Scott Galloway's Blog, page 19

Tethered

Perspective

My week has been a cocktail of layoffs, margin calls, and Covid.  How’s your week going?

Markets are down, the risk of nuclear war is up and, worst of all, it looks as if Cumrocket will not replace the dollar. Professor Adam Alter, my colleague at NYU, says dramas perform best in good times and comedies in bad. So I don’t want to read more bad news … much less write into its shadow. The nitrous oxide (love nitrous) for most bad weeks is a small dose of perspective administered while awake/aware.

One shortcut to this perspective for me is to think about my parents. They’ve both had good lives, but when it comes to opportunities presented as a function of where and when a person was born, I am from a different planet. I saw my dad this week. He is 91, and the paths of conversation are getting narrower and fewer. His favorite: He asks me about my life. The things people pay me for (to speak in front of an audience); how much they pay (a lot); the school field trips my boys take (the Grand Canyon); and that I have a TV show (didn’t tell him the plug was pulled). It used to bother/upset me that he’d ask the same questions over … and over. I then realized it’s just fine, good even, if he finds joy from the same thing.

But, inevitably, I think more often about my mom and the self-worth she instilled in me. The following was written five years ago, when we had fewer than 5,000 subscribers, which means there is a 2% chance you’ve already read it. It felt good writing it, and I hope it does the same for you reading it.

[The following was originally published on August 25, 2017.]

Tethered

In relationships, I’ve gotten so much wrong, with so many people, for so long. With romantic partners, I focused on managing the person, vs. being honest and open, creating an uneasy calm interrupted by shock and disappointment. Professionally, I’ve expected employees to be loyal, as … well, I’m just so fucking awesome — instead of investing in understanding their objectives and calibrating my efforts to address our mutual aspirations.

One place I’ve gotten it right with the people most important to me: affection. I rub my boys’ ears and backs, brush their hair, and roughhouse with them so as to demonstrate my strength, for about a second, and then collapse on them and begin kissing and tickling them. I’ve recorded several minutes of us wrestling, specifically the sound my boys make when they burst into joyous, uncontrollable laughter. This will be the last thing I hear on this planet — I’ve prepared for this.

In contrast, at work, I’m less affectionate than Darth Vader. I work with people on average 20 years younger than me, and the thought of creeping somebody out with an unwelcome hug or hand on their shoulder, in a professional situation, is horrific to me. As a result, I don’t even like to shake hands.

Affection exchange theory, introduced by Professor Kory Floyd, postulates that affection strengthens bonds, provides access to resources, and communicates your potential as a parent, increasing your pool of potential mates. I think it goes even deeper. I know a lot of people who, despite their good fortune, are wandering. Few meaningful relationships, an inability to find reward in their professional lives, too hard on themselves, etc. It’s as if they’re not grounded, never convinced of their worth … wandering.

When I look at my own success, it boils mostly down to two things: being born an American and having someone irrationally passionate about my success (my mom). Though she was raised in a household where there was little affection, my mom couldn’t control herself with her son. For me, affection was the difference between hoping someone thought I was wonderful and worthy, and knowing it.

Every Wednesday night after Boy Scouts, my mom and I would go to dinner at Junior’s Deli on Sepulveda Boulevard in Culver City. I would have the brisket dip, she the lox, eggs, and onions. We talked about our week — we didn’t see each other much in between weekends — only to be interrupted by different waitresses, who would comment on how much I had grown. On the way out, we’d stop at the bakery and buy a quarter pound of halvah. As we stood in the parking lot waiting for the valet to retrieve our lime-green Opel Manta, my mom would grab my hand and, in an exaggerated fashion, swing it back and forth. She’d look at me, and I’d return her gaze with an eye roll, at which point she would burst out in joyous, uncontrollable laughter. She loved me so much …

Having a good person express how wonderful you are hundreds of times changes everything. College, professional success, an impressive mate — these were aspirations, not givens, for a remarkably unremarkable kid in an upper-lower-middle-class household. My mom was 43, single, and making $22,000 a year as a secretary. She was also a good person who gave me the confidence, while waiting for our Opel, to feel connected, and to believe I had value — that I was capable and deserving of all these things. Holding hands and laughing, I was tethered.

Life is so rich,

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WMDs

The element fueling economic growth is not a rare earth metal, processing power, or NFTs: It’s attention. The average American spends 11 hours per day consuming media, 65% of their waking life. Roughly 40% of that time is spent on a mobile device. Billions of dollars and millions of person-years are spent capturing and monetizing that attention. The more attention, the more data, the more money, the more relevant offering(s), the more attention … and so on and so on.

The most successful players in the Attention Economy are WMDs: weapons of mass distraction. Meta is a half-trillion-dollar business predicated on diverting attention away from physical life to its apps — advertising generates 98% of its revenue. Google started as a simple digital billboard appended to an industry-leading search bar; it’s morphed into a digital Times Square masquerading as a search engine.

Individuals, too, have turned their attention-capture skills into wealth and power. Social media has been a steroid for reality television, turning suburban teenagers into “influencers,” B-listers into millionaires, and the attention economy has turned game show hosts and comedy actors into presidents. There is real upside in the reshaping of the attention supply chain. From Substack to Spaces, thinkers and entertainers with heft and talent have established distribution channels outside the superstructure of media brands.

On balance, however, WMDs have proven corrosive to the commonwealth. They are highly infectious, as we have no natural immunities. One of the problems with the Attention Economy is the sclerotic lurching from single topic to single topic. We’re losing the capacity to follow multiple threads, with more nuance, at once. We’re becoming a one-track hive mind, when we need to be a community of multithreaded individuals. F. Scott Fitzgerald described intelligence as the ability to hold two opposing thoughts in your head concurrently. Speeding down our one-lane highway with no scenery or opposing traffic is making us stupid.

For the past few weeks, we’ve had our attention diverted by an extraordinary entrepreneur’s quest to become a co-co-co-CEO. We (myself included) went too deep into the paint on this one. My NYU colleague Aswath Damodaran said, “We shouldn’t think of Twitter as some national treasure that needs to be saved,” and he’s right.

On that note, let’s re-embrace our peripheral vision:

Rights

After 50 years of the constitutionally protected right to abortion, a leaked opinion draft alerted us that the Supreme Court is poised to reverse Roe v. Wade. Conservative legislators are filling the gap that will create. Last year, Texas banned abortions after six weeks of pregnancy; Oklahoma followed suit in August; then Governor DeSantis signed into law a ban on abortions after 15 weeks of pregnancy in Florida; new laws in Kentucky mean the state’s last two remaining abortion clinics will close. It’s a profoundly undemocratic movement: Less than a third of Americans want to see Roe reversed, and popular support for prohibiting abortions entirely remains at under 20%.

Reversing Roe is not merely a validation of an extreme minority view. It’s a reversal of what we have come to rely on the Court for: conferring rights, not removing them. Where will this conservative majority go next? Rights not expressly granted by the Constitution undergird our society. Will the Constitution continue to protect gay marriage? Interracial marriage? The Constitution does not expressly obligate that women be treated equally with men, but the Court has conferred that right over and over again. Will it now reconsider? The right of women to vote is guaranteed by the 19th Amendment, but the value of all our votes is protected by the Court’s decisions (not texts) assuming every person’s vote should have equal force.

My mother became pregnant at 47. I’ve written about this. Without her having access to family planning, I would have been tasked with economic responsibility for the household as the 17-year-old son of a single woman who was a secretary. I wouldn’t have attended college, much less gone on to graduate school and founded e-commerce, strategy, and analytics firms. Without the economic security these ventures provided me, I wouldn’t have had kids … full stop. What Trotsky said about war applies to men here. You may not be interested in choice, but choice (specifically the diminution of choice) is interested in you.

War

As Putin loses an information war, he continues to kill thousands in a real war we’re losing interest in.

Europe’s superpower is starting world wars, and this is beginning to look like the worst fucking sequel ever. Last week, Ukraine deployed a drone strike that sank two Russian naval boats in the Black Sea. Russia launched missiles into a bridge and a church in Odessa, killing multiple civilians, including a 13-year-old child. An anchor on Russian state television warned the Kremlin could use a nuclear underwater drone to wipe out the U.K. in retaliation for its support for Ukraine. Europe responded with more sanctions, while China offered more rhetorical support for Putin and spread conspiracy theories that the U.S. operates a network of weapons biolabs in Ukraine. Russia has killed twice as many people in Mariupol as Nazi Germany did, and 5.5 million people have fled the nation since the war began.

Recession

It also appears we are headed into a recession. Inflation in the U.S. is at 8.5%, the highest it’s been in 40 years. The price of an average home is up 15%. We’re in the midst of the perfect inflationary storm: A money-printing orgy, supply chains seizing, and the leading producers of energy and goods, Russia and China, fighting wars with neighbors and a virus, respectively. European inflation hit an all-time high of 7.5% last month.

The Rube Goldberg device of economic turmoil (which began with an enemy one-400th the width of a human hair) has, despite our distractions, captured the attention of the market. Roughly half the stocks in the Nasdaq are down 50% from their 52-week highs, a quarter are down 75%, and more than 5% are down 90%. The only comparable drawdowns in Nasdaq history came in 2000 and 2008. The pandemic’s darlings, i.e. high-growth tech companies with online-rooted businesses, are enduring the greatest declines.

The slide may continue if the Fed makes further interest rate hikes, causing the economy to contract. Until China figures out Covid policies that don’t involve shutting down entire cities, its supply chain woes will rage on — which will continue to push prices up in the U.S. and Europe.

Unstoppable Force

It’s still the Attention Economy, however. And the business iceberg whose mass is hidden underwater by the lack of a daily mark, as it’s private, is not a bird app or Netflix. It’s … TikTok. TikTok’s parent company, ByteDance, is now the most valuable startup in the world — with an estimated valuation of $360 billion, larger than Netflix, Twitter, Snap, Uber, and PayPal combined. Ironically, this was the value of Netflix just six months ago.

The key to capturing attention is short, addictive bites of entertainment. The New York Times’s acquisition of the quick, five-letter puzzle game Wordle brought millions of new users to its platform. That’s TikTok’s DNA, and the app now commands more engagement per user than Facebook and Instagram combined. It’s producing revenue that’s orders of magnitude greater than the other social media companies can generate.

In the first quarter of this year, TikTok surpassed 3.5 billion all-time downloads, becoming the fifth app (and the only one not owned by Meta) to cross this threshold. It was also the most downloaded app this quarter, and for the last five.

What Facebook did to traditional media and Netflix did to cable TV, TikTok is doing to Facebook and Netflix both. The social media/streaming hybrid has quietly become one of the most powerful WMDs in the world, with a production army of a billion users producing its content for free. This unrivaled reserve of energy is refined by an algorithm that is a supercollider of the TV Guide, TiVo, a remote control, and the brain, choosing between billions of programs (globally) in a fraction of a second. Imagine if Netflix reported that it had reduced its content budget from $17 billion to zero … yet still added new users equal to the populations of Japan and the U.K. No need to imagine, that’s TikTok.

We become what we pay attention to. So we are becoming celebrities people are addicted to … but don’t really care about. I tried to think of a more incisive ending but lost focus.

Life is so rich,

P.S. Not all customers are alike. Neil Hoyne can teach you to capture higher-value ones in our new workshop Increasing Customer Lifetime Value. Enrollment closes next Thursday.

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High School & CNN+

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I returned to my high school in LA last week, the first time in 38 years — we shot an episode on education for my short-lived TV show. Walking down the hallway of your high school can trigger reward pathways in the brain, resulting in positive feelings of nostalgia. I was overwhelmed by this. They say people prone to sadness are more likely to feel intense feelings of nostalgia. So … yes.

