The author starts with a little background about human evolution - All mankind has a hunter/gatherer instinct which we inherited from our for bearers. We learned to get food and hoard it for a raining day. Any other approach could lead to starvation. Women gathered produce. They wanted to examine items and bring back the ripest for the family. Men were hunters and went further afield to stalk, kill, and return as quickly with the fresh meat.
Our Consuming Selves -
Today we see humans buy more than they need. We see woman spending time carefully selecting the “best” items while men just shot into a store to get say 4 things moving as quickly as possible. We also hear of people who are injured when all the “things” they have accumulate fall down and bury them in their homes. Or when there is power outage there are reports of people who lost say 3 freezers full of food.
Retail in General
Retail is the biggest sector of the economy and the preponderance of wealthy people historically have come from this business sector. Today retail is “overstored” so there is a lot of churning in retail - only 2 of the 10 largest retail in operation 30 years ago survive today. This stressful situation has spread to e-commerce firms which also have been dying. (When assessing a retail firm’s current financial status look at the frequency of their sales and the percentage of items that are offered at a “sale” price.)
The first retail outlets were corner stores which people could walk to and which they visited every day or two. They offered a few thousand item at best.
As people gained a little mobility they began to shop at dept stores which had many departments. Their selection of items was greater and people tended to visit a little less frequently, but they bought more per visit. Dept stores specialized in having sales people who could develop a relationship with the customer quickly and easily. They tried to give the customer the sense that the store felt blessed having the customer there. (It was a dept store owner in England that coined the term “the customer is always right”. This is perhaps the most important guide for success in retail.)
These replaced stand alone dept stores. These were very popular in suburbs which lacked a downtown area or main street. Malls seemed to give such a community a focal point, a common centering place.
Big Box Stores
Once retail price maintenance laws were outlawed, big box stores showed up which allowed the public to buy large amounts at substantial discounts. With better roads, better cars and modern refrigerators in the home, people could take advantage of these lower prices and larger quantities. Regular shopping at such stores could give a family a significant bump in their standard of living.
Speciality Stores -
More successful people have always felt they are special and they need a way to display this status. Speciality stores have filled this need by offering goods with logos and fancy decorated bags. Some of the better known speciality brands are William Sonoma, Pottery Barn, Whole Foods and Restoration Hardware. Speciality operations that offer well designed e-commerce sites seem to have stronger futures. Williams Sonoma is an example of such a speciality operation.
E-Commerce and Amazon
Into the landscape described above, came Jeff Bezos and Amazon.com. Bezos’ big insight was that e-commerce could succeed only if it was done on a massive scale. He also realized it would require lots of patient capital to let the company gain size and wide acceptance before expecting a return on investment.
Retail was always a modest growth business, but with the arrival of Amazon it became a terrible business. Amazon began to capture all the growth in the retail sector forcing others into dog eat dog behavior. Bezos wanted to put all other retailers into a defensive posture, he has succeeded.
Bezos’ strategy was to start in a product category that had a well developed system of determining product quality, few returns, no spoilage, and where relatively high margins were available so a discounter could grab some of that margin. Books offered such a product line. Newspapers provided reviews across the country to help people assess the quality of a new book, and there was some margin to work with. His next product was CD’s.
It is interesting to note the other name Bezos considered for his company was “relentless.com”. He still owns the internet address and name.
Over the years Bezos has sold his vision to hundreds of wealthy investors and millions of small investors; they had invested mostly through stock purchases a total of $2.1 billion before the company turned its first small profit.
Amazon has decided to make its expensive computer system available to other marketers who are seeking to sell via e-commerce. Today about 40% of Amazon’s sales are really sales for others who are responsible for fulfillment. This allows Amazon to make a percentage but also to gain deep visibility on which products sell well so Amazon can decide to either start offering a competitor’s product via its own warehouses or even to contract with a manufacturer to get a proprietary Amazon branded product to sell. Today Amazon branded batteries are the biggest sellers on Amazon (40% of all batteries sold).
Amazon has used its cheap capital to build automated warehouses with very sophisticated robots to gather up the items ordered. Bezos is constantly monitoring the e-commerce marketplace and uses a quick response strategy to keep all others off balance. In addition, Bezos has discovered that retired logistics officers from the armed forces are very familiar with setting up storage and delivery systems for difficult situations. In 2016 alone the company increased the money invested in robots by 50%.
Bezos is trying to develop a “re-ordered items regularly needed” menus for each customer. Ideally he would periodically send a refill box to each customer with a small return box included. The customer would keep items wanted and return the items not wanted. Each cycle would give Amazon’s computers greater understanding of these customer’s exact needs and hopefully the returns would dwindle to almost nothing. The system would start by providing non-food repeat items with food items added later as Amazon gets into groceries.
Amazon has introduced Amazon Prime which forces members to pay $99 per year. Amazon has found these members buy 140% more product than non-Prime members. Today 52% of American households are members of Amazon Prime. These Prime payments provide Amazon with its first large scale recurring revenue source.
Amazon has introduced Alexa and Echo which allow voice ordering of product by the customer. They encourage this products use by giving a slightly better price if voice ordering is used. The other advantage of Alexa is its “constant listening” feature which allows Amazon to gain even greater understanding of each household’s habits and needs.
