Scott Galloway's Blog, page 11

Swingers

I spent the first 30 years of my life not worried enough about things I could control. And the last 10, too worried about things I have almost no control over. That’s accelerated over the past few weeks, but there’s a silver lining: I’ve been so fucking freaked out over the Middle East that, for the first time, I’m genuinely concerned, anxious even, about something other than me and the people closest to me. Anyway, that’s my way of apologizing for the geopolitical posts. I’d like to think they have some relevance to marketing and business, but it’s really just therapy. My knowledge and appreciation for stoicism (the ability to recognize what you can and cannot control) has increased with age, but my ability to practice it has declined.

Next week we’re all business … I promise. OK, back to the post.

Stories & Principles

Humans love stories of principled people who stand up for their beliefs in the face of risk and resistance. “Flip flopper” is an insult; it likely garnered W a second term in the midst of a failed war. We admire — or claim we admire — honesty and forthrightness in other people. But in some instances, bullish consistency is less effective than agility. And the power to make (or prevent) change is a function of circumstance more than conviction. Many of the world’s problems can be traced back to people with alarmingly steadfast convictions and principles. Increasingly, our elected officials use “principled” to wallpaper over “feckless.” Our elected representatives embody the inability to discern between being right and being effective.

Soccer Moms

In next year’s U.S. presidential election, the most important of our lifetime since the last (or next) one, tens of thousands of staffers and volunteers will work up to election day, as their campaigns spend several billion dollars molesting our media and mailboxes. Over 150 million Americans will cast a ballot, and thousands of bureaucrats and lawyers will fight over how to count them.

But hardly any of that will matter, because 44 states have (effectively) already voted — no amount of electioneering in 2024 is going to swing California to the GOP nominee or Texas to the Democrat. And even in the swing states, most voters have already decided. In sum, out of 330 million Americans, a few tens of thousand soccer moms in the Philadelphia and Detroit suburbs will, again, choose the leader of the free world. Maybe that’s a good thing. Maybe.

Democracies Gonna Democracy

Maybe it (i.e., democracy) is working. There are billionaires in California who will have less impact on 2024 than a charismatic substitute teacher in a Wisconsin focus group. If you want to watch the most powerful people in the world plan the future, don’t venture to Davos or the Oval Office, just click here: 2023 Swing Voter Focus Groups.

Ironically, it’s the data analysis that campaigns gleaned from billionaire tech bros that has undercut the influence of big donors. The parties have fine-tuned their platforms and messaging on the issues to a nearly perfect 50/50 split of the electorate, and they’ve invested in voter data that tells them house by house where each persuadable voter is and what might sway them. Pro tip: Buy a media outlet in a swing district; every four years you will register an unnatural surge in revenue that has nothing to do with your product.

Every presidential hopeful clears their calendar for CPAC or a summit hosted by a tech influencer/billionaire, but the real Hajj would be to this yet-to-be-formed PAC, a PAC yielding more power than any political group in U.S. history: A coalition of suburban moms and voters under the age of 25 in swing states, blue-collar workers in the Rust Belt, and Latinos in Arizona bound together under the banner of a “Swing PAC” or “SPAC.” First off, SPAC is a brand ripe for the taking right now, but that’s another post.

If Reid Hoffman, Marc Cuban, Rick Wilson (Lincoln Project), David Axelrod, and Frank Luntz want to build, and sit on, an Iron Couch, they will organize these groups. SPAC would organize an agora in a purple state (e.g., Georgia) for a robust discussion of the issues and commit to voting as a block. If this group of maybe 10,000 people, representing just 100,000 voters, assembled and coordinated, they would have singular control over who leads the free world and his/her legislative agenda. The PAC to end all PACs.

Supreme Swing

It’s not just in presidential elections. Justice Anthony Kennedy spent two decades as arguably the most powerful person in America, sitting between four more liberal and four more conservative colleagues on the Supreme Court. In the last decade of his tenure, Kennedy was in the majority in more than three-quarters of the 5-4 decisions taken by the court, including some of its most important. From the power of the EPA to the limits of the death penalty, one man held sway over our Constitution, not because he was smarter or more principled, but because he was the swing vote.

SwingStop

The poster children of swing-vote investing are the retail investors, inspired by Reddit, who brought down multibillion-dollar hedge funds shorting GameStop stock. They coordinated to buy shares and options, driving up the shares exponentially and severing the tether between a company’s market capitalization and its intrinsic value. This was the ultimate market flex, David bringing down boomer hedge funds, and it spawned an obvious question: Now what? The answer was the ever-present gravitational pull of fundamentals, which forced a crash landing for these stocks. GameStop peaked at $483; today it sits at $12.

Still, the options value on meme stocks has a built-in premium, as there is a new species of great white in the financial market waters: retail investors who coordinate. The swing vote in the markets used to be institutional investors in emerging markets and activists. However, the billionaire who experienced childhood trauma and writes poison-pen letters to management in a futile grasp for his father’s approval has been replaced by a millennial with a mobile device, RobinHood account, and dearth of mating opportunities. I’m especially proud of the previous sentence.

Sheik Swinger

With 37 million people, Saudi Arabia is the 40th most populous country, trailing Ethiopia, Myanmar, and Morocco. The ocean of accessible oil beneath its desert makes it arguably the greatest swing vote in the world. Venezuela has greater reserves, and Iran and Canada are in the same class, but the Saudis’ wealth carries more weight. They understand they sit at the pivot point — able to swing east or west.

The most visible facet of their strategy is the normalization of relations with Iran in the face of proxy wars in Syria and Yemen while edging closer to diplomatic relations with Israel. The Iran connection was facilitated by China, with whom the Saudis are forging closer ties. (China is the largest importer of Saudi oil.) All the while, the Kingdom is still maintaining its tight relationship with the United States.

The measured, steady liberalization of Saudi Arabia, which MBS is undertaking at some risk to his power within the ruling family, is, I believe, a deft foreign policy maneuver. MBS didn’t spend $250 billion to win the 2034 World Cup, but to become the world’s soccer mom. The Kingdom is gaining influence, and the U.S. would be well served to counter China’s rapidly improving ties with Saudi — just as the Kingdom’s best post-Gaza move would be to normalize relations with Israel. That this is even feasible (it was in the works pre-October 7) is a function of MBS’s pivot from Islamism to capitalism. Like him or not, MBS might be one of the best things to happen to the West in a decade.

The Kingdom is not alone. Turkey has emerged as Europe’s swing player in recent years, extracting concessions on its priorities to accept Finland and Sweden into NATO, even as it buys Russian military equipment. Turkey’s stance in the pivot comes naturally; it is the geographic and cultural bridge between Europe and the Middle East. Istanbul also boasts a great Soho House. But I digress.

Home Game

In my home, I’m the swing vote. Just as America decides once every two years that what Latinos in Arizona think is important, the rest of my house periodically turns to me to settle a tie. Mostly though, we live in a hegemony that rivals the Mongol Empire under Genghis Khan (i.e., mom). Admittedly, when it comes to TV shows or restaurants, dad is elevated from influencer to decision-maker. I’m away from and at home enough to get along reasonably well with all parties. Also, when things break down, I mean collapse (screaming, etc.), they turn to me. Though there’s usually a steady stream of eye-rolling and consensus that I’m wrong before I open my mouth. I listen, ask questions, and empathize. I’m the bridge between east (mom) and west (boys) and offer a solution neither party is happy with … but both accept.

They listen to me not because, as in geopolitics, I have power … I don’t. But because I love them, they love me, and they love each other. When things get really bad, I matter. I’m dad, the swing vote.

Life is so rich,

P.S. Predictions 2024 is coming on Dec. 12. Last year, 11,000 people heard me predict that AI would be tech of the year, Meta would be the best performing stock of ’24 and Disney would acquire Roblox. Sign up here, and I’ll see you in December.

 

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Short-Form War

Fifty-one percent of Americans aged 18 to 24 believe the Hamas attacks of October 7 “can be justified by the grievances of the Palestinians.” That’s not how most Americans feel, and the disparity in sentiment is correlated with age.

This is not unique to the Hamas attack. The older you are, the more likely you are to be pro-Israel: In March 2022, 69% of Americans over 65 had a favorable view of Israel, while just 41% of those under 29 did. Worries about increasing antisemitism in the U.S. are similarly correlated: 85% of seniors say it’s growing; 52% of Gen Zers say it’s not.

Young people are resistant to the views of their elders. And that’s a good thing. As kids enter adolescence, they develop a healthy gag reflex triggered by anything associated with their parents. This helps them develop their own opinions and beliefs about the world, and it’s also good for the parents, because by the time kids are 18, they can be such assholes that everyone’s ready for them to leave the house.

But that doesn’t explain students at my employer (NYU) holding up protest signs reading “keep the world clean” with images of the Star of David in trash cans. I’d like to think this is a fringe view, but when 51% of their cohort believe the murder of 1,200 people is justified, something more serious is happening.

Young people’s attitudes about Israel have been hardening for some time: Months before October 7, a majority of Americans under 43 were more sympathetic to the Palestinians than the Israelis. Yet during that time, U.S. policy has remained staunchly pro-Israel, and American media generally favorable toward Israeli interests. That gap is widening into a gulf, between establishment views and those of young people. All of which made me think of … Dresden.

125,000

In 1945 the U.S. and British air forces rained 4,000 tons of high-explosive bombs on the German city of Dresden for 48 hours straight. The attack was militarily advantageous. It impeded German troop movement, destroyed a key city center, inflicted heavy German casualties, and, as the officers of the U.S. Strategic Bombing Survey put it, “left the German people with a solid lesson in the disadvantages of war.” It also destroyed acres of historical and culturally priceless art and architecture and killed 25,000 civilians.

The Allies considered it such a success that a month later the U.S. repeated the tactic at an even greater scale on the other side of the globe, destroying 16 square miles of central Tokyo and killing 100,000 civilians — making March 9, 1945, the deadliest night in human history. Four months after that, Truman ordered the atomic destruction of Hiroshima and Nagasaki. Contemporary assessments and public opinion in the U.S. focused on the military advantage gained from these attacks, and little mention was made of the horrific human toll. It had no measured impact on U.S. support for the war or those prosecuting it.

What would have happened if the people of Dresden had had TikTok? The same TikTok that is serving me dozens of videos from Gaza, epitomized by a couple taking cover with their innocent child from Israeli bombs. Around them only rubble. Heartbreaking. Heartbreaking enough to make you hate those behind the bombs, whatever their flag or justification.

Three Photos

For most of modern history, governments and elites have had outsized influence on the narrative, especially around foreign affairs. Outright, 1984-style control is unnecessary, when words, sounds, and images are only accessible through controlled channels. Corporate ownership of media, access journalism, and bias go a long way in choosing what stories to cover and how to frame them.

The exceptions prove the rule. When contrary evidence breaks into public awareness, the impact can be profound. Just three photos shifted U.S. public opinion against the Vietnam war more than thousands of dead American soldiers or lost battles: the 1968 image of a South Vietnamese General shooting a prisoner in the head, the 1970 picture of Mary Ann Vecchio kneeling over the body of a Kent State classmate, and the 1972 image of a naked girl fleeing napalm. If you are over 50, you likely can recall these images just by closing your eyes. If you are over 70, you don’t need to close your eyes. Regimes that lose control of the narrative lose power soon after. The shift in American opinion about Vietnam brought down LBJ. The Gulag Archipelago fatally undermined the Soviet Union’s historical and moral narrative. Ayatollah Khomeini’s taped sermons brought down the U.S.-backed Shah of Iran.

All governments seek to shape the narrative. Vietnam was called the “living room war” because media, especially television, brought it home in ways that newsreels never did during World War II or the Korean War. The lesson the U.S. military took from the experience was a simple one: It had to regain control of the narrative. It implemented a system of “embedding” journalists within military units, which, of course, meant what the journalists saw and how it was presented to them fell largely under government control. Embedding put the genie back in the bottle for a generation. But social media, especially the short-form video format popularized by TikTok, has shattered the bottle.

