Motley Fool Money - The Business of Popularity

Episode Date: October 6, 2017

Costco slips on margin concerns. Netflix hits an all-time high after the company announces a price hike. And General Motors reports some electrifying news. Plus, Chris talks about the business of popularity with Derek Thompson, author of Hit Makers: The Science of Popularity in an Age of Distraction. Thanks to Audible for supporting our podcast. Get a free audiobook with a free 30-day trial at audible.com/fool. Thanks to Bombfell for supporting The Motley Fool. Get $25 off your first purchase at http://bombfell.com/fool   Learn more about your ad choices. Visit megaphone.fm/adchoices

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This is Motley Fool Money. It's the Motley Full Money Radio Show. I'm Chris Hill and joining me in studio this week from million-dollar portfolio, Matt Argusinger, and from Total Income, Ron Gross. Good to see you, as always, gentlemen. Hey, hey. We've got the latest headlines from Wall Street. Best-selling author, Derek Thompson is our guest. And as always, we'll give you an inside look at the stocks on our radar. But we begin with some retail earnings. Fourth quarter profits for Costco came in higher than

expected. Overall sales look pretty good too, Ron. But their profit margins seem to be going in the wrong direction. hit me with details. Actually, I like this report, but it is within the context of what's going on in the retail and grocery business. But specific to this report, you can't complain with 5.8% comp store sales, 16% revenue growth, e-commerce grew 21%. These are all solid numbers. Their renewal rates, which are so important to their business model, because, again, a vast

majority of their profits come from this membership fee that people pay. which actually they just hiked. That's a nice lever they can pull to kind of juice profits. That was down slightly, but they still have a renewal rate of around 80, a little higher than 87%. Pretty strong. But as you know, gross margins took a little hit, and that's because of the environment we're living in. They had to be kind of competitive on prices to kind of get in there and not have Amazon and Whole Foods and Walmart take over the world. And that shows up in profits. I'm surprised that the stock is down as much as it is on Friday. And I just wonder, given the report they had, which I thought was pretty good, and I know there's focus on these lower

margins, but it just seems to me that the perception about Costco has changed since the Amazon Whole Foods tie up. It seems stale, doesn't it? It seems kind of like not the new thing anymore. Well, I think, I just think investors now are really questioning whether or not they will be able to pull the lever of higher membership fees down the road, because what am I ultimately getting for those member fees if I can now get so much more at Amazon. And so even if Costco continues to come out and do well at a 27, 26 P.E. multiple, I just don't think investors are going to be all that excited about it anymore.

Right. They are moving, trying to move into the age of Amazon. They just announced two online initiatives. Costco Grocery, which you can get 500 non-perishable food and sundry items delivered to your house in two days or less. Free delivery if the order is over $75. And they're also partnering with a delivery startup called Instacart for same-day delivery of about 1,700 items. So they're trying to get in there and get their piece of the pie here. I think we have to wait and see how successful that is.

I would think, given their membership-based, hitting that free shipping point of just $75, I would think that would be easy. Just because... Yeah, no. A case of Twizzlers is $75. Shares of Netflix hit a new all-time high this week after the company announced it is raising the price of some of its monthly plans, the standard plan, which is Netflix's most popular plan, will increase from $10 a month to $11 a month.

Maddie. I'm out. It kind of feels like they could have gone up more than a buck and people would have happily paid. I know. And it's interesting because when they last did this in 2015, it did affect new subscriber growth for a little while. But I think even in a stretch of two years, Netflix is at a different point now. It's got so much more content. There's so much more to the platform. And by the way, great timing with Stranger Things Season 2 coming out later this month.

