Scott Galloway's Blog, page 17

ID

 

In 1791 an obscure baroness and her daughters left Paris in a carriage headed west. Along the way, at Sainte-Menehould, their male servant went to change horses, and the town’s postmaster, Jean-Baptiste Drouet, thought he looked familiar. Drouet took out a banknote and confirmed, from the face printed on the back, the servant’s identity: King Louis XVI, who was supposed to be confined to his palace under revolutionary guard. Within hours, the “servant” was detained at Varennes. It was a costly ID: Two years later, an executioner would hold up the King’s recognizable head.

Anonymous

The ability to don a disguise and take on a new personality is in our DNA. It’s key to the plot in half of Shakespeare’s plays and the focus of my favorite holiday. Our nation’s liberty was won with the aid of anonymity. Madison, Hamilton, and Jay wrote the Federalist Papers as “Publius,” Ben Franklin and Thomas Paine often wrote anonymously. On the flip side, state tracking of identity should not be taken lightly: See Nazi Germany, the Soviet Bloc, and modern China. In sum, identity can be weaponized.

In its early days, the Internet seemed like a haven for reinvention and anonymity. However, unchecked anonymity online is not working. The prevalence of anonymous accounts and bots has evolved into a sociopolitical scourge. It has threatened the integrity of our elections, divided our nation, and — as Jonathan Haidt put it — systematically made us more stupid. We should change course and require proof of identity online. Enforced ID won’t solve all these problems, but it would be a step in the right direction.

Tagged

Binding ourselves to the administrative state sounds ominous — “Your papers please” — but verified identity is a cornerstone of modern life. In the two centuries since Louis XVI inadvertently created himself a photo ID, we have institutionalized identification. In 1803, Napoleon introduced internal ID cards for workers, which reduced the levels of trust needed to transact and employ, unleashing economic growth. Other nations followed suit. In World War II, fear of saboteurs and spies spurred heightened ID requirements. The rise of the administrative state in the years after rendered persistent identification essential. Today, driver’s licenses, passports, social security numbers, email addresses, and a hundred other pins and flags of personal identifiable information tag us like endangered species in a reserve.

Nearly 90% of the world’s population has some form of official identification, and we couldn’t function without it. Keeping dangerous drivers away from our highways, psychopaths off our airplanes, and 14-year-olds out of our bars makes us safer and lubricates economic growth. Nobody likes paying taxes, but automation makes it (reasonably) fair and efficient. When we moved to London this year, I rented our house in Miami to a family I never met. And it didn’t occur to me to do so … because the infrastructure of banks and agents and bureaucrats knew both our identities, and they’ll track either party down if we don’t live up to our end of the bargain. 

Yet our appreciation, and enforcement, of identification has not extended online. When the internet appeared, we took to anonymity like Louis fleeing to Varennes. We could be anyone, go anywhere, say and do anything.

Online freedom from institutionalized ID has virtues big and small. No interesting adult human is the same person in every context, so it’s best for all concerned that I don’t know my employees’ Reddit handles, and they don’t know mine. (Note: Don’t have one.) Online anonymity allows us to try on new identities or express our true ones — honest expression can be dangerous in many contexts and communities. On the geopolitical scale, protests against oppression, like we’re seeing right now from brave women in Iran, are often coordinated and leveraged using anonymous accounts.

Cost

That freedom has come at a cost, however, and the downside is both too great and not necessary. Similar to oil’s extraction and conversion to energy, converting attention to influence and purchases produces emissions. When users can hide behind pseudonymous usernames with anime profile pictures, many of the real-life disincentives for acting, well, shitty just disappear.

For decades, studies have demonstrated how crowds, anonymity, and obscurity unleash our worst instincts. There’s a term for the online version, the “online disinhibition effect.” Research shows anonymity is an accurate predictor of cyberbullying. It also causes a lack of empathy. In sum: When we don’t have guardrails or face consequences, we’re prone to being assholes. And the incentives of ad-driven media promote the most aggressive and uncivil among us to prominence, coarsening the discourse further and crowding out a key component of civilization’s progress: civility.

At least in the physical world, the number of assholes is capped at one per human. But thanks to technology — and its leadership, which hides behind the illusion of complexity — no limits exist online. A single human can be a virtually infinite number of masked bad actors. Russia has been using armies of bots to sow seeds of unrest in America for years. A recent New York Times article revealed how Putin’s regime used bots to pit Americans against one another in 2017. Pretending to be real Americans, Russian operatives posted aggressive and inflammatory tweets about the leadership of the nascent Women’s March movement. One message gained traction, targeting a movement co-chair with racial and religious abuse. It shattered the organization. Now China is getting in on the action.

Verifying online identity is not a new idea — it was actually the original plan. For years, Facebook demanded its users go by their “authentic name.” Google had a real-name policy for its (now abandoned) Google+ social network. What happened? Google’s policy was described as an Facebook’s was criticized for being . These criticisms reflect real issues. The list of situations in which attaching your real name to a public online profile can be unreasonable or dangerous is . But these concerns can also be addressed. The real reason the platforms opened the door to bots and fake accounts? Short-term profits. Fanning the flames of incivility generates traffic (at least at first), which means more inventory to sell to advertisers.

Now that our online world has been rendered a post-apocalyptic dystopia, with the living and the undead wandering amongst one another, the platforms claim that cleaning up the mess is just too difficult. The illusion of complexity is a bullshit rap performed by incumbents who want to protect and enhance their wealth. If Amazon can figure out a way to ensure that reviews for Lord of the Rings are from genuine viewers, shouldn’t we expect the same veracity re our elections, vaccines, and asset values?

There is broad public support for identity verification online; 80% of U.S. adults support verification for creating accounts. To be clear, there should be safe spaces and platforms where people can remain anonymous. We all have the right to send confidential messages to others, and to not have our data surveilled or used against us or without our knowledge. But when you mix real and fake accounts, and profit from the explosive results, you’re not pursuing anonymity … but fraud.

KYC

Under Know Your Customer (KYC) laws, certain companies (mostly in financial services) are required to obtain credentials that prove the identities of their customers. Providing the infrastructure for compliance with these laws is a growth industry. The average U.S. bank spends up to $130 to validate the identity of each new customer, and roughly $60 million a year — globally it’s a $1.4 billion market.

KYC isn’t perfect, as we learn every few years with another document dump detailing how the rich and powerful use shell companies and lax jurisdictions to hide their wealth. But the complexity of those schemes is testimony to the robustness of the system they seek to circumvent. Just compare traditional banking with the “anonymous” crypto version, so-called DeFi, which suffers from a massive fraud problem: Over $12 billion was stolen in 2021 alone. The success of KYC proves we can build secure systems to confirm that a real live human is attached to every online identity, and to provide recourse if that human breaks the law.

Platforms could employ KYC directly, requiring ID for every new signup, and limiting the number of accounts each person can control. But not everyone wants to have to trust Meta with their personal information, because the company’s data security team is about as reliable as Man U’s back four. (Sorry, had to.) Social media’s untrustworthiness is a business opportunity, however. The solution to confirming online identity is a profitable layer/middleman in waiting. Users could set up a single identity account with a trusted provider, who’d then vouch for the uniqueness of that user with any social media company or other online business where they open an account. Sort of a Clear for platforms.

First in line for this role is … still Big Tech. If you’ve signed up for any new website service lately, you’ve probably been offered the chance to “Sign in with Google” or “Sign in with Apple.” Even Meta is in on this, hoping you’ll forget about its track record. (It’s not going well.) But consumer trust is everything here, and these companies have revenue goals that depend on harvesting your data, selling you stuff, and manipulating you, not keeping your data safe.

If Big Tech can’t earn our collective trust such that we’re willing to give them the keys to our online identities, an alternative model is emerging. Pure-play identity companies that are financially incentivized to maintain security — not sell more ads or upgrade your phone. There are some startups working on this. Footprint, for example, is a security company that stores important user data and then verifies the information before the user is onboarded to other platforms. I.e., KYC.

Once an identity is affixed to an account, a platform could decide whether to permit pseudonyms. LinkedIn likely sees little value in anonymous accounts, and Facebook’s basic premise is in opposition to pseudonyms. Both brands would benefit from maintaining an environment where real people post under their real names (perhaps with exceptions for worthy cases). Twitter, on the other hand, might see the virtue in continued anonymity, and even allowing multiple accounts (a subscription perk, perhaps?), but it could wipe away its bot problem with KYC. A “no-anonymous account” Twitter competitor might also emerge.

Incentives

Why would platforms do this? Even in the current environment, there’s a business case for fixing identity online. Bots and fake accounts are a cancer on these platforms, and they drive content creators away. The vast majority of Twitter users may not encounter the bot problem directly, since there is minimal engagement on most Tweets. But, having a reasonably large following, I can confirm the bot problem is severe. When I discuss crypto, Elon/Tesla, VC-backed firms’ valuations, or say anything Trump, an army of Joeybagofnumbers accounts floods my mentions. Most of it is noise, but some of the replies — clearly coordinated attacks from accounts wearing masks — are just troubling. Nobody would say this traif out loud. And I don’t endure a fraction of the grief others do.

We can dial up the incentives further by tying social media’s sacred 230 protections to robust KYC standards. Section 230 is the U.S. law that protects social media companies (any online publisher) from liability for user-created content. But an implicit assumption behind 230 is that the user, who remains liable for harms their content causes, can be brought to justice. Which is an empty assumption when the platform is handing out accounts to spoofed phone numbers and burner email accounts.

We can absolutely provide anonymity to good actors and should begin the process of carbon capture of the toxicity platforms emit under some adjacent cries of free speech or privacy. Last week, California passed the FLASH Act. Now you can be fined if you send a pic of your junk to someone who didn’t ask for it. Shouldn’t we also have (dis-) incentives for people pretending to be someone else (or thousands/millions of someone elses) or harassing or misleading people?

When you step up to the bar that is discourse in our society, you should be asked the same question that used to bother but now delights me: “ID, please.”

Life is so rich,

P.S. If you’re new to platform strategy, the Platform Strategy Sprint, created by Mohan Sawhney, is one of our best. Become a member to take it on your schedule, or watch the first lesson for free.

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House of Cards

My new book, Adrift: America in 100 Charts, comes out Tuesday. It’s the story of America told through … charts. You can buy it here.

The previous excerpt I shared was (cautiously) optimistic. In a world where bad news sells, it’s easy to feel nihilistic — apocalyptic, even — about the fate of our nation. Taking a step back to recognize our myriad accomplishments over the long term helps restore perspective, and hope for America. I stand by the virtues of optimism, and try to practice it regularly. (Emphasis on try.)

However, optimism — like alcohol — should be consumed in moderation. We shouldn’t abuse it to distract ourselves from our responsibilities and the commitments of daily life. And we certainly shouldn’t use it to sedate ourselves in the face of clear and present dangers.

This excerpt highlights some of the dangers I believe are most pressing. The news cycle has convinced us that the greatest threat to America is other Americans — MAGA Trumpers, social justice warriors, deep state bureaucrats … pick your poison. These narratives are compelling (profitable). And wrong: The greatest threat to Americans is our fear of other Americans. For the past several decades that fear has grown, and the rifts between us, broadened. We are reaching a tipping point.

