so good at making money, they shouldn’t be trusted to do anything else. Treating your employees well, investing in the community, and generally supporting the commonwealth all offer short- and long-term benefits to stakeholders, and so stakeholders — us — should ensure it all happens. This is not an abdication of corporate responsibility or reheated Milton Friedman, but a call for more robust government oversight and regulation, including antitrust actions and a rebalancing of power from the top 1% and corporations.

(Do)n’t Be Evil

Larry and Sergey weren’t being disingenuous when they founded Google as a “different kind of company” or adopted “don’t be evil” as their guiding principle. In their original paper introducing the Google search engine, they included an appendix about the evils of advertising: “Advertising funded search engines will be inherently biased towards the advertisers and away from the needs of the consumers.” I’m sure they believed that — because it’s true. Their original sin was naiveté, not deceit. They thought they could defy gravity.

Likewise, I don’t believe that John D. Rockefeller founded Standard Oil intending to heat the planet to an unlivable temperature, or that the thousands of good people who work at Chevron or Exxon or Shell are rooting for the mass migrations and economic collapse their continued carbon production will cause. All the worst people in the world didn’t decide to go work for tobacco companies in the 20th century, nor have Meta’s recruiters developed a skills-based assessment to find evil geniuses. There are bad people in business, and immoral conduct (recruiting underage children to a product that gnaws at their mental health, promoting antisemitism) remains immoral. We should call bad acts out where we see them, and withhold our business or capital from bad actors when we can. But don’t expect it to change anything. As the late Charlie Munger put it, “Show me the incentive and I will show you the outcome.”

Door 1 or 2

If you could keep the executives and change the incentives vs. change the executives and keep the incentives, I’d argue Door 1 is the better way to go. And the upside incentives are, most definitely, in place. There is no country on Earth minting as many millionaires and billionaires as the U.S. Regardless of the odds, and the harsh reality that success is more about when and where you are born than your talent, most Americans believe they have a shot at extraordinary prosperity. And that’s a good thing.

We can’t — and shouldn’t — weaken the pull of capital. The profit motive is capitalism’s driving force, and it’s driven a greater increase in prosperity than any other human creation. The problem is our better angels are outmatched; we need counterweights to the incremental rationalizations made in conference rooms named “Only Good News.”

It’s the lack of regulation and the disincentives that have let externalities run amok. Government prosecutors sending SBF and (likely) Zhao to prison will do more to clean up crypto than any ESG fund overcharging investors. If we want to stop Meta from sending images of nooses to bullied young girls, we need to make that behavior a crime. Or, at least, let those girls’ parents sue (i.e. reform Section 230, as I advocated for here).

ESG and (in-)Effective Altruism are heat shields against real limits on action. They allow corporations to retain their power (and their capital) while expectorating exhaust into a headwind. Every time I write about the abuses of tech companies, I get the response, “Well, if you don’t like the companies, don’t use their products.” This is the cry of the defeated, those so broken on the wheel of corporate exploitation they’ve unilaterally disarmed, abandoning the one power we the people possess that’s equal to capital: democracy. It’s not up to each of us to protect the commonwealth, it’s up to all of us. Put another way, the most effective ESG is not a fund charging higher fees to invest in American Airlines. It’s a perp walk.

Life is so rich,

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The Line

OpenAI, summary of events: The board fucked up and fired CEO Sam Altman, but over the next several hours/days the situation was unfucked. As of this writing, the state of play is Altman is back as CEO and a majority of the board has resigned. Whether or not that status survives the long weekend, the ultimate outcome has been clear since Sunday night: Altman reinstated at OpenAI. The board’s last stand was Darryl Hannah in a tree, refusing to come down in protest — illusory relevance with the half-life of a Planet Fitness seven-day pass. 

Microsoft hiring the entire OpenAI workforce was never realistic, despite the made-for-TV moment of 500 people boarding a plane for Seattle. Some of the problems: broken employee and partnership agreements with OpenAI and infringement of its IP rights; Microsoft’s assimilation of 500 different comp/equity agreements; the response of OpenAI investors (a16z, Khosla Ventures, Sequoia, Thrive, and Tiger) to their multibillion-dollar stakes getting effectively transferred to MSFT; and antitrust concerns over greater concentration in AI power. Satya knew this and was careful to say he welcomed the opportunity to work with OpenAI again should Altman return. Which was the better/more viable outcome for both of them all along.

