Pivot - BONUS EPISODE! Live from Pivot MIA: The Life Cycle of a Company with Prof. Aswath Damodaran

Episode Date: March 3, 2022

In one of the most popular presentations from Pivot MIA, Professor Aswath Damodoran of NYU's Stern School of Business compares the life cycle of a company to the stages of life of an actual human being. It’s the structure he uses to understand why companies do what they do, and more importantly, to pinpoint “when companies do things they shouldn’t be doing.” Learn more about your ad choices. Visit podcastchoices.com/adchoices

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Just go to Indeed.com slash podcast right now and say you heard about Indeed on this podcast. Indeed.com slash podcast. Terms and conditions apply. Need to hire? You need Indeed. Hi, everyone. This is Pivot from the Vox Media Podcast Network. I'm Scott Galloway. Today, we've got a bonus episode. It's a presentation from NYU's Aswath Damodaran,

given at Pivot MIA on February 15th. Aswath's speech was one of the conference's most discussed events. Have a listen. He's outstanding. I'm going to start my session by talking about something completely tangential. I had to teach all day in New York yesterday. I had my regular class back in the classroom. I took the late night flight. I got into Miami at 10 o'clock. I took the cab. I got out. It was 1045 at night. And as I was walking into the hotel, there was a whole group of people whose nights were just beginning. They were all young. They were very hip. To me, they looked partly dressed, but that might be just... And I got a reminder that I was getting old.

Because if I went out at 10.45 and my night got started then, I know exactly what I'd be doing today. I'd be crashed and burned today. I'm getting old, but it's not a choice, right? Growing old is mandatory. Growing up is optional. And that's going to be the launching pad for what I want to talk about today. I teach two classes. I teach a corporate finance class and a valuation class. You say, what the heck does that even mean? Like MBAs come in and say, what's the difference between the two classes? I tell them the truth. It's the same class. I give it different names. That way it looks like I'm

teaching two different classes. But the truth is that in corporate finance, I talk about businesses from the inside out. How do you run a business? How do you increase the value of business? In valuation, I look at the same companies from the outside in. It's got to be much more passive, right? I've got to value Peloton given the people running Peloton, not based on what I wish it were run like. And in both these classes, I find myself looking for things that explain the cross-section. Because you can talk about anecdotal evidence. I've never used a case in 40 years of teaching because to me it's an insane misuse of my time.

I've got 45,000 live cases in front of me, every publicly traded. Why would I go back to 1988 and let some Harvard Business School professor tell me what happened then, especially when I know the outcome. So I'll give you one of the structures I find incredibly useful in understanding why companies do what they do, and more importantly, in pinpointing when companies do things they shouldn't be doing. Just like human beings, companies go through a life cycle. Let me describe the life cycle. You have a business idea, brilliant idea, a startup. You're like a baby, right? You need constant care and attention, not to mention capital. You make it through the startup years, and let's face it, the mortality

rate for businesses and companies is far higher than the mortality rate for human beings. Two thirds of startups don't make it through year two. Great business ideas don't make it. But let's say you make it. You're now a toddler company. What do toddler companies do? They fall, they get up, they fall, they get up. Sometimes they fall and don't get up. If you make it through the toddler years, you get what I call a bar mitzvah moment. You know, the bar mitzvah moment is? If you're Jewish, this is when you're told you are now grown up, even though you're not.

Companies go through, and many companies are not quite ready for the bar mitzvah moment because they're so used to being kids, somebody else taking care of everything. If you make it through the bar mitzvah moment, you become a teenager company. You know what teenagers do, right? I have four kids.

Thank God they're all through the teenage years. But every morning, here's what teenagers do. They look in the mirror and say, I have lots of potential. What can I do today to screw it all up? So when you have a teenage company, don't expect it to act rationally. Some of you might know I bought Tesla in June of 2019. Why did I buy them? Because it was a particularly good time to buy them.

Because Elon had been doing some crazy things in the months leading up to, including things like tweeting out $420 funding secured. Every word in that tweet was a lie. But it kind of caught up with them. Stock price had dropped. I valued Tesla for a long time. I always wanted the company in my portfolio. So at $180 per share, it looked good.