House of Cards

In 2018, residents of a 12-story condominium tower along a beautiful stretch of the Florida coast reported evidence of deterioration in the tower’s concrete support slabs. Engineers attempted to repair surface damage in 2020, but the project was abandoned because of concerns that it would destabilize the entire structure. In April 2021 there were more reports of concrete deterioration, which was noted to be “much worse.” Remedial work was discussed and planned, but never begun. Two months later, the Surfside, Florida, condo collapsed, killing 98 people.

In the aftermath of the Surfside tragedy, images and reports of pooling water, cracked concrete, and rusting rebar were made public. The problems had been plain for all to see. It’s a familiar pattern. Warning signs are always obvious in the rearview mirror. What are our warning signs? What are the weaknesses in our foundation?

We are divided against ourselves, seeing enemies rather than adversaries in our politics. The moniker United States of America is a paradox today. A poll by the University of Virginia found that 2 out of 5 Biden voters believe it’s time to split the country by party lines. Trump voters agree, with more than 1 in 2 favoring a breakup. Secession is the new Succession, and Texit the new Brexit.

This feeds a vicious cycle: As enemies, we cannot negotiate in good faith, and our government accomplishes nothing. Which further undermines our faith in government, and fuels our hatred for our opponents.

Political Divides Become Social Divides

We might say we support “bipartisan” politics, but we’re increasingly partisan in every aspect of our lives. In 1960, 1 in 25 parents had concerns about their child marrying someone from the opposite political party. By 2018, almost half of Democratic parents and a third of Republican parents had such concerns.

The Long-Term Erosion of Trust in the Federal Government

In a democracy that’s been pushed to its limits by competing narratives and unfounded online theories about politicians and political agendas, it’s no wonder that Americans seem to have lost faith in the people running the nation. The National Election Study began surveying the public about its trust in the government back in 1958 — a time when about 75% of Americans trusted the federal government to do the right thing almost always or most of the time. That percentage hasn’t surpassed 30% since 2007.

In 2021, 42% of Americans believed our political system needed to be completely overhauled, and another 43% said it required major changes. In contrast, only 12% to 15% of people in most Western European countries said their political systems should get a complete revamp.

Declining Infrastructure

In 1966, the U.S. committed 2.5% of its potential GDP to infrastructure investment — roads, bridges, schools, hospitals, water treatment, sewers, and more. Over the next twenty years, mainly during the Nixon and Reagan administrations, infrastructure investment fell dramatically, hitting a record low of 1.3% of GDP in 1983, and it’s held at a relatively steady state ever since. And that understates the underinvestment, as construction material prices have outpaced inflation in recent years.

In practical terms, what does this mean? Simple: worse conditions for working Americans. About 1 in every 5 U.S. roads is in poor condition. Forty-five percent of Americans do not have access to public transit.

A water main break occurs every two minutes. Numerous faults in our core infrastructure have led to crises that once seemed unimaginable: In Flint, Michigan, 12,000 children drank lead-contaminated water, causing irreparable brain damage that affects academic performance and IQ and increases the likelihood of Alzheimer’s and Legionnaires’ disease. In Miami a twelve-story beachfront condominium collapsed, killing 98 people.

Meanwhile, as a share of GDP, China spends ten times more on infrastructure than the U.S. Which may explain why it takes 4.5 hours to take a train from Shanghai to Beijing (752 miles) but 7 hours to get from Boston to D.C. (438 miles).

Ally

As in an eighties horror flick, America’s political divide started benign, campy even, and has become gruesome quickly. However, it’s not a demon in a hockey mask that terrorizes us. The threat is not an outside malevolent force. In fact, the call is coming from inside the house. We need programs and investments that reinforce a basic truth: Americans’ strongest allies will always be other Americans.

Life is so rich,

P.S. On October 25, I’m giving a free virtual talk on the state of business (and humanity) in America, based on observations from Adrift. Sign up and I’ll see you there.

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Attentive

For the better part of the past century, the most important commodity has been oil. Wars have been fought over it — Pearl Harbor was a preemptive strike to secure Japanese access to Indonesian oil — and it elevated desert tribes to the ranks of the wealthiest cohorts in history. But the sun has passed midday on oil’s supremacy. We’ve moved from an oil economy to an attention economy.

We used to refer to an information economy. But economies are defined by scarcity, not abundance (scarcity = value), and in an age of information abundance, what’s scarce? A: Attention. The scale of the world’s largest companies, the wealth of its richest people, and the power of governments are all rooted in the extraction, monetization, and custody of attention.

Commercial exploitation of attention is not new. Humans have been competing for attention since the days when nomadic leaders argued over which branch of the river to follow and turning “content” into wealth since Aeschylus produced the Oresteia. Oil was elevated by the invention of the internal combustion engine, industrial revolutions in mechanization and plastics, and the development of a Western lifestyle dependent on the mobility of goods and humans. Now the shift from atoms to bits — digitization — has put wells into pockets, on car dashboards, and on kitchen counters, drilling night and day for … attention.

The largest companies by revenue are still mostly oil companies, but the most valuable companies are mostly attention-seeking enterprises — Big Tech holds 4 of the top 5 spots. From Apple to Amazon, Facebook to Fox News, Twitter to TikTok, tech and media companies are the sheikhs and wildcatters finding and capping our attention. And, just as in the rise of the oil economy … there will be blood.

Artisan Attention

There are more players in the attention economy than just the tech and media giants. Podcasting is a high-growth, low-barrier-to-entry opportunity for newcomers to harvest attention, and (for about 1% of them) to convert it to wealth. Conferences are a nice business of in-person attention harvesting. Substack has spurred a modest revival of the email newsletter, Salesforce paid $30 billion for Slack’s command of workplace attention, and Spotify is leveraging our music listening attention into a platform for all media.

Conferences, newsletters, and even music streaming are all artisan projects, bit players in the shadow of the supermajors. Even a mega-conference like the 130,000-strong Comic Con is a sub-2.0 flutter on the Richter scale of the broader attention economy. The biggest players measure monthly active users in hundreds of millions.

Supermajors

However, the attention economy is defined by disruption, and even the giants are susceptible. If Facebook is Exxon and Netflix Shell, TikTok is fracking king Chesapeake Energy, the rule-breaking insurgent armed with novel extraction methods that threaten the established order. Like oil, attention must be extracted, processed, and monetized. Disruption occurs when innovators re-architect the attention economy value chain.

Pre-digital attention entrepreneurs drilled for attention with interesting or entertaining content such as a newspaper or TV show, and monetized it through subscriptions and ads. The first wave of innovation was driven by the infinite capacity of digital storage and distribution: the bottomless well of choice. Netflix rose to dominance by cracking a gusher of classic sitcoms and rewatchable movies. More commercial-free content extracted more attention. By 2016 that was enough to make Netflix bigger than the entire industry it supplanted, cable TV. But the scale was linear, with few network effects.

Social media brought two major innovations. The first was to offload content production, and its cost, onto the user. No matter how efficient Netflix gets at producing shows in multiple languages, or how shamelessly Disney milks its existing IP, their economics are dwarfed by TikTok or YouTube, where consumers build the content drill rigs that the platforms monetize.

Next, the social media companies broadened the very notion of what content could be. Twitter, Facebook, and Reddit feature “content” in the traditional sense, but they turn the emissions (users’ comments) into content that’s still more valuable (addictive even) as it has more emotional resonance. By emotional resonance I mean they satisfy a deep need for others’ approval or they enrage us. The comments/replies, the pissing match, the rapidly brigaded insanity is what mines attention and emotion. It’s as if Exxon found a way to make heroin out of exhaust. Connecting the world has augured a simple question: Should we be this connected without having a commensurate presence? You’d never say (much of) this shit to people in person. And anonymity enables fake accounts and bad actors, which platforms tolerate so they can profit from greater noxious emissions.

FrackTok

While the sewer of ad-driven social media enragement was contaminating the water table, a new innovator arrived. TikTok is remixing the attention economy value chain. The short-form video platform relies on the economics of user-generated content, but it takes a narrower, less “social” approach to delivery.

Netflix rose on the back of infinite choice. Choice, however, comes with a hidden cost: the cognitive work of choosing. TikTok asks less of its consumers than any platform since broadcast television. Open the app, and a video starts playing. A single swipe at the end of every video tees up the next one. An algo watches how long you watch, what you watch to the end, and whether you like or follow, and manicures a streaming network that is singular. You can get more involved, following individual creators and even responding, but the app is built around a passive experience. TikTok’s recombination of attention economy capabilities makes it the new apex predator: The app commands more attention per user than Facebook and Instagram combined. And among teens it’s catching up to the passive king itself, television.

Externalities

Fossil fuel’s externalities are now well understood. An economy built on burning carbon has had a catastrophic impact on the planet. The advent of fracking led to huge profits and a recalibration of the oil economy, but at increased cost: flammable water, earthquakes, and chemical leaks.

Though it’s wrapped in dance and dog videos, TikTok comes with many of the problems linked to algorithmically generated content and platforms. A Wall Street Journal investigation found new accounts registered as belonging to 13- to 15-year-olds would veer down “rabbitholes” of sex- and drug-related videos in just days, simply by lingering on initial, tamer videos with those themes. And TikTok comes with an additional, unique externality: its links to the Chinese Communist Party. The potential risks in that relationship have been recognized by our last two presidents. I’m particularly concerned with the propaganda potential of the platform.

To be clear, there is no evidence the CCP has manipulated content to undermine American interests. What is also clear: A headjack installed on America’s youth, who spend more time on TikTok than any other network, that connects them to a neural network that may be shaped by the CCP is a risk we cannot tolerate. If the product cannot be separated from the ownership (e.g., spun off or acquired by Western firm), I believe the app should be banned. Putting the term “ban” so close to the term “media” justifiably raises concerns. An easier argument may be that we should have a reciprocal approach with China re media businesses. (See above: Ban TikTok.)

It was a theme sounded by others at the Code conference. When I asked Axel Springer CEO Mathias Döpfner for his thoughts on TikTok, I expected a watered-down “we’re watching them” nothing-burger response. (That’s the protocol for a public company CEO.) Instead: “It is of course a tool of espionage … TikTok should be banned in every democracy.” There are signs of momentum: rumored regulations that could result in a ban, and calls for app store bans from FCC Commissioner Brendan Carr. We banned Russian oil, why not Chinese (potential) propaganda? Others see it differently: After I spoke about the issue on Bill Maher last week, several prominent tech journalists said my TikTok rant was distracting us from the real issues in the industry, including privacy and data reform. But this isn’t a zero-sum shitstorm. Big Tech offers us more than one threat, and I’ve been warning about those posed by Facebook and other platforms for years. We can walk and chew gum at the same time.

What’s Next

Is TikTok the ultimate evolution of the attention-economy titans? Everyone else in the attention economy is acting like it. Original content is out. CNN+ was unplugged; Netflix is churning subscribers and has shed 70% of its market cap; households are canceling cable and streaming subscriptions in record numbers; and two tech platforms that tried to launch their own original content streaming services just threw in the towel: YouTube Originals shut down in January, and Snap Originals followed in August.