The near-collapse of the Valley’s most important and successful startup is a $90 billion lesson that profit and mission don’t mix. OpenAI was founded as a nonprofit, then birthed a for-profit subsidiary. Serving “all of humanity” was adorable until 90 billion distractions showed up and the management team and investors began avoiding eye contact with the original mission. Altman and the board were supposed to straddle that divide, but it proved impossible. If this was a battle between capital and (concern for) humanity, capital smothered humanity in its sleep. 

We should abandon the mythology that the market alone can produce the great taste of capitalism (shareholder returns) without the calories (pick your poison: climate change, labor exploitation, autocracy). Nothing drives innovation and value creation like the profit motive. But it can’t be trusted to do anything but make money. That’s why we need stronger government regulation and greater enforcement. The best ESG investment of ‘23 was the taxpayers’ investment in the SEC and DOJ, which are sending the CEOs of FTX and Binance to jail. The fiduciary obligation to “humanity” belongs with democratic institutions; it can’t be dependent on the better angels of billionaires.

The Line

However … the pursuit of profit has limits. And that brings us to the other major news of the week, which I believe is more serious and consequential. Last Wednesday, what Elon Musk had previously cloaked in dog-whistling retweets and bluster broke into the open with an explicit public endorsement. “You have said the actual truth” he wrote in response to the claim that Jews are pushing “hatred against whites” and “flooding their country” with minorities. This follows months of warnings from outside groups that antisemitic and other hateful content has surged on X. Mr. Free Speech has sued several of these groups and blamed the Anti-Defamation League for undermining X’s advertising business. 

What has ensued is apologists “contextualizing” the statements of their friend, idol, and potential client. These same “leaders” were quick to judge the idiocy of a 19-year-old at a campus rally, but they’ve decided there’s “nuance” when it comes to one of their own. It’s fucking gross. You don’t need to be able to see into his Ketamine heart — you are your actions and your words, and Elon Musk is an antisemite. 

Whether you agree this is what the man is, think he’s cosplaying a Nazi for business reasons, or believe he’s just a misunderstood genius, the question remains: What is to be done when the richest man on the planet, who controls the world’s most valuable car company and a global satellite communications network, uses his wholly owned social media platform to increasingly and unapologetically aid and abet bigotry and antisemitism?

This is the latest incarnation of an old problem. I wrote about it a year ago, when another well-known figure was promoting the same dangerous feculence. The post wasn’t about him (Kanye) but the appropriate response to his statements. We’re running it again, because our response to Elon is more important. Not only because of his power and reach, but because the situation has grown more dire. Hate crimes in the U.S. have been rising for a decade, and were up another 7% in 2022 — while antisemitic incidents were up 36%. In 2021 there were eight bomb threats against Jewish institutions. In 2022 there were 91. That was before October 7 and the war in Gaza. This October saw a nearly 400% increase in antisemitic incidents. And violence begets violence: Islamophobic incidents nearly doubled in the same period.

As we argued when we ran the following post last year, these trends have tragic historical echoes: the price of doing business with those who traffic in hate is not measured in dollars, but in lives. What this post is ultimately about is the difference between opinions and principles. Opinions are easy to hold and cheap to change, and their value is commensurate. Principles, on the other hand, are things for which you are willing to sacrifice. Willing to draw a line.

There was controversy this month involving Kanye West. You can catch up here; I won’t reiterate it. I believe Kanye is ill, and I’ll return to ignoring him soon after this post. This post is about Adidas, Gap, CAA, and his other corporate partners. It is about the moral obligation we have to draw a line.

Familiar Target

Authoritarian power, fascism especially, often rests on the persecution of a group. Fascists ascribe the problems of society to the influence of a minority and argue that controlling or eliminating that group will solve a social ill. The most popular target for this form of social weaponization, for hundreds of years, has been the Jews.

Making up 2% of the U.S. population, and only 0.2% of the world’s population, Jews are, year after year, the target of more anti-religious hate crimes than any group. In the two-year period 2001-02 bookending 9/11 — when Islamic terrorists killed 3,000 people — the FBI identified 636 anti-Islam hate crimes in the U.S., up from just 61 in the two prior years. Over the same period the FBI identified 1,974 anti-Jewish hate crimes — three times as many as directed at Muslims, more than half the religious hate crimes committed during the period.

The anti-Islam number was the anomaly. Year after year, more hate crimes are committed against Jewish Americans than against any other group except Black Americans. (There are six times as many Black Americans, and in total they suffer twice as many hate crimes.) The situation is similar abroad and over time. Persecution of the Jews is so common, there’s a Yiddish word for being massacred: pogrom. QAnon is strange and vile, but likely ends up only a stain on this American era. Antisemitism is history’s most enduring and deadly conspiracy theory.