The Mobile Screen War

Young Americans spend at least 10% of their waking hours on TikTok, and 76% of 18- to 24-year-old Americans are TikTok users, compared to 7% of Americans 65 and older. That’s time they are not spending watching CNN or reading the Wall Street Journal. And on TikTok, the scale and reach of pro-Palestine content dramatically outweighs pro-Israel content. As of this week, videos tagged #StandWithPalestine have received more than 10 times the views of videos tagged #StandWithIsrael — 324 million vs. 3.4 billion. One TikTok user reported that his stream turned rabidly anti-Israel once he started engaging with such posts, and Jewish creators on the platform are reporting escalating harassment.

Cause / Effect

This is cause and effect. Young Americans (see above) are already drifting away from the attitudes of their parents’ generation (my generation) toward the conflict. Young Americans are more diverse than older Americans, and presumably more sympathetic to non-white groups such as Palestinians. And if mostly what you know about Israel-Palestine is Gaza post-2006 and bulldozed houses in the West Bank, your views are likely going to be different from those of someone whose frame of reference includes the Yom Kippur War and Munich. Young people are more prone to make pro-Palestinian content, more prone to consume it, and the wheel turns.

Accuracy Is Incidental

Access to more viewpoints and more sources of information is a good thing on balance. Despots should not be allowed to disappear their people any more than democracies should be able to firebomb someone else’s, and the unflinching testimony of a livestream can help stop them. But an unbounded information landscape is not an unalloyed good. Because social media does not favor accuracy or balance or diversity. It favors clicks. The more engaging and enraging the content, the more clicks it receives. Is the image I get of Gaza on TikTok more accurate or true than what I see on CNN? In some cases, yes. But on social media, accuracy is incidental. This presents, I believe, two profound risks.

Where We Spend Our Time

Sam Harris said you become where you spend your time. We were discussing Twitter on my podcast — I was addicted to it at the time, and I had noticed I’d become more curt, venal, and reactionary. Also, I was having thoughts in 140 characters (no joke). He pointed out that humans are more influenced by our environments than we’d like to think. If I spend 5% of my waking hours getting angry on Twitter, I become a 5% angrier individual. Same is true if I spend more time with my kids expressing and receiving love. We become where we spend our time. (Side note: I am no longer using Twitter.) (Another side note: still angry and curt.)

Just as my addiction to Twitter made me more like what I consumed there — sputtering angry hot takes — spending time on the TikTok of #standwith___ has a predictable effect. The conflict, generations old and woven into the fabric of global politics, is reduced to suffering, anger, and violence. There is a good side and a bad side. Instinctive tribalism kicks in, and young people walk through Washington Square Park with images of the Star of David in the trash, and a 6-year-old Muslim boy is stabbed by his landlord. Social media algorithms identify our politics and then shepherd us into a hermetically sealed bubble, framing our worldview through a window of rage and extremism.

CCP(roblem)

We know the first risk is real, and it’s playing out — you can see it on your phone and in the street. Our discourse is more coarse, our focus increasingly on what divides us. The second risk is more insidious, visible only in outline. But those outlines are coming into sharp relief. There is a nonzero probability that TikTok is being manipulated and leveraged by the CCP to sow division in America. That probability is high. It’s what we would do and have done. In the Cold War, both the United States and the Soviet Union engaged in a variety of covert actions aimed at fomenting internal strife. Radio Free Europe, a CIA-backed initiative, broadcast pro-democracy messaging into the Eastern Bloc to encourage dissent. During World War II, Nazi Germany dropped leaflets over American troops that highlighted racial injustices in the U.S., hoping to demoralize troops and incite racial tension. Every nation has done, or is doing, this … actively. The U.S. itself continues to pursue such tactics to this day. The U.S. Army’s 4th Psychological Operations Group describes itself as follows:

The CCP has control over the most powerful, yet elegant, weapon in the history of propaganda, and the default position is they (i.e., the CCP) are not using it? I have stated this view before. China cannot beat us kinetically or economically, but it can beat us by tearing us apart from the inside. TikTok, in my view, has the potential effect of several carrier strike forces. A 21st century Trojan Horse that also generates $100 billion in annual revenue. I was at the White House this week for an AI Summit. Government officials are not allowed to be on TikTok for security reasons. This comes at a cost, as I believe they’d be more alarmed at the skew of information.

It’s a common misconception that propaganda is like advertising: a barrage of messaging favoring one side or attacking another. Uncle Sam telling you to buy war bonds or black-and-white movies of Aryan youth saluting the swastika. That’s not how China would use (is using) TikTok. The more elegant strategy is to atomize the enemy (us). Find small differences of opinion and broaden them. Carve off slices of support for a long-time ally, one demographic group at a time. The Nazi propagandist Goebbels wrote that the purpose of propaganda is to generate “volcanic passions, outbreaks of rage, to set masses of people on the march, to organize hatred and despair with ice-cold calculation.”

Xi Jinping has described the Internet as “the main battlefield in the battle for public opinion,” and in 2013 he said, “online public opinion work should be taken as the top priority of propaganda and ideological work. Many people, especially young people, do not read mainstream media and get most of their information from the Internet. We must face up to this fact, increase investment, and seize the initiative on this battlefield of public opinion as soon as possible. [We must] become experts in using new means and methods of modern media.” ByteDance employees have confirmed the CCP has backdoor access to American TikTok user data, which it has used several times. In addition, the CCP has refused to let TikTok’s parent company ByteDance go public for national security reasons. FBI officials have themselves stated TikTok could be used as an “aggressive weapon” against the U.S. and China’s enemies at large. In sum, the CCP’s manipulation of TikTok is hiding in plain sight.

Oppenheimer Moment

The CCP’s Oppenheimer moment was the fusion of TikTok and October 7. Or maybe I’m being paranoid and am out of touch with a generation reacting to an Israel that has veered rightward. Maybe an increasingly non-white population has an easier time recognizing oppression. Or maybe we live in a social media era in which views are ushered to their most extreme on their own without interference from state actors.

Maybe.

Life is so rich,

P.S. This week on Prof G Markets we discussed Meta’s monster quarter and the U.S. deficit. Listen here. (Or watch.)

P.P.S. Section’s AI Mini-MBA is now open to all time zones. In four weeks, you’ll learn how to build an AI strategy for your business and understand the AI landscape. Register here and start in January.

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The Netflix Effect

Despite receiving scant coverage, the biggest business stories last week were Netflix and Meta’s quarterly earnings. The numbers were striking: NFLX profits hit $1.6 billion (up 20% from a year earlier) and the platform added 9 million new subscribers. Meanwhile, the company is raising prices. Over at Meta, revenue increased 24% and costs declined 7%, resulting in a doubling in profits. For this post though, I’ll focus on Netflix, as its management has better hair, and they’re not mendacious fucks.

Rewind

A year ago, Netflix was losing 1 million subscribers per quarter and had shed 75% of its market cap. It was the worst performing stock in the S&P 500. Fast-forward one circumnavigation of the Sun, and Wall Street is “gushing” over its “beautiful” results while the rest of the industry flounders.

However, rebounds are not new for Netflix. Since it delivered DVDs in envelopes, the company has defied the odds. Think about it: a DVD-by-mail company turned internet platform turned Hollywood giant that would eventually join the same power acronym as Apple, Amazon, and Google. We’ve discussed entertainment’s woes at length this year, but Netflix has replaced Disney, Discovery, and Paramount on the content Iron Throne and boasts a market cap equal to all three combined.

Told You So

Five months ago I predicted the writers’ strike would do more to help Netflix than harm it. My thesis: The strike would “force” a universal reduction in spending, while actually increasing the relative value of Netflix to consumers. The streamer was able to cut costs without materially affecting the user experience, as it already had a content library as deep as the Mariana Trench. Also, it helps to not be cable, because unlike news, late-night, and sitcoms, Ozark and Bridgerton aren’t perishable.

In addition to a 20% profit bump, the company is expected to generate $6.5 billion in free cash flow this year. That’s up from $1.6 billion in 2022. Meanwhile, revenue is also up, but only slightly (8%). Which means the multibillion-dollar windfall is a direct consequence of lower costs — that is, not having to spend $20 million per episode on The Witcher. Analysts are even cautioning against too much optimism, as the “resolution of the writers’ strike will bring higher costs” and thus depress profits. Put another way, investors don’t want the strikes to end. Would we be surprised if we found out the folks running the WGA/SAG-Aftra were covert assets working for the streaming giant? NETspionage if you will (couldn’t resist).

Anyway, Netflix’s strength in the face of the work stoppage was both a function of the strikers’ lack of long-term strategy and Netflix’s abundance of it. Over the past two decades the company has employed several simple but important business strategies that have endured. Let’s review them.

Diversify

I asked ProfG.AI to explain the value of diversification. Its answer: “Diversification is the kevlar that protects you from fatal financial injuries. It’s a defensive strategy that limits your downside, even if it limits your upside.” I’d hate to hang with this guy, but he isn’t wrong.

Netflix has invested heavily in diversification, in the form of international content. The company is shifting spending away from Hollywood and increasing investment in local-language productions. In the past two years, spending in Asia has increased to $2 billion and European investment has doubled. More than half of Netflix’s scripted titles are being produced abroad. Compare that to Warner Bros. Discovery (a third) and Paramount (a quarter). The effect has been protection against supply chain interruptions (i.e. content shortages), because while American actors and writers went on strike and TV series orders declined 25%, the foreign production gears kept grinding.

In addition, Netflix has diversified its library with a mix of original and licensed content. One of its more creative moves this year was approaching NBCUniversal to buy the rights to Suits. After debuting on Netflix this summer, the 2011 legal drama (featuring the divorcée who saved a prince from the horrors of Buckingham Palace) performed better than any original Netflix show this year. Scratch that — better than any show, period. Suits was the most streamed show across all platforms for three straight months this year, hitting the record for most-ever weeks at No. 1. This is the Netflix Effect in action: Take a solid series, reheat it, and make it the most consumed content on the planet.

Adapt or Die

The species that survive aren’t the strongest or fastest but the most adaptable. As we’ve discussed before, the most valuable companies in the world all have one thing in common: They build a thick layer of innovation on top of investments made by the premier VC in history, the U.S. government. Apple used Darpa’s GPS to build the iPhone. Facebook built an app on top of a government-funded hosting service called the Internet. And Netflix, like Amazon, leveraged the nation’s largest content distribution platform — the U.S. postal system — to send DVDs by mail.

Mailing DVDs sounds dense now, but it was a great business. The company launched in 1997, went public in 2002, and reached a billion dollars in revenue in 2006 by addressing a pain point: that IED in your kitchen drawer, the VHS of Turner & Hooch you forgot to return. The company’s leadership could have settled and backed away from the massive investment required to pivot to streaming. But CEO Reed Hastings recognized another multibillion-dollar investment in broadband would soon render DVDs obsolete. “Don’t be afraid to change the model,” Hastings said, and in 2007, Netflix introduced streaming to the world.

Streaming was not the company’s only bold pivot. In 2011, despite its reputation as a “platform,” Netflix decided to foray into original content. At the time, it seemed absurd. The company was going up against Universal, Paramount, Warner Bros., Disney, and Sony — Hollywood titans known in the industry as the Big Five. Still, Netflix dove in headfirst, spending $2 billion on content in Year One. One of its first original series, House of Cards, went on to earn 33 Emmy and 8 Golden Globe nominations.

Opportunities vs. Problems

Peter Drucker said invest in your opportunities, not your problems. Few have done this better than Netflix. For a long time, the company’s obstacle was plain to see: It was burning hundreds of millions in cash every year. But Netflix knew brute force was its strength. Specifically, it recognized the market viewed it as a tech company, so it did what other media companies couldn’t: Massively invest, lose money, and grow.