You think this was intentional? I think that's a little bit intentional. So, I mean, a dollar, it doesn't seem like much, but if you think about it, if you apply that to Netflix's roughly 50 million paying US subscribers who are most often paying that $10 a month, that's an extra $600 million. That's not free money, but I mean, it's just money that they didn't have before. And they're going to need that because they're planning to spend about $6 billion to $7 billion next year on licensing and creating new content. So I think it's the right move. I think it's the right time to do it. And I think the fact that the stock

is almost $200 a share, investors realize that Netflix can do that and not lose subscribers by doing it. And that's the point to what you just said about Costco. Netflix seems to right now have that pricing power, and Costco not as confident in that because the value proposition might not be as compelling as it is with Netflix. Right. Well, if you are just keeping it within the streaming industry, if you are HBO, if you are Amazon, which is given the amount of streaming that they do, if you're Hulu, you're kind of rooting for this in a way, aren't you? You want Netflix to succeed and not lose subscribers because if Netflix can charge a little bit more, then maybe that means you can charge a little bit. I know. I think, yeah, this is demonstrating the power of sort of the anti-bundle, right? It's just, hey, how much are you? users willing to pay for these apps. Netflix, of course, is the biggest, most popular, most well-known.

They can raise prices. We probably can, too. Third quarter profits for Pepsi came in higher than expected, despite weak beverage sales in the United States. Ron, Pepsi trying to push healthier drink options in the U.S., and people just aren't buying. They're on what's called a multi-year journey, I read somewhere, to move people to healthier products. And they're not giving up on it, actually. They blamed this quarter's weakness on declining store traffic, a colder summer, which I guess somehow decreases demand for Gatorade. I guess that makes sense. Wait a matter, wait a bit.

I'm sorry. Pepsi played the weather card? A little colder summer than anticipated. But they did admit that they directed too much of their media spending and shelf space to new lower calorie, much smaller brands. And that hurt Pepsi and Mountain Dew, the bread and butter that has been the bread and butter for so long. And they're making some changes there. They're reallocating shelf space. They're reallocating their marketing spend back to those brands. But they did beat expectations, but it was mostly because of some cost cutting and some efficiencies that they were able to kind of ring some additional profits out there. Friedole was fine, grew 3%. Quaker foods up 1%. International

actually remains pretty strong. They generate 40% of their sales overseas. I'm glad you mentioned Frito-Lay because it was yet another quarter just for the snack business of Pepsi that was strong enough that it's just one more brick in the wall for people who looked at Pepsi because for years the debate was, gosh, they just got to split this off. They just got to focus on beverages. They got to sell off the Frito-Lay. And the CEO at the time was like, no, we're keeping the snack business. And this is another quarter where it's really carrying the weight. Agreed. Literally carrying the weight. Smart food, Doritos, all good stuff. You'll keep hearing that debate, though, depending on where the stock prices. Every now and then some investment banker will come up with a bright idea to break it up. Tough week for Shopify.

Citron Research came out with a short report on Shopify saying the Canadian e-commerce company is, quote, a business dirtier than herbal life. And shares of Shopify down to 16% this week. Maddie, we were talking right before we started taping. I get that Citron is in the business of shorting and they're coming out strong. That seems over the top. It seems like you can raise questions about Shopify's business. Because when I hear something like that dirtier than Herbalife, that is really raising the bar and raising expectations for just how much of a scam Shopify may or may not be.

Yeah, this is Citron's band. This is what Andrew Left does. He comes out with fairly sensational arguments when he's going after companies, and this is no exception with Shopify. He probably took it to a whole new level here. Unfortunately, I'm not going to speak to those allegations whether or not Shopify's this pseudo-pirament scheme that's offering get-rich schemes, whether the FTC needs to get involved. What I can say is we looked at Shopify in a million-dollar portfolio about a year ago. We were concerned about the lack of profitability, lack of real competitive advantages, mainly switching costs, limited information they give about customer churn and retention and things like that. And then the valuation, when we looked at the valuation about

a year ago, it was 13 times sales. Growing like crazy and nice relationship with Amazon and all that. Before this, even before the Citron report came out, it was trading for about 20 times sales. And so, you know, it's not a... Sounds compelling. Right. Well, it's not a stretch here. Andrew Left and Citron could be right on the fact that maybe the stock just drops because it was overvalued. And he can end up looking like a genius by doing that. But I would just say going in, very highly valued, lots of questions about the business and the model. We were concerned. I'm not surprised. He is. I don't believe a lot of sensationalist stuff that he's saying.