That’s why special attention should be paid to tropes like “the Jewish media.” The real demon, of course, is demonization, of any target. The history of discrimination and violence against “out” groups is extensive, from the Armenian genocide, to the mass killings of Christians by ISIS, to China’s detainment of Uyghurs, and much, much more. In fact, the Nazis did not limit their attacks to Jews alone. They targeted Romani people, Black people, homosexuals, and the handicapped. Whoever the target, identifying a group, blaming them for society’s problems, and encouraging persecution, including violence, against them is the fascist playbook. We cannot ignore these tactics in the rantings of billionaire celebrities, regardless of what we think of their music, their shoe designs, or their mental health.

A companion tactic is the assertion of victimhood by the fascists themselves. “Replacement theory” is the noxious combination of both, asserting that the persecuted minority will somehow supplant the majority. The rhetoric of fascism is like a battery, drawing energy from contradiction. A self-proclaimed billionaire, for example, wailing about how oppressed he is.

New Normal

We have incorrectly conflated the liberal tradition of “free speech” with neutrality,  with protecting the dark shoots of fascism in the name of tolerance. By the time speech has flowered into actions that cannot be ascribed to a “lone wolf” or the “mentally ill,” it has ripened into a movement. Movements are harder to stop, and the cost of resistance becomes so high that good people stop doing and saying the right thing as the understandable instinct for self-preservation kicks in. Later, we find eloquence and grace only in our regret.

I have the feeling that we let our consciences realize too late the need of standing up against something that we knew was wrong. We have therefore had to avenge it, but we did nothing to prevent it. I hope that in the future, we are going to remember that there can be no compromise at any point with the things that we know are wrong.

— Eleanor Roosevelt

Standing up against the rhetoric of hatred has nothing to do with censorship. There is no law forbidding people from employing the rhetoric of oppression, nor should there be. But no principle obligates us to accept them in media or business relationships.

A pillar of state-sponsored horror is the steady normalization of stereotyping and blaming. One person ranting about the Jews or anyone else is readily identified as an outlier and ignored. But as these claims multiply, as they have recently, they seem less outrageous. Political scientist Joseph Overton postulated that at any time there is a range of policies the population deems acceptable, but this “window of discourse” is not constant. It’s become a strategic objective of extremist groups to shift the “Overton window” over time toward their position by using rhetoric and advancing policies just outside the current scope of societal acceptance. And as the volume of hateful rhetoric rises, as research has shown, so too does hate crime.

Normalization Inc.

The rise of fascism — the normalization of hatred — is concomitant with the accommodations of powerful people who register political and financial gain by looking the other way. “Appeasement” is historically associated with Neville Chamberlain, the U.K. Prime Minister who caved to Hitler’s territorial demands rather than risk war with Germany — only to make the eventual war more costly. Chamberlain is unfairly singled out. Much of the British ruling class supported his position, and the U.S. Congress passed law after law barring aid to those threatened by the Nazis until Pearl Harbor made such a position untenable. Accommodation inside Germany began years earlier, with Hitler’s rise to power (via an election) in 1932.

Although Chamberlain is the poster child for appeasement, often the key enablers of fascism are not politicians, but corporations. Large companies benefit from stability, the expansion of their nation’s sphere of influence, and the centralization of power at the expense of the individual — many of the central themes of fascism. It’s no surprise that corporate power is often the handmaiden to authoritarian rule. I write that not as an indictment of corporations — corporations are essential. They are how we organize human effort to accomplish extraordinary things, from electric cars to vaccines. But as corporations become more powerful, their rejection or enablement of hate speech takes on additional importance.

Corporate accommodation of and support for the Nazis is well documented, from Adidas to Volkswagen to Krupp to IG Farben. Multinationals flooded into Pinochet’s Chile as he murdered his political opponents by the thousands. Vladmir Putin’s Russia has made “oligarch” (once simply a term for a member of a ruling clique) into a synonym for business leader. The risk is even greater today, considering the role corporations play in modulating our national discourse. The pure pursuit of profit can lead to dark places. There has to be a line, a moral consideration in place.

Drawing that line can be hard, because the leaders of large companies are culturally inclined toward, if not political neutrality, avoiding political adventurism. Corporations take political positions for business reasons, and 99% of the time, the best position is none. Donate to both sides, lobby for regulatory capture, and then stand on the sidelines.