Instead, everyone is trying to outTik the Tok. Netflix launched “Fast Laughs,” Instagram introduced “Reels,” YouTube brought out “Shorts,” Snap did “Spotlight,” Roku is trying “The Buzz,” Pinterest launched “Watch” … even Twitter is exploring a TikTok-like product. I think they should call it Vine. Just a thought.

Internal documents at Meta reveal that users spend less than a tenth of the time watching Instagram Reels as they do watching TikTok. Reels engagement is in fact falling, perhaps because a third of the videos on the platform are created on a different platform (usually TikTok, complete with watermark). Meta has tried to algorithmically “downrank” these videos so they receive less traction, but they remain pervasive. Users are actively resisting these product changes. After Kim Kardashian and Kylie Jenner spread a meme asking Meta to “Make Instagram Instagram Again,” a petition gained, at last count, 312,000 signatures. The petition will fall on (Mark’s) deaf ears. Meta is not innovative (see Oculus and fever dreams of a legless hellscape), just the fastest follower in social. Note: Many who pushed back on my calls to break up Meta and let the market do its job have an increasingly strong argument, as the company’s stock is at a five-year low.

Red Pill

TikTok’s short-term dominance at the front end of the attention extraction business won’t be stopped by anyone who doesn’t hear “Hail to the Chief” every time they walk into a room. However, if you check this space five years from now, will TikTok still be a supermajor in the attention economy? If the answer is no, I’d posit that the likely dragon reigning over, and defending, Kings Landing will be YouTube.

Fifty-six percent of Americans watch YouTube on a daily or weekly basis. Ninety-five percent of teens use the platform, compared to a third who use Facebook and two-thirds who use TikTok. Back in 2019, YouTube disclosed that users were uploading more than 500 hours of footage to the site every minute, a number that’s likely much higher today. Last year the platform generated almost $29 billion in advertising revenue — roughly equal to Netflix’s total revenue.

As with so much in business and biology, diversity is key. Oil can be found in the desert, under the sea, or in the tundra, and extracting it from each ecosystem demands a unique skillset. Likewise, refiners convert crude into gasoline, natural gas, lubricants, and aspirin. No attention-economy player has the diversity of YouTube. Videos can be as short as one second or as long as 12 hours. Some are user-generated, others are studio-produced. (In fact, the second half of my Bill Maher appearance was produced specifically for YouTube.)

You can socialize (argue) with people in the comment section, or you can just use it as you would a streaming platform. More and more people turn to YouTube for more and more reasons: home improvement projects, makeup advice, music videos, product reviews, etc. You can load up infinite videos on a topic or from a creator, subscribe to your favorites, or just let the recommendation algo take over. While it depends on user content, YouTube isn’t passively waiting for that content to arrive. The company’s strategic partnership managers advise about 12,000 creators. According to a senior director, if a YouTube star doesn’t post once week, their manager is “likely to know why.”

YouTube’s kevlar is its betweenness, especially on the creator end. Users can get their start with low-production vlogs and selfie videos — just as they do on TikTok. However, as your following grows, the scale of your production can grow with you, bringing longer videos, broadcast-quality camera crews and performers, and increased costs commensurate with revenue. A prime example of this is YouTuber Jimmy Donaldson, otherwise known as MrBeast. MrBeast started making cheap gaming videos and commenting on YouTube dramas.

As his YouTube subscriber base grew, so did Donaldson. Today, MrBeast creates formidable productions with reinvested earnings. His most popular video, a real-life reenactment of Squid Game, cost $3.5 million to produce (the cost of an episode of Mad Men). It received 300 million views. This is the sort of content that currently doesn’t happen on TikTok, whose specialized attention-extraction tech has a much more limited range. Now, Donaldson is refining his attention to offline energy, with a burger restaurant (it drew 10,000 fans opening day) and cloud kitchen venture.

What to Do

Any massive increase in wealth over a short period is accompanied by externalities. There is no free lunch. OK, maybe caffeine. The externalities are typically opaque, and the parties best able to address them early are incentivized to create weapons of mass distraction to delay and obfuscate while they achieve economic security for themselves and their families. It’s also clear that the longer the externality runs unfettered, the more damage is done and (exponentially) greater the cost to address the issue. TikTok’s COO, Vanessa Pappas, didn’t wrap herself in glory at this week’s congressional hearings. She was over-consulted by her comms team and claimed that ByteDance has no headquarters, as it’s “a distributed company.” Despite the awesome news that there’s a new class of firm we can legitimately call a DisCo, being full of shit only fosters additional resentment against the company, and the uncomfortable link it’s forged between the CCP and the emotions and beliefs of a rising generation of American citizens.

This shouldn’t distract us from the (still) clear and present danger American platforms present to our privacy, teens’ mental health, and our less and less civil discourse. The leaders of American media platforms don’t suffer from immorality but amorality — indifference and dissonance about the damage their companies do. When it’s raining money, your vision gets blurred.

An autocratic government that seeks to diminish America’s standing and way of life is, in my view, immoral. There is evidence that the CCP has used, and will continue to use, all assets at its disposal to undermine U.S. interests domestically and abroad. TikTok should be spun to Western investors or treated the way China treats American platforms: kicked out.

Life is so rich,

P.S. We could all stand to be more productive. Our Productivity & Performance Sprint closes enrollment on October 4. Watch the first lesson for free, then upgrade to membership to sprint with a group.

 

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Labor Day

I’ve been thinking about labor and the holiday meant to celebrate our nation’s workers. My observation: “Labor” Day is a ruse, just as “hero” is a moniker typically attached to someone we’ve decided to underpay — teachers, front-line workers, etc. A more honest name for a holiday describing who/what we value would be “Capital” Day.

We don’t honor workers, we throw loaves of bread at them and give them circuses to distract them from their servitude to capital, which captures more of the spoils each year. Over the past five decades, U.S. GDP growth has outpaced wage growth by 63% — in years prior, GDP and wages expanded at the same rate. In 1970 the American middle class received 62% of the country’s aggregate income; today it’s 42%. The top 1% now owns 32% of our nation’s wealth, and the bottom 50% owns 3%. America has never been so disdainful of its workers.

I discuss this in my forthcoming book, Adrift: America in 100 Charts. (You can pre-order it here.) It’s the story of our nation told through (wait for it) charts. It covers a lot of topics, but the common thread is that our middle class is dying — largely because of a purposeful, decades-long transfer of power from labor to capital. There was a time when 30 years of hard work got you the American Dream: homeownership, college-educated children, retirement, greater economic security than your parents. No longer. Today economic security is defined by the assets you already possess. We impose harsher taxes on income gains (i.e. the fruits of labor) than on capital gains, and reward high-net-worth individuals with tax loopholes and bailouts. America is no longer the best place to get rich, but to stay rich.

Anyway … this week I’ve been thinking about labor. What it means, who performs it, and how the holiday can register real meaning again.

Unions

Unions are making positive headlines recently. Some Starbucks workers organized in December. Amazon workers followed in April. So far this year, unions have won 641 elections (the most in nearly two decades) with a 77% win-rate (the highest percentage on record). Almost 80,000 American workers have gone on strike in 2022 — three times as many as in the same period last year. Meanwhile, U.S. approval of labor unions is at its highest level since 1965. By the looks of it, unions are making a comeback.

People will say these wins for unions are wins for workers. Maybe. However, in my view, this is a dead cat bounce. Over the past several decades, unions have proven they don’t work.

As Rani Molla wrote, forming a union is the easy part. The hard part is negotiating a contract with the employer. Companies deploy various methods to ensure there is almost never an agreement with the union — usually just stalling. After Amazon’s Staten Island workers voted to organize, Amazon buried them in paperwork. Starbucks did the same. Almost a third of unions don’t reach an agreement within three years. Proving to the National Labor Relations Board (the agency that enforces labor law) that a company is unnecessarily stalling is difficult. And even if you do, per Rani … “there’s not much it can do.” So the union gets tired and discouraged, the employees inevitably turn over, the effort bleeds out, and the company marches on sans union.

In many ways, the union is the corporation’s perfect enemy: disorganized, inexperienced, underfunded, and understaffed. “I want to work for the United Auto Workers union,” said no ambitious college graduate ever. It’s not a coincidence that, despite the recent uptick in union formation, union membership is in freefall.

One Union, for All Workers

The need for labor representation remains, however. The balance of power between capital structurally favors capital. Capital has, well, the capital — to hire lobbyists and public relations teams, lawyers and strikebreakers, to outwait workers who need their paychecks to put food on the table. You don’t need to be a labor economist to see this, just review the past 50 years in America. And it’s likely to get worse: automation is projected to put nearly 40% of American jobs at “high risk” by the early 2030s. We already let offshoring decimate a generation of American labor, we have a moral and economic obligation to better manage this greater transition. But if not labor unions as we know them, who?

There should be one union: the federal government. Unlike small, fragmented groups of workers, this is a force to be reckoned with — and companies must comply with its demands. It should demand more. Dignity in work, for starters. The right to not be sexually harassed or discriminated against is a good thing, but it’s a floor. In America, the wealthiest nation in the world whose corporations are registering the greatest profits in history, you can still work full time and fall below the poverty line. We must raise the minimum wage, dramatically. If the federal minimum wage had risen at only the same pace as U.S. productivity since 1960, it would be three times what it is today. A $20-plus federally mandated minimum wage would send some consumer stocks down, and make many small businesses unviable. It would also be worth it.

Workhorse

We often talk about income inequality, the top 1% vs. the 99%, and we should. But there’s another cohort that’s rarely discussed, whose workers on an effort-adjusted basis may be the biggest losers re changes to the tax code: the 90th-99th percent.

Lawyers, doctors, accountants. Smart, ambitious, hard-working, college-educated people who’ve played by the rules and done everything right. While the media often buckets them in with the top 1%, many are actually struggling — but they’re too embarrassed to complain about it.

A lawyer living in San Francisco making $350,000 a year likely pays 49% of their income in federal and state taxes. Most “workhorses” need to live in a high-cost urban area (the average home in San Francisco costs $1.5 million), and things are likely tight. This is not a sob story — many Americans would kill for these problems. However, we’re being heavy-handed with the wrong people, as many could build real wealth and make the jump to lightspeed if we returned to a progressive tax system that charged the same rates on the top 1%. Asymmetric upside is reserved for the ultra-wealthy — accounting for capital gains tax, they pay lower tax rates than the 90th-99th percent. We have opted for a regressive tax system.

Care Work

When we discuss labor, we almost exclusively talk about paid labor, the work we do for money. But there is an enormous, critical swath of labor this view overlooks, and it’s important work: caring for one another. Raising our kids, administering to the sick, and caring for the aging.

A good measure of a society is how well it provides for its weakest members. It’s also a good predictor of a society’s future. A poor system for raising children is a recipe for future failure. What’s our system? We turn to women. Among solo-parent households, 82% are headed by single mothers. When it comes to the elderly, 61% of caregivers are women, and they are much more likely to be the primary caregiver.

