Motley Fool Hidden Gems Investing - Hit Makers and Hidden DNA

Episode Date: December 29, 2017

On this week’s show, we revisit two of our favorite interviews from 2017. NYU business professor Scott Galloway talks big tech and shares some insights from his book, The Four: The Hidden DNA of Amazon, Apple, Facebook, and Google. Plus, Chris talks about the business of popularity with Derek Thompson, author of Hit Makers: The Science of Popularity in an Age of Distraction. Learn more about your ad choices. Visit megaphone.fm/adchoices

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select overnight shipping, and then enter the promo code FOOL. Everybody needs money. That's why they call it money. From Fool Global Headquarters, this is Motley Fool Money. It's the Motley Fool Money radio show. I'm Chris Hill. On behalf of everyone here at The Motley Fool, we hope that you are enjoying the holidays. This week, we are wrapping up 2017 with two of our favorite interviews from the past year. Later in the show, we will revisit my conversation with Derek Thompson, author of Hitmakers,

The Science of Popularity in an Age of Distraction. I had the chance to interview Derek at a Motley Fool event this past fall. We talked about how things become popular and about all of the disruption that is happening in the world of media and entertainment. But we begin this week's show by talking about what is behind the success of four iconic tech companies. Google is God, Facebook is love, Apple is sex, and Amazon is consumption. So writes Scott Galloway, professor of marketing at NYU Stern School of Business and author of the brand new book, The Four, The Hidden DNA of Amazon, Apple, Facebook, and Google. He joins me now from New York City. Scott, thanks so much for being here. Thanks for having me.

These are not just four of the biggest companies in the world. They are also among the most heavily covered by the media. And I'm curious, when you set out to write this book, what did you think you were going to find and what did you actually find so i'm a tremendous admirer like most people these companies i would say the biggest surprise is just how dominant they are we know they're influential we know that we know they're great at what they do but we actually add up the numbers their market capitalization combined is approaching the gdp of india and when you look at the respective markets they're in they literally are not only kind of dominating the markets they compete in, but they begin disrupting markets before they even enter

them. And they're able to kind of dominate or, if you will, grab the mic away from every other business and have sort of co-opted old media into being their outsource investor relations department. And I would say, finally, it feels as if society, we no longer worship at the altar of kindness and character. We worship at the altar of innovation. And these companies have taken on almost like a Jesus-like status in the eyes of the consumer. So in terms of the competitive landscape, is the ballgame for all intents and purposes over? Because we've certainly seen over the last 50 years, various companies, and I'll just pick two from the tech industry, IBM and Microsoft, at various points, they were

the dominant player, and not that they aren't still big companies, but they're no longer on top of the mountain, how much longer do you think the reign of these four companies will last? Yeah, it's a fair point. About the time guys like me saying these companies are becoming too dominant is usually about the time they start to go into structural decline. Having said that, I think each of these companies doesn't show really any signs of letting up or at least increasing their market capitalization. However, I think you can distinguish a little bit between the four. If we were going to do a sequel and call the book The One, I think the company that is dominating not only its respective sectors, but beginning to eat into the other three's

businesses is Amazon. And that is, if you look at where Amazon butts up against Google and search, 44% of product searches were conducted on Amazon. That share has grown to 55%. If you look at where today. Amazon overlaps with Apple in streaming video. During primetime, it's gone from the number seven player to the number three. Four and a half billion dollars devoted to original content is behind Netflix. If you look at where they compete with Apple on computer hardware, the most innovative products of 2015 and 16 weren't the Apple Watch or the Apple Pods, but Amazon's Echo device. And you can kind of go on and on and on. It looks like Amazon is literally running away with it, if you will, in terms of being the most dominant company in business. Now, having said

that, if you have a child in a developed market, affluent household, I think a life expectancy now is near 100 years old. None of these companies will be around in 100 years. Of the Dow 100 from 100 years ago, only 11 have survived. And as the business cycle speeds up, so will the mortality rate. But in the short term, I don't see anything stopping these firms other than maybe regulatory intervention. I want to get to regulatory intervention or at least the possibility of it in a minute. But I'm curious if at least part of what makes these companies so dominant right now is the fact that if you look at each one of them, the journey to where they are right now in terms of their dominance is not this boulevard of unbroken green lights. They've all had pretty

