Post Corona: From Crisis to Opportunity

by Scott Galloway

Uber has a global brand and has demonstrated a flywheel—Uber Eats. With the purchase of Postmates in July 2020, amid the pandemic, the flywheel gets stronger. If Uber leverages their formidable brand, culture of innovation, and flywheel, it could be worth $40 billion, even $50 billion—a 50% decline from its pricing on the eve of the IPO.

Uber has a Benjamin Button effect—the more people that use the algo, the better it gets. The more drivers, the lower the rates, and the more accurate the maps, time estimates, and other aspects of the algorithm.

In terms of vertical integration, Uber’s strength (minimal CapEx) is also its soft tissue, as it doesn’t own cars or have exclusive driver contracts.

Warby Parker. The incumbent (EssilorLuxottica) has raised prices and not innovated—offering hundreds of millions, maybe billions, in unearned margin up for grabs. Despite a sector, specialty retail, that’s been hammered, Warby will be a rare retail IPO of 2021.

Warby Parker gets nearly 80% of its traffic organically. Warby looks to have the muscle (vertical distribution, differentiated product) and fat (access to cheap capital) to survive an Amazon winter and emerge stronger.

WeWork. No, really. The concept works (coworking) but needs to be right-sized. Restructuring may be in store for many unicorns who have a decent business at their core, but just got way over their skis. They need to think like the real estate business they are.

If WeWork can shed its bad assets (step one, fire the founder, done) coworking has a bright post-pandemic future. Many of America’s office workers have been freed of the office, but not everyone wants to work at their kitchen table.

Twitter’s stock jumped 5%, only to slide back once investors did the math and realized any deal would mean that ByteDance would effectively be buying Twitter, in light of Twitter’s relatively small valuation.

The bottom line is that TikTok has a great product. The algorithm is brilliant at surfacing new, relevant content, and the content creation tools ensure there is plenty such content queued up.

Venture capital investments have largely recovered to pre-Covid levels.

As opportunities arise, the private markets are flush with capital, the public markets are hungry for growth stories, and the potential acquirers have deeper pockets than ever

Again, I believe the 2020–21 IPO class will be one of the best-performing vintages of the last several years.

Few industries sit closer to the ground zero of Covid acceleration than higher education.

The disruptability index for higher education is off the charts. In the past 40 years, college tuition has increased 1,400%.

Healthcare spending has “only” increased 600% in the same period.

We rightly complain about healthcare costs increasing, but if you go to a hospital today, the technology, procedures, and medications are substantially different than in 1980. Our nearly $4-trillion-a-year healthcare industry provides cutting-edge training and technology. Have outcomes kept pace with price increases? No. But there has been substantial innovation.

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.

How has my industry raised prices at this rate without improving the product? At a few elite institutions, including NYU, we’ve leveraged scarcity.

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.

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.

We like to position education as the great leveler. But in fact it has become a caste system, a means of passing privilege on to the next generation.

Wealthy kids today are over twice as likely to go to college as poor kids, and over five times as likely to attend an elite school.

Technological improvements have brought distance learning to the threshold of market acceptance.

The best brands in the industry—Harvard, Yale, Stanford, MIT—have been steadily expanding their online offerings.

Demographics are destiny, and higher education’s demographic picture is ugly.

Students lost one of “the best years of their lives.” After a spring semester of upheaval and ad hoc Zoom classes, 75% of college students were unhappy with e-learning,14 and 1 in 6 high school seniors were considering deferring college for a semester or a year.15

Understanding the pandemic effect on higher education requires understanding higher education’s value proposition. In exchange for time and tuition, college offers three components of value: a credential, an education, and an experience.

C = Credential (the lane you are put in post-graduation based on the brand/school you attended) E = Education (learning and stuff) Ex = Experience (fall leaves, football games, falling in love)

FISCAL SHOCK The pandemic will accelerate change in higher education in two waves. In the first, which hit the industry in late summer 2020, many institutions experienced fiscal shock. Even Harvard, with its 4.6% admission rate and its $40 billion endowment, is projecting a $750 million revenue shortfall for fiscal year 2020 and is asking employees to consider early retirement or reduced schedules.

For every student who takes a gap year or transfers to be closer to home, there are ten more who want the seat. The elite universities will weather the storm and emerge stronger.

But when the top schools fill their pandemic revenue hole by going deep into their waitlist, that will exacerbate the problem for less prestigious schools, who incur a double whammy of decreasing yield (percentage of student admittees who enroll) as some applicants get off the waiting list of a more prestigious school while others decide to defer. The effect will ripple down the rankings, until it hits schools that don’t have a waitlist.

Schools that already admit 60 or 80% of their applicants have no reserve, and they are going to go into Fall 2020 and future semester...

As Kevin Carey of New America put it, “The financial solvency of many private colleges now rests on a latticework of probability.”

In short, schools that offer an exceptional credential will be fine. Schools that offer a solid education at a great price are also well positioned.

The schools facing an existential threat are colleges that rely largely on the experience aspect of the value proposition.

Schools that offer an elite-like experience, with elite pricing, but without the credential, are about to experience a reckoning.

A psychology professor writing in The New York Times called the reopening plans “so unrealistically optimistic that they border on delusional.”

The bulk of the teaching is done by adjuncts and assistants, who receive anemic compensation (and grad students, who work for nearly nothing), while the aristocracy of higher ed, the full professors, have their high salaries protected by tenure.

So rather than spend the summer of 2020 focused on dramatically improving the online education experience (an investment that would provide returns for decades), university leadership and faculty have spent millions of hours and dollars pursuing a consensual hallucination that they could properly protect their campuses.

In August 2020, one third of college students said they were not planning on going back to campus, and Harvard reported that 20% of its freshmen had asked to defer.

The most consequential absences will be international students—the cash cows of high-tuition universities. We claim we let them in for diversity. True, but that’s not the primary motivation for a steady increase in kids from abroad. Two thirds of international students finance their education with money sourced abroad. In aggregate, international students contribute nearly $40 billion annually to the U.S. economy.

A pandemic coupled with a Trump administration committed to the demonization of foreigners, including severely limiting the work prospects of highly skilled grad students, may dramatically impact the number of international students applying in future years.

Just as retail closures are accelerating from 9,500 stores in 201922 to 25,000+ in 2020,23 we’re going to see hundreds of universities begin a death march.

A semester of online education and reduced attendance will kill hundreds of schools. A year without the in-person experience, and the pricing power it brings, could drive 10–30% of universities out of existence.

If handled poorly, it could lead to the transfer of more wealth from the young and working class into the coffers of big tech, and the continued reduction of economic mobility.

Schools are putting their faculty through training programs, teaching them how to use the available tools, how to restructure their classes, how to migrate online.

(research routinely shows that men dominate classroom discussions and that instructors are complicit in the problem).

Going forward, look for companies like Blackboard and Canvas to massively innovate or be replaced. There will be an explosion in new tools and technology hitting the market in the first quarter of 2021 as the tsunami of venture capital being deployed into higher ed takes root.

As former NYU associate dean Anastasia Crosswhite put it, “The median faculty member went from ‘online education over my dead body,’ to ‘I’m not stepping foot in a classroom until there’s a vaccine,’ within two weeks.”

Scale will allow individual institutions—and individual professors—to exponentially expand their reach. This provides the potential to correct one of the great inequities of the last half century—the artificial scarcity of elite education.