Besides the inequity, our assumption that mom will take care of things is brittle. Covid illuminated how brittle. Students fell four months behind in school, and reading and math scores sank by the sharpest margin in three decades. The gender gap in employment and labor participation increased, and a quarter of mothers said they had to either stop working or work less.

In some distant past, when people lived in extended family units, with three or four generations under one roof and a dense network of siblings and cousins ready to pitch in, an “informal” system of caregiving — i.e. no system at all — might have been viable (though it was rarely fair between genders). But that’s not how our society works today, and more important, that’s not how we want it to work. Mobility and migration are the unlocks that have powered a century of innovation, but they mean we need to support people as they care for those who need support.

This is the role of government. It is neither feasible nor fair to expect employers (the paying kind) to abandon their competitive advantage and unilaterally support a societal good. Yet our existing protections for caregivers are deficient. The U.S. is one of only six countries that doesn’t offer paid family leave. The others? Marshall Islands, Micronesia, Nauru, Palau, Papua New Guinea, and Tonga. This is bad company. Every other developed nation provides substantial paid family leave, with the average OECD country offering more than 17 weeks.

The Biden administration tried to advance another much-needed policy to support family care work, the child tax credit. This is something I’ve long advocated for, inspired by Senator Michael Bennet. When we instituted this program on a temporary basis during the pandemic, we kept 3.7 million kids out of poverty and cut hunger by 25%. This was a massive win: child poverty is a scourge, and its costs on society compound over a lifetime. But the Democrats were forced to strip a provision extending the credit from the Inflation Reduction Act, after Joe Manchin (and, to be fair, the entire GOP caucus) refused to go along. Maybe next year.

The rise of remote work and new flexibilities in employment will allow us to do more. I believe we need to explore an additional employment protection that gives people who care for others rights in flexible work arrangements. If working from home enables a single parent to stay in the workforce, that’s a win for society. Temporary part-time status and flexible schedules can match our needs to our resources. We should incentivize companies to make this happen and level the playing field so they’re not at a competitive disadvantage when they do so.

As always, the criticism of taxpayer support for care work is the cost. However, we spent $800 billion bailing out corporations with PPP loans while offering $1 trillion in tax breaks per year in the form of loopholes. No government agency can provide a good level of care, more efficiently, than a loved one. We need to arm citizens with the resources to care for loved ones.

A substantial increase in the minimum wage, restoration of a progressive tax system, and greater flexibility for caregivers starting with paid family leave. There’s nothing wrong with America that can’t be fixed with what’s right with America. And Americans like to work. All of these efforts would come at a cost, and it’s likely the stock market would go down. But putting more money in the hands of middle-class Americans has one key advantage: They spend it.

Loneliness, stressed young families, a lack of connection, class warfare, the draining of meaning. All of these things plague America. There is no silver bullet. But there is something we can do to help address all of them. We can work.

Life is so rich,

P.S. Our next workshop is an essential one if you want to grow your career: Building a Business Case, taught by Meta’s Nicole Alexander. Sign up now.

P.P.S. Tonight (9/9) at 10 pm I’ll be on Real Time with Bill Maher, streaming on HBO Max.

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Malignant

Last week President Biden issued an executive order to forgive billions of dollars in student loan debt. It was met with mixed reviews. For some, it’s a miracle, others think it’s a “bailout for the wealthy.” Representative Lauren Boebert believes it’s “robbing hard-working Americans to pay for Karen’s daughter’s degree in lesbian dance theory.” She says that like it’s a bad thing. At UCLA I took (no joke) Ellingtonia: The Study of Duke Ellington.

As with most political conversations, this one lacks nuance. Upon initial review, Biden’s act bothered me. However, like most things in life, the closer you look … the more shades of gray appear. What the executive order does:

Forgives $10,000 in federal student debt to any borrower who earns less than $125,000 per year ($250,000 for a household of two or more). Pell Grant recipients get an additional $10,000 forgiven.Extends the pause on current student loan payments through to the end of the calendar year.Reduces the existing cap on monthly loan repayments from 10% of the borrower’s discretionary income to 5%.Diagnosis

The tumor of student debt, initially benign, swelled into a malignant mass. We’re now dealing with a $1.6 trillion student debt load that affects 45 million people. More money is owed on student loans than credit cards, car loans, or any other consumer debt. It now accounts for 36% of all non-housing debt in America — up from 12% in 2004.

That debt is burdensome. Before the pandemic moratorium on loan payments, 7 million people had defaulted on their student loans — 1 in every 5 borrowers. Of those, 70% hadn’t completed college. Put another way, a tenth of people who took out student loans don’t have a degree, just debt.

Treatment

In isolation, Biden’s plan is a good one: Shrink the size of the tumor — by 20%-40%.

Estimates of the cost of treatment range between $300 billion and $1 trillion. However, many of these estimates don’t account for the additional payments to Pell Grant recipients, or the $125,000 income cut off. When you price in other factors, including the moratorium extension and the 5% income cap, the bill is roughly $600 billion over 10 years. This is real cabbage. Implementing universal pre-K and extending the child tax credit would have cost $350 billion and $545 billion over 10 years, respectively. Fun fact: Neither made it into the Inflation Reduction Act, as — unlike college attendees, old people, and private equity partners — kids don’t vote. Breaks my heart. But I digress. Many taxpayers, including the nearly two thirds of Americans who didn’t go to college or those who already paid off their loans, are understandably unhappy.

Also, college grads are rich(er), no? Well, maybe … in general, the demographic makeup of student loan borrowers is not affluent. Sixty percent of borrowers are Pell Grant recipients — and two thirds of those recipients come from households making less than $30,000 per year. In sum, 90% of relief dollars will go to people earning less than $75,000 per year. Some people who don’t really need relief will receive it — but they will be a statistical anomaly, and a pin drop compared to the share who are struggling. As for the burden of paying for this debt relief, even the National Taxpayers Union, a research group opposed to Biden’s plan, estimates it will cost taxpayers who make less than $50,000 per year a modest $190 in taxes; the long-term tax burden on those making more than $200,000 per year will be about $12,000. As for inflation, the impact is expected to be negligible: Moody’s estimates it’ll increase inflation by 0.08%; Goldman Sachs expects it’ll increase GDP by 0.1% and affect inflation only “slightly.”

Cancer

The bad news: We’ve treated the symptom but not the disease. When dealing with a malignant tumor, standard procedure is first to shrink it. But cancer is the underlying disease, and the day after the debt is forgiven, this tumor will resume its growth.

In the past five decades, the price of college has accelerated three times faster than inflation. Pell Grants used to cover 80% of tuition costs, now it’s 30%. Since 1990, tuition has risen three times faster than U.S. college enrollment. Higher ed has become a luxury good subsidized by BNPL-like loans that prey on young people and parents who’ve been taught to believe if their kids don’t graduate from college they’ve failed … on a cosmic level. I’ve railed against this system again, and again, and again, and again, and again, and again, and again.

I am also complicit. At NYU, we charge students more than $74,000 per year, making us one of the most expensive schools in the nation. Many of our students can afford it; most can’t. NYU parents and graduates have borrowed $3.5 billion in federal loans — more than at any other university in America. And in 4 out of 5 graduate programs, our students have borrowed more than they earned two years out of school. The median NYU loan size is the price of entry: $74,000. The dynamic is best summarized by the great philosopher Otter from Animal House: “You [the student] fucked up, you trusted us [NYU].” Note: There are exceptional leaders and donors at NYU committed to changing this.

Despite exorbitant price hikes, the product hasn’t changed materially. You’re still paying for a four-year tour of auditoriums and projectors, and access has barely increased. Critics of the debt relief plan argue that whatever the cost of higher ed, students chose to take out the loans, so why should we bail them out? I’m sympathetic to that view, but my experience inside higher ed tempers it. The truth is, we (universities, employers, society) haven’t held up our side of the deal.

When I applied to UCLA (for the second time) in 1982, the acceptance rate was 74%. Today, it’s 9%. My Pell Grants covered all of my tuition and much of my living expenses. Fast forward, we have embraced an exclusionary, rejectionist culture such that the beneficiaries of great public education and infrastructure can entrench their own wealth and influence and limit new entrants into the market. The problem of income inequality in America is well documented. What gets less attention is age inequality. In sum, my generation has earned the moniker “the greediest generation.” In terms of wealth by age, there’s never been a more unfortunate time to be young in America — or a more fortunate time to be old. The average 75-year-old today is 77% wealthier than the average 75-year-old 30 years ago; the average 35-year-old is 19% poorer.

Cure

So, leveling up a younger generation that has seen its wealth as a percentage of GDP cut in half over the past 40 years is a worthy objective. After we’ve treated the tumor (debt), we have to cure the cancer (costs). Biden’s addressed the tumor, but he has no real plan for a cure. On Monday, the president tweeted he’s “holding colleges accountable for jacking up costs without delivering value to students.” How? He’s going to create … a naughty list. However, Mr. President, I can confirm we (university faculty and leadership) no longer see ourselves as public servants, but Birkin bags … and we have no shame. The last class I taught, at the peak of Covid, was 300 NYU Stern students (all via Zoom). We charged each student $7,000 to take the class. That’s $2.1 million (much of it in debt) for 36 hours of bad Netflix.

It’s true Biden did right by terminating federal loans for fraudulent for-profit college institutions, including Corinthian Colleges. But the notion that defunct for-profit colleges are the only institutions guilty of defrauding students is laughable. There are more than 1,800 colleges across the U.S. with student loan default rates of 15% or higher. The national average is 14%. Aunt Becky wasn’t sent to prison for fraud, but for cheaping out. (If she’d paid $1 million to USC directly vs. $500,000 to a middleman, her kids would have gotten in and she’d have stayed out of prison.) Similarly, for-profit universities have been punished as they are not part of the cartel and don’t charge enough to have tenured faculty and “ethics” centers.

Apart from the Department of Education’s unmanageable debt list, our government has done nothing to disincentivize colleges from raising prices. The only guardrail in place is this: If a university’s student-loan default rate breaches 25%, it can no longer access federally backed loans. In other words … 1 in 4 students must default before a college pays any penalty. One. In. Four. The bottom line is the culprit is universities — not taxpayers — and they should be on the hook for this, and any subsequent bailouts.

The missed opportunity here was a well-structured relief package paired with a plan to address the underlying problems. It’s easy to spend other people’s money and play Monday morning quarterback. However, we might actually be forced to step back to the plate, as Biden’s executive order is expected to be met with legal scrutiny and could be overturned. Then debt relief will require Congress to act, and that’s the opportunity to treat the cancer: cost, access, and format.