The first wave of emotion hit me while walking past the trophy/award case — it hadn’t changed. I remembered the case decorated with the headshot of a student and flowers, not once but twice in the same month. Brent Alberts had rolled his Jeep, and Bobby Mitchells had been struck on his moped. Both died. Drunk driving and binge drinking were the tragedy and scandal at University High School in 1982. However, my best friend was Mormon, which was (mostly) a good thing, as I didn’t drink.

(Less Than) Great Expectations

I went in expecting to hear depressing stories of kids dropping out, struggling with depression, and not going to college. What I experienced was inspiring.

I met with Principal Claudia Middleton and college counselor Paula Van Norden, impressive women who made me feel optimistic about the future of our public high schools. I also met with Superintendent Alberto Carvalho who had been described as the LeBron James of the Miami-Dade school system before his tenure in LA. I met with the students — curious, ambitious kids who let me join them in the drumline — many underprivileged, some without a permanent home address. The important stats: 97% are graduating, and 92% are going to college. This. Is. Wonderful.

At the assembly, all the questions were a different flavor of the same query: What can we learn from your success, so we too can be successful? A: It began for me at Uni (high school). I ran for sophomore, junior, and senior class president, and I lost all three times. Based on that track record, I decided to run for student body president where I — wait for it — lost again. Amy Atkins turned me down for the prom, and I was cut from the baseball and basketball teams. Then I was rejected by UCLA, the only school I could afford to attend, as I could live at home.

However, I never lost my sense of enthusiasm. I appealed the rejection, UCLA admitted me, and by my senior year of college, I was president of the Interfraternity Council. Weak flex, I know, but it felt important at the time. I graduated with a 2.27 GPA, but that didn’t stop me from getting a job in the analyst program at Morgan Stanley (applied to 23 firms, one job offer) or getting into graduate school at Berkeley (applied to nine schools, rejected by seven).

In sum, the secret to my success is … rejection. Specifically, my willingness to endure it. Everybody knows failure, everyone will experience tragedy. You will get fired, make bad investments, and fall in love with someone who doesn’t love you back. Worst of all, someone you love, and who loves you a great deal, will get sick and die. A core competence of successful people is the ability to mourn, and move on.

So, how to develop this skill? People find strength and resilience in different places. For me, it’s atheism. I do not believe this is a dress rehearsal, and at some point I’ll look into my sons’ eyes and know our relationship is coming to an end. And that’s OK — I’m less afraid than most to risk public failure (starting businesses, making predictions, approaching strangers, etc.) because I believe this will all be over soon. In addition, age has given me the courage to be more forthcoming with my emotions. To tell people I love them, that I admire them. Looking at important decisions through the lens of your deathbed usually yields the same answers: Go for it, and tell people you love them.

NFLX

My friend Todd Benson says, “Market dynamics will always trump individual performance.” This is the Harvard Business School version of stoicism; focus on the things you can control. Last Wednesday night, I learned our show was the No. 1 weekly program on CNN+. Thursday morning, I was forwarded a New York Times article titled “CNN+ Shuts Down Weeks After Its Start.” In sum, when you’re killing it, try to maintain some humility. And when things haven’t gone well, forgive yourself. Much of your success and failure is not your fault. Your emotions are less a function of what’s happened than the variance. Perspective and gratitude are powerful Neosporin for disappointment. I know that for many people my worst day would be their best.

My show’s success was, to some extent, a function of luck — we were assigned a very talented team who could (often) turn chicken shit into chicken salad. That it was birthed on a platform that would experience SIDS … also (bad) luck. This is about to be a very bad time to be in streaming, regardless of your individual contribution. Netflix, the OG of streaming, is the tail wagging the dog. A dip for the giant was bound to send a chill through the market. But this is full-blown pneumonia.

In less than six months, Netflix has shed 70% of its value, or $215+ billion. Subscribers are churning, and the company is considering “New Coke” levels of risk to find revenue streams. For the first time, Netflix will have an ad-supported option. What I believe the market misses is Netflix does not have a subscriber problem, but a watcher problem — an estimated 611 million people watch Netflix, yet only 222 million subscribe. Securing the service (i.e., tightening password-sharing) is the right move, but polluting the streaming service with ads about opioid-induced constipation erodes a key point of differentiation.

What’s happening at Netflix suggests the current streaming model isn’t sustainable. The top U.S. streaming companies will spend $140 billion on content this year. There are 125 million households in America, and 90 million are likely streamable. So companies are spending $1.5k on your household to deliver Bridgerton and Euphoria, i.e., more than the average household’s credit card bill. Meanwhile, households are canceling their video subscriptions in record numbers. The most sustainable “streaming” platform might be TikTok, which spends $0 on original content (vs. Netflix’s $17 billion), and is free. The platform now commands more attention than Facebook and Instagram combined.

In the Red

In the face of this, CNN decided it wanted to get into streaming. And it made sense, as media firms are trapped in a multiple on EBITDA, marketing spend trap, unless they can bust a move to subscription. Trouble is, they were fighting Panzer tanks on horseback. People gasped at the reported $300 million budget of CNN+, but this meant the war was over before it started. Consider the math: For every dollar spent per month on CNN+ ($3/month), you received $100 million worth of content, vs. $1.7 billion on Netflix. Three hundred million dollars is what Netflix spends on a single season of Stranger Things.

Anger and Ego

Meanwhile, the guys moving boxes into the corner office (Discovery Inc.) were telling CNN not to do it. Despite this, they went ahead: CNN+ made its debut 10 days before Discovery’s merger with WarnerMedia closed. This was dumb … you don’t stick up the middle finger to your soon-to-be partners, much less your new owners. (I just read the last sentence, and it dawned on me that writing this post may also be … dumb. Anyway.)

On the morning of April 11, the first business day of new ownership, Discovery’s head of streaming called a meeting with CNN executives. His message: All CNN+ marketing is to be suspended. They initiated a formal business review, and the following week, CNN+ wasn’t just unplugged but smothered with a pillow. There’s no getting around it: The execs, staff, talent — all of us — look stupid.

The reflexive narrative has been “that’s what happens in media.” I run a small media company and have served on the boards of multibillion-dollar media firms. There’s no excuse for crass actions masquerading as decisiveness — this isn’t how you treat people. I’m not talking about the anchors cashing seven-figure checks (Chris Wallace will be fine), but the gaffer, sound-guy, editor, and camera operator. Discovery offered a solid severance package to the employees, but this doesn’t resolve the shitshow that is getting hired and fired within a month via the NYT. Shutting down CNN+ was probably the right call. But the whole thing reeks of anger and ego.

My Network

So, I’m back in high school, rejected again. But I have the perspective to know nothing is ever as good or as bad as it seems. I loved every second of the experience. The crew was great, and the show was good.

After we wrapped filming at my high school, I flew back to Florida. I checked my phone on the drive home — dozens of emails and texts checking in with me, asking if I’m alright, saying they liked the show … so nice. Yeah, I’m fine … I’ll mourn for a day, and then move on. See above: These are (really) good problems. I came home to the network that’s carried me for years.

The team does not show me the respect I deserve, rolls their eyes at my jokes, eats my socks, and the younger talent is especially difficult. The upside? The contract is for life, and we’re always there for one another.

Life is so rich,

P.S. Being a great boss is hard … but achievable. Enrollment for the Complete Manager Sprint closes on Tuesday.

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Power

“Just as the individual is not alone in the group, nor any one society alone among the others, so man is not alone in the universe.”

— Claude Lévi-Strauss

As a young man, I thought my success was solely a function of my being awesome. My character, my grit, my talent. What a fucking child.

I’ve built companies, had some success in different forms of media, and am a good (not great) professor. The fire that drove my success was not talent or some calling; it was a fear of being broke (again), and desperately needing to feel relevant — to impress my mom, friends, and people I’d never met. When something really wonderful happens these days, it feels as if it didn’t really happen, as I can’t call my mom to cement the achievement. For 18 years, she hasn’t been there. I’m a 57-year-old man who still hasn’t gotten over the loss of his mother. And that’s OK. Truth is, I hope my boys feel some of the same emotions about me when I’m gone. But that’s not what this post is about.

If I’m generous with myself, I do have one skill. I foster a decent amount of loyalty among the people I work with. It’s not a function of character or empathy, only the recognition that nothing wonderful happens when you’re on an island. Simply put, greatness and happiness are in the agency of others.

Partner

Married people are happier, healthier, and wealthier than single people. Partners compensate for our weaknesses, encourage us to take risks, and (in a healthy relationship) have the strength to tell us when we’re doing something wrong, unfair, or just plain stupid. Good partners protect you from others; great partners protect you from yourself. It’s true on sports teams, boards of directors, and ensemble movie casts.

Everyone needs counterweights. Indeed, the more weight you carry, the more you need others to balance you. Some of the most valuable advice I get isn’t about what to do, but what not to do. I’ve done so many dumb things in my life. But a number of 15-car-pile-ups have been averted because someone said, “Hey, maybe … don’t.”

Day 1

Entrepreneurs succeed by navigating an ecosystem of counterweights. Customers want the lowest price and the highest quality. Employees want you to compensate them at, or above, market rates. Investors want to dilute your stake in exchange for their capital, and the big hand of the government is calloused and slow. Finally there’s the most formal, obvious counterweight: your boss, the board of directors.

Building a company requires that you listen to, and balance, all of these counterweights. Each has (traditionally) held influence over the trajectory of your business, providing inputs that lead to course corrections. Early-stage entrepreneurs who ignore their counterweights fail. They lose access to key information and piss people off: Customers stop buying, employees quit, investors sell. Stories of people ignoring everyone around them and coloring outside the lines make for great scripted television, but they ignore the ropes and parachutes that guide the ascent.

Some entrepreneurs achieve enormous success within this system, balancing leadership and consensus. And with great success comes great power — the power to stop listening. Which often results in a fall from grace and loss of power.

Unchecked

The British historian John Acton said, “Power tends to corrupt and absolute power corrupts absolutely.” Some of the greatest tragedies in human history have validated this — we’re witnessing one in Ukraine. But corruption that morphs into inhumanity (Putin) obscures how power corrupts people every day in less stark ways. Power doesn’t just create bad actors, it creates ineffective actors. Ignoring advisers means ignoring their signals that you’re headed toward an iceberg. Immorality is not the biggest threat in business. That’s easy to identify and bleach from the ecosystem. As Dov Seidman said, it’s amorality that is the bigger threat. People who are not bad people, but ignore the externalities of their actions as they continue to host benefits and give earnest speeches about the ills plaguing other sectors of society.

Research shows power dulls you to risk. That is, it decreases the cognitive resources dedicated to recalling and anticipating constraints. As a professor at my alma mater who studies this phenomenon has observed, there are parallels in evolution: Predators have forward-facing, binocular vision to better track prey — at the expense of good peripheral vision. While prey species have more sensitive peripheral vision: “They sacrifice depth perception and focus for the ability to detect danger approaching from any angle.” Lions are awesome, and yes, you want a lion running your company, not a nervous antelope. But someone needs to alert the lion to less obvious threats.

Power is a drug that downplays costs and magnifies rewards. People with power are psychologically more inclined to act on their instincts than those without it. Which helps to explain the #MeToo problem: Power has a nonconscious influence on sexual arousal; a common thread among sexual aggressors and harrassers is that they aren’t aware their advances are unwelcome. Power does, in fact, intoxicate.

