What we experience is change, not time. Aristotle observed that time does not exist without change, because what we call time is simply our measurement of the difference between “before” and “after”. The pandemic’s primary effect has been to accelerate dynamics already present in society. Many of the trends the pandemic accelerates are negative and weaken our capacity to recover and thrive in a post-corona world. We registered a decade of ecommerce growth in eight weeks.
It took Apple 42 years to reach $1 trillion in value and 20 weeks to accelerate from $1 trillion to $2 trillion (March to August 2020).
The Chinese word for crisis consists of two symbols, one meaning danger, the other, we are told, meaning opportunity.
Patriotism used to be sacrifice, now it’s stimulus. In the pandemic, our nation and its leaders have spoken with their actions: millions of American deaths would be bad, but a decline in the NASDAQ would be tragic. The result has been disproportionate suffering.
Covid and the culling
The market is making bold bets about the post-corona environment and we are seeing both big gains and steep declines.
This “disconnect” — between the big and the small, the innovative and the old fashioned — is as important as the more talked-about gap between the market and the broader economy.
And there is an incredible amount of capital looking for a home right now. The U.S. government has poured $2.2 trillion into the economy, and because of some terrible policy decisions a huge amount of that is going right into the capital markets. For the last decade, the markets have replaced profits with vision and growth when determining the value of a company. Share buybacks have always been ticking time bombs, trading the long-term future of the company for short-term investment returns, and now those bombs are detonating.
At the outset of addressing this crisis, it’s essential to understand where a company is on the strategic spectrum of the pandemic. The right moves for the biggest elephant in the herd are not the smart play for a “sickly gazelle” (how Jeff Bezos once described small book publishers).
If the strongest asset is the brand, but the business is in structural decline, think seriously about milking the brand until it dies. As much as we humanize them, brands are not people — they are assets to be monetized.
The post – corona world will prize contactless transactions of all kinds.
In terms of digital, anything you can do to save your customers time will build your NPS (Net Promoter Score) more than flowery marketing language about “these unprecedented times”.
Cash is great for survival purposes, but the real gangster move is to be capital light, that is, to have a variable cost structure.
The gig economy is attractive for the same reasons that it’s exploitative. It preys on people who have not been casted into the information economy.
The transition to electronic health records was a major thrust for Obamacare and may be the program’s most lasting and important legacy, as electronic records enable a dispersal of an industry ripe for disruption.
The trillion-dollar question is whether tech can disperse our workforce without reducing a culture of innovation and productivity.
We can’t ignore the fact that remote work will be a means of increased income inequality. Sixty percent of jobs that pay over $100,000 can be done from home, compared to only 10 % of those that pay under $40,000.
From the end of WWII until the introduction of Google, the gangster algorithm for shareholder value was simple — create an average, mass-produced product and infuse it with intangible associations. You then reinforce those associations through cheap broadcast media, which occupied the average American for five hours a day.
Success in the services industry is a function of your ability to communicate ideas and develop relationships. I loved the former and despised the latter — managing colleagues and being friends with people for money. The services industry is prostitution, minus the dignity. If you spend a lot of time at dinners with people who aren’t your family, it means you’re selling something that is mediocre.
If Tivo marks the beginning of the shift from the Brand Age to the Product Age, the summer of 2020 saw the Brand Age’s end. The killing of George Floyd and subsequent protests briefly displaced the pandemic in the front and center of our national consciousness, making obvious the passing of the Brand Age into history.
“This you?” became the Twitter meme that exposed the brand wizards. Companies who posted about their “support” for black empowerment were called out when their own websites revealed the music did not match the words.
There are two fundamental business models. One, a company can sell stuff for more than the cost of making it. Two, a company can give stuff away — or sell it below cost — and charge other companies for access to its product: the consumer’s behavioral data. As we move into a tech-based economy, however, that second business model becomes both more lucrative and more troubling.
We used to trade time for value. Now we trade our privacy for value.
Tim Cook has promised us that Apple won’t harvest our data. “Privacy is a fundamental human right”, he said. But Apple receives $12 billion a year for making Google the default search engine for iOS. Apple will likely divorce from Google, even though it will cost them $12 billion a year, plus the billions it will take to build or buy their own search engine.