Amazon has bought Whole Foods and is experimenting with Amazon GO stores where you shop in a normal way but there is no check out. The computers using cameras have 1) identified you and 2) identified everything you selected. All you see is an entry on your next credit card statement.
Amazon has got into the large scale data storage business for other companies. This division is actually Amazon’s fastest growing business right now.
In 2016 Amazon was named the “most reputable firm” in America.
So Who is Losing -
All brick and mortar retailers are feeling pressure from Amazon. They privately refer to Amazon as the “prince of darkness”. Amazon has a very low cost of capital because billions has been invested in Amazon stock by investors who are exercising extreme patience by not demanding dividend payouts.
Mall operators, particularly those catering to low and middle class suburbs, are really struggling. The only malls that are doing well serve people in the top income quartile. These consumers are attracted to dept stores and speciality shops that sell upscale branded products. Many of these high end brands chose not to offer their products via Amazon.
There are other significant problems associated with Amazon’s behavior. For instance 2.6% of Americans work as cashiers in retail. If Amazon Go is successful the technology will spread to other retailers and could eliminate perhaps a million jobs. Also consider the increased use of robots at Amazon fulfillment centers. Many thousands of low end jobs at Amazon are being eliminated.
The Race to a Trillion -
Amazon seems posed to become the first firm to achieve one trillion in market capitalization. Its revenue in its last fiscal year were 250 billion on this it made 12 billion in profits just about 5%. None of this 12 billion profit was devoted to dividends. For this performance, Amazon commanded a PE ratio of 88:1 compared to most retailers that trade at a PE of 8:1.
In 2015, Amazon had shipping costs of about 7 billion and recovered only about 2 billion of this from its customers. How does Besos do it? How does he keep the hype going when the numbers are so anemic ?
It is in his constant innovation that Besos retains the interest of and forbearance of his investors. Amazon has two types of innovations 1) essential - needed for the future of the company and 2) optional - flashy innovative ideas with small prospect of success but with 100 to 1 payoff potentials. Hopefully a couple will workout. Bezos hypes the second group a lot but is always prepared to kill any idea that begins to look overly problematic. The first type receives less hype but chew up most of the firm’s plant and equipment budget. Consider the warehouse automation project. It is essential to reducing Amazon’s labor cost , so no expense has been spared and failure is not an option, the project will go forward all be it with little fan fare. On the other hand, consider all the hype around drone delivery and Amazon Go stores. Both of these projects have encountered severe problems during implementation, and Bezos is prepared to shelve these ideas if problems persist. These type 2 ideas are not essential to what Amazon is today; whereas the less discussed and more costly automated warehouse idea is very central to Amazon’s core mission.
The USA is the Best Home for Risk Takers -
The author goes down a side street here to point out that 29 of the 50 wealthiest entrepeuner live in the US and 2/3 of start ups that achieved a billion in sales are in the US. He says it is the country’s easy bankruptcy laws and the willingness of US investors to give a failed entrepeuner a second chance that has given the US an edge.
Amazon has benefitted greatly from the American willingness to believe a good story. Bezos, if he is nothing else, is a great story teller. He kept his investors on board for seven years until Amazon made its first profit and even today the company has both volatile earnings and loyal investors.
Amazon’s future -
Amazon is posed to begin major pushes on the logistics side.
There are plans to develop a fleet of trucks so Amazon will no longer be dependant on UPS and Fed Ex for its fast deliveries. Bezos is troubled by the fact that these shippers have raised their rates 83% over the last ten years.
Amazon has leased 20 Boeing 767s for quick, long distance fulfillment particularly overseas. Amazon has also acquired the license to operate an ocean going freight shipping line. It is likely Amazon will acquire some ships to better control its product deliveries from the far east and China.
Amazon is annoyed that many luxury brands refuse to allow Amazon to handle their products. To break into this lucrative area, Amazon has been acquiring select speciality retailers to force the luxury brands to reconsider their decisions to avoid Amazon.
Amazon has programmed Alexa to play dumb when a customer orders a product where Amazon has its own branded offering. When the customer want a product, like batteries, Alexa offers the Amazon batteries and when asked for other option it says “I sorry I don’t find any other batteries”.
Bezos is convinced the brand loyalty of consumers is an enemy of Amazon. By encouraging voice shopping through Alexa, the visual reenforcement of seeing the branded product’s picture is lost and by having Alexa play dumb, the link to the brand is further weakened.
Amazon is now opening “book stores” in major cities. There strategy is not really to sell books but to have a place where customers might come to learn about and perhaps buy Amazon Kindle e-readers, or Alexa and Echo devices. Amazon is following Apple’s store strategy.
Best Retail Offering in the Future -
The retailing world has come to two conclusions. First, that the last mile to the customer’s home is the most difficult part of getting product to the consumer. Second, some sort of Multi Channel offering is likely to be the most desirable solution.
Multi-Channel involves both brick and mortar stores augmented by e-commerce ordering with the consumer deciding whether to pick up the product at a brick and mortar location .... or pay more and have it delivered, but they also want traditional walk around the store shopping.
Multi Channel addresses the last mile quandary where speedy delivery costs so much. If speed is important the consumer can opt for in store pick up to avoid the high delivery cost, but if speed is not important the customer might let the home delivery go forward using a slow, low cost option like US Postal Service parcel delivery.