Beyond the existing treatment plan, here are three suggestions for creating systemic change:

Offer expanded enrollment subsidies. This is the Grand Bargain. For public universities, which educate three quarters of our students, a carrot: extend federal/state funding to pay for the infrastructure (mostly technology) to expand enrollment through a mix of hybrid programs and year-round classes in exchange for tuition caps and reductions. If we have $600 billion to reduce the tumor we can find another $600 billion to cure the cancer. Private universities, on the other hand, get the stick: Increase freshman enrollment faster than population growth, or we dispense with the fiction that these are nonprofit institutions and start taxing endowments.Make colleges pay penalties for defaults. We need to implement harsher penalties on schools when former students default on their loan payments. So here’s an idea from former Education Secretary Bill Bennett: Make colleges pay a fee for every default. This would not only offload the debt relief from taxpayers onto our colleges, but incentivize colleges to bring education and cost in line with the economics of the Main Street economy. Another Bennett idea (similar but different) is to force colleges to take a 10%-20% equity stake in each loan that originates at their school. In other words, we engineer downsides into raising costs. (Specifically, downsides harsher than some bullshit naughty list.)Fund nontraditional one- and two-year vocational certificates. This would be especially powerful for the cohort that’s fallen the furthest fastest — young men. Vocational training in health tech, cybersecurity, specialty construction, and a plethora of other trades that don’t involve SaaS software are in demand. We need more mixing among young people who are going to Google and those doing apprenticeships to install energy-efficient HVAC. (BTW, great job — you can make almost $100,000 a year.)Silver Lining

There are missed opportunities in the debt relief package. But there’s a lot to like. (See above: shades of gray.)

It’s also a positive sign for our government. Specifically, our government’s ability to get something done. The past four decades of policy have been characterized by gridlock and lethargy. Filibusters have become the norm; cloture motion filings have quintupled over 20 years. Our nation’s wealthiest call on government not to take action but to “get out of the way.” Eighty years ago, FDR was issuing more than 300 executive orders per year; these days, we get around 40.

A Higher … Higher Ed

A society built on rejectionism and frequent bailouts inspires moral hazard and class warfare. Many people approach me at conferences claiming their kid “doesn’t need college.” Yes, college isn’t for some people, but higher ed (affordable, different formats) could benefit most American youth. Jay-Z didn’t go to college and is a billionaire; assume your kid is not Jay-Z.

I was (seriously) an unremarkable kid, raised by a single mother who lived and died a secretary. The access and affordability offered by public higher ed not only gave me the opportunity to achieve things I wouldn’t have otherwise, but to be a better father, son, and citizen — more engaged in our society, more able to care for others. We need more, much more of this.

These are problems of our own making: a rejectionist culture, university presidents making $5 million a year, and an obsession with a four-year degree format. Where to start? Simple, where we came from: 76% admissions rates, Pell Grants that cover 70% of costs, different formats, and university accountability.

Universities are the tip of the spear for America. Our idolatry of innovators was fomented by a creeping, insidious gestalt on campuses that perverted our mission to identify the remarkable and make them billionaires. No, that’s not our purpose nor the soul of America. Our country is about giving as many people a shot as possible, as no institution or bloodline can predict greatness. Instead, we need to love the unremarkable … again … at scale.

Life is so rich,

P.S. One way to scale higher ed — do it online, with other people, at a much lower cost. This is exactly what we do at Section4. Check it out if you haven’t already.

 

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A Tsunami Brewing

I’m a little fucked up (i.e., drunk). And drunk, I’m a better version of myself: more in touch with my emotions and unafraid to register those emotions. Forty years ago this week, at 17, I joined a fraternity at UCLA. Pledging ZBT was one of the best decisions I ever made. I grew up with no siblings and an absent dad, so I had few male role models. Without the socialization, scrutiny, and camaraderie of my “brothers,” it’s unlikely I would have graduated from college. 

My freshman roommate, Pat Jarvis, and spring pledge, Ron Baham, were smart, handsome, and talented. Within 10 years of graduation, both would be dead from AIDS. Pat faded away — I’m still not sure where he died — and Ron (very ill) called several people to make amends before ingesting several dozen valium mixed into a large glass of vodka.

Even more upsetting, they died in the late nineties, when America’s view of AIDS deaths among gay men was roughly “that’s a tragedy, but you kind of had it coming.” Only people who contracted the virus from a blood transfusion or heterosexual sex were the legitimate “victims.”

Before the Tsunami

There is an interesting discourse in social media re the importance of addressing issues early, before they can become a real shitstorm. We Democrats ignored the chipping away of women’s rights over the past 20 years only to have the unthinkable happen. It’s likely going to take years, decades even, to get the moral compass of the U.S. back on its axis. The steady erosion of gay rights is accelerating into a second tsunami.

One GOP principle that’s always resonated for me (though it’s barely visible in today’s GOP) is personal liberty. Opting for the individual, making your own decisions about how you want to live your life. Paramount: the right to pursue life. Next: liberty. It’s unfathomable to imagine, in my view, a society dictating whom we can love and who can love us back. New laws in states all over the union, couched in false flag concerns about school curricula or swim meets, amount to nothing but a gross assault on what it means to be American and a violation of our sacred right to liberty.

If advocating for fraternites and gay rights in subsequent paragraphs sounds inconsistent, you can take comfort in knowing that the world is not cable-TV news. Society, people, and life are more nuanced and complex.

Anyway, I wrote this in 2017, which means 97% of you have not seen it.

[The following was originally published October 6, 2017.]

Tom Petty and Bad Timing

Tom Petty’s passing hit me as much as any death of a celebrity since Robin Williams. While we don’t know celebrities, they can transport us back to a time in our life we usually feel good about. Death is not airbrushed or shot in a soft light, so we see them as more human, empathize, and register our own mortality.

Tom Petty takes me back to freshman year at UCLA. As a fraternity pledge, I was thrust into a four-man, 300-square-foot room in the fraternity with my “brothers” (total strangers):

 Gary was a big kid from Seattle who rowed in high school and wore expensive polo shirts. He drove a new Accord and was more ambitious than us, at an earlier age. Senior year, he essentially stopped going to class so he could work full time at a real estate firm. He traded smoking a shit-ton of pot and watching Planet of the Apes with friends during the day for the chance to get a nine-month professional jump on us. The rest of us opted to spend 60, vs. 61, years working and experience a year with Charlton Heston, cannabis, and each other. So. Worth. It. Pat was from a farm in Visalia. He was also the most creative and likable person any of us had ever met. He was hilarious and outrageous, writing songs and scripts and then having us sing and read them, usually very high. Pat and I bonded, as, unlike most of our brothers, our families were not affluent. We were always broke … always. Craig was from the Valley and had a nice innocence about him. He was artistic and constantly doodling, and soon he was designing all the shirts and swag for social events. Claiming it was his psych homework, Pat would put on the theme from Jaws, pin Craig to the ground, and tickle him until he passed out from oxygen deprivation. Then, in the middle of the night, he’d put on the theme from Jaws so we could watch Craig wake to the music and reflexively scream “NO!” This still stands as the hardest I’ve ever laughed. Ron was a handsome Black guy with a movie star voice. He dressed as if he’d walked out of The Preppy Handbook. He ended up at a Jewish fraternity when he was unable to secure a bid from the Lambda Chi fraternity next door. Ron seemed older than his years and was universally loved. By his late twenties, he was director of television programming for Disney.Damn the Torpedoes

The soundtrack to all of this in 1983 was Tom Petty’s Damn the Torpedoes and Bruce Springsteen’s Born in the USA albums, which we literally wore out. Hearing of Tom Petty’s death took me back to freshman year, and a bunch of us started a group text around the shock of his passing. I was reminded of Pat and Ron’s deaths by their absence.

The last time I saw Ron was at a friend’s wedding in the ’90s. Severely ill and wasting away, he seemed embarrassed to speak to me. I tried to be as nonchalant as possible, acting as if nothing was wrong, talking about anything else. A man was dying, and another (a friend) was too immature to find the behaviors or words to bring some grace to the situation.

Several years before that wedding, at another friend’s rehearsal dinner, Pat captivated the table with stories of being kicked out of his church-sponsored “re-education” camp, as their attempts to turn him straight weren’t getting traction. By that time, the early nineties, American society was slowly becoming more accepting of gay people. But at UCLA in the eighties, there was no acceptance whatsoever of gay people or their lifestyle. I couldn’t have named a single gay person at UCLA, though several of my good friends, unbeknownst to me, were gay. My closest friend, the godfather to my youngest son, and the CEO of my first firm — all of them friends from college and grad school. All gay.

So much about who we are and the lives we get to live is a function of where and when we are born — out of our control. I have no choice over my sexuality. Being born a straight man in California in the sixties was the luckiest thing that could have happened to me. Being born a gay man in the sixties proved fatal for Pat and Ron.

Born 20 years earlier, they could have had a full adult life. Born 10 years later, science would have caught up with them and made living with HIV manageable.

Most of us have had the chance to do the things we dreamt of in college. Many of those things (achieving material items, having exotic experiences, finding relevance) have been meaningful. But as you get older, the relationships you have with people you love and who love you overwhelm everything else in your life. It’s not something easily explained to a young person. And, unlike most things, we get better at love as we get older. At a minimum, we appreciate it more. Pat and Ron were more talented and likable than any of us, but they were robbed of the time to achieve much. Nor did they get to find loving relationships to wash over those achievements.

I heard about Tom Petty and was sad and nostalgic. I remember Pat and Ron and am just sad. Very sad.

Life is so rich,

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Welfare Queens

What’s the most successful venture capital firm in history? Kleiner Perkins and Sequoia Capital backed many Internet-era success stories. Andreessen Horowitz? No, one organization towers above. This firm was there before the first transistor was printed, and it will be there after we receive brain implants. One investor funded the computer, the internet, speech recognition, last-mile distribution, mapping the human genome, the core technologies of fracking, and the first horizontal shale drill, and today it’s driving down the cost of solar and wind power below that of coal. Even better news: If you’re a U.S. taxpayer, you’re a limited partner.

The Firm

Founded in 1776 by General Partners Washington, Jefferson, and Madison, and headquartered today in a Beaux Arts corporate campus in the District of Columbia, the U.S. government is the world’s premier funder of technological and commercial innovation. The Inflation Reduction Act (“IRA”) is being hailed/hated as a climate bill, but it’s really just the most recent investment by Eagle Capital. Opponents of the legislation claim it’s a poor investment. Eagle Cap’s track record suggests otherwise, and we can expect big returns.

The IRA (awful name) will direct $369 billion to a variety of clean-energy initiatives, largely through tax credits. The largest investments are for solar, wind, and nuclear power generation, where Eagle builds on a track record of success. The government has invested over $3 billion in wind power R&D since 1976, and it’s been offering tax credits for wind and solar since the 1990s. Just since 2010, the cost of solar has dropped 85%, and the price to harness wind energy has been halved. Public funding, through R&D and tax credits, has been instrumental to that progress. Ninety percent of U.S. coal-fired power is now more expensive to operate than replacement wind or solar sources. And that’s not for lack of investment in coal. Conservative accounting puts government subsidies for coal at $20 billion per year, and the IRA includes investments in carbon-capture technology intended to support coal energy for several years.

Eagle Cap’s $528 million loss on solar cell manufacturer Solyndra, which declared bankruptcy in 2011, was a notable miss. But failure is inherent to venture investing. One analysis found the best-performing VC firms have more money-losing investments than the average funds. The key difference is the magnitude of their successes and aggregate portfolio returns. Solyndra was a miss, but the $30 billion Department of Energy loan program that funded it turned a profit. There are many notable wins; one business that took a $465 million loan from the same program in its early days: Tesla. You likely didn’t know that, as its CEO spends more time shitposting America than crediting it.