But neutrality in the face of evil is not neutrality. Amorality is too easily hijacked by the immoral. Hannah Arrendt was fascinated by Adolf Eichmann, the architect of Hitler’s death camp system. He evidently had no ideology of his own, just a “manifest shallowness,” she wrote, “which made it impossible to trace the incontestable evil of his deeds to any deeper level of roots or motives.” If Meta were to change its name again … “Manifest Shallowness” strikes me as a decent fit.

If you are neutral in situations of injustice, you have chosen the side of the oppressor. 

— Desmond Tutu

Drawing the Line

Which brings us back to Kanye. And to the corporations that did business with him. Their decision to sever ties is important. Not because they need to “cancel” Kanye. It’s not about Kanye, but drawing a line, arresting the normalization of the demonization of a minority.

In the case of Adidas, the ink for this line will cost shareholders hundreds of millions, if not billions, in shareholder value. The shoe maker has been criticized for waiting 10 days to cut ties. Ten days is an eyeblink in history (and even if management made the decision in 10 minutes, the logistics and legalities of responsibly disentangling a multibillion dollar relationship take time). The company should be commended for its actions.

As expensive as it was, Kanye did Adidas, the corporate world, and maybe America, a favor. As John Oliver put it, “The answer to where you draw the line is literally always ‘somewhere.’” If you never draw one, you forget how. So when someone goes to “death con 3,” society’s writing hand rediscovers penmanship. It helps to practice our cursive so we know we can do it. Drawing a line is a chance to remind yourself, your employees, your shareholders, and your customers that you’d rather take a stand now, when the cost is only profits vs. something much worse.

The Line to Here

In writing and presentations, I often point out that much of my success is due to my circumstances — being born in America, getting a state-sponsored education, etc. But the real roots of my good fortune run even deeper. During the Blitz, my mom was a 4-year-old Jew, sleeping in the London tube. Had the British not drawn a line, and then the Americans and Russians, it’s likely that a 21-mile-wide strip of water would have been breached, and my mother’s life would have ended with a train ride. And someone else would be writing this newsletter.

It should be noted: The allies drew a line against fascism and potential invasion, not antisemitism. The costs would have been less dear had we drawn those lines earlier. The line on Kanye should have been drawn sooner. Every elected leader, citizen, and CEO must ask themselves, Where is my line? To answer the question: We must first decide there is one.

Life is so rich,

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WeBur

The tsunami of private capital that crashed against digital innovation after 2008 shaped a new economic entity: the unicorn. Among private companies valued at over $1 billion, the two that marked the era were Uber and WeWork. Uber was the second tech company to breach a $50 billion private market valuation (Facebook was first), and WeWork peaked at a valuation of $47 billion. Since leaving the barn, their paths have diverged: Uber is publicly traded, profitable, and valued at more than $100 billion; WeWork filed for bankruptcy this week after burning through $22 billion — on its own, lead investor Softbank immolated $14 billion, likely the largest venture loss in history.

The two businesses raised a combined $44 billion in private capital, substantially more than the total combined capital provided to birth Amazon, Apple, Facebook, Google, and Microsoft. How was Uber able to convert its massive capital hoard into a profit-generating enterprise, while WeWork set its cash on fire? I believe two fundamental factors drove these divergent outcomes: the idolatry of innovators and the power of the asset-light model.

The Dilemma’s Innovator

Founding a business that achieves any level of success requires ambition, talent, an irrational belief that “this” makes sense, and most important the ability to attract a flock of investors who consent to engage in your hallucination. The best founders are Zealots.

Zealots are high-talent, high-energy people — but they also tend to be narcissistic and divisive assholes. If you’re thinking “Takes one to know one,” trust your instincts. Zealots make good founders, but as companies mature, the ratio of their passion relative to the cost incurred by their difficult personalities erodes. Maturity calls for sober leaders who are better at managing risk and serving the market’s desire for predictable, if not remarkable, growth: Pragmatists.

Some (i.e., few) founders can make the transition, tempering the quicksilver aspects of their personality without losing their drive or vision. Watching the evolution of Bill Gates is to see a man evolve from Australopithecus afarensis to Homo sapiens in one lifetime. The wealthiest man in the world, Elon Musk, is still dragging his knuckles across the floor at his companies. An antisemite who controls an influential media business and a global communications network — what could go wrong?  Prediction: The records for the most shareholder value created and lost will be set by the same person. But I digress.