Today, e-commerce shippers particularly Amazon have used the US Postal Service package delivery so much that they are big players in the room whenever rate increases are discussed. Typically, in recent decisions, first class rates have been increased twice as much on a percentage basis than package delivery rates. This difference has caused many to say first class is subsidizing parcel delivery, in other words, the USPS is subsidizing Amazon.
Even though Amazon loses money on its current delivery arrangements, Bezos is pushing Amazon to speed up last mile delivery even more. He wants to offer something no other e-commerce site can possibly offer and thus frighten them into closing down or into some other flawed decision. Again he is following the military maxim “confuse the other side , then study your opponent’s response and then quickly prepare implement another disruptive move.”
Destroyer of jobs -
While Amazon is automating its operations and eliminating Amazon jobs. Experts have projected the company is causing the elimination of about 75,000 other jobs annually as brick and mortar retailers cave under Amazon’s relentless pressure (remember Bezios’ love for “relentless.com”). Think of that, a large football stadium could be filled each year with the non-Amazon employees fired each year because of Amazon.
This is far and away retail’s biggest sub-sector and Amazon wants in. It bought Whole Food with over 400 outlets in upscale areas. Now it is converting these into multi-channel locations and has installed return bin where customers can return product without incurring shipping charges.
The grocery sector is a little different. Customers like to see and/or touch the meat and produce products before they buy. (Remember the women gathering carefully in early human societies.) This makes a brick and mortar presence essential for this sector.
Amazon is now about 3.5% of grocery in the US far below its 10%+ in other sectors. But no one doubts it is a player.
Walmart realizing it had to face up to the Amazon challenge, decided to buy a successful small e-commerce company (e.g. Jet.com) and then sacrifice earnings for a few years so 1) it could enlarge Jet.com to handle Walmart’s wider set of product offerings and 2) the necessary order fulfillment facilities could be set up. The day this plan was announced, Walmart stock suffered a huge drop equal in fact to the entire value of the Macy’s chain. Investors are willing to put up with Besios’ storytelling but Walmart is expected to focus exclusively on its next quarter’s results.
Walmart is also handicapped by its history. Walmart grew by opening over 4000 retail outlets and in the process hired thousands and thousands of low skilled workers. This work force is not what is needed against a company like Amazon which attracts more highly educated workers to design and program its thousands of web pages. In the evolving fast moving dance between Walmart and Amazon for retail dominance, Amazon holds most of the cards: smarter employees, better story for investors, a better story teller, a lower cost of capital, a more innovative management, proven flexibility meeting challenges, etc.
Will all retail go away? Not by a long shot. There will always be some shops. Think of the Quick Shops at the gas station that handles impulse sales, or the high end speciality stores like those run by Tiffany, or the super low cost grocery outlets that attract “cash and carry” customers without credit, or the stores like Best Buy that have experts on staff to answer questions and educate consumers, etc.
Will other segments be hurt by Amazon’s ascendence? It is hard to say but probably. For instance a fast delivery of prepared food (or dinners that need little addition attention beyond being heated) could effect the restaurant sectors - fast food and casual dining. However, this might be taking this analysis too far.
On thing is sure e-commerce by itself is a money loser. Over time Amazon itself would be forced out of business as a pure e-commerce company if: 1) localities figured out how to make Amazon’s customers pay all applicable sales tax, and 2) the full cost of last mile delivery was also forced on Amazon’s customers.
It should be mentioned that Amazon has a vision of going worldwide. It is already a major factor in Europe and moving into India. The company has acquired 20 airplane to facilitate international fulfilment and is considering acquiring ocean going container ships for perhaps the same purpose.
Google vs Amazon -
The Amazon search function has proved a real asset. Although Google is the king of overall search, it is losing product search to Amazon. Over 55% of all product searches now start with Amazon. This is important because product search attracts the most internet advertising dollars. This is true because after a product search is concluded an actual sale is possible. .... (prepared by Hugh Murray on 4/1/19)
About Apple ..... from Scott Galloway’s book The Four
Introduction - The discussion of Apple begins with a retelling of the 2015 San Bernardino municipal employees Christmas Party incident where a Muslim building inspector killed 14 and wounded 21. The federal government asked Apple to create a program to unlock the perpetrator’s I-Phone. Apple denied the request saying “even creating such a program would violate the privacy trust their users had vested in Apple”. Polls showed half of the US population was on Apple’s side in this debate.
The government countered that they would let Apple crack into the phone at Apple HQ and further the government would not require that the new “phone cracking software” be disclosed to police labs around the country. Apple followers yelled that a private company should not be compelled to do the government’s “dirty work”. Apple held firm because they wanted to show their loyal customers how far they would go to protect the customer’s privacy interests.
Galloway, the author, asks the reader to imagine what public opinion would be if Samsung or Blackberry had defied our government. Do you think they would have gotten such a positive reaction from the public? What a Double Standard!
The Sacred and The Profane - In this section Galloway explores what it takes to elevate an everyday object making it holy or sacred. The iPhone has been “fetishized” and other Apple innovations have nearly matched it. Think of the list: iPod, iTunes, iPad, Apple Watch, and don’t forget the Apple Store. At some point the people and even their government decided Steve Jobs was above normal constraints.
