Post Corona: From Crisis to Opportunity

by Scott Galloway

Netflix likely needs to bulk up. First move is to acquire Spotify, another pursuer of the throne with great assets and potentially fatal weaknesses. Together, they snatch up Sonos, and have music and video, along with a physical presence in the home to help fend off Alexa and Siri.

Worth noting: Jack Warner, the original owner of Bezos’s LA mansion, was subject to antitrust action by the DOJ in 1948.

One way to know when big tech is seriously threatening established players is when the established players forget what made them great and start doing dumb things. Cue HBO Max.

Who sees opportunity in HBO’s blunders? Apple. The Cupertino firm is investing $6 billion in original, vertical content on Apple TV+, seizing the luxury positioning from HBO. Luxury is about artisanship and scarcity. Apple TV+ isn’t about what’s on Apple TV+, but what isn’t. Specifically, nothing that isn’t produced by Apple. Sure, The Morning Show is no Sex and the City, but neither was HBO’s Arliss. HBO spent years ramping up its original content before Sex and the City (1998), and The Sopranos (1999) made it the prestige TV champ. When you wonder where all of Apple’s $6 billion in content spend went, remember, the first iPhone didn’t even have apps.

There are a few places Amazon can go with healthcare. First is likely insurance.

Between Amazon and Whole Foods purchases, the Amazon card, and all the “pay with Amazon” merchants, the company has vastly more individualized data than any insurance actuary. And with more and more people working in the gig economy or as long-term freelancers, more and more people are responsible for their own health insurance. If you are one of them, don’t be surprised to hear your Alexa ask, “Are you interested in saving 25% on your health insurance?”

Amazon has invested billions to develop. The source of this firepower (cheap capital) will arrive on the day they announce a healthcare service, and the stock increases over $100 billion that trading day.

In spring 2020, doctors across the country were seeing patients in online sessions and being reimbursed by Medicare and private insurance companies—something that had required onerous special licensing requirements just weeks earlier. Doctors have seen firsthand the benefits for their patients: fewer cancelled appointments and increased efficiency. And of course, no capital investment is out of reach for big tech.

Apple became the most profitable company in history in 2014.

Yet even just a few years ago, a pandemic would have put Apple’s status as a member of the Four at serious risk. Apple has always been unique in the group, as it manufactures and sells physical objects for profit.

However, firms that ask the consumer to make one decision a year, or until you decide to opt out or cancel, are much more resilient, as it is often a bundle, increasing the exit costs across fewer decisions. In addition, the ability to ask the consumer to enter into a monogamous relationship (a subscription) requires a choice that is more of an IQ test than a decision.

As Apple ran up against the law of big numbers, the firm invested heavily in recurring revenue offerings—iCloud, Apple Music, Apple TV+, Arcade, etc. In Q4 2019, Apple’s services revenue was up 25% year over year to 23% of revenue. As a result, Apple has been recast as a software firm, and despite a negligible increase in earnings, it doubled its valuation and P/E multiple in just 12 months. Apple’s services business would stand as the 258th company on the Fortune 500, just beating out Bed Bath & Beyond.19 And on the hardware side, the company is transitioning one-off sales of its flagship iPhone into a monthly service through the iPhone Upgrade Program. Tim Cook said he believed that model would “grow disproportionately.”20

There is only one path to a dramatic increase in stakeholder value in the face of flat/declining revenues: The rundle—my term for “a recurring revenue bundle.”

The other big save that Cook and Company have made in recent years is how successfully Apple has disarticulated itself from the rest of big tech. In large part, this is due to their business model, which is blue/iOS.

Apple, he pointed out, had chosen not to turn its customers into products for data mining. “Privacy to us is a human right.” Facebook, you’re no Jack Kennedy, and you’re fundamentally fucked up.

Cook can seize the high ground here due to his company’s business model, and because Apple remains one of the last of the great brand builders. Apple doesn’t need broadcast media anymore, with stores and “earned” media. However, the world’s strongest consumer brand will always be a multichannel marketer, and it recognizes that the assault on broadcast media has brought costs down such that they (again) make sense for building intangible associations (brand).

THINK RUNDLE Where does Apple go from here? Double down on the recurring revenue that has powered it through the pandemic. The only thing better than recurring revenue is a recurring revenue bundle that could form a flywheel. Why not one with a literal flywheel?

In 2018, estimates were Apple TV+ would spend $1 billion on original content for the envisioned streaming video offering. But in August 2019, they announced $6 billion for original content. So, a tech hardware firm is devoting the same capital to content featuring Reese Witherspoon and Khal Drogo (Jason Momoa) as the state of California allocates to the 23-campus California State University system.21 If it sounds as if we’re living in a dystopia, trust your instincts.

The virus has been especially hard on industries whose customers consume the product sitting shoulder to shoulder, like sports, airlines, restaurants, events—and despite their noble mission, universities.

The disruptability index for higher education is off the charts. In the past 40 years, college tuition has increased 1,400%. In the 1980s and early ’90s, I attended five years of undergrad at UCLA and two years of business school at UC Berkeley for a grand total of $10,000 in tuition—all seven years.