Uber and WeWork had the blessing/curse to be founded by Zealots, men so irrationally committed to their vision that they ignored naysayers, business issues, laws, ethics, and math. Though, to date, a disregard for laws or morality has been a feature not a bug across the innovation economy. Math proves to be the arbiter of who survives/thrives. WeWork was the ultimate expression of a Zealot-founded company, exhibiting hypergrowth, a proliferation of side projects, and a company culture based on a cult of personality bordering on a (wait for it) cult. Founder Adam Neumann inspired devotion and elicited hard work from his team, but he created a workplace that felt more like a movie of the week than a public company. It likely could have survived this, as Uber did, but profligate spending ($60 million Gulfstream G650) and self-dealing transactions — (personally licensing the “We” brand to the company for $5.9 million) triggered the market’s gag reflex.

Neumann’s flaws were evident to insiders long before the company’s 2019 aborted IPO afforded investors a peek inside the circus tent and required the board to finally address the Neumann issue. However, it swapped in one Zealot for another — in this case business history’s greatest enabler: SoftBank’s Masayoshi Son. The Japanese billionaire was the largest backer of WeWork, having invested $6.4 billion by the time of the failed IPO, and he’d once told Neumann he needed to be “crazier.” Masa doubled down on his investment (literally, with a $9.5 billion “rescue package”) and took over the company himself.

A decent definition of “crazy” is doing the same thing while expecting a different outcome. So Son followed his own advice and became fucking insane, shoveling good money after bad. After a legal fight with Neumann, and the world’s largest blink by Masa (paying Neumann a billion for his shares), there was a SPAC, and more hemorrhaging of capital.

If WeWork was the ultimate Zealot firm, Uber was not far behind. The company employed several questionable business strategies under Travis Kalanick’s leadership, including spamming competing taxi apps with fake rides, tracking the frequency of one-night stands by city (and coining the Uber home “the ride of glory”), and generally evading (breaking) the law. Several fraud accusations, sexual harassment scandals, and a revolt by five of the company’s largest investors later, and Kalanick was forced to resign. (He also sold most of his shares to SoftBank, but Masa subsequently had to unload them to pay for his losses in other investments, including WeWork.)

WeWork enabled Neumann, even after it fired him. Uber, in contrast, belatedly demonstrated admirable corporate governance. The board kicked Kalanick out and brought in a deft Pragmatist, Dara Khosrowshahi. Dara learned his craft at the feet of Hall of Fame operator Barry Diller, then spent 12 years as CEO of Expedia honing it. Perhaps the best evidence that Khosrowshahi was the right person for the job? He turned it down. “​​Why would I ever jump into that mess?” was his response. (And when he told Diller he was considering it, his mentor said, “you’re fucking crazy,” and hung up on him.) After changing his mind, he led Uber through a painful but necessary changes. Four years ago the company’s Q3 loss was$1.2 billion; this year, a net profit of $221 million — its second straight profitable quarter.That will likely continue. Pragmatist.

OPA

For most of business history, having assets was good, and having more was even better. However, one of technology’s tectonic unlocks has been elevating information (bits) over objects (atoms). In the information age, owning assets is one business, while operating them is another, and each demands distinct capital structures, management approaches, and operational skills. Businesses offering the greatest return on invested capital don’t have much capital (assets) and can scale up faster, as they don’t bind themselves to cars, apartments, or even inventory. (Think: Amazon Marketplace.) Using other people’s assets makes firms more resilient, because they can scale down as inexpensively, during bad times, as they scaled up. I wrote about this in 2020, reflecting on the lessons of the pandemic:

Uber rents space in other people’s cars, driven by non-employees (in the eyes of the law, anyway). The second an Uber car stops making the company a profit, the asset and labor disappears and costs the company nearly nothing. Revenue can go to zero in a crisis, and Uber can reduce costs 60%–80%. Hertz, on the other hand, owns its cars and went bankrupt. Boeing has $10 billion in cash, but if its revenue goes down 80%, they can take costs down maybe 10%, maybe 20%.

When WeWork filed its ill-fated IPO prospectus in 2019, one of the many frightening pieces of information was its lease commitments. While WeWork did not own the buildings it operated, it entered into long-term lease contracts with landlords, which is the next best/worst thing to ownership. This gave WeWork sole use of/responsibility for that real estate — functionally similar to buying the property with long-term financing. As of its attempted IPO, WeWork was contractually obligated to pay $47.2 billion in lease payments over the next 15 years. That’s enough to build 31 Burj Khalifas from the ground up.