In 2015, Netflix registered negative $840 million in free cash flow. By 2017, that number was negative $2 billion; two years later, negative $3 billion. Fearless spending was its differentiator. Capital as a weapon, if you will — specifically, cheap capital. Original content spending at Netflix grew faster than at any other streaming service, and by 2021 the company was investing $18 billion on content per annum, with free cash flow still in the red. Meanwhile, the legacy media players were beholden to a different investor base that wouldn’t tolerate the losses needed to go toe-to-toe with the streaming platform.

Netflix is now firmly profitable in all aspects of the business. It is the only entertainment company with a profitable DTC streaming business, and the legacy players are playing catch up.

Name Your Price

Netflix’s decision to increase subscription prices this quarter reflects the strength of the platform. It has reached utility status. There are 140 million households across the U.S. and Canada, and 77 million Netflix accounts. Consumers no longer consider the cost benefit of a subscription. The question isn’t if you subscribe to Netflix, but rather, what other platforms you decide to accessorize it with.

The premium plan is now $22.99 per month, up 15%. Meanwhile, the standard ad tier remains $6.99. Netflix has correctly adjusted for the most fundamental economic trend in America, income inequality. It has adopted a means-based pricing strategy that retains low-income users while squeezing more from upper-income households. Plus, research has found that introducing lower-quality products actually increases sales of your higher-margin premium products. I was skeptical of Netflix advertising at first, but it may ultimately drive more users to the premium product.

Threats

I’m tempted to say the only thing that can stand in the way of Netflix is Netflix. But that’s not true — it’s TikTok and YouTube.

We’ve discussed TikTok’s ascent before. The Chinese juggernaut is stealing eyeballs (especially young ones) from the streamers and generating $25 billion in quarterly revenue in the process. BTW, that number is up 34% from last year.

Less discussed, however, is the threat of YouTube. Netflix gave it a casual mention in its shareholder letter, but the implication was so relaxed as to be tense. “Our share of TV screen time in the U.S.,” the letter read, “is greater than any streamer other than YouTube.” This was meant as a not-so-humble brag. It isn’t. YouTube is the most popular TV streaming service, and that doesn’t account for the minutes it gets on laptops and mobile phones. I assume (hope) management recognizes this is a problem.

Bill Maher

I’m going on Bill Maher tonight. It’s my fourth time, and when they introduce the panel a wave of fear always envelops me that this will be one of the times I have a panic attack. (I get them 0.7% of the times I speak.)  It’s important to me, as I respect Bill and his team, and my 93-year-old father only watches two things: Maple Leafs hockey and Bill Maher. He recently called me to announce I was on, as if it was news to me. He’s struggling.

I’m sitting in my room, on the 60th floor of the Wynn hotel, writing this. Every year for the past 35, my three closest friends and I have come to Vegas for my birthday. The trip’s changed: We now spend more time in the spa and less in the casino, but the company remains the same. I look out my window and see Summerlin, where I lived for seven months 20 years ago. My mom, battling cancer for the third and final time, asked to die at home. I moved in with her. She had raised me alone, on a secretary’s salary, and it was the right thing to do. It wasn’t much of a sacrifice for me, as I had no real relationship and no real career, and found the experience rewarding. During the day I’d manage her health care and we’d watch Everybody Loves Raymond and Jeopardy together. At night, I’d venture downtown where I’d party with a friend, a young guy who’d moved from Houston to open a cigar bar, and strippers. One night, I met him at the Rio hotel and he gave me a “healing candle” for my mom, whose breast cancer had metastasized to her stomach and was terminal. A candle. People are strange, and wonderful.

Today’s appearance on Maher will happen, but not really. Whenever anything really great happens to me, I instinctively think to call my mom and bask in our collective victory … we made it. Her response would cement it, make it real. These days, wonderful occurrences sometimes don’t feel as if they’ve happened, as she’s not there. I am 58 and, two decades later, still not over the death of my mother. And that’s OK. I hope my boys feel the same way about me when I’m gone.

Life is so rich,

P.S. Our Prof G Markets podcast is hitting new records. Tune in every Monday for our fresh take on what’s moving the capital markets.

P.P.S. Ex-Netflix VP for Product Gibson Biddle is teaching the Product Strategy Sprint starting Nov. 6. Watch the first lesson on his DHM (delightful, hard-to-copy, margin-enhancing) model for free.

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Listen

Listening is underrated. Unlike vision, hearing works in the dark and around corners. We hear 20 to 100 times faster than we see, and what we hear stays in our heads longer, often evoking strong emotions — just listen to your favorite band from college. However, for many of us, we don’t begin to harness this superpower until the age we begin to lose it. Hearing, like youth, is wasted on the young. We all hear things; there’s no corner of the globe that’s free from the vibrations that manifest in sound. So we must decide what to listen to. But many of us aren’t listening, and that dampens our abilities and undermines our relationships.

“Leadership = Listenership”

That caption is cheesy and off-brand, but it’s late here. As a younger founder/CEO, I believed leadership was getting a quick take on a situation, pondering it for several seconds, and then expectorating a confident opinion. Like a fraternity brother who owns his vomiting, with the bravado of a middleweight holding up the belt awarded for giving another boxer early-onset Parkinson’s. Leadership, for me, was rallying troops into battle. Except I hadn’t thought through the strategy and wasn’t even sure who or where the enemy was.

All that mattered was inspiring action aligned with my (emphasis on “my”) view. Lately I’ve been seeing these TikTok videos (I think the CCP is boosting them to show how stupid we are) where an American family lights a pyrotechnic that becomes an out-of-control hose, spraying fire. As a young leader, I was the firework, directionless and loud, demanding everyone’s attention.

Levi Strauss & Co.

I was 26 when I started my first company, a strategy firm called Prophet. Our first big client was Levi Strauss & Co. I attended several board meetings, and what struck me, other than how opulent big company board meetings are, was the CEO and chairman mainly asked questions and listened. They weren’t there to advocate or cajole … just to listen.

Around that time, I joined the Young Entrepreneurs Organization, where I was assigned a mentor. Mine was Bob Swanson, the founder and CEO of Genentech. He shadowed me for a day, not saying a word, just observing. At the end of the day, I prepared for a mix of professional therapy and a validation of my general awesomeness. He said, “You need to listen more,” and nothing else.

Loyalty

Good leaders are known for producing great results. And greatness is in the agency of others. A leader’s opportunity to take the field with the all-star team is a function of retention — the loyalty of the most talented players, who have more opportunities to go somewhere else. Their loyalty is a function of the leader’s appreciation, economic and psychic. Great leaders listen, then tangibly demonstrate they understand someone’s unique needs. Some people want to manage others, some would like to work abroad, have more balance, or see their name in lights (be quoted in industry media), etc.

In Peter Drucker’s classic article on executive leadership, he lists eight critical practices, and the first two are questions to ask. His concluding advice: Listen first, speak last. Madeleine Albright put it this way: “You can lead, but you must listen.” A host of research studies back them up. Good listeners make better leaders.

Where Listening Goes to Die

Add this to the list of ways social media is ruining society: It’s skewing our perception of the relative value of listening vs. speaking. Social media is a contact sport in which “takes” are the game ball. It’s taught us (incorrectly) that all our opinions matter. Worse, that everyone needs to hear and comment on them. (Pro tip: Words are wind.) Do I really need to express my outrage, and do you really need to hear it?

Most humans suffer from a lack of impulse control, ignorance, and ignorance of our (wait for it) ignorance — and social media amplifies these flaws. Going public on an important/sensitive topic you have no domain expertise in is a transfer of value, a trade of reputation and unnecessary risk for ear-cleaner adverts. Justin Bieber’s Instagram post “Praying for Israel” lost some of its force when people noticed the background image of a destroyed city was a photograph of Gaza. Social media has not only elevated virtue signaling to pseudo-importance, it has weaponized it. People are losing their jobs because they feel compelled to make “statements.”

The online obsession with “statements” in the aftermath of terrible events is the daily experience of social writ large. Twitter’s basic structure is about speaking, not listening — the platform’s formal innovation was that it made replies first-class citizens, equal to posts. Social gave everyone a voice, but it blocked our ear canals. The more complex or painful or shocking an event, the more it behooves us to “listen first, speak last.” But we don’t. There’s likes to be had, and if you’re a semifamous DJ, your fans need to know what you think about Gaza.

Posting your view on an issue not only reveals your position, but also cements it. You can inadvertently back yourself into a corner. I see this all the time — someone takes a position without thinking, just as part of the flow of the conversation; it’s challenged; they defend it; and within minutes, that passing opinion becomes a central tenet of their being. This is part of our larger bias toward consistency, our need to see our words and actions as coherent. Speaking hinders subsequent listening. Social media makes this worse, encouraging us to record our every passing thought, and then binding us to it, lest the Guardians of Gotcha come for us with “receipts.”

Speaking on a hair trigger also makes us more prone to misinformation. If you listen for support of your views rather than illumination or evolution, you’re less discerning of sources and claims. Just as you can’t breathe and eat at the same time, you can’t listen when you’re speaking.

To be clear, everyone has the right to speak. But before you decide to share your views on a charged topic with the 5 billion people on social media, ask yourself three questions: Do I have something to offer? Do I have a personal or professional connection? Is it worth the risk? If the answer to any of these is no, perhaps take a beat before speaking.

First Wives Club and Parent Hack

I was married to a wonderful woman — smart, nice, fun to be around … generally impressive. She was also in touch with her feelings, which I was not. She would regularly express something she was upset about. My response was to manage and deflect. It didn’t matter what she felt or even how I felt, her comments were incoming missiles, to be shot down or diverted. This resulted in a relationship that was harmonious but increasingly distant. She wasn’t in a relationship with me, but someone managing the relationship. The truth built up, and up, and then burst.

Listening alone makes feedback more effective and engenders loyalty. If I want to give my sons advice, what to tell them is the easy part — they’re such dopes. There are only so many problems, and young people have more in common than they realize. It’s getting them to listen that’s the trick. The parent hack is to ask questions before we start preaching. As my dad says, communication is with the listener, and if you don’t soften up their defenses with active listening, you’ll never get to the beach.

(Super) Power

Listening is a gift. When people are in pain, in doubt, or struggling in any way, they may legitimately need to express themselves. For every celebrity village idiot who feels the need to express their ill-formed opinions on social media, thousands of people with an actual stake in events use platforms as an outlet for grief and rage. (But then the platforms feast off this pain and convert it into fodder for someone’s else’s take. And the wheel spins.)

The urge to express oneself when facing a dilemma or in pain is real. I communicate for a living, so I have to resist the need to take the floor and begin speaking in every situation. Something that helps is that, as I age, I’m becoming more introverted, which (oddly) has strengthened my relationships. Today I’m more prone to listen than to perform.

The delta between hearing and listening is attention, being present. This is difficult in the age of devices, but respect is what makes the other party feel heard. Sam Bankman-Fried would play video games on Zoom calls, and our idolatry of innovators mistook this bug for a feature, a sign of his genius. No, he’s not “thinking different.” He’s just an asshole.

Time & Care

When people seek advice, it often isn’t advice they want, but someone to listen. A good listener — someone who is present, who asks probing questions, who doesn’t use the person’s pain as a starting gun for them to speak — is a balm for anxiety. That’s why a good listener makes a useful partner in problem-solving. Some of the best mentorship moments I’ve experienced, on both sides, have been when the mentor doesn’t offer advice, but expresses affection by focusing solely on you and what you are saying.

The best advice you can give is to listen, which is to tell that person that they matter. The most effective treatment for anybody’s grief or anxiety is time and care. The former takes care of itself, and the latter can be achieved when we tell someone we love them, without words. By listening.

Life is so rich,

P.S. The Prof G Pod is now on YouTube — check out our channel here.

P.P.S. Yoshua Bengio is the godfather of artificial intelligence. I’ll be listening to his concerns about the ethics of AI (and, sure, contributing a few thoughts of my own) on Nov. 21. Sign up here — seats are limited.

The post Listen appeared first on No Mercy / No Malice.

