The Covid-19 pandemic has not only acted as an accelerant of economic and social trends, it has allowed the strongest market players to magnify their advantage. In the process, innovation is playing second fiddle to a much more lucrative opportunity: market exploitation. That’s the view of Scott Galloway, professor of marketing at NYU Stern and serial entrepreneur, expressed in his new book Post Corona: From Crisis to Opportunity.
Galloway has founded nine companies in his time, including the multinational brand consulting group Prophet, and ecommerce company Red Envelope, and has served on the boards of major companies including the New York Times. His previous books The Four and The Algebra of Happiness topped business bestseller lists in the US. His podcast called Pivot was named Adweek’s business podcast of the year for 2020.
Speaking to The Irish Times, Galloway says he believes the power of the Big Tech giants will ultimately face the rigour of antitrust in the manner of AT&T break-ups in the telecoms sector.
“The law is cumbersome, but it is steadfast, and antitrust is coming. The Justice Department has already filed suit against Google. The Biden-Harris administration will pick that up, I believe. They might modify it and they will do it through laws and systemic change, so it will take a while, but it’s coming down the pipe.”
Earlier this week details of the EU’s new Digital Markets Act were revealed, and included measures to force big tech companies to break up their businesses if they repeatedly break competition rules, according to leaked details of the plans.
The tech giants are having a great pandemic. Take Apple, which owns the most profitable product ever made, the iPhone, and sells it through the highest per sq ft retail business of all time, the iStore. It took the company 42 years to reach $1 trillion in value and only 20 weeks to reach $2 trillion (March-August 2020), Galloway notes.
Those perceived to be on a long-term growth curve are being rewarded disproportionately. “The pandemic is boosting an innovation narrative. Firms deemed to be innovators are receiving a valuation that reflects estimates of cash flow 10 years from now and discounted back at an incredibly low rate. Investors appear to be focused on a firm’s vision, its narrative about where it could be in a decade. That’s why Tesla’s value now exceeds that of Toyota, VW, Daimler and Honda combined,” says Galloway.
When markets decide firms are winners, a self-fulfilling prophecy occurs. Markets lower the cost of capital for these companies, enhancing their ability to buy what they can’t build themselves. As Galloway notes, there’s an incredible amount of capital looking for a home right now.
Disruptive
This momentum is compounded by the expectations and demands of investors that their investment will double over the next five years – otherwise the implicit threat is that they will buy other disruptive stocks.
Other forces are favouring the incumbent giants. Being trapped at home increases inventory for Facebook and Google advertisers, he observes. No other platforms can offer the scale and granularity that they can. They are the most effective ad vehicles in history and, with eight million advertisers, Facebook has what he terms “the most elastic self-healing customer base in history”.
Working from home has benefited the wealthier, who have the space for dedicated offices. Productivity appears to be up in the short-term, but Galloway wonders whether that is at the expense of innovation. “Ideas need to flirt and fight with one another and that happens best in person,” he notes, adding, “presence is also great for accountability – visual clues help build trust.”
Galloway also devotes a section of the book to Amazon and appears equally impressed and disturbed by its ability to disrupt and dominate markets at its choosing. Amazon Prime, he says, turned a function (delivery) into a product offering with enormous success, just one of multiple ways the company has innovated. Look out for a move soon into medical insurance, given that it knows so much about its customers, he predicts.
“Don’t be surprised to hear your Alexa ask, ‘Are you interested in saving 25 per cent on your health insurance?’ while CFOs can expect a call from Amazon offering a similar deal across its entire employee base.”
While Amazon, Apple and a number of other giants in the tech sector especially have skewed the market, the notion of a bull run stock market misses the bigger picture. The 600 Small Cap Index was off 15 per cent at the end of July, he noted as he completed his book.
Bigger picture
Galloway is concerned about the bigger picture in the US, too. Employment losses in the first three months of the pandemic exceeded those in the first two years of the Great Recession, and surveys suggest that 40 per cent of Americans would have trouble covering a $400 emergency expense. Income inequalities are growing, and America’s status on the global stage has been damaged by Donald Trump’s isolationist policies. The key word in the Biden-Harris first term will be “repair”, he says.
If you want to find the sectors most ripe for disruption, look to ones where prices have risen faster than inflation without an equivalent rise in innovation having taken place. Education is a clear example, he says. In the US, college tuition fees have risen by 1,400 per cent against consumer price inflation (CPI) of 294 per cent since 1978.
Technology has a role to play and it may be a force for good. Virtual learning will increase capacity and lower the cost per student enrolled. This will not affect the elite universities, who increasingly see themselves as luxury brands and will double down on their exclusivity, he says, but will have downstream effects.
“What I’m hoping is that the bigger public universities will embrace small and big tech to deliver something like half of their classes online. You can then double the capacity without losing any quality. In fact, you might be able to enhance the offering through greater interactivity and guest lecturers.”
Galloway’s T Algorithm
The author suggests the following eight characteristics contribute to a firm’s ability to grow to trillion-dollar valuation status:
1. Appeal to human instinct "As humans we are hardwired with a set of biological needs, from the brain to the heart to the gut, to sex. The most powerful firms have found ways to exploit that, from Google (brain) to Ferrari (sexual attractiveness)."
2. Career accelerant "A company that serves as an incredible springboard for a person's career. Attracting talented employees is one of the most important contributors to a firm's success."
3. Balancing growth and margins "Traditionally that's an either/or but today's most successful firms, including tech's Big Four, maintain both explosive growth and margins."
4. Offering 'rundles' "Rundle: a bundle of goods and services that justifies recurring revenues. This strategy exploits one of our key weaknesses as human beings. We are terrible at estimating the value of time, so firms that encourage consumers to enter monogamous relationships do better than firms that interact transactionally.
5. Vertical integration "A firm's ability to control end-to-end customer experience by controlling as much of the value chain as possible. Take Apple. By controlling the App Store and the iPhone, the firm takes a cut of every sale of third-party apps."
6. Benjamin Button products "Products or services that age in reverse and get more rather than less valuable to users over time. Consider a Spotify subscription. More artists create more users which means more personalisation of playlists over time, including sharing with friends, which draws more artists."
7. Visionary storytelling "The ability to articulate a bold vision for the company to stakeholders. Telling a compelling story unites employees and attracts top talent and cheap capital."
8. Likeability "The ability of a company's leaders to insulate the firm from government and media scrutiny, strike favourable partnerships and attract top talent. Consumers tend to personify brands, and those that take on positive animate characteristics reap outsize benefits."
Post Corona:From Crisis to Opportunity by Scott Galloway is published by Penguin/Portfolio