At a corporate level, the combination of risk blindness and a lack of inhibition creates a vicious cycle. People begin to yes-man you to share in your power. As a result, you start receiving false signals, which artificially inflate confidence, leading you to believe even more firmly in the notion that you are all-seeing, all-knowing, divine even. What’s left is a hypersonic missile with a broken GPS.

Successful companies build guardrails into their corporate architecture. Waffle House, for example, requires its executives to work shifts in its restaurants. At Amazon, Jeff Bezos was obsessed with information flow and decision-making, and he expressly took actions he didn’t personally believe in when he did believe in the team — he called it “disagree and commit.” Bezos understood that Amazon’s success was due in part to his genius but not entirely — that he functioned best when he trusted his team. Beyond the counterweights of Amazon, however, power is having its effect. (Note: I’m especially proud of working Waffle House into the above paragraph.)

The greatest prosperity vehicle in history (America) was built on guardrails: Our Founding Fathers created three branches of government to protect each of them from themselves. The executive is strong in action and given the power to spend money and deploy violence. The legislative is strong in planning, able to coordinate the views of hundreds of opinionated members. Both are subject to the whims of political expediency, however, so the life-appointed judiciary forces long-term principles of constitutional order. At least in theory.

God Complex

Over the past three decades, we as a nation decided to lower these guardrails and glorify the individual. We got bored of the slow, careful process of deliberation. We fetishized vulgar narcissism and confused it with leadership.

You can see it in corporate governance. We’re obsessed with visionary founders, as evidenced by the increasing popularity of the dual-class shareholder structure. WeWork’s failed IPO in 2019 would have given Adam Neumann stock with voting power worth 20 times that of public shareholders. It took several billions of dollars in losses before the board stopped drinking from Adam’s ayahuasca Venti Big Gulp. BTW, it wasn’t his wife or the board, but the Public Investment Fund of the Kingdom of Saudi Arabia that forced Adam to be less crazy.

You can see it in politics. In 2016, 46% of us decided that our self-regulating system was too slow and/or broken and that the best man to fix it was a failed businessman who’d made a name for himself fake-firing people on TV. Unchecked power made him think he could do anything. “When you’re a star, they let you do it. You can do anything. Grab ’em by the pussy.”

Elon

Elon Musk has a lot of power. He’s the richest man in the world, thanks to his 173 million shares in Tesla. He runs two of the most important companies on Earth, and he’s been an enormously positive influence on the electric vehicle market and space travel. He commands the price movements of crypto markets and the attention of 82.6 million Twitter followers.  And now he wants to buy Twitter itself — to buy one of the world’s most influential vehicles of mass-communication, or what he calls the “de facto public town square.” It’s also clear there are no longer any guardrails.

I believe Elon will be a poster child for how power corrupts potential. Not the Putin kind of corruption, but the more pedestrian (and still troubling) kind. The kind that reduces effectiveness. Last week at TED, Mr. Musk continued to disparage what’s left of our nation’s umpires, calling the SEC “bastards” for its enforcement action against him after he tweeted he had “funding secured” to take Tesla private. Elon insisted the Commission had bullied him into saying he’d lied and had no funding. The day after Elon’s TED interview, a court filing confirmed that, yes, he had lied, and funding had not been secured. Mr. Musk’s wealth results, in large part, from the protocols of the SEC, not despite them. Likely the biggest one-day hit to his wealth would occur if he were to leave this ecosystem of bastards and re-list TSLA elsewhere. Without subsidies and credits from the entity he has such contempt for (Uncle Sam), would TSLA even exist?

Putting a town square under the ownership of one man has already proven catastrophic. Mark Zuckerberg owns 13% of Meta’s shares and, thanks to the company’s dual-class structure, controls 55% of the votes. As Shoshana Zuboff put it, “Zuckerberg sits at his celestial keyboard, and he can decide day by day, hour by hour, whether people are going to be more angry or less angry, whether publications are going to live or die.”

F. Scott Fitzgerald defined intelligence as the ability to hold two contrary thoughts in your head concurrently. Elon is a) the greatest entrepreneur of his generation, and b) reckless and likely to do more harm than good with Twitter. The second follows naturally from the first, absent strong self-discipline and any guardrails. What we know about power has nothing to do with a person’s track record or moral intentions. Power is a psychological change agent that makes you act erratically. Unchecked, it can lead to disaster (see above: Zuckerberg). With our guardrails in place, someone who committed blatant securities fraud, repeatedly, would be prohibited from serving on the board of any publicly traded firm, much less allowed to acquire one.

Elon’s narrative is that he’ll bring “free speech” to Twitter. What exactly does he want to say/do on the network that he hasn’t said/done already — kill a puppy live on Twitter Spaces? We should be wary of billionaires promising free speech. Musk’s co-founder at PayPal, Peter Thiel, created an entire law firm to put another media company (Gawker) out of business for exercising too much free speech — a lack of moderation — and outing him. In sum, the blood sugar levels of billionaires now decide which content we consume or don’t consume without any financial, fiduciary, or regulatory guardrails. It’s not new — billionaires control other media businesses. However, algorithms and network reach, coupled with the absence of any counterweights, create an exponentially greater blast radius.

Supporters claim that any objection to Musk’s ownership is an attempt to throttle free speech. Evangelists include the governor of my state, Ron DeSantis, who’s threatened Twitter’s board with all the power of his office if they don’t accept Elon’s offer — while simultaneously ending a 55-year-old tax and governance agreement with Florida’s largest employer because it dared criticize his “Don’t Say Gay” legislation. Every single action of both my Senators and Governor is an attempt to capture the gaze of a 60+ year-old Iowan with a straw in his hand. “Hey, look at me … I’m even crazier than that guy.”

The argument about free speech and/or moderation is a distraction from the real issue: Should a small group of individuals — who ignore the guardrails that shaped their success — have so much power that they can acquire and/or extinguish media companies and the influence they command? This is about power, a lack of counterweights, and a history that confirms that when the ratio of power to guardrails becomes this imbalanced … bad things happen. The previous sentence was hurried as two guardrails, aged 11 & 14, demanded I drive them to school. Right. Now. Dad.

Life is so rich,

P.S. Want to learn from a world-class investor? Eric Kim built a $1 billion fund by the age of 40. Enrollment for Business Drivers for Growth closes on Monday.

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

Umpires, Not Kings

Competition over scarce resources is at the heart of our evolution as a species and the success of Western democracies. We are the product of millions of generations of survivors who bested their rivals for food, shelter, and mates. From two single-celled organisms competing over an energy source to a pair of sisters grinding through practices in pursuit of Grand Slam trophies, competition has inspired endless effort and innovation.

Charles Darwin kept his work private for 20 years before learning a colleague was advancing a similar theory, prompting him to write On the Origins of Species. Nikola Tesla and Thomas Edison feuded bitterly on their way to establishing the building blocks of our electrically powered economy. Hemingway and Fitzgerald pushed one another to invent modern American literature, and Jay-Z and Nas mined their disdain for each other to spin lyrical and literal gold.

Common Thread

From flame-broiled burgers to retina displays, companies are spurred to improve their products not by ideals or curiosity, but because if they don’t, the other guy will eat their lunch. Avis made an entire ad campaign out of the premise: “When you’re only No. 2, you try harder.”

Business history is a tale of competition, redoubled effort, and greater innovation. In 1869, Central Pacific laid 10 miles of railroad in less than 12 hours from fear that Union Pacific would get there first. In 1978, Airbus entered the U.S. market for the first time; Boeing responded with three historic aircraft in five years (the single-aisle 757, the twin-aisle 767, and a revamped 737). It took a near-death experience at the hands of Japanese manufacturers to wake Detroit from its victory coma.

Silicon Valley was birthed from the “space race” competition between the U.S. and the USSR. In October 1957 the Soviets launched a dog into orbit. Within a year, the U.S. founded NASA and ARPA and authorized the investment of millions of dollars in math and science education, all of which funded the first generation of Valley firms. Competition has been in tech’s DNA ever since. Steve Jobs founded Apple 362 days after Bill Gates founded Microsoft.

The most prosperous societies are built around free-market competition. It’s uncomfortable — harsh even — so we’ve tried to design societies based on planning and enforced economic equality. But communism leads to stagnation, repression, and economic collapse. China’s economy went from starving its people to minting self-made female billionaires after Deng Xiaoping embraced private enterprise and competitive markets. “To get rich is glorious,” he proclaimed.

Winner’s Circle

However … winners’ lust for competition wanes after they’ve won. Why let anybody on the medals podium if you can occupy higher ground and repel anybody who gets near the stage?

Imagine if the team that won the Super Bowl automatically qualified for the playoffs the next season, or started every game with a 10-point lead? In fact, the opposite happens: the best teams get the worst draft picks. The NFL may be the most successful league in the world because it doesn’t let the largest market teams leverage their scale to collect more of the lucrative TV contract: The Green Bay Packers get the same share as the New York Giants. Do well in professional soccer, and you get moved up a division to face tougher opponents — and play for greater rewards.

No field sees winners try to retract the ladder behind them more aggressively than business. From Cecil Rhodes using the power of the state to turn diamond mining into a cartel, to Martin Shkreli blocking generic manufacturers so he could raise the price of a life-saving drug 56x, nothing threatens today’s competition more than yesterday’s winners.

John D. Rockefeller was upfront about his distaste for competition, once saying that he was engaged in the “the battle of the new idea of cooperation against competition.” And later: “The day of individual competition in large affairs is past and gone.” Though Rockefeller’s idea of “cooperation” was rather one-sided: To bring down the price of a refinery he wanted to buy, he’d first buy the pipeline that transported oil to it and cut off the supply.

Starting in the late 19th century, U.S. lawmakers realized that centralized economic power wasn’t just bad for business, it was bad for the country. Senator John Sherman, who sponsored the first major U.S. antitrust legislation, said, “If we will not endure a king as a political power we should not endure a king over the production, transportation, and sale of any of the necessaries of life.” We broke up Standard Oil and American Tobacco and stopped the consolidation of the railroads. The economy roared as competition oxygenated the ecosystem.

Today’s largest companies offer a masterclass in anticompetitive behavior. Amazon bars sellers on its platform from offering lower prices elsewhere, then uses the information it gleans from them to design and market its own, lower-priced products. It gives favorable search results placement to vendors that use Amazon fulfillment services (for which it’s been fined $1.3 billion by the Italian government). Defenders of the company say this is all business as usual … yet Amazon lied to Congress, repeatedly, about all of it.

Apple takes a 30% cut of app revenue, which it says it needs to run the app store, but it books billions in profit instead of cleaning up obvious frauds or copycats, while giving preference to its own products over competitors. (Can you get your iPhone to stop trying to play music through Apple Music instead of Spotify?) Microsoft charges more for its applications when users run them on a competing cloud provider. Google doesn’t merely sit on both sides of the digital advertising negotiation, it owns the negotiating table. And Facebook has stated that it acquired Instagram to eliminate a competitor.

This is hardly new for Big Tech. In the 2000s tech titans conspired to suppress competition for employees. For example, when Steve Jobs learned that Google was recruiting an Apple engineer in 2007, he emailed CEO Eric Schmidt: “I would be very pleased if your recruiting department would stop doing this.” Schmidt forwarded the email to an underling: “Can you get this stopped and let me know why this is happening?” He was told the recruiter would be “terminated within the hour” and to “please extend my apologies as appropriate to Steve Jobs.” Then a Google SVP chimed in: “Please make a public example of this termination with the group.” (We only know about Jobs and Schmidt channeling their inner Rockefellers thanks to a class action lawsuit former employees brought against the companies, which led to a $415 million settlement.)