significant business challenges along the way. With Amazon, it was, well, they don't make any money, and how can they make any money? And they pretty quietly were working on Amazon Web Services and made that the financial engine of their business. With Apple, right out of the gate with the iPhone, there were a lot of people saying, well, they're never going to be able to maintain the pricing power. And they have absolutely done that and more. Facebook, when it went public was not making a dime off of mobile advertising, and they have answered that challenge. And with Alphabet, with Google, for so long it was seen as a one-trick pony, and even though it was one heck of a trick, they've managed to turn YouTube into an incredibly

dominant search engine on its own. I almost think if you're any other business looking at competing with these four, it's got to be so dispiriting. Yeah, again, you bring up a lot of issues. A lot of people focus on how just aggressive these companies are in terms of taking big, bold bets, which they can do either because they're so incredibly profitable or because they have such access to so much cheap capital that what would be a devastating disappointment for most companies is barely even a speed bump. These guys are able to access – I mean, if you look at – so you talked about Apple.

Apple has pulled off the impossible. Companies are usually the low-cost producer and go for volume, or the premium-priced product and go for high-profits niche. What Apple has done, no company has pulled off in history, and that is they're both a low-cost producer. They have the best-selling phone, and as a result, are able to extract the best value in the supply chain. At the same time, it's the premium-priced product. So the auto equivalent would be an auto brand with the margins of Ferrari and the production volumes of Toyota. The most profitable company in history will do double the profits this quarter than Amazon has done. It's an entire history as a company now.

On the Converse side, Amazon purposely runs its company at break-even and has kind of changed the relationship between companies and the investment markets in that it's trained the market, or specifically investors, to value vision and growth over profits and has been given sort of the mother of all hall passes in the world of business in that it doesn't have the profit expectation that other companies have to live up to. So as a result, it can reinvest $0.01 on the dollar in the consumer value proposition as opposed to most companies have to get to reinvest $0.60 or $0.90 on the dollar in terms of the actual value to the consumer.

So different dynamics, but we have companies, you know, in the case of Apple, we've never seen a company that's profitable. And in the case of Amazon, we've never seen a company with this market capitalization that is this unprofitable. You mentioned the regulatory landscape. At this point in time, who do you think is the betting favorite in terms of the risk of being broken up? so the one again a thoughtful question it's a comp that is complicated that from an antitrust perspective the one that is most vulnerable is google because it commands a 90 plus percent share in a lot of the markets whereas the rest don't have nearly that type of dominance and when you're talking about the search category where google has a 90 plus percent share in a lot of

its markets. The search market is now a bigger market by dollar volume than the entire advertising market of every nation, with the exception of the U.S. So from traditional antitrust standards, you would say Google. Now, having said that, what Amazon is now able to do in terms of looking at industries and disrupting them before it even enters, that is probably going to create a decent amount of tumult or anxiety in Washington and Brussels. Between the time it announced the acquisition of Kroger's, the largest pure play grocer in America. And when it closed, Kroger shed a third of its value. Just this past Friday, when Amazon hinted they were going potentially into the pharmacy or drug business, you had not only drugstore retail stocks,

but also manufacturers, brands, and the drug industry declined four and five percent just off of a press release. When Nike announces that they're distributing through Amazon, Nike shares go up, and all the other footwear companies and footwear retailers' stocks plummet. So we're headed to this weird singularity with Amazon where the entire consumer marketplace experiences big moves based on what Amazon does or does not do. Facebook is the one facing the most regulatory anger right now, I would say, from Washington because of the news that their platform had been weaponized by Russians. So to your question, who gets regulated, the honest answer is I don't know. What I'm more confident of is where the regulation will come from, and it won't come from where people think it's going to come from.