Seconds

We receive dozens of thoughtful emails each week from people (mostly young men) asking for advice. They all deserve a response, but the time/space continuum gets in the way. So we’ve set out to leverage AI to develop a digital twin capable of answering questions in my voice. ProfG.ai is an experiment we hope will provide insight into AI and (someday) help people make better decisions re their offline lives. Or not. For more about how and why we made it, check out our podcast announcement here.

—

Disrupted

Disruptive innovation is often felt more in second-order effects, clear of the original idea’s blast zone. The automobile was transformative, not because of the cars but the suburban lifestyle they inspired. Global power was increasingly shaped by the flow of energy. And the manufacturing innovation required to wrap steel around four wheels and an engine at scale became central to the West’s economy.

Today the media (including this newsletter) is obsessed with the changes wrought by artificial intelligence. In my view, it’s an obsession caused by the collision of techno-narcissism and the idolatry of innovators. Our new gods, tech innovators, posit that they are the fathers of the singular point of leverage that will save or destroy humanity. “Now that my options have vested, I want to profess that I am such a fucking genius, I’m now worried about my brilliance being unleashed. I’m so awesome as to be dangerous, accidentally of course.”

Jesus Christ, get over yourself.

I believe there is another innovation that will also be transformative as its full impact and second-order effects play out. What GPT is to the media, GLP-1 will be to the real economy.

GLP-1 > GPT 4

GLP-1 is an agonist, a hormone our bodies use for internal communication. Among other things, it triggers the pancreas to produce insulin, which brought it to the attention of diabetes researchers, who developed a synthetic form of GLP-1 called semaglutide. In 2017, Novo Nordisk brought semaglutide to market in the U.S., under the brand name Ozempic.

Note: My use of the word “agonist” in the previous paragraph was an attempt to appear more intellectually svelte. My use of the word “svelte” in the previous sentence is an attempt to sound prim. Using “prim,” more British. Trying, always trying … desperate for other people’s affirmation. But I digress.

The scientists who developed semaglutide faced a problem when conducting their research — if the dose was too high, patients taking the drug lost their appetite. Ozempic was formulated at a low enough dose to reduce this side effect. However, Novo Nordisk realized this was a feature, not a bug, and formulated a higher-dose class specifically for weight loss, Wegovy, approved in 2021.

Semaglutide will be followed by similar GLP-1 drugs, including retatrutide and tirzepatide, both in trials from Eli Lilly. Studies with overweight patients show weight loss of 15% to 24% of body weight. Both Wegovy and Ozempic are weekly injectables, which discourages some people, but now there’s a pill version, Rybelsus. Whatever the label on the box, GLP-1 drugs make us feel fuller for longer and suppress hunger cravings. In sum: the most effective weight loss drugs to-date.

Hungry Market

The market for this product, and the potential for meaningful societal change, are massive. In America, 70% of people are obese or overweight. There isn’t anything that over two-thirds of America is. (Only 30% of Americans watched the last season premiere of Game of Thrones.) More than 42% of U.S. adults are obese, up from 31% in 1991. Globally, the prevalence of obesity has tripled since 1975, and 800 million people, including 50 million children, are now obese. People with limited access to healthy food or bad genetic luck with their body chemistry are preyed upon by one of the most well-oiled marketing and distribution engines ever built: the industrial food complex. They’d like to teach the world to sing, in perfect harmony with addiction and diabetes.

Obesity is not a form of personal expression or finding one’s “truth,” it’s a disease that invites illness and disability, including coronary heart disease, stroke, cancer, gallbladder disease, and Type 2 diabetes. Globally, obesity is the fifth-largest cause of premature death. Our health-care system suffers from many problems, and the chaser to many/most of them is obesity. According to The Milken Institute the direct and indirect costs of obesity total $1.7 trillion, or 7% of U.S. GDP. A 15% reduction in body weight would move 43 million Americans out of the obese column.

In the fourth quarter of 2022, 9 million prescriptions for GLP-1 drugs were written in the U.S. Over the past two years the share of health-care patients in the U.S. using semaglutide has tripled to 1.7%. That number will grow, as an estimated 93 million Americans could benefit from the drug. I believe even that understates the economic opportunity for Novo Nordisk (and, eventually, other GLP-1 drugmakers), as the numbers understate the demand. In the past 24 hours I have spoken to three people, whom I wouldn’t describe as being overweight, much less obese, who are on Ozempic to lose that last stubborn 15 pounds.

What happens when millions of people start taking a drug with a limited track record? The FDA (and foreign) approval processes are robust. The average FDA approval involves six different studies in four phases over 10 to 15 years. But they’re not perfect. Long-term and widespread use of a compound can surface side effects invisible in trials. The FDA approved a diabetes drug with a different mechanism, rosiglitazone (branded as Vandia), in 1999, but it has subsequently been associated with an increased risk of heart failure, and many countries have pulled it from the market. GLP-1 drugs are already associated with severe stomach issues in a small number of patients, and they may cause some people to lose lean muscle.

Obesity Economy

The obesity economy is the iceberg below the surface of our $23 trillion consumer economy, and GLP-1 is the latest taste to inspire salivation across Wall Street’s greed glands: Traders have been shorting restaurant stocks, putting nearly $1 billion on the Do Not Pass line in just the last month. One analyst told CNBC that the revenue hit to the restaurant business could be $25 billion by 2025.

The evidence? Morgan Stanley surveyed 300 Ozempic users, and 77% of them said they visit fast-food restaurants less often now that they’re on the drug. Walmart is already seeing a decline in food purchases among people taking GLP-1 medications. These effects likely aren’t yet visible in firms’ EPS as these drugs are limited in supply and a fraction of overweight people are taking them … so far. However, the stock market is a mechanism for trying to see around the corner, and the decline in share values across the obesity industrial complex will front-run the impact.

Fast food gets hit first, but fast casual is also under threat. Look for snack foods, frozen meals, candy, soda, and baked goods to all take a hit. Among GLP-1 users, 58% report they ate four or more snacks per day before taking the drug, and 90% say snacking decreased while they were on it. In any category, profits are driven by a minority of customers. And these products’ best customers are becoming Novo Nordisk’s newest.

Food sales are an obvious target, but the effects of lower obesity rates will inspire other aftershocks, some greater in magnitude than that felt at the food epicenter. One interesting knock-on effect: it’s estimated that United Airlines would save $80 million a year in fuel costs if its customers lost an average of 10 pounds. Sports and fitness will be restructured: Gyms, built on a consumer base trying to lose weight, will see lower revenue, whereas sports for which fitness is a prerequisite (skiing, mountain biking, climbing) stand to benefit.

Apparel likely sees a short-term bump, as people splurge on clothes to fit their remodeled bodies, but the longer-term outlook is harder to predict: Less yo-yo dieting means some people won’t need separate wardrobes to accommodate different selves, but formerly overweight people spending less money on food might allocate that cash to clothing. Where else could that extra food budget go? Discretionary spending increases will spread through every non-caloric category. Could this help reverse trends around loneliness and declining birth-rates as people feel better about themselves and are increasingly ready to mingle?

Craving Economy

If that’s all these drugs did, they’d still be a first-ballot hall of fame medical breakthrough. But this may be just the beginning. The Washington Post reports: “For some, these new weight loss drugs also seem to dampen the rewards of addictive substances, whether that’s nicotine, opioids or alcohol.” Let that sink in. It’s possible GLP-1 drugs are not weight loss drugs, but anti-craving drugs.

In lab tests, mice on an earlier form of synthetic GLP-1 receive a lower dopamine hit from alcohol. Rats are less interested in cocaine. Monkeys with a demonstrated preference for booze drank less. Anecdotal evidence from human users includes reports of reduced nail biting, shopping, and smoking.

If you scroll back through previous issues of this newsletter, you’ll find a recurring theme: societal ills resulting from cravings. From meme stocks and Robinhood to TikTok addiction and Twitter enragement, to obesity itself, human weakness subjugated to our brain’s reward circuitry is no less a threat to our well-being than climate change, authoritarianism, or cancer. According to Harvard’s Grant Study on happiness, the factor most commonly present in the least-happy cohort was alcohol. It’s that fundamental.

A drug that rewires these reward circuits could be an epochal step in human evolution. And why not? We’ve compensated for evolution in many other ways, from the protection of clothing to the assistance of eyeglasses to the power of wheeled transport. Perhaps we’ve reached the point where a salt/fat/dopa drive, evolved on the savannah of scarcity, can give way to a motivational superstructure suited for our era of superabundance. GLP-1 innovation may be scaffolding for instincts in need of updating.

Portion Sizes

Large health-care insurance companies and providers, starting with the U.S. Government, should make delivering GLP-1 drugs a priority (instead of pulling back, as the short-sighted insurance industry has done). Globally, the WHO and national health organizations could do the same. You can get Ozempic over the counter in five Emirates in the Gulf. And Americans are venturing to Mexico and Canada where cost is (spoiler alert) a fraction of what it is in the U.S. Government funding will test the fulcrum between the obesity industrial complex (food, pharmaceutical, and hospital networks) and long-term economic thinking, because these drugs will register an enormous ROI for society as health-care costs decline and mental health improves. Depression rates among obese children are double those of average-weight kids and can haunt them in adulthood. A 5% reduction in weight can cut an obese person’s medical costs by $2,000 per year, and it’s estimated that a full transition from obese to a healthy weight saves nearly $30,000 in direct medical costs and productivity.

Fun fact: My digital twin (ProfG.AI) believes “obesity drugs, while important for public health, are more of a niche solution.” It’s obvious he disagrees with me as he’s jealous I got to go to Chiltern Firehouse (in person) last night. Anyway, the potential to calibrate the drug for specific addictions is mind-blowing. One can envision similar hormone-mimicking drugs that could be engineered to address addictions to money, affirmation from strangers, short-form videos of chiropractic care, WWII documentaries, Zacapa, edibles, smoked meats, or reading random theories about the universe. Because here’s the thing — I’m slim, but obese.

Life is so rich,

P.S. This week on the ProfGPod I spoke with CNN host and Washington Post columnist Fareed Zakaria on the conflict in Israel — listen here.

P.P.S. Not getting the results you want from ChatGPT? Download Section’s guide to setting up your AI workspace, or enroll in AI Prompt Writing for $250.

The post Seconds appeared first on No Mercy / No Malice.

Private

A source of capital has morphed to a source of entertainment. A reality show, minus hot people and Andy Cohen. The charismatic carnival barkers on CNBC serve up a steady diet of SPACs, social media, and space, and would have you believe that’s the center of the economic universe. It’s not. Of the 310 SPACs launched in the past three years, 10 have registered positive returns. It’s a head fake, as the deeper story goes ignored. The traditional IPO construct is in structural decline, and that’s a symptom of a fundamental shift in the capital markets.

4 IPOs and a Funeral

Blue Apron, the home-meal-kit delivery company, sold itself to Wonder Group for $103 million. Which feels like a victory for a business that delivers cardboard boxes of chicken and kale to millennials until you realize this was its last stop on a tour that included an IPO at a valuation of $2 billion. (BTW, I predicted this six years ago.)

Similarly, Instacart, which delivers chicken and kale to millennials in green plastic bags (innovation), went public this month at $10 billion … following a 2021 private-round valuation of $39 billion. Since then the company has lost value almost every day, bumping against $7 billion as I write this. Consumer “tech” firms Rent the Runway and Allbirds are each down 96% from their IPOs. Warby Parker has outperformed, losing only three-quarters of its value.

This follows the June IPO of Cava (it asks millennials to leave the house for chicken and kale), which raised $700 million in private funding, went public, popped to $4.7 billion, and then deflated to $3.5 billion. Oddity, a firm I invested in, priced at a $2 billion valuation, ran to $2.7 billion, and closed yesterday at $1.5 billion. Better Mortgage reached a private valuation of $6 billion in the private markets before its SPAC, and now trades at a valuation of $123 million. I’m not immune. I invested in Better at a valuation of $600 million and haven’t sold a share because my SPAC is “different.”