And I bought it. And at the time that I bought it, I wrote a post saying, I'm buying Tesla because I think it's undervalued, but I also am buying it with open eyes. I'm buying Tesla because I think it's undervalued, but I also am buying it with open eyes. I'm buying a corporate teenager. And what I mean by that is if you buy a company like Tesla, be ready for some frustrating things happening.

Like what? Your CEO getting up and tweeting about a diver in Thailand. Come on. Or taking $2 billion via cash and buying Bitcoin. You got one of the great stories of all time why the heck would you just but you got to take it as part of the parcel you make it through the teenagers you know the peak of your life you know the peak of your life looks like those people yesterday leaving at 10 45

peak of your life you can go to bed three, wake up at six and be a fully functioning human being. Enjoy it while it lasts. It doesn't last that long because after the peak of your life comes middle age. And let's face it, none of us liked that day. I don't know what the exact year was, 30, 32. You wake up and say, I'm not young anymore. Even if you don't say it, your body will tell you, you're not young anymore. You're middle-aged. Enjoy middle age because there are worse things coming down the pipe at you, right?

After middle age comes old age. After old age comes dementia. After dementia comes death. One of the first things I do when I look at a company is I try to put them in the life cycle. Think about your favorite company or your least favorite company. Ask yourself where it falls in the life cycle because here's why it matters. How you move through the life cycle is a function of what kind of business you're in. If you think about how quickly you can climb the life cycle, if you're a capital intensive

infrastructure business, it takes a long time to climb the life cycle, right? You've got to build assembly plants, you've got to build capacity. It might take you 30, 40, 50 years. And along the way, you're complaining about how long it took you, but here's the advantage of taking a long time to build up your life cycle. Once you've got to the top, it becomes much more difficult for people to come up because it took you a long time.

It takes them a long time. You stay at the top for an extended period because you took a long time getting there. And then when you decline, the decline is slow. You still don't like it, but you decline slowly. The quintessential 20th century company, the successful 20th century company, that's what the life cycle looked like. Think of how long it took Ford to go from being a startup to

a mature company. Think of how long it stayed at the top. We forget that GM and Ford had an extended run at the top and they've been in decline for a while. The reason I bring that up is one of the things that I think we all need to think about is the 21st century company life cycle. I describe tech companies as aging in dog years. Basically, a 25-year-old tech company is like a 100-year-old manufacturing company. And I'll give you two contrasting examples. Where would you put GE in the life cycle right now? Do you guys like The Walking Dead? This is a walking dead company.

It's a zombie company. It's the only stories you can tell about how quickly the end will come and how painful it's going to be, right? But it had a great run. A hundred and twenty-five years. Don't shed any tears for GE. It's a corporate entity. It's lived its life.

And the end is coming. But it took a hundred and twenty-five years. When was Yahoo founded? 1992. Hundred billion dollar company in seven years by 1999. Glory days lasted about five years. The day Google went public, Yahoo slide started. And by 2015, it was gone. 23 years from start to finish. And there's nothing anybody could have done to stop this slide.

I remember when Marissa Meyer was hired with a great deal of fanfare to be CEO of Yahoo. And what was she given as a mission? Turn Yahoo around. And anybody with any sense looking at this from the outside knew that this was a suicide mission. There's no way Yahoo was getting market share. I mean, how much would you pay for a search engine that nobody searches on? With a mail program that's used only by people over the age of 60?

Not much. And Marissa had a different problem, which is she ran Yahoo, but was like controlling the outhouse of a building where much of the value came from things she didn't control. You know what I'm talking about right? The bulk of Yahoo's value towards yen came from a 21% holding in Alibaba and a 35% holding of Yahoo Japan which is a publicly traded

company on its own. The way I described when I talked about when she became CEO is I said, what happens on any given day at Yahoo is driven more by what Jack Ma is doing at Alibaba that day than anything that Marissa Meyer can do here. I'm going to talk about the implications of this compressed lifecycle, because everything we know in business and finance was designed for the 20th century company. I'll give you a personal example of what we do in finance that I think we need to rethink. Have any of you done a discounted cash flow valuation? Just show of hands.