In the first decade of the new millennium, Apple was in semi-chaos. Under Jobs it was unstoppable with his regular presentations to the press where he used showmanship to keep the world waiting for the next new feature and his competitors on the edge of their seats with worry. But Steve was less than a nice guy. He used his muscle and the world’s fear of true thieves, like Napster, to force concessions on music download policy and fees. Jobs was a fanatic on the innovation and marketing impulses driving his company to find something new and a better way to package it. In 2015 alone, Apple racked up $53 billion in net profits. Congress should have implemented some sort of tax reform to rein in Apple, but even Congressional representatives were infatuated with their iPhones.
Closer to God - Apple began to separate itself from other tech companies as far back a 1977. In that year, the author notes, others were trying to offer more for less. Jobs working with his creative partner Steve Wozniack decided to offer “better looking” for “more money”. Apple’s products were sleeker or lighter or more colorful or had more attractive screen icons. They offered their proproiety operating system (e.g. iOS). For instance, they offered lighter, shinier cases made of aluminum.
Jobs somehow realized that the life cycle of products and companies in tech land was shorter and more difficult than products and companies that operated on the luxury side of the street. So Jobs decided to position Apple in the luxury goods world. Luxury makes ordinary people feel extraordinary. With a luxury item a person feels special, feels more attractive. Buying a luxury item in a beautiful setting is even better. This led Jobs to create the Apple store. A brightly lite space staffed by very smart people reinforced the idea that “I’m special”. Jobs also realized that luxury brands have been the source of more corporate longevity and more great fortunes than anything else in retail.
Apple in the 1970's had basically a normal computer, a little easier to use maybe, a little easier to look at, but nothing special. Apple passed the 1980's with a caretaker in charge, named Sculley; it was losing market share to Windows machines. In the midst of this that Jobs returned, and Apple decided to focus on people’s hearts and not so much on their brains.
The two decade turnaround hit its high point in 2015 when Apple offered its Apple Watch, not through an article in Computer World or the Wall Street Journal, but by doing a spread for Vogue using a high priced model wearing a $12,000 Apple Watch featuring a rose & gold case.
He goes on to point out that Apple has created an iconic, luxury image that causes people to lose objectivity; cost vs. value calculations go out the window.
Scarcity - Today only 1% of the world can rationally afford an iPhone if they do any reasonable price/value calculation versus the other needs in their lives. This scarcity factor has allowed Apple to capture just 18% of the smart phone market but 92 % of the industry’s profits.
These are five factors that have allowed Apple to execute this incredible plan:
1. Iconic Founder - Jobs was something of a jerk. He actually appeared in court and denied fathering his own daughter. Of course, tests later proved up the truth. But this side of Jobs is not widely know. What people recall is his masterful performances presenting Apple’s latest improvement. Additionally his status benefitted from his relatively early death which, like Elvis’ early death, helped propel him into stardom. The author notes that Elvis’ reputation also benefitted from his early death.
2. Artisanship - Apple wants their products to be simple and beautiful. An Apple executive, named Don Norman, put it very well , if not very accurately, when he said “Attractive things work better”
3. Vertical Integration - Apple’s marketing strategy is vertically integrated. Jobs learned from the Gap that decided to compete with Levis by opening lots of attractive stores. Everyone agreed Levis had the best TV ads but Gap’s attractive stores won the battle. The Apple Store concept follows that model.
4. Global reach - It is perhaps counter intuitive but luxury is the category that has the easiest time developing a global sales strategy. Rich people everywhere have more homogeneous characteristics than any other class. This fact has allowed Apple to penetrate many markets. Additionally by thinking globally Apple has managed to greatly reduce its manufacture cost. Surprisingly Apple is both a low cost manufacture with one of the best luxury cachet in the world.
5. Price Premium - Apple demands a premium price even when their product is only slightly better than its low priced competitor. For instance, the iPhone 7 sold for $700+ when a comparable smart phone from Samsung could be had for $180. These low cost, high priced models caused Apple to make net profit of $53 billion in 2015 alone. The company had long term investments plus cash and equivalents, as of Sept. 29, 2018, of $300 billion which is more than it needs to support sales of $260 billion per year with expenses of only $190 billion per year. (More on this later.)
The Tech Cycle - The normal Tech Company cycle is quite short; companies come and go. IBM, HP, Gateway, Commodore, Netscape, etc. are just a few names that have struggled to find a new niche or have simply closed down completely. Apple has side stepped this cycle by turning itself into a luxury brand and for that reason it is expected to survive longer than any other tech company. Adding to survival security was the decision to replace Steve Jobs with Tim Cook a hard nosed businessman who elevated profitability ahead of innovation. Apple now realizes they don’t need to actually produce the fanciest smart phone to maintain the #1 position. They are now producing good, not great, products which sell at premium prices.
Vision(less) - Galloway argues that Apple has become a vision-less company that simply takes an existing suite of features and moves them from a small beautiful case to a large beautiful case and then back again to a small case demanding an upgrade premium each time. Sure they might give you a new feature which you rarely use.