And these IPOs are, relatively speaking, wins. But wait — isn’t the market up? Yes, but like college rankings, the indices are a weapon of mass distraction: 70% of the gains have come from just seven stocks. BTW, OpenAI is raising funds at a $90 billion valuation — a threefold increase from earlier this year. It has real revenue and explosive growth. When will it go public? A: When existing shareholders believe there is no additional upside.

WTF Happened?

Simple, really. When capital piles in returns go down, and private market investors want to capture the upside previously leaked to public investors. Charismatic promoters weaponized CNBC and social media, more hungry for entertainment than news, FOMO infected the masses, and MBS pivoted from terrorism to capitalism creating a torrent of capital to be deployed.

VC firms, who posted remarkable returns the first two decades of the millennium, needed a home with a backyard big enough to absorb billions in fresh capital. Tens of billions piled into pre-IPO growth firms. Never underestimate the market’s ability to create a product when consumers have cash in hand.

The Shift

Does this mean there’s something rotten at the heart of the capital markets? Yes, but not what it seems. The problem isn’t that IPOs have become a pump and dump scheme (often they are). The problem is that they don’t matter. The center of gravity is shifting from public to private capital. The change has been incremental, so it doesn’t get much media attention. But market trends are similar to kids: If you aren’t with them every day the changes feel implausible when you finally see them. In this case, however, Grandma would remark, “I can’t believe how much you’ve shrunk!” If the shift continues, expect an ever-greater concentration of capital and power in fewer hands, and depressed economic returns available to the “P” in IPO.

Structural Decline of the IPO

When I was a 22-year-old analyst at Morgan Stanley in the 1980s, good companies went public when they wanted to raise capital and provide liquidity to investors and employees, in that order. In 2002 I participated in the Nasdaq bell-ringing ceremony for Red Envelope, a firm I’d founded five years earlier. The feeling was, to that point, singular — I’d made it. I was at the helm of the bobsled of capitalism and would be financially secure the rest of my life. Dudes would want to be my friend, and women would want to sleep with me. Such an awesome bell. Spoiler alert: none of that happened. Maybe some new friends.

It’s been gradual, but that bell no longer rings true. The product it introduces brightens up a room by leaving it, as returns are concentrated among a few outsized winners. Companies are waiting longer to go public and issuing fewer shares with no real voting power. And many, perhaps most, of them offer little upside to their new owners.

In 1980, 9 out of 10 tech IPOs were profitable. In 2021, it was 1 in 5. Among all venture-backed companies, in 1980, 78% were profitable; in 2021, 10%. Among the 13 VC-backed companies that went public in 2022, not one was profitable.

Deepest Pockets

The rise of the unprofitable IPO isn’t a matter of companies going public earlier in their growth cycle. On the contrary, many of them are massive and raise huge amounts of capital before they go public. Just 10 years ago, when venture capitalist Aileen Lee coined the term “unicorn” to refer to a private company with a valuation over $1 billion, she was able to identify just 39 of them. Today there are 1,221.

Growth, tax avoidance, bailouts, debt-fueled spending orgies, and the weaponization of governments that pass laws to privatize gains and socialize losses have formed chunks of private wealth the size of Ayers Rock. Public capital was once the hypermatter for the jump to lightspeed, but no more. Sovereign wealth funds including ADIA and PIF, mega venture funds Softbank, Sequoia, and Andreessen Horowitz, wealthy individuals, and corporations now deploy billions where their predecessors could only write checks for millions. They have no choice but to make investments in $100 million+ chunks as you can’t put $10 billion to work $10 million at a time.

In 2007, Microsoft’s $240 million investment in Facebook at a $15 billion valuation was deemed “astronomical.” Google raised just $26 million before it went public; Netflix, $102 million. Tesla, in a capital-intensive business, raised less than $200 million in equity and another $500 million in debt before its IPO. Fast-forward to today: Six distinct VC investments of $100 million+ closed last week. Elon’s other company, SpaceX, has raised $9.4 billion across several rounds … and remains private.

Private Capture

With great wealth comes great opportunity. Historically, a company could be expected to grow long past its IPO, and the resulting share gains were available to anyone with a Schwab account and the foresight to buy in early. Google provided investors a 30% annual return for the first decade post-IPO, Facebook, 19%. If you invested $1,000 in Apple at its IPO in 1980, it would be worth $1.75 million today.

But if you don’t need the public markets for capital, why give up those gains to the unwashed masses? You don’t,unless it’s the latter stage of a pump and dump. Uber raised $10 billion in private capital, most of it from Softbank and the Kingdom, before going public in 2019 at a valuation of $82.4 billion. Four years later, public shareholders have earned a 3.5% annual return. Blue Apron raised $135 million privately before its IPO — more than Netflix and Google combined.

Companies going public today aren’t necessarily bad businesses. Airbnb is a great company, one of my largest holdings, but it’s been a far better investment for its private backers than people in the public markets — three years after its IPO, it trades below its first trade, when public-market investors could purchase stock. Private investors who don’t need the public markets to fuel growth anymore are holding on to companies longer, squeezing all the juice before tossing husks to the masses.

Table Scraps

So why go public at all? Like winemakers getting one last press from flattened grapes for their bargain label, private capital providers have one more trick up their sleeve, and it’s part of the story of the decline of the IPO.

“Initial Public Offering” is a misnomer, because rarely are shares sold initially to the public. Instead, bankers sell them to a group of buyers made up of the bank’s favored institutional customers. The first day “pop” is the difference between what those buyers pay the company (the “offering price”) for their shares, and what they can sell the shares for on the first day of trading. Access to IPO shares at the offering price is a reward to the institutional clients of investment banks who generate fees elsewhere (i.e., not you). To reward their clients and set a positive tone for the stock, the banks want a first-day pop. This isn’t new, and there’s long been tension between these banks and the companies, who see the pop as money left on the table. What’s changed is the machinations used to generate the pop and how swiftly it dissipates.

One secret is tiny floats. In 1980 the median float at IPO — that is, the percentage of the company offered to the public — was 29% of the total shares. In 2022 that number was 15%, the lowest in four decades. In an efficient market, float shouldn’t affect price, but if you can turn the hype machine up high enough and squeeze supply, you have the Lost Ark of marketing: artificial scarcity. Instacart offered only 8% of its total shares to the public when it IPO’d a few weeks ago. The story led the financial press for the day, and the stock gained 12% on its first day of trading. Airbnb offered just 7.5% of its shares to the public, and the stock more than doubled at the opening bell.

Decarceration

Historically, a short-term pop was less valuable, because insiders were subject to lockups, typically for 180 days, before they could sell their shares. However, that too is changing. In 2021, 25% of IPOs featured shorter lockup agreements that allowed insiders to sell before the 180 days were up — that share was the highest on record. Of that group, two-thirds were tech companies (shocker). Direct listings (which skip the banker-institution pipeline) are promoted as a more democratic alternative to IPOs with “open and equal access for all” and are increasing in popularity. To be clear, a direct listing has less to do with access, and more to do with dumping as there are no lockup requirements.

The other benefit of a small float is it allows insiders to retain more control. That goes hand in hand with the increase in dual-class share structures. These provisions grant insiders special shares that have 10 times the voting power. Founders love this because it allows them to decouple risk from control. In 2021, 24% of IPOs had dual-class share structures, up from 2% in 1980. Among tech companies, that number was 46%. Robinhood’s mission is to “democratize investing” — unless you invest in Robinhood, where the founders own 16% of the company but control 66% of the voting shares. The founders haven’t democratized investing, they’ve autocratized it.

Private Liquidity

The second motivation for an IPO is creating liquidity for early investors and employees. But public ownership is no longer the only way to create liquidity. Investors are increasingly able to unload some of their stock in the private markets. OpenAI is in talks to sell existing shares at a healthy valuation. eToro recently sold $120 million. And in the first half of last year, while the IPO market was frozen over, private equity firms sold $57 billion in secondary shares — a record high.

In the VIP

With no need for public-market financing, and more options for finding liquidity, private investors will continue to fund a company until the firm arrives at one of two stations: The company is strong but mature and the returns from its growth phase are fully harvested, or its model is suspect and existing shareholders need to deploy a series of false signals to greater fools so they can fling feces at tourists to the unicorn zoo.

And while private capital investors (aka the very rich) reap the gains, public investors (aka everyone else) have scant access to the markets where real wealth is created. As capital concentrates, so does power. The “shareholder class” has always been elite. But, at one time, it reached down to the merely affluent and then, through pension and retirement funds, to the masses — diffusing influence, and strengthening democracy. Public ownership’s transparency requirements are preventive against collusion, graft, and a steady march toward a dynastic society.

Instead we have bailouts of the rich, tech firms who capture trillions building a thick layer of innovation on top of public investments while decreasing R&D and paying less taxes, and an idolatry of innovators who, despite being absent fathers or just shitty investors, continue to capture our affection and capital.

What to Do?

Disavow yourself of the notion that you, or anybody else, knows how to pick stocks. Invest in low-cost ETF and index funds. Also, just because someone has chunky glasses, is on CNBC a lot, or made a lucky investment in the Amazon of China, does not mean they know what they’re doing. In fact, they may be lousy fiduciaries for your capital. Actually, that’s not accurate. They have been horrible fiduciaries for other people’s capital. Warren Buffett says the markets are a vehicle for transferring wealth from the impatient to the patient. The IPO markets are increasingly a(nother) mechanism for transferring wealth from young to old, poor to rich, and public to private.

Life is so rich,

P.S. This week on the Prof G Pod I spoke with Senator Chris Murphy. We discussed loneliness, social media, and capital vs. labor — listen here.

P.P.S. Last chance to sign up for Section’s AI for Business Mini-MBA. I’ll be kicking things off with a live lecture on Oct. 18.

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Think Bigger

Last week, after five months of striking, the Writers Guild (WGA) and the Alliance of Motion Picture and Television Producers (AMPTP) reached a tentative agreement. “We can say, with great pride,” the WGA wrote, “that this deal is exceptional — with meaningful gains and protections for writers in every sector of the membership.” 

Five months ago I compared the writers to the British coal miners of the ’80s, predicting they’d exit these negotiations severely impaired. I received a lot of “feedback” (“I hope you die,” etc.). Good stuff. So here we are. Headlines universally lauding the “historic deal” and “victory of human over AI.”

Unexceptional

The WGA is claiming victory as it has no choice. (Imagine declaring defeat after subjecting your constituents to five months of no pay.) So let’s put the ketamine down and acknowledge this is no victory.

The key issue in this debate was money. Specifically, the writers wanted more of it. Adjusted for inflation, the average writer-producer salary has declined 23% in the past decade. Last year, when prices rose as much as 8%, TV writers received a nominal pay increase of 2.25%.

So the WGA made a reasonable demand: a 6% pay bump. But last year, prices rose (I repeat) 8%. In other words, the WGA arrived at the negotiating table demanding a decline in purchasing power. And then … didn’t get what they asked for — they settled for 5%. Meanwhile the striking UAW have rejected an offer of a 20% increase, and asked for 40%.

To be fair, the deal includes pay escalations of 4% and 3.5% in years two and three, respectively. However, to keep up with inflation over the past three years (since the last contract was struck), the writers would have needed a 10% increase in year one. The new deal also includes an increased contribution to health and pension benefits of 1% and overseas royalty payments that, from my vantage, are purposefully opaque and wordy enough to give members enough psilocybin to hallucinate that there’s a there there.

The already ugly math gets hideous when you factor in the five months in which the writers, as a function of the strike, registered a 100% reduction in pay. For a three-year union contract to compensate for those losses, you would need to increase writer pay (again) by 14%. That’s in addition to the inflation losses. So the minimum increase the writers need to not lose purchasing power is 24%.

My favorite jazz hands in the agreement is writers get a 50% royalty bump if their show is viewed by 20% of the platform’s subscribers. Yes, and I’m giving my employees a 50% bonus every time the Jets win the Super Bowl. Sure, it’s happened … just not that often. The series finale of Succession registered three million viewers, i.e., 6% of HBO’s 50 million subscribers.