When you think about a discounted cash flow valuation, you project cash flow for a certain point in time. Then you get really tired and you stop. And then you estimate what's called a terminal value. Basically saying, I am too tired to go past year five or 10. I'm going to estimate a terminal value. You know what we assume in terminal value calculations? That your company will go on for how long? Forever. And the reason we justified it is forever is a reasonable approximation if you can last 60, so when you value the G's of the world and the fourths of the world, forever you could get away with.

But when you're valuing the Yahoo's of the world, where you know even when they're successful that this will not last that long, the question is when you get to year 10, when you're valuing Airbnb, do you assume that Airbnb will go on forever? Do you factor in the reality that you're talking about a much more compressed life cycle? I would argue everything we know in business and valuation was designed for the 20th century and it's time we started rethinking how we approach valuation, how we make business choices because the world has changed. I'm going to tell you why it's so useful for me to use the corporate life cycle.

I'm going to give you my corporate finance class compressed into a minute. And you know what? The rest is all fluff anyway. When you think about its core, what corporate finance is about, it's about three groups of decisions that every business has to make. The investment decision, where you decide what projects to take, what acquisitions to make, what to invest in. The financing decision, where you try to decide what mix of debt and equity you use to fund those investments. And the dividend decision, where you reap the harvest of all the good decisions you made in the past. Now, when we teach corporate finance, we act as if all three decisions are equally important. You have to pay just as much attention to all three. But that's a lot. If you're looking at a young startup, let's say you take Airbnb, not quite a young startup, but a young company.

Which decision of these three decisions, which of the three do you think drives Airbnb's value the most? The investment decision. Everything else is a side story, right? In fact, I'll save you the trouble on how much debt Airbnb should have. No debt. How much dividend can it afford to pay? Are you kidding me? You're losing money of negative cash flows.

It's all about the investment decision. So I ask you, who's the CFO of Airbnb? Most of us say, I don't know and I don't care. The CFO of a young startup might as well be the janitor, basically. You're the guy that everybody ignores and walks by. Because really, what are you going to do? You're not going to make this company great again. As you mature, though, you're supposed to're going to see your investments start to get less

lucrative, right? You're not, you know, so in a sense you're past that great. Now you start thinking about maybe there's something I can do to lower my cost of capital. Anytime a company talks about lowering the cost of capital, it's a signal. You're middle-aged. Young companies, when you're making 35% returns on your project, who cares whether your cost to capital is 12% or 10%? But there will be a time when you care, and your financing decision comes to the core, mature companies. You get past mature, you get past middle-aged, you get to be a declining company.

Guess what you care about? How do I return cash? The dividend decision comes to the core. Sometimes just looking at what a company is focused on will tell you a little bit about where they are in the life cycle. And you can think about where a name change will come in here. And I'll let you think about that. And what it tells you about the future of a company. And I'll let you think about that. And what it tells you about the future of a company. But that's something to factor in every action, not just financial,

is telling you something about where the company sees itself in the life cycle. Now, of course, as all of this is happening, your earnings and your cash flows are changing. Early on, you're a young company. You could lose money. It's a feature, not a bug. You're building a business model. Your cash flows are going to be even more negative. Why? Because not only are you losing money, you're investing for the future.

Of course, this is what people call cash burn. They ring their, oh my God, the company has so much cash burn. If it's a young company, it better have a lot of cash burn because if it isn't, then it's not a young company. That's another thing to look at. If you see a company with negative cash flows that claims to be a mature money-making company, something is not in sick in this story. Now, a lot of companies, if you have enough negative cash flows long enough, don't make it.