Fast forward to 2023, and those lease obligations have pushed WeWork into bankruptcy. On September 6 the CEO acknowledged they were “two-thirds of total operating expenses … and are dramatically out of step with current market conditions” and announced plans to renegotiate them. The “We know we’re contractually obligated to pay but would rather pay less” conversation didn’t go well. Uber, in contrast, has been able to navigate the departure of its CEO and rising and falling competition, and has made strategic bets of varying success in food, logistics, and other related businesses, because of the flexibility of its asset-light model. WeWork has only one means of survival: Rent more desks. It couldn’t, so it didn’t.

Not Dead Yet

Bankruptcy, one of capitalism’s best features, is handcrafted for a firm whose main problem is … lease commitments. One path forward for WeWork would be to use bankruptcy to look over its office portfolio, get out of the leases of underperforming locations, and get better deals on the good ones. It ought to have some leverage: The commercial office market has been a shitshow since the pandemic, with values down 25% year to date, after losing 38% last year. Office property values are expected to be 40% lower by 2029 than they were in 2019. Think about this. It’s likely U.S. commercial office space has shed more gross value than any asset class, globally. A Sophie’s Choice of “cut this rate in half or we walk” may be an offer your average landlord can’t refuse.

But there may be a better way. Go asset-light and ask someone else to own that space. Hotel brands figured this out decades ago, and there’s nothing WeWork resembles more than a hotel. They are both REaaS, to borrow an acronym from tech, Real Estate as a Service. Here’s how the Four Seasons and the Ritz do it: They run their hotels through operating contracts with the building owners, earning them fees and a share of top-line revenue. It’s the “one weird trick” that converts a business weighed down by expensive, illiquid real estate into a 21st century asset-light operation. Another approach would be to franchise the business — which is what WeWork version 2 (the era after firing Neumann and before Chapter 11) did with its international operations. The franchisees have to sort out their real estate risk and strategy, but they have the benefit of local expertise. (The extreme asset-light option would be to go full Uber, though the better analogy is Airbnb: Convert the business into a network of providers who bring their own office spaces to rent. But that’s neither the promise nor product that WeWork offers, and it’s likely fraught with security risks and operational challenges.)

Both WeWork and Uber have an asset that is worth billions, brands that have reached Elysium — they are the generic term for their category. WeWork’s brand has been dinged by the business failures of the past few years, but the impact of corporate missteps on consumer brands is typically muted. Airlines, for example, can’t stay out of bankruptcy court (American, Delta, and United all being recent examples), but their brands keep flying. I expect more than a few potential buyers are fielding brand equity surveys right now, gauging the strength of WeWork’s potentially most valuable asset. My bet is Barry Sternlicht brings the firm out of bankruptcy. We’ll see.

All of this assumes there’s a market for what WeWork is selling. There is. Three in four workers would take a “flexible work environment” over better pay. But for most people under 40, the kitchen table or local Starbucks (another brand that could get into this space?) isn’t going to cut it. And a WeWork contract is more attractive than a lease to an employer looking to go asset-light. The service aspect of short-term and small-lot rentals is the office space business of the future. The asset base is an albatross.

Home Game

In the C-Suite, the Zealot and Pragmatist personality types are sequential re a firm’s evolution. In relationships, the two mix well. I’ve been going through pictures from a backpacking trip I took through Europe with my friend Lee 35 years ago. He brought maps, a wallet belt, and traveler’s checks. On the train, he’d plan out our day, and I would comb the train and try to find new friends (i.e., women) we could hang out with at our destination. Lee and I shared the same doctor (Raul Zimmerman), who summarized our relationship when he heard we were headed to Europe: “Lee will make sure you don’t miss too many trains, and Scott will make sure you miss a few.” Lee and his husband came to watch me on Bill Maher a couple weeks ago, and Lee pulled me aside afterward and said, “I’m just so proud of you and what you’ve accomplished.” This was so meaningful for me. I think of myself as a fairly fearless person, but I’ve never had the confidence to say this to a male friend. Still time. Anyway, we’ve been making and missing trains for four decades. So blessed.

Life is so rich,

P.S. No Mercy / No Malice is offering exclusive sponsorships of our newsletter and site. More here.

P.P.S. Want to know what it takes to build a generative AI bot? Section CEO Greg Shove is lecturing on Nov. 29 on how Section built its new AI course tutor. Sign up here.

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