Twitter finally announced in July 2020 that it would “explore” a subscription model. The market loved it. I can save Twitter another year of “exploring” the subscription model. Subscription fees should be based on the number of followers. The subscription model offers a free gift with purchase — identity. People are less awful when their name and reputation are attached.
While Twitter is figuring this out at half – CEO speed, Microsoft should launch their own microblogging platform as a sub-brand of LinkedIn. If there is any doubt that media is nicotine (addictive) but advertising is what gives us cancer (tobacco), compare and contrast the most successful media firms of the last decade: Google, Facebook, Netflix and LinkedIn. Two are tearing at the fabric of society, the other two . . . are not.
Facebook and Google run on rage as an engagement model; Netflix and LinkedIn are powered on a subscription model.
Over the same five-month period, nine major tech companies increased in market value by $1.9 trillion. And they weren’t any five months, but the worst five-month stretch the world has experienced in nearly a century.
We are witnessing the rise to dominance of a subset of American companies. The biggest of the bunch are the companies I call “the Four” (Amazon, Apple, Facebook and Google), along with Microsoft.
These five companies make up 21 % of the value of all publicly traded U.S. companies.
Big tech is the twenty-first century version of John D. Rockefeller and Andrew Carnegie, and there is no trust-busting Teddy Roosevelt on the horizon to rein them in.
How have they done it? The algorithm is this: innovate, obfuscate and exploit. Tech monopolies are founded on innovation.
In the context of business, as the flywheel rotates it increases output or revenue without increasing input or cost. The ultimate flywheel is Amazon Prime.
Once you have a monopoly and your flywheel is spun up, network effects, cheap capital, idolatry of innovators and a feckless DOJ and FTC have resulted in a monopoly era in which a wildly profitable business (phones , digital marketing, loyalty programs, cloud, Yoda dolls) can generate such staggering value (“antimatter”) that entire industries become loss leaders (“features”) to differentiate and protect the antimatter.
Just by buying Jet, Walmart went from 6 % to 16 % of sales online.
What Jeff Bezos knew all along was that very soon, technology companies would no longer merely make technology infrastructure for other firms. Instead, technology companies would be in those businesses themselves.
From the outside, companies including Airbnb, Uber, Compass and Lemonade look like rental agents, ride-hailing services, real estate agents and insurance companies. But in fact, these are technology companies, differing only by the analog industry they’ve chosen to deploy their technology against.
Whatever your widget, you can make more of them for cheaper and sell more of them for higher margins, if you build your business from the ground up to be online and data driven. But the companies that figured this out early and capitalized (the Four — Amazon, Apple, Facebook and Google) now have an equally powerful advantage: size. With their lower cost of capital, monopoly power and bulk, they are herding every business toward tech.
Some examples. First, delivery. Amazon has decided it wants to own the delivery business. Another example: wearables. Apple is dominating wearables. Apple’s wearables business (Apple Watch, AirPods, and Beats) alone generated over $20 billion in revenue in 2019, making it bigger than McDonald’s. Congratulations, wearables, you’re now tech. One more example: streaming media. What tech has done to retail is unfolding in media. Streaming video adds momentum to the flywheel.
Large entertainment media firms (Comcast, AT&T, Verizon, Fox, Sony) will cede value to Amazon and Apple — two tech giants for whom media is not a core business, but just a part of the flywheel, a feature.
The shift in value has already started. In the 13 – month period between January 2019 and February 2020, Apple and Amazon added Disney, AT&T/Time Warner, Fox, Netflix, Comcast, Viacom, MGM, Discovery and Lionsgate to their market capitalization.
Netflix is perhaps the only other company to have accomplished what Amazon has pulled off by convincing the markets to essentially give them a blank check for customer acquisition and infrastructure investment on the strength of a vision.
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. That would give Netflix even more daylight.
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.
Inevitably, companies without serious competition become less innovative and capture more profits and share from exploiting their position, and less from creating real value.
When companies become “too big to fail” they realize taking outsized risk is the right strategy, as the upside is privatized and the downside socialized — they get bailed out.
Difficult — there is little that individuals or even companies can do when firms become this powerful. This is the role of government. Laws written by the light of coal power don’t work against digitized monopolies. We should stop thinking of the breakup of big tech as punishment for doing something wrong, or that it means tech leaders are bad people. We break companies up to restore competition to markets, which is the gangster app for a growing economy that demands better behavior.