Another favorite Big Tech trick is demanding competitors obey the rules they ignored when they were starting out. Amazon used to have a price advantage over physical retailers because it didn’t collect sales tax, and it fought to maintain that edge, even closing down a warehouse in Texas to avoid having to charge tax there. But once other online innovators became more of a threat to Amazon than brick & mortar ones, the company flipped the script, invested in the infrastructure necessary to collect sales taxes nationwide, and announced its support for a federal sales-tax-collection framework. Now Uber is following the Bezos playbook. After building its business by ignoring livery laws that regulated the hired-car market — and protected the incumbent taxi companies — Uber is embracing traditional cab companies and listing them on its app, thereby building a moat against incursions by Lyft and other digital-native competitors.

“Free speech” is a trending topic because of debates about how to police online forums, chiefly Twitter and Facebook. The leader of the supposed free speech movement, Elon Musk, says he wants Twitter to be an open playing field for competitive speech. And he’s right, that’s a great goal. But a competitive field is not an unfettered, uncontrolled one. Serena Williams has won 23 Grand Slam titles because she’s the best player in history. She’s won only 23 Grand Slam titles because she’s not allowed to use her winnings to buy a pack of tennis playing automatons and bring them onto the court with her. The rules are the same for her and each opponent, and those rules are enforced by an umpire.

In an unmoderated online forum, all speakers do not play by the same rules or have the same tools. University of Maryland professor David Kirsch has found that automated pro-Tesla Twitter accounts are responsible for 20% of the tweets about Tesla, and that the launching of these bots correlates with increases in the company’s stock price. It’s not just bots. Say something negative about Elon online, and I’ll vouch for this, the Tesla Taliban comes for you. Anyone who tells you this is “free speech” doesn’t want freedom, they want power via elimination of competitive speech.

As much as competition is natural, it’s not inevitable.

In Praise of Umpires

Competition depends on rules, and rules depend on umpires. We should fight to protect competition — not winners. Because winners subvert the process. In the name of competition, they demand that their anticompetitive acts go unpunished. In the name of freedom, they insist on their right to shout down the dissenter’s voice. In the U.S., winners have funded “think tanks” and politicians, bought newspapers and cable news stations, and convinced us the umpire is our enemy.

Our failure to police Big Tech’s anticompetitive conduct is suppressing innovation. Despite an explosion in VC funding, the growth rate of innovative young companies has actually slowed. For startups in developing sectors, a Big Tech acquisition is a kiss of death. Yes, the folks who get acquired can take the money and run, but the sector itself dries up. Research shows that when Google and Facebook purchase a company, VC investment in that sector drops 40% within three years. When Google enters an app market category, innovation among competing apps drops 5.1% and developers flock to other categories. Apple the underdog produced the Mac, the iPod, and the iPhone. Apple the colossus charges 30% for the privilege of being on the App Store. When you’re only No. 2, you try harder.

The standard term for the government’s role in ensuring competition is “antitrust.” It’s an unfortunate anachronism, from the Teddy Roosevelt era. Today, Senator Klobuchar gets it right when she calls antitrust “competition policy.” The point of rules and referees isn’t to stop people from winning. It’s to keep the game alive.

Capitalism is full-body contact violence at a corporate level. On the way up and down. Winners will always seek to entrench themselves, buying up competitors or starving them of resources and seizing control of political power and forums for speech and debate. Misconceptions about censorship and free speech are false flags distracting us from power grabs by those who don’t want their speech to compete, but to be promoted/protected by algorithms. Just as complaints about competition policy “picking winners and losers” or “punishing winners” are cover for letting those winners rig the next round of competition in their favor. It’s long past time to replace the idolatry of innovators with a reinvigorated respect for the rules and the umpires who enforce them.

Life is so rich,

P.S. Speaking of winning, No Mercy / No Malice has been nominated for a Webby, and we could use your vote to help us win: http://wbby.co/web-email-business. Help put us one-fifth of the way toward a WEGOT.

P.P.S. Another thing about those “genius innovators”? A lot of them are terrible to work for. Don’t be that person. The Complete Manager Sprint closes soon.

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@elon

Desperate to recapture a delinquent attention cycle that’s wandered off to war, Elon Musk announced Monday he is the largest shareholder in Twitter, with a 9.2% (correction: 9.1%) stake. @elonmusk has trolled me (i.e., called me names on … Twitter) before … but this feels like cosplay.

Backstory

I’ve been taking activist positions in companies (i.e. participated in $800+ million worth of investment and advocated for change at a publicly traded firm) for the better part of two decades. I’ve served on the boards of seven public companies. In December 2019 I took a stake (approx .03% the size of Elon’s ownership) in Twitter and wrote a public letter to the board, highlighting the company’s lack of innovation and weak shareholder returns, and calling on them to replace part-time CEO Jack Dorsey. I received no response. Shocker. Although the chairman’s son tweeted at me that I shouldn’t be so harsh on Sheryl Sandberg. So … there’s that. A few months later, Elliott Management, a large activist fund, called me and said they were signing my letter with a $2 billion pen. They bought a significant stake in the company and secured two board seats in record time, as the directors realized they’d been acting like sycophants vs. actual fiduciaries. Once Elliott had representatives on the board, @jack was gone. It was just a matter of optics and cadence to make it appear as if it was his idea — ego still drives the majority of decisions around corporate governance. (And war.)

Elliott has done Twitter’s shareholders — and corporate governance — a service advocating for the crazy idea that the CEO should work full time. @jack is a great CEO of Block, but he was a shitty absentee father at Twitter.

The Song Remains the Same

Twitter’s fundamental problems remain, however, and by early this year its shares had retreated back below $40. I began (again) meeting with funds to discuss taking a position and advocating for change. My pitch: Twitter is among the most important products in history (real-time news source, global communications platform), yet it remains a lackluster investment.

The company flounders in a cesspool of ad-supported media, sacrificing quality for attention in the pursuit of profits it will never realize. Twitter defines the term “subscale” in a digital landscape where three giants command 80¢ of the digital dollar: Google, Meta, and Amazon.

Twitter’s inability to monetize is reflected in its valuation. In late January, before Elon started buying, the stock was trading at a significant discount to Meta and Snap.

What to Do

Twitter should move to a subscription model (#fuckingobvious). Corporate users and users with large followings would pay for a fraction of the value they receive. I have long advocated for this model; by shifting the company’s revenue source from advertisers to users, subscription aligns economic incentives with user experience, rather than user exploitation. This leads to a myriad of benefits, which is why recurring-revenue businesses register greater growth and retention and bigger valuations.

Nothing better illustrates the value of Twitter to its users than Tesla. The carmaker spends almost nothing on advertising (GM spends $2+ billion per year), yet it has built the best brand in the industry. This is a function of performance (outstanding products, exceeding targets) multiplied by reach. The reach is a function of Elon’s 80.9 million PR agents (i.e., his Twitter followers). The social network could charge Mr. Musk $10 million a month and — after making a series of ad hominem attacks on the board/company/CEO — he would pay it. Nearly every Fortune 10,000 company and A/B/C list celebrity who uses the platform as a real-time communications tool would pay fees scaled by follower count.

In addition, ad-supported media is what drives the enragement cycle, the bots, and the misinformation plaguing Twitter. Cleaning that up would be good for business, and for the commonwealth. False stories on Twitter are 70% more likely to be retweeted than true ones — and spread six times faster.

On the basis of this pitch, I had soft-circled substantial capital. We were working through this crazy thing called SEC rules and regulations. How would we structure the special purpose vehicle? What were the Hart-Scott-Rodino requirements if one capital source provided more than 50% of the investment? Would my background advocating for change mean we’d need to file a 13D (active) vs. 13G (passive)? You know, “the law.”

By early April we’d spent the better part of a month sorting through these issues. But TWTR was suddenly on a tear, up 20% in two weeks. The market had perceived the shape of a whale moving beneath the surface. My team speculated that another big activist fund was accumulating a position and we updated our models. Then the whale breached.

Enter Elon

To be clear, there’s a lot to like here. Elon correctly saw the opportunity and seized it. Twitter was dramatically undervalued and should be better. And the board was smart to embrace him and give him a seat. The easiest way to silence an activist is to make them an insider. Corporate governance is out of fashion in an era of dual-class public stock and a dangerous diminution of government. But Twitter is 2 for 2 in recent months, showing Jack the door and putting a large shareholder on the board.

In addition, Musk is a genius. He leads two companies that are simultaneously revolutionizing important industries. Tesla makes the world’s best cars and has accelerated industry adoption of electric vehicles by years. The same day he disclosed his Twitter stake, Tesla announced record shipments. But in my view, Tesla isn’t even his most impressive company. SpaceX’s reusable rockets are fundamentally changing the economics of space hauling, core to our future infrastructure. In sum, we have the preeminent entrepreneur of his generation, who’s taken a seat on the board of a company that needs to command the space it occupies.

Glass Half Empty

But…

For starters, Musk’s track record is mixed when it comes to errant distractions from the businesses he’s responsible for. Over the past several years, he’s been reckless, toying with companies, cryptocurrencies, and technologies that captured his fleeting attention only to move on when the next shiny object caught his gaze.

To date, Elon’s stated objectives for Twitter are vague, and clearly bullshit. His main beef with Twitter, it appears, is there’s too much moderation.

Where to begin? Some basic law: Free speech is essential to a functioning democracy, but free speech is a protection from government limits on speech. Free speech doesn’t limit Twitter … it protects Twitter. Rigorous adherence to the principle of free speech means Twitter shapes its own voice, which, if it decides, is not amplifying hate speech, false speech, or speech calling for insurrection. Users who want that content can find it elsewhere, such as 4chan, or Truth Social (not really … DOA). Free speech principles are government principles, just as censorship is government action. Everything else is competing speech.

Moreover, Twitter is an important space for communication, but “free speech principles” and “democracy” do not require or even suggest that Twitter let anyone say anything. On the contrary, they militate for reasonable moderation. An unfettered forum is not free, it’s an invitation to mob rule. If Twitter is the “de facto public square,” that’s because the site moderates content, not despite its efforts to do so. Almost nobody wants unfettered speech on Twitter. Imagine your email inbox but with no spam filters … times 280. Moderation is why 4chan gets 20 million users per month, while Twitter gets 217 million users per day.

In practice, Elon’s interest in “free speech” has been mostly about intimidating journalists who wouldn’t be stenographers for his unfounded claims. His solution was a website where people could vote up or down on journalists, where the magic of crowds would fix media. He wanted to call it Pravda. Today, Pravda, like so many Elon missives, is long forgotten, and Elon’s answer to the problems facing Twitter is: “Something … something … open source.”

This echoes a long-standing interest by @Jack and others at Twitter, including new CEO Parag Agrawal, in a future version of Twitter that’s “decentralized.” A web3 Twitter, if you will. Specifics are absent — it’s easier to vomit a buzzy word salad. Users will be able to configure their own moderation, no centralized authority, all the same crypto-web3-decentralized BS that has resulted in few real products or services, but has secured billions of dollars for VCs and (other) grifters. The notion that hundreds of millions of Twitter users are all going to tinker with their personal moderation algorithm is as likely as people connecting directly to the blockchain with their handheld phone.

Opening Twitter to outside parties could be powerful, and there’s potential for a new architecture that would let different flavors of Twitter evolve. That’s the idea behind Bluesky, which Twitter created and funds. But a) Twitter is already pursuing this, they don’t need Elon on the board for it; and b) there’s no commercially viable version of Twitter without moderation. Whatever emerges from Bluesky, it will still need centralized entities that filter content and make judgment calls, or the system collapses into chaos.