It's not going to come from D.C. It's going to come out of Brussels. The U.S. registers tremendous upside from these companies with some serious concerns around privacy, job destruction, tax avoidance, but we get tremendous upside in terms of national pride economic growth. The largest recruiter for my class at Stern is Amazon. Europe registers a lot of the downside, but very little of the upside. And that is they're not a source of national pride in Europe. They don't recruit nearly as many students out of the Bocconi or the University of Cologne as they do from MIT or Stanford. And the regulators there, I think it's stiff in their backbone. And I think you're going to see the mother of all fines or regulatory

intervention come out of continental Europe. The war against big tech is about to break out in Europe. It's interesting, because if you think back to 2000, 2001, and Microsoft was very much in the regulatory crosshairs as being a monopoly, and there was talk of, should Microsoft be broken up? Should they proactively break themselves up? And all that sort of thing. But if you think about it, there was no love lost with Microsoft. Even people who used it in their work every day just did it because they felt like they didn't really have any other choice. These four companies that you've written about, to varying degrees, are loved by consumers. There's not nearly the same amount of animus towards them as there was towards Microsoft.

I'm wondering if that alone helps them or at least guards them to some degree against regulatory risk. It's a great point, and your instincts are correct. They've learned from Microsoft that it's important. Your perception is really important as it relates to regulatory intervention or the timing of regulatory intervention. These companies wrap themselves in a neon blue, a pink, or a rainbow blanket, And they're very open about their progressive values. And they'll fly Sheryl Sandberg around to talk about leaning in. Tim Cook, first openly gay Fortune 500 CEO.

And I'm in no way doubting their principles or that they, I believe they do believe these things. I think they are all inspiring people. I think Tim Cook and Sheryl Sandberg are impossible not to like. But they purposefully put this image out there. As I believe the progressives are seen as, in general, as nice but weak, which is the perfect cover for companies that during business hours act more like the spawn of Darth Vader and Ayn Rand. So whereas Microsoft had sort of this conservative bent to it, and Steve Ballmer and Bill Gates were seen as super smart, but kind of mean and cutthroat, which made it easier for elected officials and regulators to go after them because the public didn't have a good feeling. The public, until very recently, has had very warm and cuddly feelings about these companies. If Sheryl Sandberg was vehemently pro-life, I don't think Facebook would be setting up meetings and presentations for her for 500 industry executives in Cannes to all the female executives there.

I think they purposely promote their progressive values to create an illusionist trick such that people think they're softer and cuddlier than they actually are. Coming up, more with Scott Galloway on Amazon, Apple, Facebook, Google, and what keeps those companies up at night. Stay right here. You're listening to Motley Fool Month. Hey, if you're looking to get a mortgage, here's a couple of tips. Boost your credit score before applying. The better your credit score, the less your loan is going to cost you. Here's another tip. Check out Rocket Mortgage. Getting a mortgage or refinancing your existing home loan, it's not easy. And when you're making a big financial decision like that, you want to be as confident as you are at your job, in your life in general. Rocket Mortgage gives you that same level of

confidence when it comes to buying a home or refinancing your existing home loan. It's simple. It allows you to fully understand all the details and be confident you're getting the right mortgage for you. To get started, go to rocketmortgage.com slash fool. Equal housing lender, licensed in all 50 states, NMLS, consumeraccess.org, number 3030. Welcome back to Motley Fool Money. Chris Hill talking with Scott Galloway, author of The Four, The Hidden DNA of Amazon, Apple, Facebook, and Google. Jeff Bezos, Tim Cook, Mark Zuckerberg, Larry Page. What do you think keeps them up at night? Is it each other? Or is it something else that worries them on a business level? I think it was each other until a few months ago. Now I think it's Washington. I think the

person they're most scared of right now is a woman named Marguerite Vestager, excuse me, who's the EU Commissioner on Competitiveness out of Europe. I think she has, if you will, I think she's the first regulator whose testicles have descended and is absolutely not afraid of these guys. And I think you're going to see the first $10 billion-plus fine come out of Europe. You know, again, look at it this way. If Italy or Belgium looks at the four and looks at what they've done, they've welcomed these companies.