Google and Facebook could seize the remaining revenues of the radio and print industries and they’d still wake up hungry for more revenues within 24–36 months, based on investors’ expectations. The Four need to add nearly a trillion dollars to their revenue over the next five years. This requires entering new markets — and coming for one other.
Amazon’s core competence is vision and storytelling. While most firms’ profits are reevaluated every three months on their quarterly earnings call, Bezos has retrained investors’ Pavlovian mechanisms, replacing profits with vision and growth.
Not in their wildest dreams could Amazon shareholders devise this scenario: the government closes down the competition, restricts everyone to their homes and then sends consumers trillions in cash.
Apple or Amazon. Apple won that race by a nose and reached $2 trillion in August 2020.
One of Amazon’s arsenal of gangster moves is turning expense lines into revenue lines. It’s one of Bezos’s best tricks, and like so much else they do, it is made possible by a combination of scale and ultra-low-cost capital.
First, a company gets really good at its essential, but non-core, business functions. Step two is Amazon turns around and starts selling that competency to other companies as a service.
So how do we know where Amazon will go next? Simple. What are its biggest expenses? The vision to see expenses as investments in future stand-alone businesses is Latin for “3 trillion”.
Leadership is the ability to convince people to work together in pursuit of a common goal.
Consumers by and large dislike and distrust insurance companies, and for good reason. It’s a bloated industry, protected by inefficient state regulatory schemes and entrenched relationships.
By achieving a business paradox — a low-cost product that sells for a premium price — Apple became the most profitable company in history in 2014.
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 %.
The pandemic test for Apple will be in the supply chain — can they get new products to consumers?
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.
For every $1 that you spend a month, the company spends $1 billion on content a year (about the same as Netflix).
Apple is also in a position to offer a Prime-like rundle. Just send me the latest iWhatever with unlimited media (television, games, apps) activated on the good phone at $50 a month, $100 for the better phone plus watch, and $150 for online classes on design and UX/UI and an iPeloton. Amazon is still going to beat Apple to being the first $ 3 trillion company, but if Apple goes full rundle, they won’t be far behind.
No other platform can offer the combination of scale and granularity that Facebook and Google provide. They are the most effective advertising vehicles in history and, at 8 million advertisers, Facebook has the most elastic, self-healing customer base in business history.
The opportunity for disruption in an industry can be correlated to a handful of factors — a disruptability index. The key signal is dramatic increase in price with no accompanying increase in value or innovation. This is also known as unearned margin. The poster child for this is my sector, higher education. Another industry ripe for disruption: healthcare. Much of the industry centers its operations on the insurance payer and the doctor/institution provider. Disruptive health clinics, including One Medical and ZOOM + Care, and online pharmacy Capsule, are centering on the consumer/patient.
There is always a tension between capital and management. However, it appears we have reached peak founder worship, a transition that is being accelerated by the pandemic. In the late 1990s and early 2000s the power began to swing back toward founders.
VCs jockeying to fund successful founders devised term sheets that included secondary sales, two-class shareholder structures, and other founder-friendly terms.
Two other factors pushed the founder-worship era to greater heights. The sheer amount of capital meant that companies could pursue capital-driven growth strategies. And with all this private capital available, companies could stay on this money-losing merry-go-round longer before going public.
The average age of a company up for IPO increased from three to eight years over the last 20 years. The two dynamics fed on one another, and “visionary” founders feasted. A new species of start-up emerged: the unicorn.
Back in 2013, venture capitalist Aileen Lee coined the term unicorn to describe them. Value is a function of growth and margins. As they did in the’ 90s, many of today’s unicorns have deployed massive capital to achieve the former while not demonstrating the value proposition to achieve the latter.
My NYU colleague Professor Pankaj Ghemawat published gangster research showing business and trade are, despite rumors of the death of distance, a function of geography. Another tenet of venture, is they do not like to lead subsequent rounds. Good investors resist the temptation to “smoke their own supply”. The availability of capital is not correlated with the availability of good places to invest the capital.
Too much capital and not enough talent is the cue for the rise of the charismatic founder. All things being equal, a charismatic founder is an asset. They not only attract capital, they attract great employees, sell the product and provide a halo for the company when it faces threats.
