SCOTT GALLOWAY who will be the first tril­lion-dol­lar com­pany?

An NYU Pro­fes­sor pre­dicts which of ‘The Four’ will be the first to reach a tril­lion­dol­lar val­u­a­tion.

Rotman Management Magazine - - FROM THE EDITOR - In­ter­view by Karen Chris­tensen

You have closely stud­ied the com­pa­nies you call ‘The Four’—google, Ap­ple, Face­book and Amazon. Which do you pre­dict will be­come the world’s first tril­lion-dol­lar com­pany?

Most peo­ple would put their money on Ap­ple, be­cause it’s the clos­est to that val­u­a­tion at the mo­ment, but I ac­tu­ally think it’s go­ing to be Amazon. To date, The Four have mostly gone af­ter be­fud­dled prey within their re­spec­tive sec­tors; but over the last 24 months, they’ve started to en­croach on each other’s ter­ri­tory. And, in ev­ery in­stance where there has been an over­lap of com­pe­ti­tion, Amazon has beat the oth­ers.

Take the case of search. Some peo­ple de­scribe Amazon as ‘a search en­gine with a ware­house at­tached to it’. So, de­spite the fact that it is Google’s largest cus­tomer, it also com­petes with Google. In 2015, 44 per cent of searches in­volv­ing a prod­uct search be­gan on Amazon; and by 2016, that had climbed to 55 per cent. Amazon’s growth of share of rel­e­vant search for prod­ucts grew 25 per cent year-over-year.

In the hard­ware realm, they’re com­pet­ing against Ap­ple. If you ask any tech ex­pert, ‘What was the most in­no­va­tive hard­ware in­no­va­tion of 2015 and 2016?’ most would say it was Amazon’s Alexa. So, a com­pany that had al­most no rep­u­ta­tion for hard­ware in­no­va­tion is now con­sid­ered one of the most in­no­va­tive in tech hard­ware.

If you look at where Amazon over­laps with Face­book and Google in dig­i­tal mar­ket­ing, Amazon’s dig­i­tal­mar­ket­ing of­fer­ing, Amazon Me­dia Group — which sells

ad­ver­tis­ing on the plat­form — is grow­ing from some­where be­tween 40 and 60 per cent per year. It’s now big­ger than Snapchat and will prob­a­bly be big­ger than Twit­ter within two or three years.

Mean­while, Amazon’s me­dia mar­ket of­fer­ing is now grow­ing faster than Google’s or Face­book’s, and will start to im­pact their share; and Amazon is also com­pet­ing against Ap­ple in terms of video stream­ing. In 2015, they con­trolled two per cent of all video stream­ing time and were ranked sev­enth; in 2016, they con­trolled four per-cent — they dou­bled their share and jumped to num­ber 3, just behind Netflix and Youtube. When­ever Amazon bumps up against one of the other Four, it wins.

In ad­di­tion, with the ac­qui­si­tion of Whole Foods, it is about to be­come the fastest-grow­ing off­line re­tail com­pany; and it’s also the dom­i­nant mar­ket share leader in the world of the Cloud, which is the most prof­itable and fastest-grow­ing seg­ment of tech­nol­ogy. In a seem­ingly end­less num­ber of busi­nesses or sec­tors, when Amazon is­sues a press re­lease, it is viewed as a cred­i­ble threat or player. Amazon has ex­traor­di­nar­ily-cheap ac­cess to cap­i­tal. This year it will be the sec­ond largest spender on orig­i­nal con­tent at four and a half bil­lion, sec­ond only to Netflix, at six bil­lion.

We sim­ply have never seen a com­pany like this be­fore, that is so well-po­si­tioned in so many cat­e­gories. It is now in more U.S. homes than homes have land­line phones — or that voted in the 2016 elec­tion. For all of these rea­sons, I be­lieve Amazon will be the first tril­lion-dol­lar com­pany.

Many be­lieve that Amazon’s core as­sets are its op­er­a­tional ca­pa­bil­i­ties, en­gi­neers and brand—but you dis­agree; please ex­plain.