If you look at what's happened to their economy, their jobs, their media companies, their technology companies, and then they look at China, which basically stole the IP of these companies and then created their own version, their own copycat versions of these companies, who's better off? Distinct to the morality or trade agreements, what country made the better decision? And I think there's a decent argument that China made the better decision by stealing their IP and just ripping off these companies. Now, and I realize that's not how we do business in the West, but I think these companies in Europe are starting to say, you know, if there's job destruction here and they can be weaponized by a government that's an adversary of the West and we're not recognizing a lot of upside, there aren't a lot of university buildings or hospital wings named after Facebook or Google millionaires in Europe where there's a lot of them in the U.S. I think they're coming to the conclusion that, you know what, there's not a lot of downside to going after these guys because we're not getting the same upside as America's getting. I'm sure your publisher, even though your book has been out for just a week or so, I'm sure your publisher is already interested in a sequel.

Let's just go ahead and assume it's going to be called The Five. If you had to add a fifth company to the list that you've put together, who would you add and why? so arguably there is five and the fifth would be microsoft they've performed exceptionally well the last two years i think they now have the third largest market cap in the world number two in cloud they've just done a fantastic job on on every dimension i didn't include them because i think of them as more b2b and i think of these companies as having more equity among consumers and being b2c but what's fun is to say well who among the unicorns or the new guys could be the fifth horseman a year ago i would have said it was uber right now if you

were to bet what company could get to three four five hundred billion right now i would say it's probably netflix as at the end of the day when you look at the four they're really just operating systems for different key components of our life whether it's information media or retail they're operating systems and netflix is becoming an operating system for the joy in our lives which is television or the operating system for the second most important screen in our lives which is, again, the TV. Millennials watch more or spend more time on Netflix than they do on the rest of cable television combined, meaning arguably Netflix should be worth more than all of the rest of cable television combined. Their use of artificial intelligence, their

momentum, recurring revenue business model, Netflix is probably the good money for the next horseman. The mother of all battles or celebrity death match, everyone talks about Amazon versus Walmart. People are starting to talk about Google versus Facebook. I think the real big battle, the Ali Frazier of the information age is shaping up, and it's going to be Amazon versus Netflix. I think Amazon is lining its troops up and is about to invade Netflix's core business. The book is The Four, the hidden DNA of Amazon, Apple, Facebook, and Google. It is available everywhere you find books. Scott Galloway, thank you so much for being here. Thank you. Thanks for your time. Coming up, why does something become a hit? Is it superior

quality, superior distribution, or something in between? Why should Facebook and Google consider sending Netflix a fruit basket? And what can the history of Sears tell us about the future of Amazon? Those are just a few of the questions we will cover with Atlantic Senior Editor Derek Thompson. That's coming up next. Stay right here. You're listening to Motley Fool Money. You got me working, working day and night. You got me working, working day and night. Popular. I know about popular.

It's not about who you are or your fantasy. Welcome back to Motley Fool Money. I'm Chris Hill. So what makes something popular? Earlier this week in front of a live audience, I talked with Derek Thompson, bestselling author of Hitmakers, the science of popularity in an age of distraction. Let's start with just sort of how you got here. What was it about popularity that got you interested to the point where you thought, oh, I think I've got a book here?

I think popularity is inherently weird and inherently interesting. And that's a good intersection to write a book about, because you sort of have to stay, it takes so many months to write it and so long to read it. Coming up with a subject that was both small, why do things become popular, and big, why do things become popular, was the challenge here. And for me, the article that I wrote for The Atlantic that really taught me or showed me that this book would be possible and interesting was an article that I was writing about the TV industry. And it was about Mad Men and AMC's strategy when it greenlit Mad Men. Typically, throughout television history,

the role of a TV company is to array the largest number of contemporary viewers around the television at once. Big Bang Theory, Chuck Lorre comedies, you want the biggest possible audience. But the business model of cable television is such that a lot of cable companies make the most money, not from advertising, but from what are called affiliate fees, from money that is essentially sent from the subscription, the household subscription, straight to the television companies. And so the goal of AMC wasn't to maximize audience. It was just to stay on the cable bundle. And the really clever strategy was what we need to do is we need to create a show that elites on the East Coast love and will call up Time Warner Cable and complain very, very angrily if AMC is taken off of their cable bundle. We need to create something that is unmissable for a very small segment of the population. And that turned out to be Mad Men.