The charismatic founder speaks in a characteristic dialect: yogababble. That’s our term for abstract or spiritual-sounding language in IPO’s S-1s, a company’s formal disclosure before going public.
According to LinkedIn, there are more corporate comms personnel working for Bezos at Amazon (969) than journalists working for Bezos at The Washington Post (798).
Abundant capital permits a heft of financing rounds previously only available in the public markets, and a robust secondary market provides liquidity to shareholders. A major reason we are seeing so many unicorns is companies stay private longer.
Another change has been the increased potential for another form of high-return exit — acquisition by one of the mega tech companies like the Four.
Apple has cash worth 200 unicorns ($200 billion) on its balance sheet. Google has $120 billion. But it’s not just that the Four can pay IPO valuations — their dominance of markets (and ability to move aggressively into new ones) makes their offers difficult to refuse.
The cheap capital economy that offers disruptors the opportunity to pull the future forward sucks oxygen from the incumbents, who are forced to retrench (layoff, cuts in CapEx) as the new kids on the block can lean into new investments and hiring.
Sectors that have raised prices faster than inflation, without an equivalent increase in innovation, are the sectors where disruption is more likely.
The T Algorithm, which I developed in The Four, and have refined since, defines some of these key qualities. The T stands for “trillion” — these are the traits that give a company a chance at a trillion-dollar valuation. The eight elements of the T Algorithm are as follows:
- Appealing to human instinct
- Balancing growth and margins
- Vertical integration
- Benjamin Button products
- Visionary storytelling
Appealing to human instinct. As humans, we are hardwired to share a set of biological needs. The most powerful firms have found ways to serve and exploit these instincts:
- the brain instinct
- the heart
- the gut
- the genitals
We pay irrational margins for products that improve our sex appeal.
Accelerant. A firm that serves as an incredible springboard for a person’s career. Balancing growth and margins. Today’s most successful firms maintain explosive growth and strong margins. Rundle. A bundle of goods and/or services that justifies recurring revenue. Vertical integration. A firm’s ability to control the end-to-end customer experience by controlling as much of the value chain as possible. Benjamin Button products. Products or services that age in reverse (get more, rather than less, valuable to users over time) due to network effects.
This is the definition of good marketing and business strategy — finding products for your consumers vs. finding consumers for your products. Consumers don’t want more choice, but more confidence in the choices presented. Choice is a tax on time and attention.
Netflix. The streaming video firms accomplished something only Amazon has managed in recent years: first they achieved a near-zero cost of capital through exceptional storytelling, then they maintained that superpower while shifting from a growth story to a margin story.
Shopify is the most impressive tech company of the last decade, and perhaps the most courageous. The Canadian firm recognized the huge white space to become the anti-Amazon Amazon. Shopify disrupts Amazon by offering customers the service and value of Amazon without the data and branding exploitation.
The gangster move? Netflix and Spotify merge and acquire Sonos for vertical integration.
Yes, Tesla has changed the world for the better through alternative energy. However, at the end of the day, it’s bending steel, and that’s not a business that can support a (double checking my notes) 128 times multiple of EBITDA.
Twitter needs to go iOS — charge for value vs. exploit for data. It needs to move to a subscription model,
Uber. Ride hailing is the tobacco of the gig economy and the most recent battle waged by the lords against the serfs in the U.S.. Uber has a Benjamin Button effect — the more people that use the algo, the better it gets.
Warby Parker. The incumbent (EssilorLuxottica) has raised prices and not innovated — offering hundreds of millions, maybe billions, in unearned margin up for grabs.
WeWork. No, really. The concept works (coworking) but needs to be right-sized.
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.
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.
How has my industry raised prices at this rate without improving the product? At a few elite institutions, including NYU, we’ve leveraged scarcity. Ivy Leagues have acceptance rates of 4 – 10 %.
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.
The best brands in the industry — Harvard, Yale, Stanford, MIT — have been steadily expanding their online offerings.
Bernie Sanders and Elizabeth Warren put free college at the center of their platforms.
In 2013, renowned Harvard Business School professor Clayton Christensen predicted that online education would disrupt traditional higher education just as steam power had put sailing ships out of business.
We are in for at least a year of radically transformed higher education and much of the change will be permanent.