Wild West

Musk’s call for a Wild West version of Twitter isn’t surprising, as it’s consistent with an emerging Valley ideology I label “takerist.” Takerists view the commonwealth as a hunting ground for personal enrichment and amusement vs. a community invested in mutual prosperity. The great taste of community — roads and charge stations, EV tax credits, air traffic control for Gulfstream 650 ERs, public universities that graduate engineers — with none of the calories — taxes, laws, the basic comity of man.

True to Form

We found out Elon was Twitter’s largest shareholder on Monday morning, because that’s when he disclosed his holdings to the SEC, as required of anyone who acquires more than 5% of a public company. Only Elon filed the wrong form, and he filed it nearly two weeks late. He filed the form for “passive” investors — and if you’ve been talking to the CEO for the past few weeks about joining the board and changing the product, you are not a “passive” investor.

Elon filed the correct form (Schedule 13D) the next day, but it requires more fulsome disclosures, which revealed he had crossed the 5% threshold on March 14. Meaning he’d been obligated to disclose his stake back on March 24. By illegally concealing his stake for 11 days, Musk was able to continue buying shares from sellers who didn’t know he was accumulating a huge position. Had he disclosed his shares properly on March 24, TWTR would have shot up 25% then, instead of on April 4, and the shares he bought subsequently would have garnered selling shareholders approximately $150 million more. That’s fraud, and while I have increasingly less confidence in the SEC, Congress has recently beefed up its power to seek disgorgement of ill-gotten gains for securities law violations. Shareholder lawsuits may also be in the offing.

Even if the SEC acts, $150 million is immaterial to Elon. On a relative basis, his entire $2.5 billion investment in Twitter is about the price of a MacBook for the average household. A $150 million fine is buying an extra charger. Takerists such as Elon are exempt from the law — they can buy their own. The rest of us would be left with a Musk-flavored Twitter, which would look similar to the replies to his announcement: a septic tank of crypto scams, far-right blather, and screeching wokeism. For all his complaints about “free speech,” Elon has always been able to speak his mind. Or if not, what hasn’t he said?

What’s Next?

Whatever we think of Elon’s move, he’s made it, and the future of an increasingly important media company is increasingly up to him. He “only” owns 9%, but his influence far exceeds that. Even on a strong board (vs. one that would tolerate a CEO on permanent safari), a mega-billionaire celebrity will command outsized influence.

As with all things Elon, it’s the Elon show (unless/until he gets bored and moves on to the next shiny object). Pop quiz: Name somebody else who works at Tesla, SpaceX, or The Boring Company.

Elon bumped the stock, but he’s also likely removed any takeover premium. His antics and wealth make him a human poison pill — neither a financial buyer nor a strategic acquirer wants to deal with the chaos and unpredictable behavior he brings. And Elon himself signed away his right to buy more when he joined the board. The market sensed these issues and, after its initial explosive gains, the stock began to check back.

Prediction: Even the flaccid SEC has to do something here … and that will be an unwelcome distraction for the Twitter board.

Inner Child

20 years ago I joined my first public company board. I was obnoxious, constantly heckling from the cheap seats and more concerned with getting credit for change than increasing stakeholder value. Two decades and seven boards later I’ve finally (I think) embraced what it means to be a fiduciary: to represent the interests of others. Elon is the most brilliant product engineer of this, and likely the last, century. A fraction of that brilliance could transform Twitter. The risk is that his takerism, constant punching down, and cold take on the First Amendment could push Twitter further off course.

Twitter’s future now comes down to one question: Can Elon Musk’s inner child develop an outer man?

Life is so rich,

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Film Credits

In 2015 I gave a presentation at the DLD Conference about brands and tech. The video of the talk went semi-viral on YouTube after a music industry analyst (@boblefsetz) featured it in his newsletter. Soon after, I had a book deal; I was writing this newsletter every week; CNBC, Fox Business, and Bloomberg were calling me for on-air spots all the time; and the firm I’d founded a few years earlier, L2, began growing 60% a year. I built a studio above my garage to handle the pace of livestreams and TV hits. After working my ass off for 25 years, I was an overnight success. The lesson? Our society, for some reason, links credibility with appearance in a video format endorsed by an umbrella brand (i.e., a broadcast network) or millions of views/likes on a platform.

When the pandemic hit, Vice TV convinced me we could do an entire show remotely, from that home studio. My wife cried after she saw the first episode. And not good tears. More like “I am deeply disturbed at how bad this is, and what it might mean for our family” kinds of tears. Vice wanted to renew for more episodes … but I said no. The quality wasn’t there, and I realized that my actions need to match my words: I shouldn’t be producing an ad-supported show while I’m publicly criticizing how advertising is media’s carcinogen. That flummoxed them. Being on TV is an addictive substance, and not many people walk away.

Bloomberg, a firm I admire, asked me to do a show for them. With launch just days away, and four episodes in the can, they asked me to do some promotions for social media. In one, I dressed up/down as a “bitcoin miner” (inspired by David Hodo’s construction-worker character from the Village People) and tweeted it out. Twitter liked it, and so did the Bloomberg execs, at first. But the video offended one, or more (still not sure) people in the newsroom, and management asked me to clarify that they hadn’t approved the video (true) and to apologize. I refused as … I wasn’t sorry. The execs were generous with me and wanted to figure out a way forward. However, after meeting with my team, we decided that if we couldn’t do what we do, the juice wasn’t worth the squeeze. So we were canceled (sort of) before the show aired.

Jeff Zucker from CNN offered me a program on its upcoming streaming network (CNN+). I told Jeff what had happened at Bloomberg; he told me he realized his newsroom was not America and said he would protect me. I can see why he fostered such deep loyalty from the people he worked with. So we’ve spent the past few months building our show: No Mercy No Malice with Scott Galloway. So far, CNN+ is a dramatic step change from anything we’ve done previously in terms of depth of talent and resources.

Failing Forward

So, how did this train keep running long enough to carry me to CNN? There are 115 billion reasons. Specifically, that’s how many dollars streaming companies are investing in content this year (plus another $25 billion for sports rights), greater than the defense budget of Germany. This has enabled me, so far, to fail forward. What’s happened here is a decent metaphor for an art form that’s drawn more capital than the combined discretionary budgets for the U.S. departments of Agriculture, Commerce, Justice, Labor, and Transportation.

State of Play

In 1998, 55 million people gathered around the TV to watch Titanic win Best Picture. In 2022, 15 million TV viewers watched Coda win. However, on their phones, hundreds of millions saw one millionaire assault another millionaire and then receive an award and a standing ovation. It’s hard to imagine seven seconds that reflect more poorly on America and the age. Maybe January 6, or the former President mocking a disabled person. OK, there’s been several, but that’s not what this post is about. This was the second-least viewed Oscars ceremony ever.

Hollywood used to be the cultural center of the universe. It’s fallen to a close second behind the tech community. The two have a lot in common: Both mix fame and money to create a brazen lack of grace and self-awareness. Perhaps the Academy is the ultimate validation of Netflix’s long-tail strategy: It’s been decades since we saw Best Picture nominees regularly appear in the box office top 10. This year the combined earnings of the 10 nominees were a quarter of the new Spider-Man’s 2021 domestic box office haul of $800 million. Action movies (which are overwhelmingly comic book movies) and adventure movies (aka Star Wars spinoffs) now account for two-thirds of global box office revenue. Many years, the box office top 10 consists entirely of pre-existing IP.

While movie theaters have completed their transformation into genre palaces, billions have gone into “small” screen content for screens that are increasingly bigger. And on the streaming side of the entertainment divide, Big Tech continues to roll. In just the past three years, Netflix has created 1,298 original titles, and it’s received more Oscar nominations than any other studio over that span. The Best Picture award this year went to a company that makes phones, two weeks after Amazon completed an $8.5 billion deal to buy one of the most storied movie studios in Hollywood (home to Bond, Rocky, and Thelma & Louise).

Proceed With Caution

It’s been a phenomenal run for streaming. But as the public and private markets are starting to learn, all runs come to an end. Netflix got a taste of this in January, when it reported its subscriber growth had slowed. The stock dove 22% on the news, setting into motion a larger retreat. Apple and Amazon are immune, because they’re not in the streaming business per se — they use their entertainment offerings as a means of differentiation, vs. an actual business that needs to be profitable. FYI, this is supposed to be one of the reasons we have antitrust laws. But I digress.

User growth at all costs is great until your user base is too big to grow. The streamers know this, which is why they’re looking for revenue in new places. Specifically: advertising. Disney+ is releasing a lower-priced tier with ads, HBO is experimenting with pre-roll commercials, and Netflix (for whom ads have historically been verboten) has developed a new stance: “Never say never.” And, in a move that has the same risk profile as New Coke, it looks as if Netflix is cracking down on password sharing.

Final Frontier(s)

Two frontiers remain: news and live sports. What trucks are to U.S. auto manufacturers, news and sports are to the cable and broadcast markets. They still account for more than 62% of Americans’ total TV consumption.

The streamers have been nibbling at sports. Hulu tried leveraging its parent’s access to ESPN, Peacock tried paywalling the Olympics, and Amazon bought its way into Thursday Night Football.

Now CNN+ is asking the important question: Are people down to pay for better TV news? And to be clear, it is better — not as a function of what it offers, but what it doesn’t offer: advertising.

Streamed news is built on a novel proposition: Pay for what you get. U.S. news broadcasting has long been subsidized — neither we nor the ads we watch cover the costs. In the era of the Big Three, the nightly broadcasts that defined “TV news” for generations of Americans were money losers, but the networks invested the profits of prime-time sitcoms and daytime soaps into them to burnish their brands. “I have Jack Benny to make money,” the head of CBS told his news division.

Since 1967 the federal government has funded PBS and other stations, with a mission to deliver unbiased journalism throughout the nation. Cable news stations enjoyed subsidy by bundle: Sure, you really wanted ESPN and the Comedy Channel, but you were going to pay for Fox News and MSNBC, like it or not. Today news is bundled with data-harvesting — 86% of Americans consume news on a digital device, with 1 in 3 getting it from Facebook and 1 in 5 getting it from YouTube. In sum, we don’t have much experience paying for the most important content we consume.

It’s possible, however, that America is done with misinformation posing as news on social platforms — and this could be the wind in CNN+’s sails. Yes, you can still find CNN content on Facebook, but your diet there is determined by the algorithm, which wants to enrage vs. inform you. The streaming option (CNN+) feeds our digital habit with a diet shaped by an editorial board of journalists. The cable news players are also guilty of relying on novelty and opinion to keep you around until the next ad for an opioid-induced constipation medication.

The move from news to novelty, networks attacking each other, and the assigning of news brands to identity and politics has been accompanied by an enormous erosion in trust.

Putting cable in our pocket also means untethering networks from cable’s soft tissue. Specifically, the clock and the need to communicate a certain amount of news regardless of how much news there is that day. Streaming fixes this. Slow business day? Five-minute segment. Superpower invades sovereign nation? Three-hour special. This might also disincentivize the network from creating extraordinary headlines about unextraordinary events. We can discuss this tomorrow in The Situation Room. I hear Fox’s streaming platform is being rebranded The Panic Room.

One thing that could hold CNN+ back is it hasn’t gone all-in, and it likely never will. Cable news is trapped in a classic Innovator’s Dilemma. Which is why Anderson Cooper is still on the network (in addition to CNN+): Putting AC completely behind a paywall risks the serious cabbage that reverse mortgage brokers and statin manufacturers pay to interrupt him. Media successes tend to be pure-play, all-in affairs: In the cable era, ESPN, CNN, and HBO were new ventures. Netflix is the king of streaming scripted content; Facebook, Instagram, Snap, and Twitter rule social. Not a brand extension in the lot.

