In one of the most energetic and entertaining presentations I’ve seen in a while, Scott Galloway, Clinical Professor of Marketing, NYU Stern, Founder & CEO of L2, business intelligence firm serving prestige brands. spoke in Munich about “The Four Horsemen of the digital economy“: Amazon, Apple, Facebook and Google.
Galloway starts out like a whirlwind, declaring that he has 90 slides and 900 seconds and wisely warns listeners to fast their seatbelts. He and his team at NYU Stern have developed an algorithm that looks at more than 800 data points across four dimensions—site, digital marketing, social and mobile—and across 11 geographies. They applied this algorithm against 1,300 brands, thus providing the basis for predicting winners and losers. They see themselves as “trainspotters.”
Galloway argues that it’s as important to talk about the losers in this fast-moving marketplace as much as the winners. Galloway declares two winners—Apple and Facebook—and two losers, Amazon and Google. By “winners,” he means companies that will increase in influence and value. Losers are those that will decrease in influence and value. His valuation is relative: any of these giants could lose for the next ten years and still be terribly important. They are all, he says, “amazing companies.” He points out that these four firms are so dominant that their combined market cap is greater than the GDP of South Korea (US $1.3 trillion). They have a market cap of $5 million per employee.
Galloway’s winners: Apple and Facebook
Apple is a winner for Galloway. It is dominant both on-line and in stores. It’s vertical and global. Its future is strong in part because it is becoming a global luxury brand. That, he says, is good thing because rich people all around the world like the same things. Apple has all the elements to make a luxury brand work: craftsmanship, an iconic founder, exceptional price point, expanding margins, vertical control of distribution, and globally recognizable. It’s on the way to becoming the world’s largest luxury brand with the help of former CEOs of Burberry and Yves Saint Laurent, Angela Ahrendts and Paul Deneve. Apple is completing its transition to luxury with the iWatch, predicted to have more sales than any other watch company in 2015. Some apercus from his talk:
“The expensive watch that I wear has nothing to do with telling the time. It signifies that I am more likely to look after your offspring than someone wearing a Swatch watch.”
“There are three things we do in business. Help people survive (head). Help the ability to love (heart). Help your desire to bear offspring (propagation). As you move down the torso, the margins get better and the business gets better. Luxury is in the business of propagation.”
“Tesla is not an environmental car. It’s a man’s attempt to tell people he can afford a $120,000 car.”
“Women pay $600 for ergonomically impossible shoes to try to solicit inbound offers from men who buy such cars.”
Facebook, says Galloway, is the platform people of all ages spend the most time on. Reports of Facebook’s decline in popularity among young people are “hogwash.” It is also doing well in Europe with around 90% share of social. Facebook has the ability to track users by their identity, something only Google is able to match (through Gmail). It successfully pulled a bait-and-switch by convincing brands to invest in building Facebook communities, and then charged for access. Galloway applauds the acquisitions of Instagram and Whatsapp, as Instagram is growing faster than any other social platform in the world, except WeChat.
“The primary drivers in social are mobile and images.”
“Facebook is pulling away. The world of social is becoming ‘Facebook and the seven dwarfs.’”
“Facebook has relationships with 2.4 billion users. The Roman Catholic Church 1.2 billion. Facebook has more relationships on the planet than God.”
Galloway’s losers: Amazon and Google
Galloway sees two major flaws at Amazon. One is that Amazon is single-channel retail. Galloway believes that the future lies in multi-channel retail. He says single-channel retail will disappear, whether it’s pure e-commerce or brick-and-mortar without an online presence. Apercus:
“Amazon cannot survive as a pure-play retailer.”
“Stores are the new black in the world of e-commerce. We have discovered these incredibly robust flexible warehouses called ‘stores.’”
Amazon’s growth has slowed, as brick-and-mortar stores have begun matching prices and providing instant pickup. He announces the funeral of e-commerce companies like Fab.com, Gilt, and Net-a-porter. For Galloway, the winner will be Macy’s, which has successfully gone online, and e-commerce players like Rent the Runway and Warby Parker that are opening up stores.
The other flaw at Amazon is shipping costs. According to Galloway, in 2014, Amazon received $3.1 billion in shipping fees and spent $6.6 billion on delivery. This, he says, is unsustainable. Some apercus:
“Free shipping is a race to the bottom.”