In exchange for time and tuition, college offers three components of value: a credential, an education and an experience.
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. Schools that offer an elite-like experience, with elite pricing, but without the credential are about to experience a reckoning.
College is an expensive operation with a relatively inflexible cost structure.
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 year without the in-person experience and the pricing power it brings, could drive 10 – 30 % of universities out of existence.
The heart of the coming transformation of higher education is technology. This is not only because online instruction can provide learning opportunities that classrooms don’t, but because online education does something else. It scales.
Lifetime learning, a recurring revenue model, presents an enormous opportunity for universities to take a page from the private sector (Amazon Prime, Netflix) and evolve to a superior business model. Tech creates scale, and scale increases both access (social good) and revenue (necessary fuel), bypassing the cartel that is university accreditation.
We fetishize a university degree, but for many it’s prohibitively expensive and unnecessary. One thing we should not do? Free college. That’s a populist slogan and a bad idea. It’s a further transfer of wealth from the poor to the rich.
The prescription for the pandemic is the same as the prescription for our broader illness — a wholesale renewal of our sense of community. We must wrest our government from the hands of the shareholder class, which has co-opted it and end the cronyism they have instituted to protect their wealth.
Capitalism in itself has no moral compass. The problems of unfettered capitalism are all around us. There are externalities: costs (or benefits) of activity that are not borne by an actor. Pollution is the paradigmatic externality. And there are the problems of inequality. Inequality is not in itself immoral, but persistent inequality is.
As a species, we are not very good at attribution — connecting our individual actions with the broader world or thinking long term. As consumers, we use our fast thinking. So, we need government to slow our thinking, consider the long term and register moral and principled concerns. Keeping these forces in balance — the productive energy of capitalism and the communal concerns of government — is key to long-term prosperity.
Despite our rhetoric about personal responsibility and freedom, we’ve embraced socialism — at the top and on the way down. We don’t tolerate failure here in our socialist paradise. Rather than let companies fail — a defining and essential feature of capitalism — we have bailouts. But bailouts are hate crimes against future generations, sticking our children and grandchildren with the resulting debt.
As Thomas Piketty has pointed out, the high growth recoveries that follow economic shocks are periods of real wage growth, whereas slow and steady growth tends to favor the wealthy. The top 0.1 % now own more of the nation’s wealth than the bottom 80 %. The three richest Americans hold more wealth than the bottom 50 %.
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.
My experience is that most very successful people have a few things in common: grit, luck, talent and a tolerance for risk.
The difficult thing about a meritocracy — or what we think is a meritocracy — is that we believe billionaires deserve it and that we should idolize them.
This is why we need a strong government, to counter human nature, to balance fast thinking and selfishness with slow thinking and community.
In the past decade, we have transitioned from an innovation economy to an exploitation economy.
Uber model is model of exploitation. One might argue it’s simply the franchise model. Most franchises pay 4 – 8 % to the parent — Uber takes 20 %.
The biggest companies are increasingly getting their profits from exploiting another fertile target — their own consumers. Taking away barriers is just the beginning. Adding artificial incentives, known as gamification, is what’s next.
Only big tech is arrogant enough to assure investors its biggest customer will buy more because it’s just so damn incompetent.
People aren’t very good at planning years ahead, en masse. We want tax cuts, right now, over a cleaner environment for our children, decades from now. We surrender to our instincts for immediate gratification.
When you give money to poor and working-class people, you see an immediate multiplier effect in the economy — because they spend it.
If you believe in the power of markets, we should be putting money into the hands of consumers, not companies.
The priorities are these: Protect people, not jobs. Protect jobs, not corporations. Protect corporations, not shareholders. End of list.
The proven formula for flattening the curve without putting the economy back in an induced coma is simple: testing, tracing and isolation.
Addressing the current crisis is just the beginning of government responsibilities, of course. Looking ahead, there are two priorities that should inform our policies: restraining private power, especially that held by big tech and empowering individuals.
Liberty is a founding American value, but it is not an individual guarantee, nor one divorced from the greater good. This is the central thesis of the Declaration of Independence: not merely that life, liberty and the pursuit of happiness are inalienable rights, but that “to secure these rights, Governments are instituted among Men”.
America isn’t “what it is”, but what we make of it.