I suspect we’re going to get a read on CNN+ crisply. CNN is part of WarnerMedia, which AT&T is in the process of selling to Discovery (the complex deal closes Tuesday, April 5). Warner is the much larger entity, however, so AT&T shareholders will end up with 71% of the resulting Warner Bros. Discovery. And that AT&T legacy shareholder base didn’t buy AT&T stock to own the cash flow from Jake Tapper’s Book Club. (OK, that’s a bit passive aggressive — his show is trending above mine according to the app. Anyway … ) You own AT&T for predictable results and reliable dividends.

But to compete in streaming, Warner Bros. Discovery is going to have to make big bets. Expect a lot of legacy shareholders to bail, putting downward pressure on the stock. WBD will also inherit a sizable debt load from AT&T, which could inhibit the company’s flexibility around investment. All of which adds up to one thing: Management needs quick wins. Signs of traction could result in a streaming-like multiple; anemic results could make it an easy cost-cutting target for a new owner or activist. Few explorers don’t encounter rough seas or bears. But CNN+ has big sails and decent wind. Beneath the tribal noise we make about our preferred cable brands, the world still turns to CNN in a crisis. Viewership jumped by a third after Russian tanks rolled into Ukraine. Ted Turner’s company has never stopped investing in the muscle fibers needed to command that space: Four thousand employees work in 39 editorial operations around the world. Plus AC, Doc G, C Pour, C Dub, the Wolf, and the sexiest bald guy in America — Stanley Tucci.

Short and Windy Road

My adventures in television have, so far, been short … and violent.

As I sit here writing this, my dogs are lying on my lap and my kids are asleep in their beds. One question, present and clear, runs through my head: Why am I doing this? I don’t need the money, and the show will be a small part of my professional endeavors … that will take a lot of time. I tell people I want to be the most influential thought leader in the history of business and create economic security for the people I work with … and that involves being multi-channel. It’s mostly bullshit. I probably have more impact through books and teaching, and can make much more money on boards, speaking gigs, investing, etc. Also, I’m not sure I’ll ever be great at this: I have a face for podcasting, and I share CNN+’s vulnerability — I’m not all-in here. TV is just something I do … it’s not what I do.

So, why? I think it comes down to death. Specifically, my atheism. I believe this (i.e., our time on Earth) is not a dress rehearsal. This. Is. It. And time is just going so fast. Research shows end-of-life regrets aren’t about the mistakes you made, but the risks you didn’t take. The fears that got in the way of going for it. I have a chance to be on CNN, do something new, and be a part of the art form that defines our age (I believe this). Also, my kids seem impressed, which is nice…and rare. In sum, I don’t know if this will work, if I will enjoy it, or if I’m any good at it. But I’m here, in the moment, living life, trying to avoid regret, and ready for my close-up.

Life is so rich,

P.S. Maybe you’ll be the one to lead the next innovation in media. It couldn’t hurt to take our Platform Strategy Sprint, enrolling now.

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NFT Unpack

Last week, Mark Zuckerberg announced NFTs are coming to Instagram. What does that … mean? The announcement was a word salad of platitudes, so we don’t know how the Zuck will bolt this latest thing onto his Frankenstein product structure. The good money is it won’t work — Meta is one of the best acquirers in history, and one of the least innovative. The broader, and more interesting, question is the half-life of NFTs.

As we ended 2021, NFTs were white-hot. Forty-one billion dollars hot, and everywhere. Twitter beat Zuckerberg to the NFT punch, letting tweeters use an NFT as their profile picture, Spotify is hiring for NFTs, and brands from Budweiser to Louis Vuitton are producing them. You can even buy a virtual NFT of the McDonald’s McRib. But there are signs the hype is fading. Trading is down, Google searches are down, scams and frauds are (still) up.

The sun may have passed midday on the hype cycle, but NFTs (or something similar) have real potential to be an unlock for a fundamental aspect of the digital economy.

So … WTF is an NFT? Technobabble aside, it’s similar to the deed to a house. A digital document that identifies one true owner of a digital product. Real estate deeds rely on an ecosystem of paper and electronic records, legal standards, and institutions staffed by experts. It’s worth the expense, as real estate is valuable. NFTs, or non-fungible tokens, are deeds rendered in the world of bits, not atoms. Digitally native, NFTS are (theoretically) lower cost than real estate deeds — thus they’re economically practical for digital items and lower-value property. Deeds … for anything. As private property and ownership are central to capitalism, and economic activity increasingly moves online, NFTs may become central to our economy.

Scarcity and Authenticity

NFTs offer digital commerce something the Internet lacks: scarcity and authenticity. A scarcity mentality is built into us at an instinctual level. Our cravings for sugar and fat (historically scarce) have resulted in an obesity crisis, because our instincts haven’t kept pace with industrial food production. Authenticity’s virtues are practical (we like to know where our food comes from and who we can sue if it makes us sick) and philosophical (if we buy music, is some of the money going to the artist who made it?).

Limited options for credible scarcity and authenticity have rendered digital commerce chaotic. Napster broke the barriers of scarcity that were inherent to physical distribution of music on plastic discs. The pirating of digital goods of all kinds reduces both tech profitability and long-term innovation. Google put the news media into intensive care by reproducing its content (ending scarcity), and Facebook drove another nail in the coffin by de-emphasizing the source (neutering authenticity).

Enter blockchain. Bitcoin became a trillion-dollar asset class because it cracked this code. A dollar bill is worth $1 because only the U.S. Treasury can make it (authenticity) and we trust Uncle Sam to mint a limited number (scarcity). Bitcoin’s “proof-of-work” system likewise ensures scarcity (there will only ever be 21 million bitcoins produced) and authenticity (all are tracked on an immutable public ledger).

NFTs offer the promise of scarcity and authenticity for digital goods. NFTs aren’t the only way to create scarcity and authenticity online — trusted, centralized entities such as banks (and platforms such as Twitter and Apple) do it within their verticals, and blockchain tech is evolving to address myriad environmental and security concerns. So the current implementation of NFTs may not be the best way, or even a good way (many reasons to be skeptical). But they’re … a way. A potentially widespread, inexpensive way to offer credible scarcity and authenticity online, opening up new vistas of digital commerce. Prospectors are rushing in.

Art

The world beyond crypto-obsessives started paying attention to NFTs a year ago, when digital artist Beeple sold an NFT mosaic of his daily digital images, Everydays, at Christie’s for $69 million. No asset class depends more on scarcity and authenticity than art. The Mona Lisa’s value relies on our belief that there’s only one (scarce); plus, we know it was created by da Vinci (authentic).

As deeds do for real estate, a whole industry of galleries, museums, and consultants, along with ancient documents and high-tech gadgets, props up the fine art market. We know this from the failures: A single successful forger, Pei-Shen Qian, formerly of Queens, brought down a 170-year-old art gallery and spawned 10+ lawsuits (and one Alec Baldwin podcast) with his oeuvre of fake Rothkos. NFTs offer a defense against digital forgery. Beeple’s Everydays is authenticated publicly, on the blockchain (and a less cryptic Opensea listing, with legibility brought to you by … centralization). The lower priced the art, the more it requires a scalable platform for establishing scarcity and authenticity.

Bored Ape

Bored Ape Yacht Club — a series of JPEGs of monkeys wearing different outfits — is no more or less risible than any other trend. There are 10,000 of them, each unique, and they’re collectively valued at $3 billion. The floor price for one is $311,000. The company behind les singes ennuyés, Yuga Labs, has consolidated its position as the dominant force in NFT-based collectible bubbles, buying up the NFT brands CryptoPunks (bored dudes) and Meebits (bored avatars) and raising $450 million at a $4 billion valuation.

Is this a JPEG ape bubble? Likely. Collectible bubbles are nothing new. Beanie Babies were individually unique, cartoonish figures produced at low cost and brilliantly marketed. In 1997, eBay sold $500 million worth in a month — 6% of the company’s annual sales. Garbage Pail Kids, Cabbage Patch Dolls, animation cells, POGS, tulips — the list goes on. Some endure, such as vintage baseball cards (outperforming the S&P 500 since 2008). There is a huge market for modestly priced art and un-bubbled collectibles that could benefit from digital scarcity and authenticity. NFTs also offer the potential for creators to collect royalties every time their art is sold in the secondary market, remedying some of the creative economy’s inequities.

How long will Bored Apes remain culturally relevant? Don’t know. They are trees, which live and die. Yet the forest is immortal.

Brands

For brands, scarcity and authenticity is everything. Chanel can sell sunglasses for $500 because they’re scarce and they’re Chanel. In exchange, the customer gets to say “I’m aspirational” without saying “I’m aspirational.” But branding goes beyond signaling wealth. Doc Marten boots say something, and Wrangler and Levi’s say something else. Oatly is not milk, but it is a statement about who you are.

People underestimate the power of brands; it’s a lie we tell ourselves. Branded beer tastes better than non-branded beer. Allergy medication is more effective after you watch branded advertisements. Labradoodle vs. Labrador, Star Wars vs. Dragon Ball, iOS vs. Android, NYU vs. Columbia — we are a tribal species, and we sort ourselves with logos. Logos that we insist are “authentic,” despite the availability of knock-offs. A robust ecosystem of intellectual property laws and institutions ensures a brand’s owners control scarcity, and NFTs augment that system in the digital economy.

Many companies are catching on to this in their own socially stunted, corporate, Zuckerbergian way. People want to show up to the Miller Lite metaverse tavern no more than they want to follow Miller Lite’s Instagram page. There’s no doubt that much of the fullness brands give to physical life is missing online.

Belongings

Every morning I put on a Panerai watch to signal my masculinity and success. I haven’t wound it in 10 years. Online I have something even more scarce: A Twitter blue check. The blue check is a digital Panerai (sort of): scarce and authentic, it signals that if you mate with me your kids are more likely to survive than if you couple with someone missing the blue check.

One of the keys to NFTs will be portability across mediums. A Twitter blue check can’t exist on Instagram, but the NFT equivalent of a Twitter blue check can — and deliver credible authenticity, thanks to that NFT deed. This is the metaverse vision of interoperability that could help make digital belongings feel similar to physical belongings.

Digital belongings exist on the internet, but there aren’t that many types of them. On Fortnite you can acquire guns and outfits. On Reddit you gain badges. Point is: There’s a lot of stuff on the internet, but there isn’t much stuff that’s yours.

Now ask yourself: How much physical stuff is yours? Think of every item in your house: books, paintings, photos, CDs, heirlooms, trophies, etc. What’s the market value of all that? As our lives move further online, so will our stuff, and we’ll need some sort of infrastructure that allows us to own it.

Money Changes Everything

I’m a capitalist and generally think that functioning markets improve lives. Bringing credible scarcity and authenticity to digital markets is a net positive — but the key word there is “net.” The flood of interest in NFTs has predictably resulted in scams and exploits. The market has cooled off recently, with the top corresponding pretty closely to former First Lady Melania Trump’s NFT scam. (She bought her own NFT through shell accounts to create false signals re the value.) When I interviewed Mark Cuban (owner of the Dallas Mavericks), he raised concerns about sports team NFTs  injecting a money-making incentive between the fans and the team, replacing the emotional bond they feel with the team and players with the anxiety of a Robin Hood day trader sweating a position.

Scarcity and authenticity are powerful, and not always forces for good. Our instinctual craving for scarce sugar and fat has produced an obesity crisis, but we aren’t going to throw out the industrial food system and live off the land. Amidst the scams and bubbles, credible scarcity and authenticity will unlock real value in digital markets.

In sum, Madame First Lady Trump,

Learn the damn language: scarcity and authenticity.