The Good Stuff

The WGA did secure a couple meaningful gains. As in two. First, there is now a minimum staffing requirement for writers rooms, which translates to more employment opportunities for young writers. Second, they’ve raised the minimum number of weeks studios must employ writers for shows. In other words, work lasts longer. These concessions are meaningful and reflect well on the guild’s commitment to investing in the craft and nurturing talent.

Follow the Mouse

This whole process, however, was a distraction from what the writers, actors, and all workers in the creative community should be focused on. Henry Kissinger once said of my industry: “The reason that university politics is so vicious is because stakes are so small.” The same holds true in media.

Last week I spoke with a group of Hollywood executives and writers. (I’m trying TV for the sixth time.) They were concerned about the strikes — but more concerned that their stalwart, the House of the Mouse, has transformed into a distressed asset practically overnight. Disney stock is at a nine-year low. Subscriber losses continue to mount, with a 7.4% decline in Disney+ subscriptions in the most recent quarter. Operating profits from the cable assets have been halved, and the company’s operating margins are down 75%.

It’s not just Disney. Revenues are falling at Warner Bros. Discovery, Comcast, and Paramount. Last month, cable and broadcast fell below 50% of total TV viewing for the first time in history. Meanwhile, the industry is becoming increasingly reliant on a ventilator of recycled content. All 10 of the highest-grossing movies from last year were repurposed from existing IP. Pixar’s biggest movie was Lightyear (the sixth installment of the Toy Story franchise), and the hot news in TV this week is Greg Daniels has a new show called The Office. I.e., a reboot of the reboot.

The writers can keep fighting for a larger slice of the pie, but the pie gets smaller every day. The WGA will have 15 milliseconds of fame before it starts digging through the rubble searching for remnants of its industry. The question they should ask themselves: What would a “meaningful gain” actually look like, and how do we achieve this? Is it really a 6% pay bump? More transparent residuals? A staffing minimum for writers rooms, striking against impaired companies? To achieve a truly exceptional outcome, the writers, the studios, the executives — everyone in Hollywood must do one thing: Think bigger.

Falsely Convicted

Fixing the problem means first identifying it. The adversary isn’t a Hollywood executive in a cashmere sweater; it’s a 17-year-old kid in a basement scrolling TikTok. The rise of social media is directly correlated with the decline of traditional media. TikTok now commands 95 minutes of user attention per day, equivalent to four and a half episodes of The Office. More than 200 billion Facebook and Instagram Reels are played every day — up 50% in less than one year. YouTube, a subsidiary app owned by Google, now rakes in as much revenue as Netflix.

The ad dollars Hannah Montana used to generate have not been shoplifted by Bob Iger, but  Silicon Valley and Beijing. When queried whether they’d prefer TikTok vs. all streaming media, two-thirds of people under the age of 25 choose TikTok. There are between 300 million and 400 million creators on TikTok — their compensation is approximately $40 for every million views. None have ever threatened a strike. The result? A: The company’s valuation is roughly equal to Disney and Netflix combined.

It’s also no coincidence that the year of the writers’ strike is also the year of AI. AI was a core issue in the dispute. The writers (rightly) fear it could replace them and demanded the studios not use AI — which the studios (also rightly) declined. Instead, they met halfway: The studios can use AI, but the original writers must receive credit and compensation. This reflects a misunderstanding of AI. It’s not AI who will take your job, but a writer who leverages it.

Pennies vs. Benjamins

The industry is quarreling over pennies, instead of pursuing Benjamins. More market value in the Nasdaq was created in the first half of this year than in any six-month period in history. The catalyst was AI. The day Microsoft announced it was incorporating AI into its Office suite, it added the value of Disney. The day Morgan Stanley praised Tesla’s Dojo supercomputer, Tesla added the value of BMW. Meta’s new AI-powered recommendation algorithm drove a 24% increase in Instagram use this year. AI has inspired a tsunami of shareholder value: In 2023 alone, Google, Meta, Nvidia, Microsoft, Apple, and Amazon have registered a combined increase of $3.2 trillion.

Compare that to traditional media: The combined market cap of Comcast, Netflix, Disney, Warner Bros., Paramount, Fox Corp., and News Corp. is less than $600 billion. Think about that. The value gained by six tech firms this year is nearly six times greater than the current value of the seven largest mass-media companies put together. Hollywood needs to put down the slingshot, and go big-game hunting.

The Rapture, Pt. 2

As I’ve written before, the fastest way to build wealth is to monetize infrastructure others built for free. Amazon built a thick layer of innovation on top of a free enterprise plug-in called the U.S. postal system. Tesla leveraged green government tax credits to build an EV empire. Google struck the rare earth mineral that is user-generated data, mined it relentlessly at zero extraction cost, and placed banner ads on top of it.

AI is the resurrection of this business model, and the fuel is original content. Yesterday I discovered two of my books, The Algebra of Happiness and The Four, have been used (without my approval) to feed generative AI. I have not been credited or paid. I’m not alone. Last week, writers John Grisham, Jodi Picoult, and George R.R. Martin sued OpenAI for stealing their IP to train its algorithm. Before that, a group of artists sued Stability AI for using their content to generate AI art. So did Getty Images. I used to think tech companies loved user-generated content because most user-generated content isn’t protected by copyright law. (How many TikTokers are claiming IP rights on “day in the life” videos?) But now tech companies are taking it a step further. Now they’re harvesting content that is protected.

There is slow, if not steady, progress on this front. I also discovered I am a class member in a suit that includes all copyright holders whose work has been used in training. That Grisham suit is also a class action, but the class is fiction writers. To date, Big Tech has been hiding behind a complex generative AI algorithm too sophisticated for mere mortals to attribute credit for distinct IP.

These and future suits are important, really important. Hollywood won’t fall because Bob Iger or David Zaslav are greedy. It will fall because Silicon Valley stole the only asset that can truly differentiate generative AI: other people’s content.

What to Do

When I was on the board of The New York Times Company, two thirds of revenue came from ads. During the print days, it worked — we had strong control over distribution and could price ads on terms that made sense for the business. Then Google offered us what looked like a good deal: Let us crawl your content, and we’ll drive traffic to your website in return. More ad views, great right? Spoiler alert: not great.

So while Larry and Sergey were capturing our ad dollars, I proposed we form a consortium (NYT, News Corp, Condé Nast, Hearst, etc.) to block Google’s crawlers and have an auction for the license to our content. I believed Google and a somewhat relevant Bing (see above: 2008) would have paid billions. The board said no, and we missed the chance to upend the business model, to put creators — journalists, editors, artists — in the position of power, instead of the platforms. Soon enough, it was too late.

Consortium

This is that moment again. A world-changing technology has emerged, and we have the chance to write the rules so that we (creators) can make money from it. Notice how quiet Big Tech leaders have been throughout this process. Why? Because they see dead people. In this case, dead people are Hollywood studios and the creative community removing their heads from their asses, binding together, and transforming their assets into potentially trillions of dollars of shareholder value.

To garner an increase in compensation that is legitimately “exceptional,” the writers and the studios/executives/actors/publishers/networks must band together. They should form a consortium, file suits demanding Big Tech and AI respect their IP, license this IP, and start valuing their work. And they should do it as soon as possible. I’d suggest WME be charged with assembling the first 100 members and Barry Diller heads the new consortium. He knows everyone, understands the industry, is smart, and (most importantly) tech is scared of him. This would be infinitely more meaningful than the jazz hands of additional royalty payments for writers on The Last of Us.

Barely keeping up with inflation, minimum number of writers, 1% increases in pension contributions … Jesus Christ, think bigger.

Life is so rich,

P.S. This week I had my friend Ian Bremmer back on the Prof G Pod to discuss Ukraine, China, and AI — listen here.

P.P.S. I’ll be speaking with the “godfather of AI,” Dr. Yoshua Bengio, on the ethics of AI in November. Sign up now as spots will go fast.

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Losing My Religion

What has been the most significant change in the American experience over the past century? The internet, civil rights, antibiotics? The transition from a manufacturing to a service economy, or rapid urbanization? Right up there, I believe, is the displacement of religion from the center of our culture and what has taken its place. Religions and religious institutions play key roles in society, practical and spiritual. Humans are meaning-makers, we’re wired to imbue our actions with purpose. We will have gods, even if forced to make them of mortals … or machines.

It Works (Sometimes)

Religion is successful because it works. Participation in religious services is correlated with a reduction in mortality by a third, depression by 25%, and suicide rates by 3 to 6 times. Religion motivated the construction of cathedrals, pyramids, and temples that, set against space travel and pocket computers, still invoke awe. Here in the secularizing U.S., religious people are 3 times as likely to be active in community organizations and twice as likely to participate in local sports leagues. They’re also 44% more likely to vote and 44% more likely to describe themselves as “very happy.”

Yeah, But…

Much of religious experience has been insular, hostile to change, riven with corruption and abuse of power. The previous sentence may be the mother of all understatements. The Land of the Free was born of a violent theocracy: Contrary to what you likely learned in grade school, the earliest English settlers wasted little time before exiling anyone who differed on the fine points of biblical interpretation. Eight of the original thirteen colonies had official state churches and persecuted heresy.

From 1300 to 1600, European towns executed tens of thousands of their own people, mostly women, on accusations of witchcraft — over 3,000 in my ancestral Scotland. And in the New World, the single village of Salem executed 20 people out of a population of just 1,400. The ratio of positive to negative is legitimate cause for debate, but there’s no denying religion matters. 

Fading

Religion, like old actors, doesn’t die — it’s just fading away. Churches are still operating, and people still line up to see El Papa, but religious observance, practice, belief … is down, almost everywhere. Like, ad-supported-cable down. Even where it persists, Christianity coexists with other religions and other passions. In America, 75% of us believe religion is losing influence. We’re correct. Napoleon said religion is the only thing that keeps the poor from murdering the rich. As our nation prints more wealth and poverty, and as we register a decline in reasons to congregate (church, work, the mall), we are witnessing a palpable increase in hostility among Americans toward … other Americans.

Exceptions distort our view of the long-term trend. Compared to 40% of Americans generally, 59% of Black Americans say religion is very important to them. (In part this is a legacy of the role of churches and church leaders in the Civil Rights Movement.) But their fidelity is waning: 28% of Gen Z Black people are religiously unaffiliated, compared with just 11% of baby boomers. Membership in the Mormon church, once a growth engine, has also stalled.

Abroad, religious nationalism (which may be more the latter than the former) is driving political change in India, and it remains a headline issue in the Middle East. But even Saudi Arabia is creeping toward secularization. Much of the rest of the world is already there. In China, only 10% of people claim affiliation with a religion, and only half of them attend services. Only 11% of Western Europeans say religion is very important in their lives, and only 22% attend services regularly.

Meet the New Gods

It’s worth taking a moment to consider the monumental nature of this shift. Our species hasn’t known a time when religion played such a small role in our lives. Being religious is our natural state. And nature abhors a vacuum.

We are finding substitutes in two realms, the spiritual and the corporeal. Humans need meaning, we crave stories and reasons and higher explanations for things. We want someone (or something) to tell us what it all means. I believe this was a significant factor behind the rise of Google. Now, even more so, it’s powering our fascination with AI.

Google and ChatGPT are omnipresent, all-knowing, and soon, all-powerful. Our god(s) can drive cars and use credit cards. Sentient yet immortal, everywhere and nowhere — feels like a god worthy of worship, no? A: No.

If we’re not worshiping the tech itself, we are treating its masters as high priests. No group cements this more than the Elon stan army. Their idol is a brilliant entrepreneur, a world-changing innovator, and a Jew-baiting absent father of 11 (or 12)? The refusal to hold Musk to the same standards we try to live up to defines the distinction between admiration and worship.