The Builder King - the real innovative mover and shaker in Apple’s early years was not Steve Jobs it was Steve Wozniak. Jobs was the marketing genius. As the experts predicted that electronic gadget sales would migrate to e-commerce platforms (e.g. Amazon), Steve Jobs promoted the idea of in-store salesmen, in brightly lighted open seating spaces where the upper crust could see and be seen by other well-to-do people.
Jobs was able to corner the high end smart phone market and in the process one large mobile phone company and one small country were devastated. The company was Motorola, the country was Finland, whose most important employer was Nokia. These two suffered the net loss of 100,000 jobs. Nokia’s problems were a huge problem for Finland because the company represented 30% of the nation’s G.P.D.
Chutes, Ladders and Moats - Here the author talks about techniques leading companies can use to protect themselves from challengers.
There are those, like Malcolm Gladwell, who advise pro-active moves like lawsuits or gaining a monopolistic position with some key software (e.g. Microsoft Word). This keeps the other guy off balance. Gladwell says “don’t fight on other people’s terms”.
Galloway recommends defensive strategies which he calls “moats”. Apple with is luxury aura and 430 Apple stores in 19 counties has a “moat protected” fortress which will be almost impossible for a challenger to overcome. Some argue that retail stores are dying, which is true for stores that serve the middle class, but luxury retail remains very strong. Rich people like to see and be seen.
What’s Next - The big four (e.g. Apple, Amazon, Facebook, Google) were initially separate from each other; they were each doing their own thing in their own sand boxes. Now growth has caused each to begin to encroach into the others’ speciality. Amazon sells Kindle Fire tablets, Goggle offered computerized glasses; however, neither of these attempts have threatened Apple’s dominate position.
Denting the Universe - Galloway ends his discussion by suggesting Apple use it pile of cash to start a tuition free university. This university could be cutting edge because of Apple’s in house digital capabilities and its proven ability to motivate people. Such a move by Apple would disrupt the education sector that has lost all sense of proportionality. Such a move by Apple might actually force Harvard to use some of its $38 Bill endowment to lower its tuition.
About Facebook, a summary from Scott Galloway’s book The Four
Size Matters - The author starts off comparing the size of Facebook to the size of some other groups. There are: 3.5 billion soccer fans, 2.0 billion Facebook users, 1.4 billion Chinese, 1.3 billion Catholics, and 17 million who annually visit Disney World. Although soccer fans outnumbered Facebook users, one has to remember it took soccer 150 years to attract these fans. The author feels Facebook will surpass soccer shortly.
Not only is Facebook huge; it owns two other huge social media outlets: What’s App and Instagram. Of the five most successful social media properties, Facebook owes three.
The average social media user spends 50 to 60 minutes per day on these three internet sites. This allocation of time is just behind work, sleep, and family duties. If you think Facebook is over valued at $430 billion, think again, they control a huge swath of all internet activity.
Covet - Facebook and its subsidiaries (What’s App and Instagram) are in the business of getting to know people as deeply as possible. They do this by getting people to share the personal, even the intimate, features and facts of their lives.
Historically in marketing you could get coverage (lots of viewers most of whom had no interest in your product) or you could target (where everyone had some interest in your message but there were few hearing your message). It was not possible to do both.
Now you have Facebook that can get millions of eyeballs to watch an advertiser’s tailored message. So how does Facebook do this. Well it does it by: 1) getting its users to share lots of information about themselves by putting up pictures with comments, posting biographical information, and disclosing who their friends are, 2) then by analyzing all this info with computer algorithms, Facebook narrows each user’s set of interests. Finally 3) when a advertiser comes to Facebook and says “I want to advertise to Kayak users”. Facebook can do a database scan of all the entries and photo captions for the word Kayak and for posted pictures showing a Kayak. Then it offers the potential advertiser access to the eyeballs of the users that the database scan identified as being “interested” in Kayaks.
So the perennial marketing problem, of choosing between a wide ranging un-targeted ad spend or a very narrow gauge highly targeted ad spend, no longer applies. Facebook has solved this problem.
Connecting and Loving - Here the author speaks about the human need for interaction with other humans. He begins this section by reviewing a Harvard study started in the late 1930's that followed some 270 Harvard grads for 75 years noting the health and happiness benefits to the participants as they increased or decreased interactions with significant others (e.g. wives, children, friends, co-workers, etc.). The study is of particular interest because it covers such a long period of time.
The author feels Facebook is so popular because it helps people make other human connections and deepen those connections. Facebook has noted that when people, who might have met on Facebook, begin to interact in person, their Facebook involvement drops off. This is particularly true when dating members change their status settings from “single” to “in a relationship”.
Watching and Listening - Facebook’s intrusion goes beyond the material you intentionally post (e.g. pictures, comments, biographical info). Facebook actually listens to your conversations with friends if, for instance, your cell phone is turned on and the Facebook app has been loaded into that phone.
Facebook claims they don’t use information gleaned from this listening to improve their ad targeting, but if they don’t, what do they use this information for? Oh, they use it to send you tidbits of news that might interest you. The privacy implications are “creepy”. However so far, customers have been putting these privacy concerns aside and are focusing on the desirable experiences (e.g., your phone seems to deliver up all this stuff that interests you).