Our $600-billion higher education industry, in contrast, offers a product so old it’s comforting. Venture into a university class today. The fashion is different, there’s PowerPoint vs. transparencies, and the kids have laptops and Diet Cokes vs. legal pads and Tab. But that’s about it.

teach brand strategy at NYU’s Stern School of Business. This fall, on Zoom, the class is almost twice the usual size at 280 kids (what I affectionately call students). They are paying $7,000 each. That’s $1.96 million for the semester. Conservatively, the gross margins on this course are 90+ points. Name another business, at this price point, that registers 90% gross margins. Few if any have been able to achieve these economics. Not Hermès, not Ferrari, not Apple.

SCARCITY How has my industry raised prices at this rate without improving the product? At a few elite institutions, including NYU, we’ve leveraged scarcity. More than a business strategy, it’s become a fetish—believing you are a luxury brand instead of a public servant. Ivy Leagues have acceptance rates of 4–10%. A university president bragging about rejecting 90% of applicants is tantamount to a homeless shelter taking pride in turning away 90% of the needy that arrive each night.

The excess demand feeds into the cartel of higher ed. Hundreds of private, liberal arts colleges that offer a facsimile of the Harvard aesthetic have drafted off the price increases of the elites (and the 95% of families rejected), giving millions of middle-class families the opportunity to purchase a Hyundai for the price of a Mercedes. Much of this is financed with easy-to-obtain credit, exploiting a uniquely held American belief that has morphed into scripture: You’ve sinned as a parent unless you get your kid through college . . . at any cost.

Some of this is our own fault. Colleges have embraced people who do not look like us, but are increasingly intolerant of people who don’t think like us. Only 1.5% of Harvard faculty identify as conservative.5 The result is that about 50% of elected officials are disinclined to fund a progressive orthodoxy.

ABUNDANCE All these price increases have been enabled by the heroin of federally subsidized student loans. Student loan debt now totals $1.6 trillion, far more than credit-card debt or auto loans. The average graduate will carry nearly $30,000 in debt away from their virtual graduation.

The median wealth of Democratic senators is $946,000, Republican senators $1.4 million. They send their kids to expensive schools, they eat at expensive restaurants, they go on elite vacations. The people they see all around them are Uber executives, not Uber drivers. It’s only natural that they give Uber executives the benefit of the doubt, and have trouble focusing their attention on Uber drivers.

CRONIES GONNA CRONY The federal government’s response to the pandemic has been true to form. Under the cloud cover of “protecting the most vulnerable,” we’ve handed trillions of dollars to the most powerful.

The $2-trillion relief package passed in March 2020 was a theft from future generations. Personal income was 7.3% higher in Q2 versus Q1 of 2020 because of stimulus payments and extra unemployment benefits. The personal savings rate hit a historic 33% in April, the highest by far since the department started tracking in the 1960s. The relief package included a $90 billion tax cut that benefited almost exclusively people making over $1 million per year.

that the only bipartisan action is reckless spending that benefits rich people while throwing some funds at the neediest for optics. Not every dollar will be wasted.

Except that the majority of the money we are asking our children to repay has done nothing but flatten the curve for rich people. Rich people have registered disproportionate benefit, their preexisting relationships with banks getting them to the front of the line. Look no further than the refusal of the administration to reveal who is getting the money—until after the election, of course.10 Instead of letting market failures play out, we propped up the shareholder class, using money stolen from the next generation. “We’re all in this together,” they tell us. Bullshit. The really ugly truth is this: for the wealthy, the pandemic means less commuting and emissions, more time with family, and more wealth (see above: markets at all-time highs).

The systemic flaw is that our government is no longer keeping capitalism’s winners in check. Instead, it’s a coconspirator in their entrenchment.

The wealthy have done well over the past few decades, in a supernova kind of way. A ton has been written on this, because the data is abundant. There is shocking data at the extremes: the top 0.1% now own more of the nation’s wealth than the bottom 80%.11 The three richest Americans hold more wealth than the bottom 50%. And there is bad news in broad strokes as well: since 1983, the share of national wealth owned by lower- and middle-income families has declined from 39% of the pie to 21%, while upper-income families have increased their share of national wealth from 60% to 79%.

A recent study of historical tax-return data concluded that the uber-wealthy paid a tax rate of 70% in the fifties, 47% in the eighties, and 23% at present—a lower tax rate than the middle class. Whereas poor and middle-class tax rates have largely stayed the same.

We’ve exploded the debt so rich people pay less tax. Money is the transfer of work and time, and we’ve decided our kids will need to work more in the future, and spend less time with their families, so wealthy people can pay lower taxes today.

paid an effective tax rate of 17–18%. I paid 22.8% federal, but the first $10 million were tax free, thanks to Section 1202 of the tax code. Section 1202 is a tax break for early shareholders, meant to encourage start-ups. Only it’s nothing but a transfer of wealth from other taxpayers to venture capitalists and founders. No entrepreneur starts, or doesn’t start, a business because of the tax code. It takes a special kind of crazy to start a company and a lot of talent, work, and luck to build it to be something you can sell for millions of dollars. The decision has nothing to do with the tax code. Tax breaks for the successful are just another way we deepen inequality.