Tech is not our only new god, however. Our need to follow is easily transferred from the pulpit to the stump. I didn’t plan to write about politics this week, but it’s inescapable. Donald Trump looms over the American landscape, more myth than man, worshiped as a savior persecuted by the sinners of the left. There’s ideological and demographic overlap between Trump’s followers and fundamentalist religion: Christian nationalist identity is highly correlated with political extremism and violence, and was bound up in the events of January 6. Equally concerning: 85% of adherents believe or mostly believe that God has called Christians to exercise dominion over all areas of American society. (Spoiler alert, they haven’t succeeded.)

Empty Pantry

Religion is not merely a spiritual succor. Religious institutions have long provided the foundation and framework of society. Their declining relevance leaves a vacuum of more immediate and practical concern than our need for meaning. Catholic schools enroll 1.7 million American kids. Around 15% of parents rely on faith-based child care. More than half of food pantries, which people rely on heavily during economic downturns, are church-affiliated.

For decades, one of the major fault lines in American politics has been the social safety net. I, and half the country, believe the government’s role is to provide it. The other half hates the notion. It’s no coincidence that my half is largely (not entirely) made up of people whose religious connection is scant.

Alain de Botton has a book about this, Religion for Atheists, in which he goes through the practical things religious institutions have provided in the past. In our increasingly atomized society, the physical coming together of weekly church attendance is sorely missed. Most religions provide moral guidelines that (at their heart) are simple and useful. Don’t steal. Be good to your parents. Render aid to the needy.

4x

My father has been married and divorced four times, so my religious indoctrination has been more varied than consistent. When I was at my dad’s, I’d go with Linda (No. 3) to a Unitarian church. At my mom’s, we’d go intermittently to Temple.

Statistics and trends only tell us so much. The role of religion is personal. While inconsistent, the impact of religion on my development was real. I remember the rabbi at Temple Isaiah delivering a d’var Torah that spanned from the conflict in the Middle East to the role of friendship. Afterward, over a brisket dip at Junior’s Deli, my mom and I would discuss the sermon, and I remember thinking, “This is fun, and I’m good at it.” I asked my mom what rabbis did and how much money they made. “They educate and comfort people, and not much. However, they command a great deal of respect.”

In high school, my closest friend was Mormon. He was part of a two-parent family who loved sports, laughed a lot, and treated me well. As a latch-key kid raised by a working single mother, I was at the Jarvis household almost every day. I went to church events, played on their sports teams, and even went to services a few times. I never felt any pressure to convert/sign-up/etc. My observation from spending several years in and around Mormons and their church: The Mormon faith is strange, and Mormons are wonderful.

Devout Atheist

My path to atheism has been downhill. I’ve always been skeptical and judgmental, and consider myself a scientist. This made it easier to dismiss believers as idiots. As I got older, I realized my belief that all “this” was nothing and then it exploded sounded no less bat-shit crazy than the parables about loaves and fishes. Regardless, my atheism is a source of strength, as it motivates me to envision my death — the end of the road vs. an off-ramp. Imagining my death has made me less afraid of it and more bold in my behavior preceding the event (i.e., now).

I’ve been more bold in my career, but also in my emotions. Risking embarrassment, I frequently tell people I love them because … why wouldn’t I? Those who might laugh, like me, face the same destination … soon. I’d also like to think that the absence of preordained truths fosters a relentless pursuit of knowledge, a deeper appreciation for the wonders of the universe, and a profound respect for the inherent value of all living beings.

Wanting

It’s clear to me that every being will register joy and tragedy, and the ratio is 90% a function of when and where you’re born and the chemistry you inherit. Seneca believed religion was regarded by the poor as true, the wise as false, and the powerful as useful. As someone who has been all of those things, however, I find the absence of religion and opportunities to congregate with strangers leaves a void. I’m getting older, wanting to serve in the agency of others, to be part of something bigger, and register comfort. I’m left wanting. I’m losing my religion.

Life is so rich,

P.S. This week on the Prof G Markets podcast we discussed the Google antitrust trial. Tune in every Monday, or go to our YouTube, for our weekly markets analysis.

P.P.S. If you lead a team or department, join our next (free) run of Leading in the Age of AI. You can get a sneak peek into Greg’s thinking in this post.

 

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Searching for a Breakup

“The notion that power should be limited so that no person or institution can enjoy unaccountable influence is at the very root of our democracy.” 

—Tim Wu, Columbia University

Capitalism is the most powerful system devised to elevate  the human condition. Its oxygen is innovation, which requires healthy markets. America has a proud legacy of knowing when a corporate organism has morphed into an invasive species suffocating an ecosystem via predatory pricing, bundling, or other actions that control the supply of products and/or services. Historically, we step in — a competitive marketplace takes precedence over an aggregation of individual or corporate power. Antitrust laws pierce the canopy, oxygenating the marketplace and preserving a core attribute of innovation and prosperity: churn.

In the 19th century a series of “trusts” were established, in the belief that a centralization of power and sectors, run by thoughtful men, would be good for the economy. Soon there was recognition that the resultant abuse and income inequality warranted an antitrust movement. When Teddy Roosevelt broke up Standard Oil, it was a signal to the nation that Americans were in charge, not American corporations. The government was the sheriff, protecting the little guy.

History is rhyming. This week in a federal court in Washington, the Department of Justice is attempting a similar Heimlich maneuver on the $180 billion search market.

Bill and Paul’s Excellent Adventure

Bill Gates and Paul Allen founded Microsoft in 1975, in the shadow of industry behemoth IBM. For decades, IBM was something akin today’s Apple, Google, and Microsoft rolled into one dominant company. So dominant, it was sued by the U.S. government for antitrust violations, which triggered a major change to IBM’s business model: It “unbundled” software and hardware, meaning it stopped giving its software away for free to its hardware customers. This created, for the first time, a competitive market for software. A market that Gates and Allen would enter just six years later, developing software for the emerging category of personal computers.

Over the next decade, MSFT software would power the PC revolution: MS-DOS in 1981, Word in 1983, Windows and Excel in 1985, PowerPoint in 1987. Tellingly, PowerPoint was acquired from a nascent competitor, not developed in-house. Over the next decade, Microsoft became known more for entrenchment than innovation. “Embrace, extend, and extinguish” was the company’s strategy for suffocating would-be competitors. It worked  — Microsoft supplanted IBM as the dominant force in computing. By 1998, Windows controlled over 90% of the PC operating system market, and Bill Gates was the wealthiest person in the world. 

As with IBM before it, Microsoft’s success was recognized with the business world’s Lifetime Achievement Award: a DOJ antitrust suit. The crux of the government’s claim was similar to that made against IBM a quarter century earlier: Microsoft was abusing its commanding position to limit rivals’ ability to get traction with competing products. The headline product in 1998 was the browser: Netscape represented Microsoft’s first serious competitive threat in a decade; to stop it, the company bundled its Explorer browser for free with Windows and cut deals with PC manufacturers to make Explorer the default browser on computers. The DOJ believed this was anticompetitive, the court agreed, and the company signed a consent decree ensuring PC manufacturers greater flexibility regarding the software they bundled with Windows-powered computers.

Google It

The DOJ’s enforcement action oxygenated the marketplace in ways nobody could have foreseen. The same year the department sued Microsoft, the cycle was beginning again. Larry Page and Sergey Brin founded Google in 1998, and over the next decade their company rode a wave of innovation to global dominance. Adwords, the revenue-generating portion of the business, launched in 2000. Then Gmail in 2004, Maps in 2005, Docs in 2006, Android in 2007, and Chrome in 2008. All built on the success of the company’s core products, Google search and the Android operating system — just as Microsoft built its empire on the dominance of its Windows operating system.

Would Google exist today had the DOJ not sued Microsoft? Unlikely. Microsoft tried to compete with Google in search and mobile in the 2000s, but, unable to deploy its bundling and exclusivity strategies, it had to rely on its products — which were inferior.

Google doesn’t dominate computing today to the extent Microsoft did in 1998. Nobody does, as “computing” is a much broader space. But its control of search — the most common entry point to the internet — is a nearly pitch-perfect echo of Microsoft circa 2001. Similarly, a quarter century after its founding, Google has a more than 90% market share, a sclerotic artifact of market power vs. a function of innovation. Its market dominance creates a virtuous cycle of increasing power. An estimated 9 billion Google searches occur every day, vs. 400 million for Bing. The massive delta of data and reach makes for a better product: Click-through rates for ads on Google are 30% greater than on Bing. More usage = more data = more advertising, and so on. Today, Google’s parent Alphabet is worth $1.75 trillion and employs 175,000 people.

However, what was the last innovative Google product? Restructuring the brand’s architecture under Alphabet? Earnings growth has, mostly, been a function of finding new ways to extract profits from its monopoly: Google search results have become a billboard for Google-sponsored results interspersed with content harvested from other sites and links to Google’s own services. In 2020, The Markup found that Google-associated results (ads for or links to the company’s other services) constituted over 60% of the first screen of an average Google search result. And in 1 of 5 searches, the entire first screen is Google results. This is the meat of its business: Search ads generate 57% of the company’s revenue.

Despite turning search results into a carousel of ads and Google services, Google has racked up 90% market share in search queries — 95% on mobile. How? As Microsoft once did, it leverages its control over the most popular mobile operating system (Android) and spends unprecedented sums on deals assuring it is the default search engine on computers and phones — more than $10 billion per year. Google says it’s the leader because it has the best product, but if that’s so … why pay $10 billion a year to be the default? Dominance in search is also self-fulfilling, as it gives the company unrivaled data re what people search for and what results generate clicks. And Google’s ability to harvest additional data from adjacent products, including Mail, makes it increasingly difficult for competitors to get traction. 

One difference? Google learned from the sins of the father and has tried to insulate itself from antitrust enforcement through lobbying and PR. Google spent over $10 million on lobbying in 2022 — in the late 1990s, Microsoft’s only presence in D.C. was an office in the suburbs focused on selling software to government agencies. In addition, today’s tech giants recognize CEO “likability” is key. Wojcicki, Pichai, and Sandberg made millions for their management skills, but billions as likability heat shields for their businesses’ abuses.

The New Gilded Age

The DOJ’s current lawsuit, one of several actions the federal government has taken against tech companies on antitrust and other grounds, reflects a much needed renewal of our free market instincts. Yes, government action is a component of a free market, despite what the techno-libertarian crowd would have you believe. Markets are not the product of divine creation coupled with a laissez-faire approach to regulation but a function of human effort that depends on rules and enforcement to work efficiently. We’ve lost our way with respect to this (see above: lobbying) and are paying the price with declining competition and innovation.

Concentrate

And not just in tech. Three companies control 95% of the U.S. beverage market. Four dominate the meat business, and rising meat prices are the largest contributor to food price inflation. Four airlines control over two-thirds of U.S. air travel, though they are substandard — the highest-ranked U.S. airline by quality of service is Delta … in 20th place, behind Air New Zealand. The next is United, in 49th place, trailing Azul Brazilian and Malaysia Airlines. Monopoly has its privileges, however: In 2014 the Economist calculated that U.S. airlines generated $22.40 in profits per passenger, while European airlines, subject to the rigors of a free market, earned just $7.84.

We see similar consolidation in banking, pharmaceuticals, health care, retail drug stores, publishing (where the DOJ recently had a big win, stopping the merger of Penguin Random House with Simon & Schuster), eyeglasses, and beer. Waves of consolidation are washing over nearly every sector.

Oxygenation

Antitrust enforcement actions are perceived as punishments or moral judgments, but we should think of them as recognition. If a company is good enough for long enough, it can achieve market dominance and earn its profits from stifling competition vs. competing on products or services. It’s the logical, shareholder-driven thing to do. And when we stop them, the benefits accrue to almost everyone. When the U.S. broke up Standard Oil in 1911, its largest shareholder, John D. Rockefeller, became the wealthiest man in the world: The separated companies, free to compete and innovate in the market, were worth dramatically more than when bundled together. The breakup of AT&T unlocked enormous value in the telecommunications industry, leading to more patents, more profits, and eventually the fertile ground needed for the internet market explosion in the 1990s. Microsoft wasn’t broken up in 2001, but it flourished despite the limitations the DOJ put on it, becoming a more innovative company. The action also fired the starting gun for growth in a sector that’s created enormous stakeholder value.

