NYU professor Scott Galloway talks about the pervasive influence of Big Tech in his new book.
Apple, Google, Facebook and Amazon have created products and services enjoyed by billions of people. But their size and reach into our daily lives also is cause for concern. Scott Galloway, a marketing professor at New York University, shines a spotlight on the dangers of letting Big Tech invade our personal lives without a second thought in his book, The Four: The Hidden DNA of Amazon, Apple, Facebook, and Google. He recently spoke on the Knowledge@Wharton show on SiriusXM channel 111 to explain why people need to pay attention.
The following is an edited transcript of the conversation.
Knowledge@Wharton: These four companies have come very far in a relatively short amount of time. While they have certainly reaped the benefits of the internet and gathering of data, what other common factors have propelled their growth?
Scott Galloway: Since 2008, these companies added more market capitalization than the GDP of India. The value accretion and influence is just staggering. I think each of them taps into a fairly basic instinct. Google taps into our need for a super being and some sort of divine authority to help us answer questions. We used to look to the skies and pray, ‘Will my kid be all right?’ Now we type symptoms into the Google query box. One in six questions presented to Google have never been asked before in the history of mankind, which intimates its incredible authority.
Facebook calls on our instinct to not only be loved but to love others. Using photographs catalyzes and strengthens relationships. Amazon is our consumptive gut. We have a need for more. The penalty for too little is starvation. The penalty for too much is lethargy or gluttony, which is a fraction of the downside of too little. Open your cupboards, open your closets. We have 10 to 100 times what you really need.
Finally, I think Apple calls on our reproductive instinct. The iPhone is the new way to signal that you have good genes. It says you’re part of the innovation class. It says you’re successful and a worthy mate.
Knowledge@Wharton: Apple has put together an impressive ecosystem in the last two decades. People want to be seen with an iPhone or Apple product because it is a status symbol.
Galloway: If you look at the watch industry and the apparel industry, they both incurred significant losses or a huge decline in shareholder value across many or most of them. We look at the over-storing of America. We look at retail, and there is too much competition. But I would argue that Apple is the new way we indicate or signal self-expressive benefit. It used to be through clothes and watches and shoes and jewelry, but I think Apple has taken the place of these items.
Knowledge@Wharton: Why hasn’t the Apple Watch caught on as much as the other products?
Galloway: The Apple Watch has become a second screen to what is the most important item or accessory now, and that’s the iPhone. I’m not sure the Apple Watch will be around in three to five years. But it doesn’t matter because what Apple’s been able to pull off, mostly through the iPhone but also the supporting ecosystem, is a company that has the production volumes of Toyota with the operating margins of Ferrari. Apple’s pulled off the impossible in business in that it’s a low-cost producer with a premium-priced product. As a result, Apple is going to do double the profits this quarter than Amazon has done in its entire history as a company. We’ve never had a company this profitable.
“Apple’s pulled off the impossible … it’s a low-cost producer with a premium-priced product.”
Knowledge@Wharton: Where do you see the pitfalls for Facebook? The company is dealing with the dark side of social media, including trolling, cyber-bullying and interference by Russian hackers.
Galloway: I believe the worm has turned against Big Tech. Up until just a couple months ago, we engaged in what I would refer to as a gross idolatry of innovators and youth. It really manifested around these few companies, yet they weren’t subject to the same scrutiny that the rest of business endures.
The weaponization, if you will, of Facebook and Google has really highlighted some issues around what it means to be a media company and not have the safeguards in check that some other media companies have in place. We’re asking some very difficult questions. Like any crisis, where it turns into a major crisis is when you don’t respond or address the issue. There’s been a series of half measures that have come out of Facebook. First, it was 250 employees to monitor safety, then it went to 1,000. But I don’t think they’ve really addressed the issue.
Knowledge@Wharton: Should Mark Zuckerberg have considered these potential problems when he came up with the idea of Facebook and put safeguards in place then?
Galloway: In his defense, I don’t think even he probably imagined that 60% of Americans would get their news from social media. It’s an incredible business model to have other people creating your content. It’s an incredible business model not to have the friction of human intervention around who’s advertising on your platform. It’s incredible to your profitability. But it’s the equivalent of being a member of a beach club, and the club would be more profitable if there was no lifeguard. The same thing happened here. There are no editors. There are no people screening the content or the advertisers. As a result, that injects some danger into the system.
Knowledge@Wharton: Is Amazon going to be the first company valued at $1 trillion?
Galloway: The easy guess would be Apple because they’re closest at $750 billion. But I think the good money is on Amazon. If you look at Amazon’s momentum and where it butts up and competes against the other three, they’re winning. Google controls 90-plus points of share for all of search, but Amazon now controls 55% of product search, up from 44% in 2015. The most innovative hardware product of 2015 and 2016 wasn’t the Apple watch or the Apple pods but Amazon’s Echo device. You can go through each of them, and wherever they’re butting up against each other, Amazon is winning. I don’t think we’ve ever seen a company with this much momentum or strategic advantage as we see in Amazon right now.
Knowledge@Wharton: What do you think of Amazon’s acquisition of Whole Foods?