Life is so rich,

P.S. Section4 membership now comes with unlimited sprints. Yes, you read that right — unlimited two-week business courses at a highly affordable price. Sign up now.

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Wash

Mount Everest has been scaled by 6,000 climbers, and 300 have died. Of those, 85% died on the descent. Just as invasion is (usually) harder than occupation, criminality itself is often easier than figuring out how to spend your ill-gotten gains. Digital bank records and international regulatory systems make it hard to turn blood money into Lambos and Alhambra necklaces.

Enter money laundering: The UN estimates that $2 trillion in proceeds from crime are laundered into the legitimate economy every year. This goes way beyond Jason Bateman stuffing cash into the walls of his house in the Ozarks. It’s billions in off-shore accounts, corrupt construction projects, and thousands of cash-intensive businesses ranging from strip clubs to five-star restaurants that do better than their footfall would suggest.

It’s a big business attracting more law enforcement scrutiny, new laws, and international task forces. The feds got Al Capone for tax evasion — following the money is one of law enforcement’s best weapons.

Kleptocracies

Yet until just a few weeks ago, a first cousin to money laundering received far less attention: money washing. The conversion of corrupt, if not illegal, oligarch money into Kensington flats and Premier League football clubs. London, aka Londongrad, has become the global capital of money washing, but it’s more widespread than that. Much more.

The sources of this money are kleptocratic regimes: Governments that operate like organized crime syndicates, extracting wealth from the resources and hard work of the people they rule. Think of Russia, Saudi Arabia, the other petrol states, and countries ranging from Argentina to Zimbabwe where corruption lets billions leak from the legitimate economy into the pockets of the elite, the patrons of the money washers.

This wealth isn’t necessarily “illegal” — the elegance of cronyism — but there are heavy strings attached.

Klepto-fortunes are made in countries where the rule of law is fluid and shaped by competing elites … who are also walking a tightrope. Russian oil oligarch Mikhail Khodorkovsky was one of the wealthiest people in the world until he fell out of favor with Putin and spent a decade in prison, ending up with just $500 million. He was lucky. Nikolai Glushkov, the former finance director of Aeroflot, was found strangled with a dog leash in his London flat, just before he was scheduled to appear in court to testify about Kremlin corruption. (Note: Don’t know what happened to the dog.)

A common feature of kleptocracies is that they are unappealing places to spend money. A hundred million dollars in London, Paris, and St. Barts buys a better life than any amount of money will afford you in Riyadh. And you don’t obtain modern economy status with a mansion or a megayacht, but with courtside seats next to Kanye or a position on the board of MoMA. There are forms of washing everywhere. Anna Wintour sells prestige in the form of admittance to the Met Ball, via purchase of print ads in Vogue. Admission to elite society is for sale, but big spenders from autocracies require fabric softener before admission.

Downey

Just like drug kingpins, oligarchs have money but can’t spend it. Enter the money washer. This is any jurisdiction with strong property rights, ample luxury goods, and a willingness to overlook origins. Also a society that accepts oligarch money for real estate, yachts, and midfielder salaries. Money laundering is done in secret, because it requires hiding the source of money. Money washing hides in plain sight, because that’s the point (appearances). Money washers merely ask the broader community to ignore the money’s origins.

Money laundering experts outline three components: Placement (getting dirty money into the legitimate financial system), Layering (concealing its source through dishonest transactions), and Integration (making it available for spending). Money washing also has three components: Removal (getting kleptocash out of the kleptocracy), Enjoyment (converting dead money into a luxury lifestyle), and Elitism (entry into the elite cultural and political circles of the adopted country).

The key principle of washing is removal: getting money out of Russia (or Iran or Kuwait or Venezuela) and into the West — the American/European financial system.

The first port of call for many oligarchs is a web of shell companies located in places including the Virgin Islands and the Caymans. This converts their cache into dollars and euros and removes it from the grasp of the kleptocracy back home, which could have a change of heart. But ultimately oligarchs want things, not numbers. Buying Western assets, vs. just shifting money into Western accounts, looks more like legitimate business activity, and the purchase can earn a return and garner Western prestige.

Oligarchs have taken stakes in everything from aluminum producers to Big Tech companies. Russian oligarch Mikhail Fridman’s LetterOne holds $25 billion in Western telecoms and oil companies; in 2016 it invested $200 million in Uber. The Saudis are prominent Valley investors as well. Sports teams are another target. Roman Abramovich’s ownership of Chelsea F.C. is only the highest-profile example of Russians owning or investing in soccer teams. Three out of the four clubs in last year’s Champions League semifinals were owned by oil sheikhs or Russian oligarchs. Abramovich has a 767 with a black mask painted around the cockpit windows. He calls it Bandit. Believable. (Try explaining all this to your 11-year-old who wears pajamas with “Lukaku” on the back.)

Luxury real estate is a top-shelf option. It’s scarce, experiences low volatility, and you get to live in a phat pad. Similar to a sports team, it serves the second objective of money washing: enjoyment. Forbes identified $2.8 billion in extraordinary real estate owned just by Russian oligarchs. Putin’s former judo partner’s brother owns three villas in the French Riviera. (Rumor is, Steven Seagal lives in the pool house, where he vapes mango-flavored Juul pods, streams Cobra Kai, and yells at the microwave.) Petr Aven kitted out his 8.5-acre Surrey estate with a “KGB-proof” mansion, complete with panic room and intelligent electronic fencing. It makes sense that oligarchs are worried their cash could be stolen … for a second time.

Achieving elite status is washing’s third phase, and the finest laundromats attract cash with their reputational accoutrements. Pay-to-play aristocracy is London’s true sex appeal: Secure a recommendation from the prime minister to the queen, and bang, you’re a lord. Unsurprisingly, the best way to gain royal favor is to be very rich: Half of Brits with a net worth over $5 billion have received a title of nobility from the crown.

It works just as well for foreigners. Aluminium oligarch Len Blavatnik (the richest person in England) became Sir Len Blavatnik after he donated £50 million to the Tate Modern. Evgeny Lebedev, the son of billionaire Russian banker and former KGB officer Alexander Lebedev (and also the owner of London’s 200-year-old Evening Standard), became Lord Evgeny Lebedev after Boris Johnson vouched for him despite national security concerns.

Wash, American Style

In the U.S. a favored way of increasing your social capital is to donate money to food banks and voting rights groups. Just kidding, it’s higher ed.

Department of Education data reveals billions of dollars in foreign donations to U.S. institutions. Much of that may be from legitimate sources, but it provides cloud cover for the influx of dirty money. The National Endowment for Democracy reports that oligarch gifts are often commingled with money from other sources (some stains need pre-soaking), but they’re then leveraged to influence academic direction, secure campus speaking opportunities, and (shocker) gain admission for family members. MIT has raked in almost $1 million from Russian oligarchs, and NYU (my HQ) has received more than $4 million. Yale has a Blavatnik Fund for Innovation (Sir Len Blavatnik) as well as a Blavatnik Fellowship. Harvard’s Islamic Studies Center was named after a Saudi prince. These are great washes — they signal care and empathy for future generations and distract from your fortune’s origins while ensuring your kid gets a seat.

Another effective wash? Museums, cultural institutions, and nonprofits. In 2012 the Brooklyn Academy of Music accepted $1 million from former Putin crony Prokhorov. Dimitry Rybolovlev donated $1 million to the Mayo Clinic. Vladimir Potanin gave the Kennedy Center for the Performing Arts $5 million. Foreign oligarchs don’t have a monopoly on this tactic. The oligarchs of pharma, the Sacklers, built a wing at the Met (the wing opposite is named after a Rockefeller). The bonus perk of museum-washing is you get to hang with more artists (fun) and fewer asset managers.

All of this works in concert. Becoming a member of the social elite reinforces property rights. Mr. Abramovich lost his Kensington mansion last week. Would things have played out differently if he’d spent his money at the House of Lords instead of Annabel’s?

Londongrad

But London is the undisputed capital of money washing. Why? Paris is prettier, LA has more celebs and better weather. But nothing beats focus: London became money washing heaven on purpose, and it’s been doing this longer than anyone — since at least 1799, when King George III introduced the non-domicile tax system. It’s still in force today, with only limited reforms. Anyone living in the U.K. whose “real home” is abroad doesn’t have to pay taxes. When agricultural depression ruined the economics of the landed aristocracy, the titled classes imported foreign wealth via marriage. Three hundred and fifty U.S. heiresses married into the British aristocracy prior to WWI, including Winston Churchill’s mother. A good trade: The Lords gets to keep the wealth; the foreigners get to live in Downton Abbey.

In the post-Cold War globalization era, the U.K. doubled down on making London a magnet for foreign wealth: It deregulated the financial sector, loosened taxes, tightened libel laws to keep journalists out of the new arrivals’ hijinks, connected PR firms to oligarchs who colluded with MPs, and created a “golden visa” that gave residency rights to anyone who invested £1 million in the country.

Today, 87,000 homes in the U.K. are owned by foreign shell companies — £1.5 billion of those are owned by Russians linked to the Kremlin. Then NIMBYism and embrace of a scarcity economy takes over. Limits on home renovation and expansion meant to preserve England’s Englishness have put homes out of the reach of the English.

Glass Houses

Londongrad may be the money washing capital, but it has competition. When it comes to shielding oligarch wealth behind impenetrable layers of shell companies and trusts, the surprising up-and-comer is South Dakota. A series of modifications to existing trust law permits the concealment and protection of assets with no questions asked: The state holds an estimated $360 billion in trust assets.

Oligarchs love U.S. real estate as well: Those skinny Manhattan ultra-high-rises that have sprung up in the past decade are a response to the influx of foreign money into the city. The condos inside are known as “the world’s most expensive safety deposit boxes.”

In America, some laundromats offer better evasion services than others. Florida, for example, has no income tax and allows you to keep your home when you file for bankruptcy. Nearly a third of U.S. houses bought by Russians in the past six years were located in the sunshine state.

The global money washing industry is thriving throughout the U.S. and Europe, and kleptocash has seeped into every corner of our economies. This has profound consequences, for us and for the exploited citizens of the kleptocracies themselves. When Russia began privatizing in the 1990s, it was clear that crime and corruption were rampant. But Western leaders reasoned that once the oligarchs gained their wealth, they’d develop an interest in stability and the rule of law to protect it, and to support the development of an economy and society where they could enjoy their ill-gotten gains. It’s an age-old phenomenon: Bandits become bandit kings and eventually see the virtues in shedding the banditry — or at least corralling it with law and law enforcement.

But as Russia scholar Karen Dawisha wrote in Putin’s Kleptocracy, that view “failed to foresee the extent to which globalization would allow Russian elites to continue to maximize their gains by keeping domestic markets open for their predation while minimizing their own personal risk by depositing profits in secure offshore accounts” — and enjoying the fruits of the Western economy by buying yachts, enjoying five-star meals, and hanging with celebrities. As she later put it, “the rule of law for Russia is in London.”

The oligarchs may be the ones stealing from the Russian people, but we are the pawn shop that fences their stolen goods. The waiter at Little Nell in Aspen is getting a larger slice of the Russian oil economy than the vareniki chef in St. Petersburg. That’s not an exaggeration as rich Russians (no joke) hold as much money outside Russia as the entire Russian people hold inside Russia. Since Russia’s invasion of Ukraine, we’ve been demanding that Western businesses stop operating in Russia. There’s good reasons for that. But we should be looking in the mirror at how our own businesses are serving the needs of oligarchs outside Russia.