Yeah, shorting based on valuation gets you in a disaster area pretty quick, more often than not. You've got to come up with something salacious, you know, using words like pyramid scheme and some kind of fraud to make it a successful short investment. Otherwise, it's very difficult. When playing the Herbalife card, makes me think that Carl Icon needs to get involved here by a huge position in Shopify and just squeeze the heck out of all the shorts. You want to make it complete and just have Bill Ackman get in? Yeah, let's get the trifecta.

Ron, back in your hedge fund days, did you ever go negative like that? Did you ever try and short a company and just get a little bit rough around the boards? Not from a short perspective. Our negativity was from an activist perspective saying, you know, changes needed to be made, board members needed to be changed, divisions needed to be changed. needed to be divested, but never on the short side. I'm proud of you. Thanks, for sure.

Coming up, surprising news out of Detroit and good news from the other side of the glass. Stay right here. You're listening to Motley Pool Money. Before we get back to the news, got to say thanks to Audible for supporting this week's Motley Full Money. Audible makes traffic and escape you look forward to in your car. You can access an unbeatable selection of bestsellers, mysteries, thrillers, and motivation. Transform your commute, ride with Audible. And for our dozens of listeners, Audible is offering a full. free audio book with a 30-day free trial. If you want to listen to it, good news. Audible has it.

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As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against. So don't buy ourselves stocks based solely on what you hear. Welcome back to Motley Fool Money, Chris Hill, here in studio with Matt Argusinger and Ron Gross. YumChina is the parent company of KFC. Taco Bell and Pizza Hut in China. Same store sales in the third quarter up 6%. That is more than double, Ron, what the analysts were expecting.

Not too shabby. You know, Yum has not always had it easy in China. There have been missteps along the way. Were there some poultry issues that we may or may not have covered on this show? But this is actually a pretty strong report. 7% improvement in KFC from a comp sales perspective. Even Pizza Hut, which actually is struggling over there, same-star sales came in flat, which was significantly better than forecast. So you saw a 10% increase in profits, and I think it took some people by a surprise.

They put in their first quarterly dividend. It's only been a separate company since late 2016. So they put in their first quarterly dividend, 10 cents a share. They expanded their buyback program to 550 million from 300 million and announced that a new CEO would be taken over on March 1st. That's a lot to throw out there at once. As you said, this is recently a spinoff. So the fact that they are coming out with the dividend, with the buyback program, tells me that they are swimming in cash. They have plenty of cash. Yeah, they still want to expand, though. They're targeting

500 to 600 new locations this year. So that does cost money, but they've got enough to get kind of do it all. Earlier this week, General Motors announced it plans to go 100 percent electric, currently GM has one extended range electric vehicle. The company plans to have at least 20 in their lineup by the year 2023. And, Maddie, that's, I don't know. The speed with which they're talking about ramping up over that timeframe, combined with the fact that this is one of the big three. I don't know. I was pretty surprised by this announcement. I'm surprised, too. This is a big deal because, yeah, the big three, you mentioned Ford,

GM now and Chrysler, even though I know Chrysler's owned by this Italian company. But they've really been behind. I mean, they've let Tesla sort of have the limelight in the U.S. when it comes to all-electric vehicles. Now, GM's taking the plunge. You mentioned 20 all-electric vehicles by 2023. I don't know how they get that done, but they're going to get it done. And I think if you look at what Volvo is doing, Volvo as of next year, is going to stop building internal combustion engines. BMW came out and said they're coming out with 12 new electric cars by 2025. Jaguar Land Rover of all companies said all its models after 2020 will be their electric or hybrid, which is shocking. And so, and this makes sense.