It’s never been easier to become a billionaire, or harder to become a millionaire.

ECONOMIC ANXIETY Proponents of unfettered capitalism shrug off the ever-increasing advantages of the wealthy and trust a rising tide lifts all boats. They rest easy knowing that working-class Americans may not have secured the same portion of our recent prosperity, but their lives are nonetheless better than they were a decade, a generation, or a century ago. This profoundly misunderstands the nature of economic security.

In 2018, 106 million Americans lived below twice the federal poverty line, which is not as nice as it sounds. Twice the poverty level for a family of four is a household income of $51,583.13

Most of them spend more than one third of their income on rent. A third do not have health insurance, despite being disproportionately sick or disabled.14 Many carry the burden of unmanageable debt, which can lead to deaths of despair. People who take their own life are eight times more likely than average to be in debt.15 For every 100 points your credit score increases, your risk of dying in the next three months declines by 4.4%.16 In the U.S., money is literally life.

Two weeks later, I left the jacket at my Boy Scouts meeting, but I assured my mom we’d get it back at the next meeting. We didn’t. So, off to JCPenney to get another jacket. This time my mom told me the jacket was my Christmas present, as we couldn’t afford gifts after buying another jacket. I don’t know if this was true or if she was trying to teach me a lesson. Likely both. Regardless, I tried to feign excitement at my early Christmas present. A few weeks later, though, I . . . lost the jacket. That day, I sat at home after school, waiting for my mom to come home, feeling the body blow I had delivered to our economically distressed household. Yes, it was just a lost jacket, but I was nine. And the point is not that I had a hard life—I didn’t, by any reasonable measure. The point is that it was just a jacket. But my sense of economic anxiety was already so finely tuned that the loss of a jacket was chilling. I will never forget that feeling of dread and self-loathing I felt that day.

I still lose things. Sunglasses, credit cards, hotel room keys. I don’t even carry house keys, why bother? The difference is that, now, it’s an inconvenience, quickly addressed. Wealth cushions the small blows—lost jacket, an overlooked electric bill, a flat tire—while insecurity magnifies them. Economic anxiety is similar to high blood pressure. Always there, waiting to turn a minor ailment into a life-threatening disease.

It’s not novel to point out that it’s good to be rich, or that it’s bad to be poor. Perhaps the ambition and drive that powers capitalism needs the spur of poverty to keep it moving. But the fundamental promise of America, of any just society, is that with hard work and talent, anyone can lift themselves up, up out of poverty, up into prosperity. And that promise has been broken.

Study after study has found that in today’s America, the biggest determinant of an individual’s economic success is not talent, it’s not hard work, and it’s not even luck. It’s how much money their parents have.

The result is a society in which there is tremendous prosperity, but little progress. The Declaration of Independence promises us “life, liberty, and the pursuit of happiness.” Yet study after study finds that Americans live shorter lives,21 are less free,22 and less successful in our pursuit of happiness23 than our European counterparts.

PRIVATE DISNEYLAND These inequalities are rooted in the tax code, our education system, and our woeful social services. Now they are embedding themselves in our culture.

And we all experienced the same Disneyland. We all paid $9.50 for our ticket books. We all hoarded our “E” tickets and waited 45 minutes in line for the Pirates of the Caribbean. We all had a similar experience at Disney. Now Disney says, for those of you who don’t have a lot of money, it’s $119. You eat mediocre food, and you wait in line. For those of you who are a little wealthier, you can pay $170 and get something called a FastPass. And instead of waiting an hour for the Pirates of the Caribbean, you only wait ten minutes. And for those of you in the 1%, you can do a VIP tour.

ON EDUCATION, AGAIN Okay, but Disneyland was never supposed to be a communist utopia. It’s free enterprise, right? Perhaps, although I’d argue that making rich kids wait in line at Disneyland probably had some salutary effects on their altruism, sense of empathy, and ability to handle irritations. But if Disneyland adopting a caste system doesn’t bother you, consider this. Read that passage again, only replace every mention of “Disneyland” with “college.” It’s the same.

The firms we’ve started have generated over a quarter of a billion dollars for investors, employees, and the founders. These firms employ hundreds of people—and neither of my parents went to college, but America wanted their kid to attend. Yet as I detailed in chapter 4, that path out of economic anxiety is getting steeper and narrower. In 2019, the acceptance rate at UCLA was 12%. Put another way, it’s five times as difficult to access the upward mobility that was within reach three decades ago. A rich society should make it easier for the next generation to get ahead, not harder. A privileged few are riding the Pirates of the Caribbean over and over, while the masses are standing outside in the sun waiting for a turn that may never come.

WEALTH PRIVILEGE We don’t see the depth of our dilemma because we’ve bought into myths ab34_reasons_negative_0928.jpgout America, meritocracy, and success. We’ve put billionaires on a pedestal and made wealth the signifier of worth—and it’s to be rewarded with . . . more wealth.