That's the survival issue. But if you do, here's what I should expect to see. issue but if you do here's what I should expect to see your margin should start to improve your cash flows will go from negative to positive why because you have to reinvest less your growth opportunities in fact your cash flows turn positive when you start to turn less optimistic about future growth because you're reinvesting less and then in those mature years your cash flows are at their peak and then you're going years, your cash flows are at their peak. And then you're going to decline, your cash flows start to go down. So just as you see a company age, you're going to see its cash flows reflected as well. I don't do consulting. I'm too lazy and too opinionated. And I wouldn't say much. I'd go into a company and say, what do you want us to do? Act your age.

And I wouldn't say much. I'd go into a company and say, what do you want us to do? Act your age. More money is wasted by companies trying not to act their age than any other single set of actions out there. When Walmart bought Flipkart, it's an Indian online retailer, about five years ago, 21 billion. I called it the most expensive facelift in history. Because let's face it, Walmart is an old company. It's a very good company. Don't take it badly. Being old is not a bad thing.

At least they've made it through their old. They want to be young again. Why? Because they're competing against a company that seems to have found the fountain of everlasting youth. And I won't name the company. It's the most expensive facelift in history and therein lies a reason why companies keep trying to be young again. There's an entire ecosystem out there that tells you you can be

young again. You know what's in that ecosystem? I mean you know if you're a human being it's plastic surgeons and personal trainers, you know, the equivalent. They're consultants and bankers. You can be young again. All you need to do is adopt our acronym. EFA, EVA, CFROI, ESG. Name the acronym. You adopt it. You're going to be young again. And then they ask you to do expensive things. You want to go do an acquisition. I think the M&A process, the most destructive process across the world, across corporations.

But if you think about why the process keeps going, there's a reason. You can be young again. Just this one big acquisition, you'll be young again. So act your age. If you're a young company, go out and reinvest money for the future. Don't talk about positive earnings and cash flows.

That's not what I'm investing in you for. Make sure you invest for future growth. If you're a mature company, don't keep trying to tell me you can grow at 20% a year. Because then you're going to do things you shouldn't be doing. And if you're a declining company, just accept the fact that your best days are behind you. We'll be back in a moment with more from Aswath Damodaran at Pivot MIA. Fox Creative.

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Learn more about how to protect yourself at vox.com slash zelle. And when using digital payment platforms, remember to only send money to people you know and trust. Thumbtack presents the ins and outs of caring for your home. remember to only send money to do it, and who to hire. Start caring for your home with confidence. Download Thumbtack today. Welcome back. We now return to our bonus episode from Pivot MIA. I actually do a session called the Theocratic Trifecta. You know what the Theocratic Trifecta are? Sustainability stakeholders in ESG. Half of all business schools have kind of every class has one of those three words in the title. class as one of those three words in the title because I think they're all marketing a myth which is if you do these things you can live forever and

I'm reminded of the Egyptian Pharaohs who had the same dream so you know what they did right after they died they got wrapped up in blankets or bandages got put into tombs with all their favorite things around them. And guess what? They died anyway. So think about that when you think about all these things that supposedly matter. As I said, the other class I teach is valuation. And I'll tell you, one of the things that troubles me about how valuation has evolved over the last 40 years is almost all valuation has become financial modeling. It's become a gigantic Excel spreadsheet.

And I'm a great believer that if you want to do valuation, you've got to think about the story that underlies the numbers. Otherwise, all you have is a collection of numbers. But if you look at how critical stories are, across the life cycle, here's what you're going to see. When you have young companies, it's all about story. You know why, right? There are no numbers.

Now, that story can be a good story. But as you age as a company, the shift is towards numbers. So if all you do is value mature companies, you can do everything on Excel spreadsheets. But if you try to do that in the Airbnbs and the Ubers and the Paytms of the world, it's not going to work because you're trying to impose a number-driven valuation on a valuation where it's all about storage. And as you go through this process, guess what? The amount and the type of uncertainty you're going to face is also going to shift. With young companies, you're at maximum uncertainty.