sense, this is where the world's going. And not so much the U.S., but China has said we're moving away from traditional engines, countries like Germany, India, Holland, Norway, saying we're going all non-electric by 2025 and 2030. And so what's actually most surprising to me about this is who's sort of in denial about this? I mean, this seems real, this is happening. The world of cars is essentially moving electric. But if you look at reports out of OPEC, ExxonMobil, BP, a lot of the other oil majors are like, yeah, we think electric vehicles are going to be like 10% of the market by 2030, which I just think is, I don't know who's behind the curb, but someone's behind the curb here. I don't know if it's GM

or these guys or not, but the world is definitely going electric. You know, and I think that somewhat the Tesla shareholders are a little bit in denial, too, because Tesla is priced as if they are the winner. And there isn't a winner in this. It's a big industry with lots of manufacturers, and the industry is all moving towards electric cars. And so I don't see how that valuation, and I'm a shareholder, actually, surprisingly, but I don't see how the valuation is a great point. Well, and the fact that they've essentially at Tesla essentially had the playing field to themselves for a long time.

And so people are willing to wait however many months it takes for their brand new Tesla to get to them. GM can be accused of a lot of things. Inability to produce a lot of vehicles in a single year is not on that list. So again, it's a pretty audacious goal to go from one to three. more than 20 in just a few years, but I don't know. I feel like they can pull it off. Yeah, and I really like Ron's point. I mean, I think investors almost think of Tesla as Apple in the sense that the iPhone, the Model 3 or with the Model S, it's the iPhone of the

auto market. It's going to troll 60 or 70 percent of the market, which is just not true when it comes to automakers. Darden Restaurants is the parent company of several chains, including Olive Garden and shares of Darden down 5 percent in the past few weeks. And gentlemen, you can draw a straight line from the day that our man behind the glass, Steve Broido, went in for surgery to have his tonsils out. You can draw a straight line from that date to today and the drop. And I'm just saying... So now that he's back. Do we buy?

I'm just saying on their next earnings report, when Darden restaurants comes out and says, yeah, olive garden sales this quarter, a little lighter than we were hoping for, long-time listeners of this show are going to know it's because Steve Broido was out. But fortunately, He's back. He's back. He's back. Steve, he's back behind the glass. I'm back.

Listeners wrote in. They tweeted. They want to know how did the surgery go? How is Steve feeling? How are you feeling? You look great. Well, thank you so much. I've created my own sound drop.

This is just every time I talk. I'm going to come in under this. I'm feeling very well. The surgery went well. I'm feeling good. And I'm back in the game. So, yeah, I'm here. Here I am.

And because we did talk about it previously on the show, what was the pain level like? Would you qualify it as the worst pain ever in your life? It was, unfortunately. Yeah, it was pretty rough at times. I will thank the narcotics industry for what it's done. I mean, there's a huge amount of, I mean, at some point. The opioid crisis is a real one in this country, but there is a place for opioids in this country

for people after surgery because it's quite a painful surgery. Last question, because this also came up on the show. What flavor of Insure was your personal favorite flavor? So there was a strawberry blast one that I liked more than I think. thought I would. It was bliss. Strawberry bliss, I believe. That's a good. If you're browsing. Are they chalky? No. I mean, at that point, I was sort of like, I think I need to eat something. I will drink this now.

All right. Let's get to the stocks on our radar. And Steve Brighto will hit you with a question. Ron Gross, you're up first. What are you looking at this week? Looking at Brookfield Infrastructure Partners, BIP. They buy and operate infrastructure assets, utilities, energy, communications towers. They've really, over the years, proven their ability to acquire high-quality undervalue properties. Recent $1 billion equity raise, pulled the stock back a bit, giving investors to buy in at a somewhat better price, 4.1 percent dividend yield, putting lots of money to work, almost $3 billion in 2016. I think the future looks bright. It's a household name, Steve, Brito. Brookfield Partners, got a question?