Going Deep

Early-stage, future-leaning research is riskier and requires large amounts of patient capital. Private industry struggles to justify long-term, mammoth investments in deep science. The most enduring societies have one thing in common: Their governments play the long game. In the 1960s in the U.S., this meant computer and networking technology. At its peak, federal R&D spending approached 2% of GDP. The most cutting-edge work was done by the Defense Advanced Research Projects Agency (“DARPA”), which developed or funded the development of almost every building block technology of our tech infrastructure, from the Internet and the mouse to graphical user interfaces and GPS. More recently, DARPA has been a major funder of AI projects, notably speech recognition — both Dragon and Siri spun out of DARPA. Speech illuminates the difference between government and private R&D: In the 1950s, private Bell Labs (aka the phone company) did pioneering work on speech recognition — but only on phone digits zero through nine.

The government also invests upstream by supporting public education and universities. Stanford established leadership in engineering thanks to a unique three-way partnership between the university, industry, and government contracts, centered around the Stanford Research Institute, where many DARPA innovations have been created. Marc Andreessen coded Mosaic, the first consumer-friendly graphical web browser — it was the precursor to Netscape Navigator — while attending the (publicly funded) University of Illinois and working at the federally funded National Center for Supercomputing Applications. Again, did you know that? Why would you? According to an MIT study, technology developed at universities and then licensed to industry between 1996 and 2010 created $388 billion in GDP and 3 million jobs.

Double-click on any major tech product or company, and you’ll find government-funded tech. Apple, Intel, and Qualcomm were all beneficiaries of a loan program similar to the one that funded Solyndra and Tesla. Google’s core algorithm was developed with a National Science Foundation grant. Economist Mariana Mazzucato, in her book The Entrepreneurial State, calculates that U.S. government agencies have provided roughly a quarter of total funding for early-stage tech companies, and that in the pharmaceutical industry (a sector requiring immense experimentation and a willingness to fail), 75% of new molecular entities have been discovered by publicly funded labs or government agencies.

Fifty years from now, the field most likely to spawn more value than digital computing is genetics, and similar to digital computing, genetics is an Eagle Cap portfolio industry. The Human Genome Project cost U.S. taxpayers $3.8 billion, was completed under budget and two years ahead of schedule, and has generated $966 billion in economic activity and $59 billion in federal tax revenue. It’s estimated the federal government’s $3.3 billion in annual spending on genetics projects generates $265 billion in economic activity annually. This number doesn’t account for the improved health outcomes and quality of life flowing from genetic breakthroughs — which have an estimated value of $1 trillion per year and growing. One of Eagle Cap’s recent wins in this space: the Moderna Covid vaccine, the result of a $25M DARPA grant to the company for developing RNA vaccine technology.

Eagle’s Biggest Critics

The biggest critics of the government are, oddly, some of its biggest beneficiaries. Tech billionaires are often the first to shitpost America, even as they continue to harvest wealth from the investments taxpayers make via the U.S. government.

In fact, the biggest bitch(er) may be the biggest (financial) beneficiary. Elon Musk says we should “get rid of all” government subsidies, that “the government is the biggest corporation with a monopoly on violence,” and last week mocked Washington for hiring more employees at the IRS. Let’s be clear: Elon didn’t build an EV company in South Africa or start a rocket company in Canada. He built Tesla and SpaceX in the United States. And both continue to be heavily dependent on U.S. government support. 

There would be no SpaceX without NASA, its largest customer. Tesla built its Fremont factory with a $465 million DoE loan in 2010, and its first 200,000 cars benefited from tax credit subsidies of up to $7,500. For years the company was able to report profits thanks to the “sale” of emissions credits to other carmakers. All told, the company has accepted an estimated $2.5 billion in government support.

Marc Andreessen says he’s “pro-gridlock,” because “when the government does things, it usually doesn’t end well.” Except for providing the state-sponsored platform for his career — the University of Illinois and NCSA. Now @pmarca is making news because he’s concerned about our nation’s “housing crisis.” We aren’t building enough houses, he wrote recently, and that’s “a driving force behind inequality and anxiety.” Except when the housing is near … his house.

Another outspoken billionaire, Peter Thiel, says the U.S. government is “socialist” and believes we have “much worse outcomes than the Soviet Union in the 1950s.” (His solution is to take up seasteading — i.e., building floating autonomous ocean communities that aren’t subject to regulations or taxes.) But Thiel’s current venture, Palantir, is a government contractor that provides data analytics to the CIA, DoD, and other government agencies — and these contracts make up almost 60% of its revenue. Note: Palantir has lost money every year of its existence. That feels like a Soviet outcome.

Mother of All Welfare Queens

In his 1980 presidential run, Ronald Reagan advocated tearing up our social safety net on the manufactured claim that it offered nothing more than handouts for lazy people. He popularized the notion of the “welfare queen,” someone living large on the government dime, having more children to generate more welfare income. It was a classist, racist stunt. And it worked. Twenty-two states passed laws banning increased welfare payments to mothers who had additional children, and we’ve been slashing and burning the government ever since. Reagan’s welfare queen was a caricature, a country club cocktail fantasy of the ungrateful beneficiary of hard-earned tax money. The new welfare queens are tech billionaires. The only difference is, they’re real.

VCs claim they partner with entrepreneurs (many do), bring unique insight (most don’t), and care about the founder (read: money). What’s clear is that the economic model of 20% carried interest — investors and VCs get 80% and 20% of the gains on capital, respectively — has been flipped on its head re: public investment, where investors (taxpayers) often get less than the VCs and entrepreneurs they back. Ironically, a Democrat held up the legislation until the most obscene tax break in our tax code was restored. I hope someday somebody loves me the way Senator Sinema loves VC and private equity.

Lemonade Stand

We’re on vacation and my kids made $27 from their lemonade stand yesterday. They then spent $29 on Nerds and Airheads candy, and were 100% confident they should have unfettered access to their returns (before/during/after dinner) … as they earned it. The gap in the math was that Dad spent $38 on supplies (table, sign, market, pitcher, cups, lemonade mix, etc.). Take this times a trillion, and you’re starting to get warm re: the relationship between taxpayers, Sand Hill Road, and the innovators they back.

Citizenship

A wonderful thing about our country is that the people who are most patriotic are the ones who’ve made the greatest investment: veterans. Less heartening are the individuals who’ve registered the greatest benefit, are the least grateful, and are often the most critical: VCs who relocate to Miami and, before buying sunblock, disparage (constantly) the state they built their wealth in. Also, mega-welfare queens who cash EV subsidy checks and sell carbon credits as they mock the elected leaders who passed those laws. BTW, nobody believes you moved to Florida or Texas for better governance — you wanted the chance to recognize a capital gain at a lower tax rate than the middle-class taxpayers who funded your infrastructure. Fuck off.

The first trillionaire will likely be an entrepreneur who builds a layer of innovation on top of the bold investment American citizens are making to address climate change. Let’s hope they display more grace and citizenship and our elected leaders demonstrate more backbone representing investors, the lower 99.99%.

Life is so rich,

P.S. My Brand Strategy Sprint is coming up on September 19. If you haven’t taken it, I’ve heard it’s pretty good. Enrollment closes September 13 – sign up now.

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Work From Office

Work from home is polarizing. Last week I was on Smerconish, and after articulating the benefits of remote work for four minutes, I spent 30 seconds on the downsides: Offices are where young professionals establish relationships with mentors, colleagues, and mates. In sum: Put on a shirt and get into the office. Cue the Tesla-bro-like pushback. On Twitter: “Garbage,” “It’s not 1954 anymore,” “Really dumb take.” In sum … you know … Twitter.

Remote work generates heat because it matters … a lot. Since the onset of the pandemic, the  dispersion of work has morphed from an experiment on the fringes of the economy to the mainstream. As of September 2021, almost half of all U.S. employees were working remotely at least some of the time. Among knowledge workers, only 34% were working full time at the office in May 2022. Think about that: More office workers in the U.S. are remote, at least some of the time, than are in their traditional place of work full time … a cornerstone of our social construct is disintegrating.

Mary Tyler Moore, ER, and The Office were about … the office. The Sopranos and Homeland were (sort of) about remote work. But I digress. With WFH’s widespread adoption, we are beginning to get real data on the most profound shift in how human capital intersects with our economy.

Work From …

We call it “work from home,” but that’s a misnomer. It’s “work from not at your employer’s location,” but that makes for a lousy acronym. We’re really discussing remote work, an ephemeral sounding phrase that’s reaching for permanent status.

The trend is not without opposition, but something that buttresses remote-work evangelists is that the strongest advocates for returning to the office have the least credibility. Jamie Dimon, David Solomon, and Howard Schultz (note: I’ve worked with all three, and they’re great leaders) built their success in the Before Times and had the resources to live close to work and ensure their kids were looked after. For most workers, not so much. So, yeah … works for you, boss.

This isn’t a populist uprising, however. The WFH movement is (another) transfer of wealth from the poor to the rich. Money is the transfer of work and time. Research shows people who cannot work at home are more likely to be lower-income, rent their home, lack a college degree or employer-provided health insurance, and be non-white. Uber drivers, Amazon warehouse workers, FedEx drivers, and meatpackers don’t have Zoom accounts. It’s bits vs. atoms, and bits are managed by higher-paid information workers.

Unlock

But remote work could also empower. Our aging population, the spread of technology that’s depressing our youth, and increased economic stress on young families all need significant investment in one thing: care. We often lose sight of the whole point, the whole shooting match of the economy — it exists to provide people with the security to form and strengthen relationships. I believe we need a new classification of employees: care workers. People who are caregivers for children or aging parents, or who find themselves in circumstances where they need to provide self-care. People struggling with mental health issues or unable to find affordable housing near work might also qualify. Companies should make a forward-leaning investment in workers fitting this new classification to ensure their career trajectory holds steady while they’re providing care. The option of remote work makes these arrangements more feasible.

There are moral arguments to be made for this, but the easier argument is economic. With birth rates declining we have to find new sources of workers, full stop. The pandemic set female participation in the workforce back decades, and we need the most educated cohort in history (young American women) to return. But making that happen will require going on offense and investing in a care worker classification. Because, let’s be honest, most of the responsibility for caring for children and aging parents falls to women, and that will likely continue. Ensuring women, and some men, can maintain professional relevance and equal pay through the leverage of technology is the big unlock.

Second Order

An attention economy brings time spent and valuation together. TikTok now commands more attention than Facebook and Instagram combined and, accordingly, tripled its revenue last year. The platform also capturing more attention is your home, specifically residential real estate, which — despite fears of a recession — has seen an unprecedented increase in home values and rents. Office space, meanwhile, is to residential what print was to online media in the aughts; its owners in denial as it hemorrhages share, jobs, and value.

Be wary of predictions that we’ll see an exodus from the cities to suburbs, however ​​– the death of cities has been often and greatly exaggerated. Yes, Midtown at lunchtime feels muted … but lower Manhattan is more vibrant and pulsing than I’ve witnessed in my 20 years here. Some workers will move to more beautiful rural areas for balance. (I hate that word.) They may or may not find it. However, it’s more likely they will find career stasis.