And it was interesting to me the degree to which invisible forces of economics and business models that you can't see explain the content that you see. There's something perfectly capitalistic and somewhat craven about that story you just told. Because, ironically, it's about the advertising industry. That's where the show is set. And they are very mission-focused. And in this case, the people at AMC are the same way, that they're just like, here's our one goal, how do we create a show that does that? Yeah, I thought you were going to say it's ironic that a show about advertising was actually created to minimize advertising revenue, which is also pretty amazing. Well, I was going to get to this at one point, but why don't we just go there now, since you've sort of touched on the business of cable television and sort of, you know,

Because that's one of the things that you write about in the book is we are now at this point in the business of television where unbundling is becoming a real thing. But one of the things that you touch on is we may actually get to a tipping point where rebundling needs to happen. Yeah, I think there's two interesting tipping points that are worth looking at. The first is that obviously a lot of young people in particular have switched from the cable bundle, from pay TV, from linear programming, to these sort of mini bundle internet only products like Netflix or Amazon or Hulu. And eventually I do think that there will be so many of these Netflix style products. Disney is talking about creating its own Disney flicks. If that's successful, Time Warner is going to try to create its own standalone product. If that's successful, 21st Century Fox is going to create its own product.

For those in the room who are investing or looking at Netflix, that's sort of a scary proposition. The idea that an incredibly exciting company in Netflix that doesn't make an enormous amount of profit is about to be joined in this market by the largest content and entertainment companies in the world trying to create perfect competitors. That's a little bit, I think, of a scary thought. But another interesting thought that I think is really worth thinking about as an investor and as a sort of 30,000-foot observer of the advertising and content space is, all right, pay TV is a $40 billion ad market. Television is the biggest medium for advertising in the United States, $40 billion annually. But young people under 35 now watch half as much pay TV as they did just seven years ago. They are migrating in droves toward Netflix and Amazon and HBO Now. And what's one thing that all those products have in common,

Netflix, Amazon, HBO Now? They're all advertising free. So, you know, Madison Avenue is used to reaching its 19 to 48 demographic or, you know, 20 to 49 demographic through television. but now that demographic is the single most likely to be leaving television and where's the advertising going to go historically it hasn't gone anywhere advertising has hovered between about 1.5 and 2 percent of gdp for the last like 80 years it's completely metronomic so where does the money go well it goes where the eyeballs are going and a lot of those eyeballs are going

to uh in terms of ad supporting mediums uh facebook and google so in a very strange way Sorry to connect so many dots here, but hopefully there's a dot connecting thing that's forming in your brains. That was my most articulate passage, I think, of the morning. In a weird way, Facebook and Google could not have better designed a corporate assassin than Netflix. Because Netflix is, for young people, destroying the advertising business, It's destroying the advertising viewers and pushing them toward the duopoly in mobile and digital advertising, which is Facebook and Google. So that, I think, is a big idea that I'm looking at, that Netflix, the biggest winner of the Netflix disruption could be Facebook and Google. Let's come back to Facebook and Google in a moment.

in terms of the real and coming direct competitors for Netflix, Disney, when you think about the content library that Disney has. And if we're just talking in terms of original content, yes, Netflix has original content, but it probably doesn't stack up all that well against all of Disney, all of Pixar, all of Marvel, all of Star Wars, all that exists right now and all that is in the pipeline.

And yet, as we were talking about earlier, it is not that Disney is dealing with a content challenge. They're dealing with a technology challenge. How big a leap is it going to be for not just Disney but 21st Century Fox, all of these other companies, Comcast as well? How big is that tech challenge for them? Because Netflix, just as a user interface,

I mean, that's part of, I mean, if you just look at how popular Netflix become and how quickly it became popular, first it was DVDs by mail, which was so much more convenient than going to the Blockbuster, and then came streaming, which is so much more convenient than going to your mailbox. Yeah, I think that when it comes for a lot of these really powerful content owners, like Disney, like Time Warner, like 21st Century Fox, I think it's sort of, I think it's 2008 right now, which is to say that a dip is coming. Everybody can see that a dip is coming, but it's not a perma-recession. It's not a permanent depression. This isn't going to be like post-Soviet Russia. Instead, it's going to be like... God, I hope not. Yeah, instead it's going to be you have a lot of really, really successful, incredibly talented, brilliant people at these companies managing the transition from cable television, probably the greatest business model in the history of the world.