The Benjamin Button Economy - A Benjamin Button product is a product that becomes more valuable the more you use it. Imagine a car that increases in value every mile its driven or a pair of shoes that become more valuable with use. That is the kind of product that Facebook (and Google) have. The more information that flows into their databases and the better they make their algorithms work, the more the company is worth.
Look at the graph entitled: THE NEW ALGORITHM OF VALUE. Here you can see the “ability to intelligently use information obtained from users” on the x axis and “number of users” on the y axis. Notice the television reaches a lot of people but has little or no feedback from those people. A professor giving a lecture has a lot of information and intelligence about his audience but few people get his information. But Facebook has both great intelligence and lots of users getting and giving information (i.e. a large audience).
Here the author notes that Twitter has a problem because it doesn’t have good knowledge about its users (e.g. many use false names and 15% are just computers acting like humans). And Twitter has not attempted to analysis the information it has gotten from its users nearly as completely as Facebook.
In this section the author notes that Facebook and Google are increasingly attracting the brightest people in computer programing and advertising. The largest ad firm is WPP. That company lost over 2200 of their brightest people to Facebook and Google while acquiring only 124 from Facebook and Google. Increasing the best and brightest are migrating to Facebook and Google. (See Chart)
Brains, Brawn, and Blood - Churchill use to say WWII was won with British brains, American brawn, and Russian blood. Facebook has all three and its customers are the .... blood.
Pictures are the key thing in social media. Facebook knows it and because the human mind reacts to a picture 60,000 times more quickly than to a block of text. Today Snapchat is challenging Facebook with its instant photo sharing, (i.e. photos that quickly disappear). Facebook is countering Snapchat by offering posts that disappear in one hour. Facebook is determined to remain #1 in photo sharing. It bought Instagram for $1 billion in 2012 and tried to buy Snapchat but was turned down.
To give an idea of the benefit Facebook derives from having engaged users, consider that Netflix spends $6 billion annually to get content to show its customers, Facebook spends nothing to get millions of pet pictures, girl friend pictures, vacation pictures, and child pictures that attract users. When content acquisition costs are minimal, your profit margins go through the roof.
Duopoly - The Google and Facebook duopoly is redrawing the advertising landscape in this country. (See Chart entitled: U S DIGITAL ADVERTISING GROWTH). These two firms account for just over 50% of all ads on mobile devices.
Head Fake - Facebook is also constantly looking ahead trying to grab the next big thing. In 2014 it spent 2 billion to by Oculus Rift the leading virtual reality company. But to make virtual reality work a person has to be in a large headset that controls their vision and hearing.
These devices are huge and ugly so Galloway, the author, thinks these things will never catch on because people don’t want to be seen much less photographed in the headgear. Galloway goes further and says Facebook will probably fail in its attempt to gain wide acceptance of virtual reality.
Insatiable - Galloway feels Facebook will continue to devour traditional media. He feels Vogue, the New York Times, the Economist, etc will survive for awhile, as their smaller competitors go broke, but eventually all eyeballs will be on social media, mostly Facebook and Google, and the surviving members of the traditional media will have to accept tech company terms if they wish to survive.
Oil - Here Galloway compares Facebook’s behavior to Exxon’s. When looking for oil, the oil company want a big field with low access cost. If they had their preference, they would go to Saudi Arabia and sink a sure well that produces lots of oil for $3 per barrel; which they could then sell at market prices between $30 and $130 per barrel. The thing oil companies don’t like is a questionable drill site in a tough, high cost area like Pennsylvania shale area where both horizontal drilling and rock fracturing is needed.
Facebook is like Exxon. It uses its algorithms to find committed people to send ads toward. Take politics, a committed Democrat can be fed ads for liberal newsletters, liberal politicians, etc. Committed Republicans are easy to satisfy as well.
However, there are lots of moderates. So what does Facebook do with moderates? Facebook feeds each moderate a stream of mildly conservative stuff trying to move that person into the “committed Republican” camp. If that fails they start feeding mildly liberal stuff trying now to move the user to the Democratic side. Once they have converted the moderate to some category of committed, they have a much easier time advertising to that person.
A committed partisan is like the $3 per barrel oil well, the moderate is like the shale well in Western Pennsylvania. So Facebook wants committed users. However, and this is big problem for society. Fostering greater levels of commitment also forces greater polarization of the broader society.
Clicks vs. Responsibility - Forty four percent of America gets news from Facebook. But Facebook doesn’t want to be classified as a media company with accompanying responsibilities, such as “fact checking”. So they call themselves a social platform. In this way, they avoid costa and they get very rich evaluations in the stock market place. Over the last four years Facebook has generally traded at a PE ratio about three times the PE ratio of the typical S & P stock.
Don’t be confused, Facebook is not interested in being a responsible entity, its mission is to get clicks and dollars. There are scam artists everywhere that sense Facebook’s irrespon-sibility. They know if they can package a fake news item the right way they can get a viral response when Facebook’s users see it. One example, the Pizza Gate story that claimed John Podesta, from the Clinton campaign, had child prostitutes in the back room of the Comet Ping Pong pizza place in D.C. This fake news item didn’t end until some gullible guy drove from North Carolina to DC to rescue the poor girls and put a bullet into the ceiling of the restaurant in the process.