An old-economy winner will be resort hotels. Business travel is a bull market right now, because event planners are suddenly strategic assets. Companies with a high share of remote workers need to get people in the same place some of the time, so they’re investing to make those moments an experience that sets an aspirational tone for the firm. They book the One Hotel in South Beach, fly in managers from around the globe, and charge the event planner with creating 2.5 days that will make people feel better about their employer the other 363 days. I know this, as my speaking business has thrived.

Productivity

But is remote work more productive? Are people working from home, or just … at home? We are starting to see some early data. And … it’s mixed. Proponents of remote work point to two recent studies that found increases in productivity: Researchers at Stanford and Harvard studied call center workers, and found productivity (calls per hour and customer satisfaction) increased 13% and 7.5%, respectively. But call center work, which is relatively low-skilled and closely monitored by management, is not representative of higher-value knowledge work. Another study, this one tracking “skilled professionals” at a large IT services company, found that output stayed the same when workers went remote — but that workers put in 30% more hours.

That’s a terrible outcome for workers but also for employers, because expecting your employees to work a third more hours for the same pay isn’t sustainable. Remote work doesn’t have to be more productive to make sense, but its other benefits become less attractive if you have to work longer for the same outcome(s).

One Is the Loneliest Number

Similar to most technological innovations, there is potential for enormous progress (see above: care worker), but also externalities (e.g., depression, addiction, misinformation, polarization, etc.). Remote work, poorly implemented (which is typical), is awful for young people, especially young men. The office has been an enormous source of social capital, and we’re getting poorer. Where do we mix with people from different backgrounds? The mall? The movie theater? No and no.

My first client at Prophet (a brand strategy firm I started in B-school) was Levi Strauss & Co. — a wonderful firm. The head of Europe was a guy named Carl Von Buskirk. I once saw Carl at the Bay Area HQ and asked if he was there for a meeting. He responded, “No, I come once a quarter to be visible and get drunk with people who matter.”

Remote work for young people is often … a bad idea. The office is where you build relationships and find mentors. And mentors are the people who become emotionally invested in your success. That same Harvard study of call center workers found that, despite greater productivity, working from home decreased the probability of getting a promotion by 12%. Another study found that people who work from home are 38% less likely to receive a bonus. There are usually several people qualified for each promotion. The job will typically go to the person who has the best relationship with the decider. And relationships are a function of proximity. If this sounds unfair, and just bullshit facetime … trust your instincts. The corporate world and small injustices will be synonyms for a long time. This isn’t to say young people shouldn’t have opportunities for remote work. However, the conversation coming is … “OK, but you will make less money.” In some cases, it may be worth it. Some.

If you’re an employer, the office is your primary tool for facilitating culture. Holiday parties and post-work drinks aren’t sunk costs — they’re investments in happiness, innovation, and relationships. The greatest driver of retention is if someone has a good friend at their workplace. Without a workplace, your employees have fewer points of contact. Sixty percent of remote workers say WFH makes them feel less connected to their colleagues.

1:12

I sit here, at 1:12 Friday a.m., and wonder … who is this week’s newsletter for? Two thoughts: Ask not what remote can do for you, but what it can do for the country? The U.S. has registered so much prosperity, but without commensurate progress — wages decoupled from productivity five decades ago as we prioritize shareholders over the middle class. We’ve lost sight of the endgame, to help others love and care for the people important to them. Remote work offers the opportunity for caregivers to earn a living and care for people at the same time. That’s a profound opportunity, and worthy of investment by corporations and the government.

My best friend’s mother has progressive dementia, and another good friend has a son who is severely autistic. The best caregiver for both is also the breadwinner. Remote technologies and a new classification of worker could bridge the gap. After all, what does all of this mean if we can’t take care of our families? If we can’t love them? Really, what’s the fucking point?

In Contrast

In contrast, for those of you starting your career — before you collect dogs and spouses, find an employer who offers an increasingly important benefit, an office. My time at UCLA was rewarding. But my first job, at Morgan Stanley, was more educational. In two years I found a mentor who was irrationally passionate about my success, learned (sort of) how to read a room, navigated around a senior exec who kept asking me out (yes, this happens to men), and learned how to succeed, or not, in a society called the workplace. If you do not enter the physical workplace early, you’ll miss opportunities and stressors that will make you stronger and more capable.

Remote work offers a huge unlock for caregivers. Also, the physical workplace offers guardrails, structure, and connections for a generation that’s been robbed of relationships and growth. We are a social species. We live in a capitalist society. Find mentors, colleagues, and mates … get to the office. All of these things can happen on a screen, most will not.

Life is so rich,

P.S. If you don’t have time to take a sprint, you can now learn with Section4 on demand. Sign up now to get access to every course we offer, on your schedule.

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Bottom’s Up?

“Sock!” wails my oldest son. We spring into action. Finding the door to my youngest son’s room open, we proceed inside to validate our fears. Our Great Dane, Leia, lies still on her dog bed, bigger than most queen mattresses, looking guilty. “Where is the other one, why did you leave your door open?” our oldest, holding up a singular Bombas sock, queries his younger brother. It’s painfully clear what’s happened. Leia has, again, eaten a sock. This revelation inspires a crisp trip to the vet.

The vet injects Leia with a small dose of apomorphine, which stimulates dopamine receptors located in the area of the brain reserved for vomiting. She’s uncomfortable for a few minutes, heaves, and we get the sock back. Bombas claims they give a pair to someone in need every time they sell a pair. I wonder if that person feels nauseated when this happens, similar to a rabbit’s blood pressure rising after a sibling rabbit dies. The previous sentence is ghoulish even for me.

But this isn’t a dog post.

Debbie Downers

Only 10% of the nation feels positive about the economy, and last month consumer sentiment hit a record low. Americans are more anxious than they were even in 2008. Inflation is raising our collective blood pressure, and the media’s love of bad news is tipping us into hypertension. Anyone with a phone and a New York Times subscription has seen, over the past six months, 20 headlines regarding rising gas prices vs. 1 on their equally precipitous fall.

We’re witnessing similar pessimism among investors. Six in 10 fund managers say they’re taking less risk, the largest share … ever. Cash vs. stock allocation has surged to its greatest level since 2001, and more than half of managers say recession is likely.

Both And

A difficult concept to grasp is that contradictory things can exist concurrently. This is partly what makes markets so challenging: A company reports significant revenue growth but the stock declines, as price is a function of millions of signals creating a set of expectations that are reflected in the stock leading up to earnings. It’s impossible for the human brain to process all of them. So we cling to binaries — up/down, good/bad — wherever possible. But binaries are black and white, and markets are in color.

U.S. GDP just contracted for the second quarter in a row — and for some people, that means a recession has already arrived. But … it hasn’t. I know this, because I just paid $140 for one adult and two kids tickets to “The Color Factory.” After waiting an hour, we were exposed to a “one-of-a-kind experience that immerses you in joy and color.” Not sure much joy was registered, but I did find out my “spirit color” is Majestic Gazpacho. Point is, there were several hour-plus lines in SoHo this past weekend so you could jump in ball pits, sample beauty products, or try on running shoes. Other anecdotal evidence: It’s become a foregone conclusion we were going into recession, which often means … we’re not.

A more robust determination will eventually be rendered by the National Bureau of Economic Research, and according to its chairman, the whole negative-GDP-in-two-consecutive-quarters thing “doesn’t make any sense.” Per the NBER, a recession is “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” And even that’s just a rough guide. Case in point: The group identified the early days of the pandemic as a recession, though the contraction lasted only two months.

Employment has risen every month this year. We added more than 500,000 jobs in July, and the unemployment rate is near a 50-year low. Personal consumption (70% of the economy), adjusted for inflation, has been up in five of the last six months. (See above: “The Color Factory.”) Over half the S&P 500 has now reported second-quarter earnings — two in three companies have beaten Wall Street’s revenue estimates, and three in four have beaten earnings estimates. Our fears, one economist says, are “completely at odds with the reality. I’ve never seen a disjunction between the data and the general vibe quite as large as I saw.”

The red lights on the dashboard: Inflation is still high, household debt levels are rising (because of inflation), we need the GDP growth number to turn positive, and the war in Europe presents real risk to everyone everywhere. That consumers and investors are so anxious is itself cause for concern. Mass feelings of pessimism (warranted or not) can become self-fulfilling prophecies.

Oh, and there’s this:

Gag Reflex

Just as we all became virologists when the pandemic hit, many of us now fancy ourselves economists. Every third tweet is a hot take on supply chains, and interest rates are cocktail party conversation. With the exception of a brief pandemic lapse, the market has been on a more than decade-long bull run. We saw “up and to the right” as the natural backdrop for stocks. Now that we’re seeing red, we’ve convinced ourselves that the market is suffering some sort of severe illness. Recession? Depression? Global collapse? Maybe. But more likely: The market is vomiting up stocks that should never have been ingested.

If we look at the stock market by sector, things aren’t that bad. Energy (albeit a Russia-Ukraine anomaly) rose 65% over the last 12 months. Utilities climbed 14%. Most other sectors, including real estate, industrials, and tech, are down, but not by much — and no more than 10%. There is, however, a vast force pulling the market down: unprofitable tech companies. Think Snap (down 86% in the last 12 months), Peloton (down 90%), and Roku (down 80%).

Within a year of the pandemic hitting, unprofitable tech stocks rose an average of 250%. These price movements made branded speculators, including Cathie Wood, wealthy. But the market’s mania for these sorts of equities was neither healthy nor normal. Most of these companies showed little-to-no evidence they could reach profitability, yet valuations promised sector domination, and many Web3 ventures were leveraged Ponzi schemes. The market’s apomorphine is fundamentals, and many companies, tokens, and platforms (e.g. Robinhood, most SPACS, all tokens sans BTC/ETH, and Celsius) were regurgitated by the market. This is healthy. And the healing may have begun: Many enduring tech companies just registered one of their best months in history.

The pain we’re seeing in the stock market is the autoimmune response of a healthy, functioning economy. We thought we had an iron stomach, that we could digest anything — from synthetic shitcoin derivatives to Opendoor shares — but these were unwholesome, even pestilential.

Floor

In recent weeks, markets have rallied. The S&P 500 and Nasdaq hit lows in mid-July and have since risen 13% and 18%, respectively. Bitcoin appeared to hit a floor of $19,000 — it seems to have now stabilized at around $23,000. Ethereum’s up 50% for the month. The NFT market crashed spectacularly in early 2022; but I recently got an update from a crypto cold-storage company I’m invested in, Ledger: The company listed 10,000 NFTs for sale that will allow owners to get first access to a marketplace they’re launching — and sold out in 24 hours, generating more than $4 million.

Put another way, there’s still a market for many of these assets, which signals they’ll be enduring. Crypto and growth stock bubbles popped, but people still want Bitcoin and Ethereum and many tech companies are muscling through. Uber, for example, is a serially unprofitable business whose stock was halved between January and July. This week, however, the company posted positive free cash flow of $382 million in the most recent quarter — and the stock rebounded 20% in a day.