“Uber will be the most disruptive force in American retail. Drivers from firms like Uber are going to disrupt Amazon.”
“Drive-through pickup points have exploded in France from 1,000 to 3,000 in just the last year.”
“Retailers are not sitting around like passive prey, waiting to be disrupted. The retailer of the future is Macy’s. Macy’s is a metaphor for what’s happening the economy. It is closing stores and investing in on-line. $40k-80k sales jobs are being replaced by $20k-$40k factory and fulfilment jobs. There are some fantastic jobs at the high end, but the real employment growth is at the low end.”
“The smart-phone economy is going to be wonderful for employment, but terrible for wages.”
Google has several flaws, according Galloway. First, although Google is dominant in search, other brands are cutting into Google’s share. Facebook now has 1 billion searches compared to Google’s 3 billion. Second, two-thirds of product high-value searches—product searches–are happening on Amazon. Third, Google has yet to master mobile in the same way it mastered computer search. Fourth, Google had major failures in Google Glass and Google+, As a result of all these factors, Google’s revenue growth is slowing down. Apercus:
“Google + is dead already.” It has had a “98% decline in engagement rate, year-over-year.”
“Google Glass is a prophylactic that ensures that you won’t conceive a child because no one will ever go near you.”
What Galloway may have gotten wrong
Galloway says that he hopes that most of what he says is right, but he knows that some of it is wrong. Let’s look at where he might be wrong.
Galloway may be too quick to write off Amazon. If having physical stores becomes key, Amazon could easily solve it, as Galloway himself predicts, by acquiring of a brick-and mortar chain. And the issue of Amazon’s shipping costs should not be looked at in isolation from the overall shopping experience at Amazon. If “free” shipping for shoppers who subscribe to Amazon Prime makes Amazon the primary search destination of most shoppers and so trump Google search in this high-value search arena, the cost of “free shipping” may be a smart investment, both cheaper and more effective than, say, buying advertising for the Amazon brand. Just as Tim Cook declared that he “doesn’t care about the bloody ROI” of individual business activities, what matters is the overall contribution to the customer experience.
Galloway’s commends Apple for its journey towards becoming a luxury brand raises questions. Yet in the past, Apple has succeeded by producing products that are simple, easy, elegant, useful and affordable. Straying into the field of $10,000 watches is taking Apple into the domain of the useless and the unaffordable. The gains from this excursion are likely to be small in relation to the scale of Apple’s gargantuan business, while also being a distraction from what have been the keys to Apple’s remarkable success from delighting a huge number of customers with products that are low-cost to produce. Apple’s continued exponential growth ultimately depends on producing products that will make most people’s lives truly simpler and better. It’s not obvious that luxury objects like a $10,000 iWatch, even once its current obvious flaws, like limited battery life and annoying alerts, are solved, is part of that future of making many people’s lives better..
Facebook has so far done a remarkable job of mastering mobile. Facebook’s knowledge about its users’ behavior is a big advantage. Facebook ad re-targeting works across multiple devices without dependency on third-party cookies that expire or get deleted. These are great strengths. So far, Facebook has been able to live with the contradiction of a business that appears to offer the personal and the social, while behind the scenes it is ruthlessly exploiting users’ personal information for commercial purposes. Facebook says it doesn’t pass this information on to advertisers, thereby eliminating liability for privacy protection. One has to wonder how long this contradiction can be maintained and remain acceptable, as users experience the creepiness of a commercial “Big Brother” listening in on personal conversations and immediately deluging those users with ads about subjects they discussed in conversations they thought were private.
Google has enjoyed remarkable financial success. Yet anecdotal evidence suggests that Google has become hard to do business with, as a result of a certain arrogance in dealing with business partners. This may indicate that it is becoming that worrying creature, “the highly-successful process-driven company.” A process-driven company has short-term commercial advantages. With a leading share in its market, minimal thinking is required to continue on that path. Few mistakes are made. It is efficient. Its optimized processes were a good fit for its existing market. But efficiency can trump flexibility. When the market shifts due to new technology or competitors or business models, the finely tuned processes become a prison. Now that Google’s market has shifted, will Google be able to adapt quickly? Or has it become a prisoner of its existing processes? If process adherence is the overriding value system, Galloway may be right and Google may grind steadily into irrelevance. If Google can recover the focus on delighting customers that made it successful in the first place, it may go on to even greater success.