Facebook is really irresponsible. It contracts with reputable news outlets to get the right to display their news items, but they also allow bad actors to post fake news items on the site as well. When the Facebook users start commenting on both of these with equal vigor, confusion begin to reign.
Platform (not a News outlet) - Facebook has decided to protect its status as a platform at all cost. For a time it had human beings editing something called “Trends”, a section that spotted news that might interest its users and did a little editing and fact checking before offering it to users. This activity was costly and, even more concerning, it might be interrupted by a slick lawyer as indicating Facebook was a news outlet, not a platform. So Facebook terminated “Trends”.
Today all Facebook reviews and checking of news items is done by computers. These computers focus on items that: 1) have been flagged by a user, 2) look funny to the computer’s algorithm, or 3) come from “funny” sources like a foreign “bot”. Most of these are then labeled as “disputed”. Beyond this level of computer checking, Facebook does not curate the news in anyway. (Note: Facebook is currently rethinking this policy because Russian interfered with the ‘16 election by exploiting Facebook’s lax policies.)
Utopia v. Dystopia - Facebook has allowed people to connect and feel more empowered, but this has come at a cost. Some say Facebook controls a large portion (67%) of the information that Americans receive. That’s huge. But the really alarming fact is Facebook wants to sit in its “cat bird seat”, and say we are not responsible even if the information we dispense proves harmful or disruptive. ........ .(prepared by Hugh Murray on 2/22/2019)
About Google, a summary from Scott Galloway’s Book The Four
Carl Sagan proclaimed that a new religion would emerge which proclaimed the achievements of science as man’s new God. Some feel Google is proving Sagan’s view true.
Good to Know - Acquisition of knowledge has been one of man’s goals for all of recorded history. Now Google is here; it provides knowledge. With knowledge the logical part of the brain can overcome and quell the reptilian “fight or flight” part of the brain. Men use to seek out oracles, such as the oracle at Delhi, to learn what they needed; today you just type a question into a search bar.
Prayer - Mankind feels called to pray. Sagan said one prayer is men of science searching space for some sense in the random energy waves coming toward earth.
A physician in Calif actually set up a controlled six month study using victims with advanced AIDS. Ten were in the control group and no one prayed for them. The other ten were the beneficiary of organized prayer groups. Six of the twenty participants died, all six were in the control group. (Later the study’s parameters were questioned because the average age of the control group was significantly greater than those being prayed for.)
So prayers may or may not be answered; but with Google prayers are always answered. In fact you can see the questions (prayers) being answered by going to google.com/about and clicking on the link that says “What the world is searching for now”. Three and one half million times per day google fields “prayers”. Sometimes it is simple “where is the best taco in St Louis” but sometimes it is more serious “why doesn’t he call me back?” or “how do I know when to file for divorce?” ... and answers appear. Then the users can go forward and live a better life.
Trust - Pundits say: Apple is the most innovative company, Facebook the best to work for, Amazon is the most reputable, but Google is the most trusted.
Think of it, through our searches we trust Google with information about our most intimate thoughts, interests, and concerns. Google responds to our queries but it remembers. We trust Google a lot, and it knows our deepest secrets.
Google reinforces this trust by giving us results separated into “paid ad results” and true organic results. People generally click the organic results but Google makes money giving the advertisers a small chance of attracting our attention.
There were other search engines but Google grew. Galloway feels it was Google’s insistence on a clean uncluttered home page with just a search box. It invites the user to “try it out”, there is nothing to break the bond between the user and the beckoning search box.
Google growth is phenomenal. In one recent year its paid clicks grew by 42% but its revenue per click dropped by 11%; this sent a shock wave through Wall Street where declining revenue per unit indicates a firm is having trouble. But actually Google simply decided to share its good fortune with its advertisers.
Congress has discussed taxing very successful tech companies, but when specific companies like Google are mentioned they back off. How can you tax an oracle?
Most companies that are doing well try to figure out how to maximize their profit per unit sold. Google, and other successful tech companies, actually strive to reduce prices. They want size more than profits.
In Feb 2016 Google had a mkt cap of 532 billion equal to Disney, Comcast, 20th Century Fox, Time Warner, and WPP advertising combined.
Minority Report - The author takes the title of this section from a 2002 Tom Cruise movie with this name. It featured humans who could predict which people would committed crimes in the future. This, in theory, allowed the police to arrest wrongdoers before they harmed others.
The author goes on to point out how Google learns about our desires and intentions. Google not only responds to our immediate request, but it also remembers our earlier requests and is able to build a very accurate picture of the our personal mix of desires, interests, and intentions.
Perhaps an example of the sorts of search requests that have allowed Google to help police catch offenders after the crime: “necksnap break”, “fatal digoxin doses”, and “could you kill someone in their sleep and no one would think it was murder?”. Of course, these search could have been shared with police earlier and perhaps saved people’s lives.
If you want to be shocked, just go and look at your Google search history. Did you really intend to give others such a view into your soul?
So why does Google save all this search information. It is simple, when someone puts in a query about hotels in Memphis, Google can present info and reviews on the hotels, but also ads for the three airlines that connect your city to Memphis, and if in the past you had inquired about jazz music you will also see ads for music venues on Beale Street. Of course, if you had ever searched for the titles of Elvis Presley’s movies you will get a ad for Graceland, perhaps with a map showing how to drive there from downtown Memphis.