I would ar­gue that Amazon’s core com­pe­tence is sto­ry­telling. Amazon has re­shaped the re­la­tion­ship be­tween firms and mar­kets in that it has re­placed the tra­di­tional profit nar­ra­tive with one of vi­sion and growth. You can trace this all the way back to Jeff Be­zos’ 1997 memo, where he said, ‘We’re go­ing to in­vest for the long-term across things that we know will be im­por­tant for decades to come’. In that memo, he men­tioned speed, se­lec­tion and price. The mar­kets re­ally warmed to this long-term vi­sion, and Amazon has stayed true to it.

As long as that story re­mains com­pelling and con­sis­tent, the mar­ket­place will put the value of Amazon in what can only be de­scribed as an ‘anti-grav­ity bucket’. Com­par­ing it to other com­pa­nies in sim­i­lar spa­ces makes ab­so­lutely no sense. There is no way to fun­da­men­tally value this com­pany, ra­tio­nally.

Peo­ple keep talk­ing about a day of reck­on­ing for Amazon, but that day has not come in 15 years. It has been able to cre­ate what is the ul­ti­mate com­pet­i­tive weapon: Ac­cess to cheap cap­i­tal through a com­pe­tence called sto­ry­telling. It has an abil­ity to paint an ex­tra­or­di­nary vi­sion and then ex­e­cute against it in­cre­men­tally ev­ery sin­gle day, which re­sults in cheaper and cheaper cap­i­tal, which it can then rein­vest — so, it be­comes an up­wards spi­ral.

In your view, why is Jeff Be­zos so in­ter­ested in talk­ing about so­cial is­sues, such as a min­i­mum in­come and neg­a­tive in­come taxes?

He is ba­si­cally hint­ing that there are not go­ing to be enough jobs for peo­ple in the fu­ture, so we should just start pay­ing peo­ple to stay home and not work. I find this both fright­en­ing and dis­ap­point­ing. Work is very cen­tral to our iden­ti­ties and our cul­ture. There’s a ton of ev­i­dence that when peo­ple work, they’re much hap­pier, be­cause we get a cer­tain amount of our self-worth from work. The no­tion that one of the smartest busi­ness lead­ers of our gen­er­a­tion has sort of ‘thrown up his hands’ on this is very trou­bling.

In 2015, Ap­ple de­fied a court or­der man­dat­ing it to un­lock a mass mur­derer’s iphone. Did it do the right thing?

I don’t think so, and this is fur­ther ev­i­dence of our idol­a­try of in­no­va­tors. Just imag­ine if the ter­ror­ists in San Bernardino

In ev­ery in­stance where there has been an over­lap of com­pe­ti­tion be­tween The Four, Amazon has come out on top.

had used a Black­berry, and the FBI had is­sued a court or­der to un­lock a Black­berry phone from Re­search in Mo­tion in Water­loo, Canada. If they had dis­puted or re­fused the court or­der, within 48 hours, we would have had leg­is­la­tion in place to put a trade em­bargo on all of Canada. But, be­cause it was an iphone, peo­ple saw it as sort of a re­li­gious ob­ject—some­how holy and un­touch­able. We treat these in­no­va­tors and these ob­jects with rev­er­ence and cred­i­bil­ity that, in my opin­ion, is scary — and just plain gross.

You have sug­gested that Ap­ple should launch the world’s largest tu­ition-free univer­sity. Tell us more about this idea.

All four of these com­pa­nies have been strate­gi­cally mas­ter­ful at iden­ti­fy­ing sec­tors that are ripe for dis­rup­tion. The way you do that is, you look at a sec­tor that has raised prices faster than in­fla­tion, with no un­der­ly­ing in­crease in pro­duc­tiv­ity or value. By these mea­sures, ca­ble tele­vi­sion was a prime can­di­date for dis­rup­tion. Its main of­fer­ing has barely changed over the years, but prices have out­paced in­fla­tion. Whereas, if you look at the car in­dus­try, the price of a Mercedes S-class on an in­fla­tion-ad­justed ba­sis is ac­tu­ally the same — or a bit less — than it was 20 years ago, de­spite the fact that it is a to­tally dif­fer­ent car on just about ev­ery di­men­sion: per­for­mance, ef­fi­ciency, mileage, ma­te­ri­als. So, you could ar­gue that ca­ble is ripe to be dis­rupted, and the auto in­dus­try is not.