Little of this has been done in secret — shell company shell games are just for the lawyers; we know who owns those yachts. Public displays of wealth are often the point. In 2020 a U.K. government report acknowledged that “a lot of Russians with very close links to Putin who are well integrated into the U.K. business and social scene are accepted because of their wealth,” and warned that these links were being actively used to undermine the country’s democracy and distort media coverage. (Dawisha couldn’t find a British publisher for Putin’s Kleptocracy, and two separate Financial Times reporters have faced libel suits for their coverage of the oligarchs.) There is growing evidence that washed oligarch money isn’t so clean after all, and remains linked to the Russian state. Yet nothing has been done.

Both the U.S. and the U.K. have laws in draft that would begin to push back on money washing. But until Russian bombs started falling on Kyiv, the legislation wasn’t moving. The U.S. “Enablers Act” has been in committee for six months. Perhaps the specter of a great power trying to crush a 40-million-person country will inspire us to take a hard look at our own money washing machine and the real costs of those yachts.

Regulatory capture by Russians in the West elevates capitalism over democracy, and that has implications beyond foreign influence. Each football club and villa purchased by oligarchs moves us down the path to cronyism and our own oligarchy. My state’s junior Senator, Rick Scott (R-FL), this week proposed halving the budget of an oversight agency (the IRS) that helped uncover the largest case of Medicare fraud in history. The guilty firm’s CEO? Comrade Rick Scott.

LIfe is so rich,

P.S. If everyone on your team is leaving for greener pastures, you’re not alone. Join me and Adam Grant on March 23 to discuss: Why is everyone quitting?

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

College Town

College is a lubricant of social mobility, a vaccine against a creeping caste system, and a key that unlocks the American dream. Yet over the past 40 years, it’s become more difficult to access and more expensive, staying more the “same” (i.e., stale) than nearly any offering. We can scale social media platforms from thousands to billions of users, turn Porsches into SUVs, and lift billions of people out of poverty globally, but we can’t shape a college education beyond a four-year tour of auditoriums and projectors.

The sector is ripe for disruption. In any other industry, innovators would have moved in long ago. But higher education is different: It’s got iconic brands (Apple and Coca-Cola have nothing on Stanford and MIT), a self-policing “accreditation” system, and an unholy alliance with the financial industry ($1.7 trillion in student loan debt). So things keep getting worse. And the worst of the worst are the elite schools, who’ve doubled down on their rejectionist cultures even as their endowments have exploded. The share of the student population enrolled at elite schools has been declining for decades. “Let’s build something wonderful, so we can share it with almost nobody,” said every Ivy League President. #Gross.

A bright spot? Our great public universities. For example, the University of California, which recently set a goal to add 20,000 more seats by 2030. But the sun of UC’s good intentions has experienced a partial eclipse of Nimbyism (Nimby = not in my backyard). This town-gown dispute is indicative of the challenges facing higher ed, and our country.

Sociology 104B: Studies in Nimby

UC Berkeley has expanded its enrollment just 1.3% per year since I graduated in the nineties. More Berkeley grads is good for California, America, and the world. Berkeley boasts the second most Nobel Prize winners of all U.S. universities, produces the most Peace Corps volunteers, and is the nation’s fourth-largest manufacturer of Olympic medalists.

However … more UC Berkeley doesn’t appeal to some Berkeley residents, who like the cultural accoutrements of a college town, just not college students or the housing they need. In 2019, the City of Berkeley and a neighborhood group sued to freeze the school’s enrollment.

The city and the university cut a deal: UC Berkeley agreed to pay $82.6 million to the city over 16 years (double its previously planned payout) to account for the increased burden on city services, and the city dropped its lawsuits and endorsed the university’s growth. Seems reasonable.

Except that the neighborhood group wasn’t satisfied with 80 million bucks. It continued its lawsuit and won — relying on an environmental law from the 1970s that observers say was never meant to police population growth, let alone higher education. The kicker? The enrollment “baseline” year is 2020, when enrollment cratered, thanks to the pandemic, so the freeze will require the university to cut 3,000 students (2,000 undergrads and 1,000 graduates) from its anticipated 2022-23 enrollment. To minimize the reductions, Berkeley will tell more than a thousand new undergrads they have to take their first semester online and require another 600 to defer until 2023.

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Economics 316A: Churn, Baby, Churn

The median sale price for a home in Berkeley is $1.6 million, nearly four times the national average. And prices keep going up (12% in the last year). Berkeley homeowners are the beneficiaries of a long economic boom — a boom that came in no small part courtesy of UC Berkeley’s graduates and researchers. On the other side of the backyard fence, UC Berkeley and its students are the arbiters of change, the potential for a better future. But what we witness incessantly in America is people who’ve benefited from our innovation economy pulling the ladder up behind them.

In 1940 a 37-year-old had a 92% chance of earning more than their parents did at the same age; a 37-year-old today has a 50% chance. It’s never been more expensive to buy a home. Since 1989, young people’s wealth relative to their income has declined, while older people’s has grown. Put another way, the old are getting richer and the young poorer.

And while the younger generation is down, we boomers continue to kick them. Today, two-thirds of jobs require a postsecondary education and training, but college costs have increased 150% faster than average earnings of 22- to 27-year-olds since 1980. We spend 7% of our federal budget on children — the only OECD nation that spends less on kids is Turkey.

Old people don’t want change. They want scarcity and ossification, because it protects what they have. Young people are different — they want churn and growth, so they, too, can go buy a nice house and turn into Nimbyists.

In Berkeley, it’s likely California will carve an exception to the law for the UC system, but housing for students is still in critically short supply, and next year there will be another battle, another lawsuit. We can’t scale America’s colleges one lawsuit at a time.

College towns are victims of their own success, bringing character and culture that benefit residents who register appreciation — and then want to create a scarcity ecosystem that will further buttress their wealth and lifestyle. University leaders need to adapt to a scarcity mindset in which companies, graduates, and homeowners all want less access once they have theirs.

Some ideas…

Urban Planning 485A (Senior Seminar): Thinking Outside the B(erkeley)ox

You know who would welcome 50,000 of California’s brightest students and most-accomplished researchers? Fresno. Or Davis. Or Bakersfield. Any town north of Sacramento or east of Los Angeles. Governor Newsom, if you want an unlock, build a campus in Fresno. Build a high-speed rail system from Fresno to the Bay Area and weave the tech industry into a new community.

That’s just a start. Our elite private schools have become enamored with satellite campuses, but they’re mostly fond of the checks autocratic regimes are willing to write to wrap themselves in the comfortable blanket of academic credibility. Building a satellite campus in Abu Dhabi (my employer’s innovation) is arbitraging the brand, not expanding the franchise. Same goes for most executive education, where a mid-level manager gets her company to pay $30,000 for six days across two on-campus “immersions” during a “multi-modal” experience so she can post a Chief Digital Officer certification from Kellogg/Penn/Columbia on her LinkedIn profile. Big Ed(ucation) is beginning to make Big Tech seem noble.

The elite should be building campuses in places that would welcome the investment instead of filing lawsuits — cities such as Albuquerque, Cleveland, Tulsa, etc. This would diversify the elite’s currently cloistered experience, worldview, and politics. Meanwhile, doubling a city’s degree production increases local human capital levels by 7%. Household incomes in college towns are 7.4% higher than in noncollege towns. Jesus, what could a second MIT do for Mississippi?

I wrote in New York magazine in 2020 that the truly elite universities would leverage their brand equity and technology to scale and consolidate the market. I could not have been more wrong. A rejectionist, Hermès-style positioning is their drug of choice, and they are speedballing the sleet.

Lean into the online-hybrid model. We tried this during Covid, and it worked … sort of. The missing ingredient from college in 2020 was socialization. But there’s no reason to believe that would disappear if we moved classes online. In 2011, 87% of college students lived off campus, and that didn’t stop them from going to bars, dating, and forming special-interest groups. Nineteen-year-olds aren’t good at much, but they’re great at getting their hearts broken, getting drunk and high, and having unprotected sex … at scale. Life finds a way. We tend to speak in binary terms: traditional experience or all online. It will be a mix. If we took 33% of our classes online (and we can), we could increase capacity by 50%. But this can’t be an afterthought or an emergency measure — distance education done well requires investment and new skills.

Here’s a pedestrian fix: Go the way of Dartmouth — quarterly.

Most college campuses sit near-empty for three months a year, an egregious waste of capital investment. But Dartmouth’s quarterly calendar means undergraduate classes continue throughout the summer. This makes sense; summer vacation is a relic we inherited from previous generations whose buildings didn’t have AC and who needed their kids to come home to work on the family farm.

A key to increasing seats may be to transfer the costs of college from students to corporations. The average cost of hiring an employee is $4,000. Why not lump those recruiting costs into a subsidy partnership with a university and provide early access to young talent? This would let talent-hungry companies build a pipeline from campus to HQ. Transfer the costs and burdens of career centers to the companies that benefit from them.

Some companies are already doing it: Starbucks started teaming up with Arizona State University in 2015 — its applicant pool increased by more than half a million, and 63% of new hires expressed interest in the partnership.

Could we put higher ed on the blockchain? Could a university rethink its relationship with the community and tie access to a token? Something like this: Stanford mints 100,000 tokens and auctions them to the public. Each Cardinal Coin gives the bearer unique access to the Stanford community: a vote on major policy changes, entrance to sporting and cultural events, and a seat in any Stanford degree-granting program (subject to minimum standards). Every January 1, another 3,000 coins — no more — are minted and sold at auction. Say, the first trade of the coin offering is at $1 million to $10 million a coin. If you have two kids, you’re looking at savings of nearly $500,000 in tuition alone, and the access would create a bidding war for a store of value that would also attract speculative investors.

What would guaranteed admission, tuition, alumni events, community access, etc. be worth? Let’s be conservative and peg the value at the lower end, $1 million per coin. This translates to $100 billion in new capital, with another $3 billion in revenue coming in every year thereafter. That quadruples the endowment, increases investment income, and lowers costs (admissions and development departments would no longer be needed). Unrivaled capital to open satellite campuses, invest in the next generation of distance learning tech, or just build more dorms.

Would this turn Stanford into the exclusive preserve of the wealthy? Elite universities already are. The wealthy game the system with multimillion-dollar donations (aka the Kushner Krush) or try to bribe someone (Aunt Becky). The Cardinal Coin, putting this all out in the open, could facilitate diversity and merit-based aid. Philanthropists could (will) purchase coins and assign the rights associated with them however they choose — to kids from low-income households with strong academic achievement, or to unremarkable kids raised by single mothers who show promise but could never get into a school that now only admits 9% of applicants, vs. 74% when I applied. #GoBruins.

This was a suggestion from Stig Leschly.

Any naval personnel meeting basic requirements can show up to SEAL tryouts, but the program starts tough and gets tougher — admissions by attrition.

What if an elite university had an adjunct campus that implemented the academic equivalent of SEAL training? No admissions department — whoever makes it through the first semester is admitted. Wouldn’t this also create fierce, resilient, strong capitalist warriors? Warriors chosen for their skills, strength, and grit vs. who their parents are?

The tip of the spear for America, higher education, has become markedly less American over the past several decades. We need massive investment and a rejection of the rejectionist and scarcity mindset to return higher ed to its rightful place as an upward lubricant for kids whose parents aren’t rich and who haven’t peaked at 17. We also need to expect more from university leaders, who’ve had little incentive to innovate or rock the boat. Technology is not the key element for the requisite innovation; class traitors are. Deans and chancellors who push back on faculty and alumni and the dangerous notion that we are luxury brands, not public servants.

Also, Berkeley homeowners, stop it. Just stop it.

Life is so rich,

P.S. I started Section4 to give people greater access to business education and the network that comes with it. We’ve got plans to expand that access even further — look out for big news from us next week.

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