The Old God - The old oracle of information was the New York Times (NYT). Its stories were well researched, well written, and well edited. They made the Times the arbiters of news and to a lesser extent culture. The NYT was the old God; here Galloway reminds the reader of the newspaper’s motto “All the news that is fit to print”.
But the Times allowed Facebook and Google to have inexpensive access to its content. That reinforced the modern notion that information should be free. It also gave these tech dispensers of news a big credibility boost while causing the source of the NYT revenues (particularly the print edition) to dry up. In fact, Google did a better job of extracting value from NYT content, than the NYT itself did.
NY(low)T - Here the author goes into an extended discourse on the problems at the NYT where he served as a board member (2009 -10) representing a hedge fund investor, Harbinger Capital, who had shored up the NYT with a 600 million cash infusion in exchange for 18% of the company and two board seats.
When he went on the board, the New York Times was much larger than it is today and Google was much smaller. Galloway felt the content the Times has was more valuable than anything else on the web. The challenge was designing a model that would allow the times to be properly compensated for its content.
The author was immediately at odds with the existing management because he wanted to reorient the company from the print version to the internet. He wanted to fired the existing CEO, Janet Robinson, and hire the former Google CEO, Eric Schmidt, who had recently gone into early retirement. Galloway realized you either embrace the Internet or watch your old print oriented company continue to shrink.
His proposal was quickly rejected by the other board members who instead wanted to have their own wholly owned internet subsidiary that could feed Times content to the Internet in a more controlled and profitable way than the earlier relationship with Google and Facebook had been doing it.
(Note: this section of the book is quite long and gives a lot of insight from 10 years ago about the future of newspapers. Galloway was surprisingly accurate with his predictions.)
About.com - In 2005, the NYT bought a information aggregator that had both NYT content but other content as well. About.com had a relationship with Google where Google would refer searches to About.com from whence the user could get to the information they sought. During this process both Google and About.com could show users ads and thus receive ad revenue.
Galloway argued in 2009 that About.com should be sold because it was only a matter of time before Google realized they did not need to go through an aggregators. Sure enough in 2011 Google cut off all aggregatord and started sorting all that out themselves. Galloway had argued from the day he came on the board to block Google from gaining free access to NYT content saying “the quality of NYT content is so good no one should be allowed to see it without paying”. When Google cut off About.com, Galloway was even more strident. However, the NYT board wanted the clicks that came in from Google directly to the NYT website where some ads were shown and some revenues were being generated.
The Times ended up selling About.com for 300 million a 25% loss compared to the 400 million they paid in 2005. Galloway had lost his seat on the board in Feb 2010 when Harbinger Capital eventually decided to sell its big stake in the New York Times because of the long recession that began in 2008.
Enter the New God - In this closing section, Galloway reviews Google’s strengths and weaknesses.
Regarding strengths, Google is at the center of nearly every search for knowledge. Its algorithms deliver anything that is publicly available on the web. It records every search and it runs other algorithms that tell its computers a lot about each user. With this knowledge about users it can target ads to selected groups of users and attract more advertisers.
Of course, there are weaknesses. Google is so dominate in search it is considered a semi-utility by many governments. It can favor its friends by giving them preference when search results are displayed. Clearly it can punish its non-friends by sending them to the end of the last page of search results. The pressure to advertise on Google and become a friend can mean life or death for a small business. The EU has been on Google’s case for years issuing fines for failing to be neutral when displaying search results. Members of the US Congress have referred to Google as utility and have proposed regulating it as a public utility.
Google has all sorts of “initiatives” going that distract the public from its core business. Google offers self-driving car research, a library project to scan every book ever published, a mapping project that hopes to map every locale in the world, etc. Google boost the greatest grouping of geniuses ever assembled in the world. These 60,000 people are told they are expected to devote 10% of each weekend to generating new ideas.
A Conclusion - What are the Consequences of Companies like Facebook, Google, Amazon and Apple?
“In a democratic society the existence of large centers of private power is dangerous to the continuing vitality of a free people”
Galloway concludes his book by pointing out that these companies make a few people very wealthy and leave the rest of society mostly poorer. Surely the companies provide little things that we like: a quicker way to get a fact, a hand sized phone/computer with amazing power, a chance to see family pictures from other cities or nations, a shopping venue with near limitless offerings that can be delivered in 1 or 2 days.
However, think of the money we send out of our communities to support 418,000 workers; many in a “lordly” fashion. It is hard to do an exact comparison here. Consider:
1) The market value of these four companies is 2.3 trillion. This compares to the 2.3 trillion of GDP in France which has 67 million people.
2) Another way to look at this is to compare the number workers and the market cap of companies with similar innovation histories. Unilever has 171,000 workers with a market cap of 156 billion, Intel has 107,000 people with a market cap of 165 billion, and Disney has 185,000 workers and a market cap of 181 billion. (This sums to 600 billion in market cap and 463,000 workers.)
Galloway then asks, has all this money paid to all these geniuses “cured cancer” or “solved global warming” or “invented another A-bomb”. The answer is “no”. Americans have sent billions of dollars and many of their brightest young adults out of their local communities for very little real long term benefit.
(prepared by Hugh Murray on 2/17/2019) .