And you don't have a crutch. You know what the crutches usually are, right? Let's look at the ratios. There's nothing there. It terrifies people. So you know what the response is? They don't try to value these companies, including most people who put money in these companies

have stopped valuing the companies. What about those VCs? They price companies based on what users, downloads, subscribers because they've given up. Their argument is there's too much uncertainty. But it's the reality. Early on when you think about valuation it's all about getting the story. And guess what your story is going to be wrong. What percent is the time? A hundred percent of the story. And guess what? Your story is going to be wrong. What percent is the time? A hundred percent of the time. But that's okay. You don't have to be right to make money. You just have to be less wrong than everybody else. Remind yourself of that reality because you'll be amazed at how many people stop because I'm feeling too uncertain.

They say, you think you're alone? You think you're special? Everybody feels uncertain, including the people running the company. What makes you think you're going to solve that by building an Excel spreadsheet? So early on, it's getting the story right. I tell people I love valuing young companies. I find them fun because not only can you tell a story,

but there's going to be differences in stories. You take an Airbnb or an Uber or a Palantir and I go across the room, my guess is we'll tell very different stories. And you know how this is going to play out. There's going to be far more disagreement about valuation with young companies and about older companies. In fact, the analogy I give is

when you value a young company, it's like having, you know how sometimes people start writing books and they die and then somebody else is brought in to finish the book. I know it's a morbid thought. A young company, it's like the person starting the book died in chapter one. And you now get to write the remaining 34 chapters. When I'm asked to value Coca-Cola, it's like the author died in chapter 34 of the book and I come in and write chapter 35. There's not much room to run. With older companies, the differences in narrative are going to get smaller.

There's going to be less disagreement. One final point. If you read the Harvard Business Review, stop. Don't read it anymore. It'll ruin your brain because it gives you all these. I mean, let's face it. Everybody who goes to Harvard Business School is a CEO in waiting. You're treated as, you're going to be a CEO. more. It'll ruin your brain because it gives you all these, I mean, let's face it, everybody goes to Harvard Business School as a CEO in waiting, right? You're treated as, you're going to be a

CEO someday. Let's teach you all the skills. And of course, one of the things Harvard Business Review likes to do is write articles about what a perfect CEO is. If you don't believe me, go. McKinsey, in fact, think of these as the twin demons driving the great CEO myth, right? You've got McKinsey who supplied more CEOs than any other consulting firm in history, like 60% of S&P 500 CEOs or one point in time of McKinsey CEOs. And they all talk about this mythical great CEO. It's a complete lie. Because you know what the right CEO for your company is?

It depends on where you're in the life cycle. When you're a young startup, who do you want? A visionary, a storyteller. You want Steve the visionary. Of course, I picked Steve for a reason. But let's say you make it through that model. You're now a company that actually has to convert this idea into a business. You want somebody who's more of a pragmatist, right?

You can't just have storytelling. You got to have somebody who takes the business idea and says, you know what? I'm willing to compromise on these things. Let's call Paula the pragmatist. I'm trying to be as non-sexist as I can be. So I'll change the names of the CEOs as I go along here. Then you get into high growth.

You're building your business now, right? It's not just the idea, it's building a business. You want Bob the builder. You make it through that. You're now a growth company, but the easy growth is gone. You've got to become a bit of an opportunist. You've got to find new markets, new products. You're Oscar the opportunist.

And now you made it to middle age. You're a mature company. You're playing defense. You need Donna the defender. And then you're going to decline. You know who you want running your company? You want Larry the liquidator. If you don't, go on Google, look up Larry the liquidator.

You know who you're going to see a picture of, right? You want Danny DeVito running your company, not Gregory Peck. You don't want a guy with big vision. You want a guy who's very focused on getting you out of businesses, liquidating. You don't want people with big ambitions running declining companies. You don't want Larry the Liquidator running a young growth company. For a brief time, remember when Travis Sklacknick had to leave Uber for lots of different reasons, and they were looking for a CEO. And briefly, they looked at Jeff Immelt. My response was, are you guys out of your mind? I mean, to begin with, we can debate what

Jeff did at GE and whether it was good or bad. But even if he thought he did a good job at GE, bringing him in as CEO at Uber would have been the worst possible choice you can make. He would have been the wrong person for the company. So a couple of days ago, I did my latest valuations of the Fang Am stocks. They fascinate me because you think about storytelling and life cycles. Each of them has a fascinating story.