This month’s trial concerning Google’s search dominance likely won’t lead to the breakup of Alphabet. However, I believe severing YouTube and Google would create significant value for shareholders, employees, and customers, who’d see their rents decline. Soon after the breakup, the Alphabet board would demand a strategy for competing in video, and the newly constituted YouTube board would ask how the company was going to challenge its former parent in text search. Even without a breakup, limitations on Google’s ability to perform infanticide on emerging competitors would be welcome. History suggests we are at the start of another 25-year cycle. Just as the web was driving innovation in 1998 (when Google was founded) and personal computers drove Microsoft’s early success, AI appears to be the emerging volcanic force. We need to ensure that the nascent challengers to Google (and to Meta and Apple and Amazon) have the light, air, and space needed to survive and create trillions in shareholder value and hundreds of thousands of jobs.

Ground Zero

This isn’t about just search engine advertising, or even tech. The power of incumbents to suffocate insurgents before they can grow is mirrored in our society at large. Ground zero for many of the biggest challenges facing America can be traced to one core problem: For the first time in our nation’s history, 30-year-olds aren’t doing as well as their parents were at 30.

This creates rage, shame, and a loss of faith in one another and the country. Limiting Google’s default deals or breaking it up won’t cure these ills. But it’s a step, and a model for what we need to do elsewhere: clear incumbent overgrowth, creating the light and space for the young to prosper.

Life is so rich,

P.S. My newest lecture, The AI Optimist, is happening next week. Sign up for free to learn how AI will transform our lives and work. Register here.

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Least Bad

For decades, America has predicted — arrogantly and repeatedly — the imminent fall of a nation. The doomed nation, according to Americans? A: America.

In the ’80s, we decided Japan was doing to us economically what they couldn’t do militarily four decades prior. My second year in business school (Berkeley ’92) was devoted to a forensic analysis of our loss to Japan. Computers and cars were the future, and Japan was building them faster, better, and cheaper. In 1984, Walter Mondale asked Reagan at the presidential debates, “What do we want our kids to do? Sweep up around the Japanese computers?” Three years later, Paul Kennedy wrote a book about it, The Rise and Fall of the Great Powers, comparing the U.S. empire to the British empire. Japan’s GDP soared to 40% of ours, and we feared what might happen when that number hit 100. It never did.

In the early aughts, our soft tissue was geopolitical. The tragedy of 9/11 was described as an “inevitable outcome.” Our subsequent invasion of Afghanistan inspired books including Dark Ages America: The Final Phase of Empire, and Are We Rome? The Fall of an Empire and the Fate of America. Each offered a similar theme: Our time was running out.

Today the decline is (supposedly) more imminent. January 6 was the “beginning of the end.” Russia’s invasion revealed a “great unwinding.” Nations view us “with pity,” and we are “on the brink of collapse.” Just last week, the New York Times opinion page compared us to Rome (again). These headlines are click bait, and we still take the bait: Three-quarters of Americans believe our country is in structural decline, and the song of the summer is an ode to our demise.

It’s not just the public. Among economists there’s a growing school of thought that our situation is dire. Two months ago, ratings agency Fitch downgraded America’s credit rating due to “fiscal deterioration” and “erosion of governance.” The debt ceiling debacle didn’t help: Investors “should worry.” Our debt-to-GDP ratio is hovering around 120%; back when it was 70%, Brookings called it “the real national security threat.”

Many believe we are in the midst of “dedollarization,” ceding our status as the world’s reserve currency because of our unsustainable spending habits and an overall loss of faith globally. JPMorgan recently flagged it, an ex-CIA adviser plainly predicted it, and one prominent tech investor bet $1 million on it. Ray Dalio, the founder of the world’s largest hedge fund, hinges his recent bestseller, Principles for Dealing with the Changing World Order, on America’s inability to adapt to our loss of status and power. Empires win and lose their hegemony depending on their reserve currency status, and in Ray’s view, we’re near freefall.

We’re Not

Culturally you could build a compelling case. National pride is at an all-time low, and the “vibe” in America is that things are not good. (See above: the song.) But these are functions of perception, and as I’ve written before, human perception is flawed.

This is an economic discussion. And when you look at the data, you’ll find every diagnosis of our supposedly terminal illness is proof the doctor is jonesing for us to die. We’ll examine them, but first, a brief summary of the doomer’s economic vision for America. It goes roughly as follows:

1) America keeps borrowing more money, leading to an increased burden of interest payments.

2) Foreign nations increasingly question our ability to make good on our debts, leading to low demand for U.S. Treasuries and thus low demand for dollars.

3) Once dedollarization takes effect and the dollar is supplanted as the world’s reserve currency, the U.S. will be forced to ratchet up Treasury yields to increase demand for our debt, leading to even greater interest payments.

4) This will crowd out private investment, as well as public investment in our own infrastructure. GDP growth will grind to a halt, and eventually we’ll default on our debt.

5) At that point we’ll be unable to borrow or finance our growth, and

6) America will collapse.

Dedollarized

Doomsday is due next century or next year, depending on who you ask. (That ex-CIA adviser said it’d be last month.) But the catalysts are consistent, and one of them is this notion of dedollarization.

The argument is that foreign central banks are losing interest in the dollar. The stat dedollarists point to is that the dollar has fallen from 70% share of the world’s currency reserves to 60% in the past 20 years. That may sound significant, but the scope is comically small. When you zoom out you find that in the ’80s our share was 50%, and 30 years before it was 40%. The only accurate description of the dollar’s reserve status over the past 75 years is … unwaveringly dominant. At 20%, the next-best option (the euro) is not within striking distance.

However, it’s not the euro dedollarists are talking about, but the currencies of ascendant nations, including China. A common headline is “Yuan’s share of global reserves hits record high.” Less common is any mention of that “high”: 2.6%. The president of Brazil made headlines recently calling on the BRICS nations (Brazil, Russia, India, China, South Africa) to join forces to create a new global reserve currency. The world’s reaction was lackluster — and even South Africa’s own central bank governor played it down: “If you want it, you’ll have to get a banking union, you’ll have to get a fiscal union, you’ve got to get macroeconomic convergence.” Translation: pipe dream.

Another pipe the hallucinations flow through is bitcoin. Among its many use cases is its potential to supplant the dollar. The argument: The value of the dollar is predicated on faith in the U.S. government; the value of bitcoin is predicated on faith in, well, bitcoin. Many bitcoin bulls argued the latter will ultimately win — and for a second there in 2021, it looked feasible. As with every other dollar competitor, though, the cryptocurrency ran out of steam. Today the total value of bitcoin is 12 times smaller than the amount of dollars held in global central bank reserves. So next time someone tells you the dollar will be replaced, ask: With what? By any metric, the most innovative payment platform or store of value has been, and remains, USD. More good news: Minting dollars doesn’t require the energy consumption of Argentina. But I digress.

Theory of Relativity

Arguments for America’s decline are rarely accompanied by a credible alternative. This is true of the dollar, and it’s also true of U.S. debt.

Take Fitch’s downgrade of our national credit rating, for example. What should have been a seismic shock to the global bond market by the premier ratings agency turned out to be a catastrophist headline. The bond market barely registered the news, with the 10-year Treasury yield inching up 4 basis points. Goldman put it deftly: “We do not believe there are any meaningful holders of Treasury securities who will be forced to sell due to a downgrade.” Jamie Dimon put it better: The downgrade was “ridiculous.”

As with currencies, creditworthiness is relative. The question creditors should ask isn’t “how likely am I to get my money back,” it’s “who’s more likely to give me my money back?” And when it comes to sovereign debt, there is no better option than the United States. Sure, Xi Jinping may make Biden look like a web browser with 19 tabs open, not knowing where the music is coming from — but the Chinese Communist Party also systematically withholds, suspends, and lies about the nation’s economic data. The Party has even ordered its own economists to stop talking about negative trends. Who would you rather lend to?

False Prophets

This extends beyond national debt. There are several linchpin data points declinists point to that are supposed to forecast our imminent undoing, but the people who cite them also forget to compare those metrics to those of other nations.

For example: inflation. Last year, inflation hit a 40-year high. Some predicted America would enter a period of hyperinflation. However, when you compare our situation to those of other nations, it’s less bad. Significantly less bad. In the U.S., prices have risen 3.2% year over year. In the U.K., it’s 6.8% — more than double. In the eurozone, it’s 5.3%. And yet — despite U.S. inflation continuing to come down and wage growth recently surpassing it — 74% of Americans still believe inflation is headed in the wrong direction.

Another catastrophist go-to: the debt-to-GDP ratio. Currently, our national debt amounts to 120% of our GDP. In other words, we’re borrowing more money than we’re making. Sounds bad. Until you look at other nations and realize it’s, wait for it, less bad. Singapore is at 130%, Italy, at 150%, and Japan, at 260%.

For years, economists have been drawing red lines around “no-go” debt-to-GDP numbers, but time has shown these red lines are also meaningless. The Maastricht Treaty said don’t go higher than 60%. The World Bank, 77%. One landmark Harvard study, “Growth in a Time of Debt,” claimed 90% was the tipping point. That study caused panic until three years later researchers found the data was faulty and the conclusion wrong. The reality is there is no magic number. Japan is at 260% and Botswana, 20%. Would you rather hold Japanese yen or Botswanan pula?

Vitals

By nearly every measure, America is doing just fine. Better than fine. Our annual GDP is $26 trillion — 40% greater than China’s, whose population is four times larger. And, despite our enormous output, our economy is still growing, with 2.4% GDP growth last quarter. China’s is higher, but slowing faster than expected. Meanwhile the yuan continues to slide and this week hit a 16-year low. We have many unique advantages, including unrivaled innovation, the best universities, the best military, strong rule of law, a willingness to embrace risk, and a culture of doing the right thing (I believe this). Last year, U.S. startups received $245 billion in venture funding — roughly equal to the rest of the world combined.

Upstream in the public markets, we remain dominant. Nine of the ten largest companies in the world are domained in America. Nvidia, the undisputed leader in AI, the next world-changing technology, is headquartered in Santa Clara. Investors have reaped the benefits, and continue to wager their money on America. In the past decade the U.S. stock market has returned 10% per year. Compare that to Europe (2%) or China (0.09%) or Australia (-0.2%).

Meanwhile, our near-term economic prospects look good. Unemployment is hovering at record lows. Inflation has fallen precipitously and is low relative to our peers (see above). Poverty rates are in decline. Disposable income is higher than any other country. We have a lot to be proud of.

Exceptionalism

The schadenfreude we feel for our own country when it stumbles is nothing new. In fact, I would argue that in a democracy this is a feature not a bug. Things appear brighter when our favored political party is at the helm, and vice versa when it isn’t. A case in point is the consumer sentiment index, which is supposed to be an economic barometer, but is really a political one. In 2019 Republicans felt great about the economy, Democrats less so. Then Biden got elected and the relationship flipped.

People will argue I’m optimistic because a Democrat’s in charge. I recognize my political bias and intentionally adjust for it. And still, when I look at the U.S. economy and America’s position as a global power, I repeatedly land on a singular conclusion: The glass is half-full.

This conclusion won’t sell books nor grow this newsletter — history has proven that “Things Marginally Better Today” does not get clicks. But it’s the truth. And the truth, as with most things in life, is usually not as good or bad as we’d hoped. We are the least bad of our kind. When I look at the data, much less my personal situation, I can’t help but hate my life less and less every day.

If you are healthy, have someone who loves you, and enjoy a household income greater than $34,000, then you are in the top 1% globally. Think about this — you are 1 in 100. Why? Yes, you’re talented and hardworking. But more than that, you’re talented and hardworking in what is the most innovative platform in history: America.

Life is so rich,

P.S. I’m an AI optimist. Join my free event on Sep. 20, where I’ll share how AI will transform healthcare, education, and finance, and create more jobs than it takes away. Sign up here.

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