Galloway: I would argue that Whole Foods will be to Amazon what Instagram was to Facebook. I think it’s going to be one of the best acquisitions in the history of that sector. Amazon now has permission or license to get into the wealthiest refrigerators in the nation. The only way you create intensity across those 60% of households that now have a relationship with Prime is to offer grocery. For what was a 2% or 3% dilution, Amazon now has 500 well-lit warehouses with proximity to the wealthiest households in America, access to long-tail brands. This was a genius acquisition.
Knowledge@Wharton: What is the reaction in that specific sector of the economic world? What can Walmart do to keep their share of the market?
Galloway: People tend to pit it as a win/lose between Amazon and Walmart. I think they’re both going to do pretty well in the digital age. Walmart is an incredibly well-run company, the largest grocer. They’re not befuddled prey waiting around for Amazon to disrupt them. They’re making a series of acquisitions. They’re doing some interesting things both in terms of acquiring Jet.com to be an adrenaline shot to their heart around e-commerce [as well as] their acquisition of Bonobos. Their click and collect [strategy], trying to take advantage of their stores. As we’ve seen, the stocks actually perform pretty well. I don’t think it’s an either/or. Who will be successful? Amazon or Walmart? I think the answer is, yes.
“I believe the worm has turned against Big Tech.”
Knowledge@Wharton: For Google, where is that next mountain to climb?
Galloway: The next battleground across most of them is in the home. To capture more of people’s attention, the home seems to be the next frontier. There’s been this enormous battle waged over the screen in terms of the phone. Netflix, Amazon and Apple are now waging that battle on the second most important screen: your television. But the notion of being relationship vis-à-vis voice in the home, that seems like the next battleground. Google is playing catch-up, and Apple kind of gave up the early lead to Amazon. But I think the next big battlefront is voice and artificial intelligence, and the battlefield is going to be the home.
Knowledge@Wharton: I grew up going to the movie theater and the grocery store. What will happen to these types of outlets in the future? Which has the greatest concern?
Galloway: All of them. Not only that, the disruption happened before. In between the time that Amazon announced the acquisition of Whole Foods and when it closed, the largest pure play grocer in America — Kroger — lost a third of its value. Keep in mind Whole Foods is only one-eleventh the size of Kroger. If you didn’t know Amazon had acquired Whole Foods, you wouldn’t know. It wasn’t as if Kroger’s business changed overnight, but it’s the expectation that Amazon is going to destroy industry after industry. It’s happening in movie theaters. AMC stock is off hugely. It’s not what industry will Amazon disrupt, it’s more difficult to think about what industries in the consumer world it won’t disrupt.
Knowledge@Wharton: It seems that even a Goliath like Comcast could be a takeover target of one of these four companies.
Galloway: I don’t think anybody’s safe. If you look at these companies, they’re now in sort of a defensive posture. They have incredible assets. They have cash flow. But television was supposed to be a place that was somewhat immune from these players. Now all of these players are doing things like bidding on sports. It’s only a matter of time before the rights of the Super Bowl are purchased by one of the four.
Knowledge@Wharton: Are there companies on the fringe of those four that could become part of the group in the next five to 10 years? Will we have five or six tech companies running everything?
Galloway: I have a chapter called “Who Is the Fifth Horseman?” I try and go through the features or components of being a $500 [billion] or $700 [billion] market cap company, and then apply that same criteria to try to identify who might be next. There probably is a fifth horseman right now, and that’s Microsoft. But I didn’t write about Microsoft because I think of it as a B2B company.
In terms of the new guys, the one that is probably in striking distance right now is Netflix. At the end of the day, these companies are all operating systems for media, for information, for retail. Netflix is becoming an operating system for the second-most important screen in our lives, and that’s the television. Millennials spend more time watching Netflix than the rest of cable television combined. So, Netflix is on the verge of being in the same weight class. People talk about Amazon versus Walmart being a huge battle. I think the battle that’s really shaping up to be the celebrity death match of the next decade is Amazon and Netflix.
“I would argue that Whole Foods will be to Amazon what Instagram was to Facebook.”
Knowledge@Wharton: What about the future of movie theaters?
Galloway: I think it’ll be similar to the magazine and newspaper industry in that movie theaters aren’t going to go away, it’s just going to be a difficult place to work or invest. We knew Blockbuster was going out of business, but we thought it was going out of business in 1998, and it took another 14 years. People are still going to go to the movie theater, but your home viewing experience is getting better and better. The original content available in your home is getting better and better. Film will continue to leak consumers’ revenues and talent and capital to television in the home.
Knowledge@Wharton: Do you have concerns about these companies having so much influence over almost everything that we do?
Galloway: Very much so. I believe we engage as a society in what I would refer to as the gross idolatry of youth and innovators. These companies are not subject to the same scrutiny as the rest of business. If the terrorists in San Bernardino, California, had been using a Blackberry, and Blackberry [formerly known as RIM] out of Canada had refused a court order from the FBI to let the FBI get into the phone to see if other terrorist activities were unfolding, I believe we would have had a trade embargo proposed against Canada within 48 hours.
But we’ve decided that the iPhone is the new object of worship. They shouldn’t call it the iPhone X, they should call it the iPhone Cross. We let these companies engage in massive tax avoidance. We don’t hold them responsible as media companies the same way we hold other media companies responsible. I think these companies get the mother of all hall passes. They’re just not subject to the same standard and the scrutiny as the rest of business.
Article by Knowledge@Wharton