I would ar­gue that the in­dus­try that is most ripe for dis­rup­tion is ed­u­ca­tion. If you look at the cost of tu­ition, in the U.S. at least, it has out­paced ca­ble tele­vi­sion and even health­care. It has been ex­tra­or­di­nary. On Mon­day nights this spring, I taught 160 kids who paid $6,000 each. That’s $960,000 in tu­ition; twelve nights at $80,000 a night. I teach for 180 min­utes, mi­nus a 20-minute break, so that’s 160 min­utes, which means the class is worth $500 per minute. You know what? I’m good, but I’m not that good.

Ap­ple could come in and launch a univer­sity with a mix of off­line and on­line cour­ses. It has the brand and the cred­i­bil­ity to do this, and I think it could po­ten­tially spark a rev­o­lu­tion in ed­u­ca­tion that would force other in­sti­tu­tions to lower their prices.

At $420 bil­lion, many be­lieve that Face­book is over­val­ued. What is your take?

I’m not an eq­uity an­a­lyst, so it’s dif­fi­cult for me to say, but I will say that Face­book is the most suc­cess­ful com­mer­cial prod­uct in the his­tory of mankind. It has a mean­ing­ful re­la­tion­ship with al­most two bil­lion peo­ple on the planet. That is more than Com­mu­nism, Cap­i­tal­ism and Chris­tian­ity. The only thing I can think of that touches more in­di­vid­u­als is soc­cer, which has three bil­lion fans, glob­ally. But soc­cer doesn’t have the eco­nomic re­la­tion­ships that Face­book does.

Why is it such a hit? Be­cause it taps into our strong need to love and to be loved. It cre­ates a lot of em­pa­thy and con­nec­tions be­tween peo­ple, and it has used tech­nol­ogy to scale that. It also has fan­tas­tic tar­get­ing abil­i­ties that make it mas­sively prof­itable. It has de­fied the laws of big numbers and con­tin­ues to grow at 40 per cent per year, de­spite be­ing a very large com­pany.

Eighty per cent of our free time is now spent on a smart­phone app, and five of the top 10 apps are owned by Face­book. If you think the mo­bile phone is re­ally the big­gest shift in our cul­ture, some would ar­gue that it’s es­sen­tially just a tech­nol­ogy for Face­book.

You be­lieve that sev­eral com­pa­nies have the po­ten­tial to be­come the fifth mem­ber of this suc­ces­ful group, in­clud­ing Alibaba, Tesla, Netflix, Uber, Wal­mart, Mi­crosoft, Airbnb and IBM. Which has the best shot at the mo­ment, and why?

That’s a tough one. I would say ei­ther Mi­crosoft or Netflix; Mi­crosoft be­cause of its B2B ca­pa­bil­i­ties and its su­per

Eighty per cent of our free time is now spent on a smart­phone app, and fi­five of the top 10 apps are owned by Face­book.

ro­bust busi­ness. It com­petes re­ally well in a num­ber of dif­fer­ent ar­eas, and it’s also a pretty big player in the Cloud. But my bet would prob­a­bly be on Netflix. A lot of us are now spend­ing a lot of time in front of this ‘op­er­at­ing sys­tem for joy in our lives’. And, if you be­lieve that Mil­len­ni­als are go­ing to own the fu­ture, they al­ready spend more time in front of a Netflix screen than all other ca­ble and tele­vi­sion chan­nels com­bined.

If the op­er­at­ing sys­tem for tele­vi­sion and en­ter­tain­ment at home be­comes Netflix — which seems to be hap­pen­ing—they should be able to mon­e­tize that in ways that are fairly ex­tra­or­di­nary. So, I would bet on them to be num­ber five, with an out­side chance for Mi­crosoft. And my third pick would be ‘TBD’ — be­cause there are prob­a­bly a cou­ple of kids in a dorm room at MIT right now com­ing up with some­thing we can’t even imag­ine. Scott Galloway is a Pro­fes­sor at New York Univer­sity’s Stern School of Busi­ness. He is the au­thor of The Four: The Hid­den DNA of Amazon, Ap­ple,

Face­book and Google (Port­fo­lio/pen­guin, 2017).

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