Just pause for a second. Think about there's never been anything closer to a private sector tax regime than there has been with cable television. 90 plus percent of american households paying 100 to seven companies every single month like that's what u.s taxes are every year about 100 of american households pay taxes to the u.s government and it supports a bundle of goods including defense and social security like that's basically what cable television was it was a private sector tax system that's you'll never have a better business model than that um uh and that's going away and it's going to be replaced by a much more competitive streaming only system um that transition is going to be rough there's

no way around it it's going to be rough they're not going to make money hand over fist the same way they did when espn for example in the early 2000s was probably the single most valuable brand in the world um that's going away but eventually they will build these tech distribution systems and then they'll be relatively equal on distribution and they'll win I think on content because as wonderful as Netflix is, I love Netflix it's been investing in

original content for five years, six years maybe. Disney's been investing in original content for nine decades it just has more stuff, it has better stuff and it's used its richness in order to make some really brilliant investments in Pixar

Star Wars, Indiana Jones and Marvel. So, I think that going forward, I think Disney is a long play. But if you're looking to make money in the next few years, I think I don't know what Disney's short-term outlook is going to look like. I think it's actually going to be very rocky. Coming up, more with Derek Thompson. You're listening to Motley Fool Money. Thanks again to Eero for supporting this week's Motley Fool Money. Eero, E-E-R-O, never think about home Wi-Fi again. They just introduced the second-generation Eero and Eero Beacon that allow you to build a Wi-Fi system in your home that's perfectly tailored for your home. More speed, more range in the same high-quality,

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For free overnight shipping, visit Eero.com. That's E-E-R-O.com. And at checkout, select overnight shipping, and then just enter the promo code FOOL to make it free. Welcome back to Motley Fool Money. I'm Chris Hill. Let's get back to my conversation in front of a live audience with best-selling author Derek Thompson. What role does luck play in all of this? Does it play any role at all? Because when I think about business, and I'll go back to Netflix, you know, Netflix, Reed Hastings, he's a tremendous leader, and Netflix is a great business. They did get lucky in the early days that whoever was running Blockbuster at the time was completely asleep at the switch, did not take the threat of Netflix seriously at all. And I think it was

six years went by before blockbuster decided you know what we're going to try this dvd by mail thing and give it a shot um so when you look out whether it's content creation distribution does luck play a role absolutely um it absolutely does and one of the reasons why i think people um who read my book i think some people read my book and were frustrated because i couldn't give them a perfect formula because i take so seriously this issue of luck and you can't have a foolproof formula if luck is a huge part of this equation so a quick story about luck um in 1954 um an artist named bill haley recorded a song called rock around the clock it was the b-side to a song called 16 women and one man about a hydrogen bomb exploding and the world being left with just 16

women and one man and you can kind of guess where that was headed um this song uh completely flopped it was not popular at all, even though Bill Haley was a relatively popular artist. It came out. People had a chance to listen to it. The label pushed it as hard as they could. It just had no uptake. No one wanted to hear this song. One of the few thousand people who bought the vinyl record was a fifth grader named Peter Ford. And Peter Ford was the son of a Hollywood actor named Glenn Ford

who was in a movie called Blackboard Jungle. And one day, Richard Brooks, the director of this movie, visited the Fords' house in, I think it was Malibu, Beverly Hills, and said, I need a jump-jive tune to kick off this movie. It's a movie about juvenile delinquency. It's a bit like Rebel Without a Cause. And I need a song to kick off this movie. And Glenn, the father, says, I only like Hawaiian folk music,

so this is not going to work out for you. My son, however, is really into this weird new loud music. The son, Peter Ford, hands the director, Richard Brooks, a stack of vinyl. One of the vinyl records in that stack had the word Bill Haley on it. And Rocker on the Clock ended up playing at the beginning of Blackboard Jungle,

in the middle of Blackboard Jungle, and at the end of Blackboard Jungle in 1955. And it is only then, three weeks after the movie came out, the song became the number one song in the country, the first rock and roll song to ever hit number one on Billboard, and the second best-selling song in American history After White Christmas by Bing Crosby, which is cheating,