The question is, if I meet someone in an elevator and I just say, hey, where do you work? Brookfield Partners, what do they say in five sentences or so, or three sentences, because I heard what you said, but I don't know anything about what you mean. We buy utility companies and energies and pipelines and communications towers, and we make money on them. Print money. Matt Argusinger, what are you looking at this week? I'm going with Baidu, a ticker BIDU. We were just at a South Carolina member event for The Fool.

I spoke about Baidu at one of the panels. Of course, the Google of China. But I actually like it because they also happen to own the YouTube of China, which is actually rapidly becoming the Netflix of China. And that's Aichi E, which is 150 million active users. There's a chance that Bidu spins off Ichee next year into an IPO. But you can take advantage of that now by buying Bidu. I think it's a big growth engine for the business.

Steve, question about Bidu? Is there ever a chance that Bidu would merge with Google in some form? And there would be some giant, universal global search engine. I don't think so because I think the Chinese government would have something to say about that. But it's an interesting idea, Steve. Two stocks, Steve. You got one you want to add to your watch list? I'm going Brookfield. Oh, wow.

Shock it. We buy stuff and print money. We do. That's a business model. Don't mock it. You know what? They should make T-shirts that just say that and sell them on their website. All right, Ryan Gross, Matt Argosinger.

Guys, thanks for being here. Thanks, Chris. Matt mentioned the event we had in South Carolina. Up next, my conversation with best-selling author Derek Thompson from our event in South Carolina on the science of popularity. Stay right here. You're listening to Motley Fool Money. Help you be popular. You'll hang with a right cohort.

Welcome back to Motley Full Money. I'm Chris Hill. So what makes something popular? Earlier this week in front of a live audience, I talked with Derek Thompson, best-selling 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 madmen. 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 Laura 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 madmen. And it was interesting to me that agreed 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 re-bundling 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 Madison Avenue is used to reaching its 19 to 48

demographic or 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% 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, in terms of ad supporting mediums, 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, 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 potential, the real incoming 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 20th First 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. You'll never have a better business model than that. And that's going away, and it's going to be replaced by a much more competitive streaming-only system.

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 fish the same way they did when ESPN, for example, in the early 2000s was probably the single most valuable brand in the world. 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 a very rocky.

Coming up, more with Derek Thompson. You're listening to Motley Fool Money. All right, real quick, I want to say thanks to Bomfell. Bombfell is an online personal styling service for men that helps find the right clothes for you. It's an easier way to get better clothes, and I am completely 100% in favor of that because I really, really don't like shopping for clothes. Bomfell does all the work for me to make it really easy. Here's how it works. You go to bombfell.com slash fool.

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I'm not, and you can ask anyone in my house, I'm not particularly easy to shop for, and my personal stylist nailed my clothing, nailed my items. I really love the stuff that was picked out for me. And we've got a special offer for our dozens of listeners, $25 off your first purchase. $25. Go to Bombfell.com slash fool. That's B-O-M-B-F-E-L-L-com slash fool and get $25 off your first purchase. purchase. Welcome back to Motley Full 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. So when you look out, whether it's content creation, distribution, does Luck play a role? Absolutely. It absolutely does. And one of the reasons why I think people

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. In 1954, 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. one man, and you can kind of guess where that was headed. This song 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 Ford's 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 worry. work out for you. My son, however, is really into like 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 rock around 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 of 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 is 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 and 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. 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 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. 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 toward in its trending news section. And is now buying advertisements in Burma in newspapers to teach Burmese people

how to read Facebook so I joke 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 said like semi-political, semi-presidential tour around the country to like talk to farmers in Iowa about like who they are and how they live. I think 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 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 on 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 an 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,

they're 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 Mack Breer. Our engineer is Steve Broido.

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