Digging in the Wrong Place

About a month ago I spoke with Ian Bremmer, President of Eurasia Group, on the Prof G Pod. Ian made a great point: We’ve all been talking about inflation and interest rates, but we’re focused on the wrong recession.

Ukrainian troops are camped along the front lines outside Kherson awaiting gunfire and airstrikes. Climate change is submerging or parching dense and developed regions all over the globe: The Rhine river is 14.5 inches away from being too shallow for cargo to pass through, half of the EU is at risk of drought, and the death toll from mass flooding in Kentucky is 37 and counting. Six in 10 Americans view members of the other political party not as political opponents, but as their enemy, and that number continues to climb. The greatest threat to our nation isn’t an economic recession, but losing the script re: what it means to be a country and a citizen. We have forgotten that Americans’ greatest allies will always be other Americans.

Our innovators shitpost the government when things are good and then expect a bailout when things get real. Just as the far right is attempting to conflate Christianity and masculinity with extreme conservatism, there is a dangerous smell of false equivalence emanating from the Valley, where a lack of respect for institutions and flouting any code of conduct correlates to innovation.

We each need our own stimulus, to be more enduring friends, neighbors, and citizens. To be kinder to each other, to realize our government is us, and to demonstrate more reverence for the most noble organization ever assembled, the U.S. government.

Rear Window

We’ve left the vet, headed home. Leia lays in the back, still queasy, and sulks for a few minutes. Unable to resist the open rear window, she soon has her ears flapping in the humid Florida breeze, taking breaks only to lay her head on the center console. Gas is $6, my stocks are down, and my sons’ socks no longer match. But Leia knows better — she’s focused on what’s important. I see her ears in the side-view mirror and have one thought: We’re going to be fine. We get back home, where the boys greet her and return to their devices. A sense of relief washes over me. Then Leia sprints up the stairs to my youngest’s room.

Life is so rich,

P.S. If you’re a product manager, you probably know Netflix’s Gibson Biddle — the guy who spearheaded many of the features that keep you glued to your couch. His next workshop, Measuring Product Success, is coming up on Tuesday. Don’t miss it.

The post Bottom’s Up? appeared first on No Mercy / No Malice.

Prime Health

The U.S. healthcare industry is a wounded 7-ton seal, drifting aimlessly, bleeding into the sea. Predators are circling. The blood in the water is unearned margin: price increases, relative to inflation, without a concomitant improvement in quality. Amazon is the lurking megalodon, its 11-foot jaws and 7-inch teeth the largest in history. With the acquisition of One Medical, Amazon is no longer circling … but attacking.

Per capita U.S. healthcare spending went from $2,968 in 1980 to $12,531 in 2020 (both in 2020 dollars), more than a threefold increase. The result is a massive industry with 13% of the nation’s workers and total spending accounting for a fifth of U.S. GDP.

[image error]Doctor No

Healthcare can boast tangible achievements over the past 40 years. Life expectancy was up from 73.7 in 1980 to 78.8 in 2019 (before Covid knocked it back down a bit). There’s been a revolution in pharmacological treatments, and genetic research is starting to pay dividends. But the financial return — improvement divided by cost increases — has been abysmal. No nation has registered cost increases similar to those of the U.S., and no one spends as much as we do per capita in absolute terms. Yet nearly every developed country has better outcomes, with longer life expectancies, healthier populations, and far less economic stress.

Two-thirds of personal bankruptcies in the U.S. result from healthcare issues — medical expenses and/or time off work. For many middle-class American families, if Mom or Dad gets cancer, there’s a good chance the family will go bankrupt. Forty percent of American adults have delayed or gone without needed care because it’s cost prohibitive. For every improvement in healthcare, it seems our system finds a way to extract a dark lining. That same pharmacological revolution that improved outcomes for millions brought the opioid epidemic. In many areas, our results are lousy at any price: The U.S. has one of the highest infant mortality rates among developed nations.

Beyond spotty efficacy, healthcare offers the second-worst retail experience in the country. (Gas stations retain the No. 1 spot.) Imagine walking into a Best Buy to purchase a TV, and a Blue Shirt associate requests you fill out the same 14 pages of paperwork you filled out yesterday, then you wait in a crowded room until they call you, 20 minutes after the scheduled appointment you were asked to arrive early for, to be seen by the one person in the store who can talk to you about televisions, who has only 10 minutes for you. New York is the wealthiest city in America, yet the average waiting time in an emergency room is 6 hours and 10 minutes.

A good rule of thumb in business is that if it’s bad for the consumer, it’s worse on the other side of the counter. Physicians spend just 27% of their time helping patients — 49% is spent dealing with electronic health records. That includes documentation, order entry, billing, and inbox management. In other words, you spend a decade going to school to get an M.D., only to become a bureaucrat.

No industry has better demonstrated the dis-economies of scale. If we received the same return on our healthcare spending as other countries, we’d all live to a 100 without getting sick. Or, more likely, we’d spend far less, still live longer and healthier lives, and save enough to pay off the national debt in 15 years. U.S. healthcare is the worst value in modern history.

OK, so what to do? At the center of the worst system of its kind, except for all the rest — i.e., capitalism — lies the answer: competition.

Prime Time

Last week, Amazon announced its plans to acquire primary healthcare company One Medical for $3.9 billion. I believe this deal represents the catalyst for a significant societal unlock. I’ve been a member of One Medical for two years and think it’s outstanding. When I contracted Covid, I tapped the One Medical icon on my phone; within a few minutes I was speaking to a nurse practitioner who prescribed Paxlovid and even told me which nearby pharmacies had the antiviral in stock.

With Amazon, the company can recognize its vision. To date, One Medical’s stock has performed poorly — down to $10 per share from $40 at the beginning of 2021. It lost a quarter of a billion dollars last year, and needs capital (which Amazon has: $60 billion in cash). Next, ONEM needs scale. At present the service boasts 736,000 members — impressive. More impressive: More than half of U.S. households are Prime members. The final piece is delivery. One Medical operates a digital health / physical office hybrid business, but you still have to pick up medication from the pharmacy. The obvious upgrade is to have your Paxlovid delivered within hours of a remote consultation. This is Amazon’s core competence — it will happen. Speed and convenience will be so differentiated in healthcare, it will feel alien.

As with most paths to disruption, it’s been long and winding. Four years ago, Amazon teamed up with JPMorgan and Berkshire Hathaway to form Haven, hoping to provide better and more economical healthcare for their combined 1.5 million employees. Despite rocking the stocks of healthcare markets the morning of the press release, it was a headfake and folded in 2021.

Next, Amazon built an in-house service for its employees: Amazon Care. Virtual health services, plus nurses … delivered to your home. It’s doing much better, expanding across the country, and now provides healthcare for other companies. (Hilton is Amazon Care’s largest disclosed customer.) The acquisition of One Medical will couple capital, domain expertise, and installed tech with billing infrastructure, and bring it to 66 million Prime households. Imagine:

“Alexa, I feel feverish and my lower back is aching.”

“Connecting you to an Amazon Prime medical professional now.”

Want to vs. Have to

I predicted Amazon would get into healthcare several years ago. Why? For the same reason Apple is getting into auto: not because it wants to, but because it has to. Amazon stock’s price-to-earnings ratio is 56 — more than double Walmart’s. For the company to maintain its share price, it needs to add a quarter of a trillion dollars in topline revenue over the next five years. It won’t find this kind of revenue in white-label fashion or smart home sales. It has to enter a gargantuan market that lacks scale, operational expertise, and facility with data.

State of Play

A reshaping of healthcare won’t just benefit consumers, but investors. In 2015 healthcare services commanded equivalent multiples to the S&P 500 average. But the market is losing faith in public healthcare companies’ ability to grow in a meaningful way. EV/EBITDA multiples among healthcare services are 33% lower than the S&P 500 average.

Amazon isn’t the only predator sniffing prey. Walmart and Alibaba are both working on their own pharmacy businesses. Uber is working on healthcare transit. And in the private markets, telehealth received $29 billion in venture funding last year, up 95% from 2020.

The obvious and immediate unlock is telehealth, which was accelerated by the pandemic. In a matter of weeks, after the first positive Covid case in the U.S., services the industry insisted had to be delivered in person shifted to Zoom … and we survived. In fact, we thrived. Even once in-person visits were permitted, video house calls remained a thing. McKinsey estimates that the number of telehealth visits has stabilized at 38 times pre-pandemic levels. Doctors adopted the technology, regulators relaxed limitations, and patients saved time as barriers fell. We’re a long way from remote surgery, but huge numbers of patient visits don’t need to be visits at all: A study of 40 million patients during lockdown showed that for certain groups (e.g., people with chronic conditions) outcomes didn’t suffer when visits shifted online. And we’ll only get better at delivering care this way.

The disruption achieved by Amazon will be significant, and the flood of capital, startups, and consumer brands that will follow it into the space will inspire profound change. Mark Cuban launched a pharmacy in January that eliminates middlemen — from the insurer to the pharmaceutical benefit manager. The result? A 90-day supply of acid-reflux treatment that cost $160 is now $17. It’s estimated Medicare would have saved $3.6 billion in one year if it had purchased generic drugs through Cuban’s pharmacy. As other apex predators look for new sources of growth, many will turn their gaze on different limbs of the carcass. Nike could enter healthcare through a wellness positioning: orthopedics, acupuncture, and chiropractic. LVMH, L’Oréal, and Estée Lauder could build the first global plastic surgery brands. The Four Seasons and Hilton might open hospitals. Lennar and Pulte could build “Active Living” communities that Nana will leave feet first, bypassing the expense and tragedy of dying under bright lights surrounded by strangers.

Risks

Privacy is a concern: Your credit card and billing address is one thing, your HIV status another. However, I believe these concerns are overblown — most consumers (60%) feel fine sharing their personal health data over virtual technology. In addition, this is inevitable. Eighty-five percent of physicians believe radical interoperability and data-sharing will become standard practice. Finally, when it comes to handling your personal data, Amazon is the most trusted Big Tech firm. Reminder: Amazon is not Meta.

And What of Antitrust?

Amazon should be broken up (forced to spin off AWS and/or Amazon Fulfillment) and prohibited from advantaging its own products on the platform. It should also be permitted to enter healthcare via acquisition. The acquisition of One Medical is minuscule compared to the larger healthcare market: a $3.9 billion deal, while the largest healthcare company in America, UnitedHealth, has a market capitalization of $498 billion.

Elegant antitrust enforcement should not fall into the trap of believing that some people/firms are good/bad. It should recognize that competition is good, and in each deal the DOJ and FTC should stay focused on the prize: How do we make markets more competitive? E-commerce, digital marketing, and social media are too concentrated, and the FTC should force a divestiture of assets. At the same time, those same companies can foment much-needed competition in what has become a social ill.

We are overweight, depressed, and increasingly broke at the hands of U.S. healthcare. The treatment that offers the best outcomes is the same therapeutic that’s resulted in massive value and prosperity across most of our economy: competition.

Dear Amazon … bring it.

Life is so rich,

P.S. The cost of ads has risen astronomically. If you feel like you’re burning money, you might like our new workshop on Marketing Acquisition Strategy with ex-Slack and Google leader Holly Chen. Enroll now.

 

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