because people just buy that for Christmas. So, is Rock Around the Clock an intrinsic hit, right? If you are an investor in some marketplace of music hits, and it's 1954, and you hear Rock Around the Clock, is the smart move

to bet on Rock Around the Clock or to bet against it? both in 1954 the song was a flop in 1955 it was the biggest hit of the century so yes luck plays a role timing plays a role no world in which the biggest hit of the century in which that song's outcome rests on the thin little shoulders of a fifth year old a fifth-grader boy named Peter Ford in 1955, you can only discuss that world through the lens of probabilities and likelihoods

and not formulas and inevitabilities. Let's go back to Facebook, because in its relatively young time, a short amount of time as a company, certainly when it went public, and it grew in popularity to the point where people's grandparents were getting on Facebook, and there were plenty of smart people at the time saying,

well, that's it, it's over now for Facebook because it's no longer the cool place for younger people, it's no longer the popular place. It has only continued to rise in popularity. When you look at Facebook today, what do you see in terms of a company that is not only one of the biggest public companies in the world, it is one of the most popular stocks,

It was one of the most popular businesses. How is it able to maintain that popularity? Is that the biggest challenge they face? When I look at Facebook, I see one of the most impressive companies in American history that is going through a very serious existential crisis at the moment that doesn't really understand what it is and what it's built. It knows that what it's built is valuable, but it doesn't know what it's capable of, and it doesn't yet understand how to talk about it.

So the best way to understand Facebook briefly, to me, is as a piece of information infrastructure, the same way a national highway system is a piece of transportational infrastructure. Facebook owns practically no content. It owns the proverbial roads on which the content reaches consumers. It's done a magnificent job of stitching together this proverbial nation, which is actually international, this international polity. polity um and but in doing so it's not only created an incredible place for advertisers to reach people and people to reach people but it hasn't understood that other equivalent with roads which is that when a state builds roads it also hires police officers to make sure the roads are safe and erect signs to make sure that cars don't hit each other and paint lines and do the

decades of thinking required to build the a safe and truly effective national highway system and facebook right now has become profitable before it's become self-aware in a weird way um and what you're seeing right now with the fake news crisis from the 2016 election another fake news crisis with yesterday's Las Vegas shooting where it turned out that Facebook was heavily promoting, I believe it was either right-wing American propaganda and or Russian propaganda in its trending news section and is now buying advertisements in Burma,

in newspapers to teach Burmese people how to read Facebook. So I joked today on Twitter, I was like, this is a grotesquely ironic version of Amazon getting back into brick and mortar, like Facebook buying advertising in print to teach print readers how to read Facebook. So this, and then on top of that,

you have sort of Mark Zuckerberg's semi-political, semi-presidential tour around the country to talk to farmers in Iowa about who they are and how they live. I think you put this all together and you have an incredible, amazingly successful company at the crossroads of an existential crisis, not understanding exactly what it's built and how to control what it's built. Because Zuckerberg founded this company thinking that connecting the world would simultaneously serve a dual purpose. It would be good for humankind, as the connections between individuals have always been, according to his philosophy. And it would be insanely profitable, because connecting people tends to be profitable and tends to grow GDP.

But I think he's now realizing that there's lots of people who are not good. and they, according to Facebook's algorithms, are just as valuable as the people who just want to talk to their uncle and aunt and share a CNN story. So I think that in conclusion, I would say that Facebook's biggest problem going forward is not

economics. It's politics. No company that has so quickly achieved what is essentially quasi-monopolistic power in its industry, no company like that wants to be on A1 of the New York Times and Washington Post

every single time there's a national news story and it turns out that they've given enormous backing to some piece of fake news. I don't think the Trump administration is going to be the one to regulate them, but you look at some of the people who want to be the next president of the United States that are Democrats,

and a lot of them are picking as their boogeyman not elites, but big corporations. And Google and Facebook are duly afraid of that future. Derek's book is Hitmakers, The Science of Popularity in an Age of Distraction. It is available everywhere. That's going to do it for this week's show. Our producer is Mac Greer. Our engineer is Steve Broido.

I'm Chris Hill. Thanks for listening. We'll see you next week.