And one of the questions is, where did they fall in the life cycle? If you get a chance, I mean, Amazon is a company I valued every year since 1997. Talk about a book that never ends, right? Each time you think you're getting to the ending chapter, they figure out a way to make this.

It's like a sequel on top of a sequel on top of a sequel. It's like Pirates of the Caribbean, part 55. And Johnny Depp is still alive and he's still drunk and he's still doing all the things he did. I mean, this is a company that started off as an online retail company. By 2010, it looked like it was getting old. But it found a second wind. It became a disruption platform. There are some companies, and this is what gives people hope, that find reincarnation.

Apple in 2000, right? Steve Jobs, a legend because of that. And these become case studies. And then what? Consultants and users. Do you want to be the next Apple? Do you want to be the next Microsoft? Come on. What company doesn't? But the reality is they're the exceptions, not the rule. And we have to remember that anytime we see a company saying, I'm the next Apple, I'm the next... How many times have you heard people say, I'm the next Amazon? I've gone well beyond where I should.

So I'm going to stop there and turn to the Q&A. When we come back, Aswath speaks with Kara. That's in a moment. As a Fizz member, you can look forward to free data, big savings on plans, and having your unused data roll over to the following month.

Every month. At Fizz, you always get more for your money. Terms and conditions for our different programs and policies apply. Details at fizz.ca. Welcome back. Here's the rest of Aswath Damodaran's speech at Pivot MIA. So we're going to stand. We're going to stand since you're so lively.

You look pretty good for a dead guy. I got to say, people think I'm tough on tech. Hello. Nice to meet you. So good to meet you. You're my date, I think. So this is a really fascinating story. I want to talk specifically about a couple of companies.

And then I'd love some questions from the audience. So we, in the agreement, talked about Facebook and the stock that was off. Can you talk about this compressed lifecycle? I completely agree with you. They go AOL went from much shorter and shorter Yahoo. I've seen them all and I'm actually working on a book on Silicon Valley and I forgot all the companies that have just died along the way. And they were big and they were important and et cetera, et cetera.

Very few survived. So can you talk about like where these big companies are now because they're sort of in the crosshairs of Washington, they're too big, et cetera? I think Facebook in particular is at a fascinating cusp in where it is in the life cycle, right? One is, if you look at the most recent earnings report, the number that I think freaked people out the most was the number of users dropped for the first time in Facebook's history. Though people sometimes forget why it dropped. It wasn't because of regulation, wasn't because of regulation. It wasn't because of governments.

It was Apple. It's privacy restrictions on its device, which actually it made me remind me of the Godzilla versus King Kong movies, right? The only thing that brings down Godzilla is King Kong and Facebook met a King Kong big enough to bring them down. So at this point, it's clear that they're not a growth company. I think that

anybody who invests in Facebook thinking 20% growth is coming back is barking up the wrong tree. The real question is whether they're at some steady state where they can grow five, six, I valued at 8% growth year, which is way below the historic norms. But there's another story you can tell, which is this is the beginning of the end, that the slide has started, that you're going to go from being middle-aged to in decline, essentially over a period of three, four, five years, because we've seen that happen. I hope that's not the case because I now own Facebook shares. Okay. But I think that there's a very real chance that that could happen. So I'm going to keep my eye on what the numbers look like.

What the numbers look like. And I'm also going to look at what they do, because that's going to be revealing, right? Because inside the company, they should see signs of a meltdown much quicker than we do. So metaverse, when they decided to change their name. In fact, I was on the show the day after they did it, and I sold my Facebook shares then. I said, there's no good reason for a company to change its name, right? It's you either go into witness protection, you know, if you're a company. Yeah. Well, that's what they were seeking. Yeah. Basically, you're trying to say, look, it's like when Philip Morris renamed itself Altria. I say, well, we're not going to

be toxic anymore. Guess what? You still sell cigarettes. It's not going to go away. Right. So I think with Facebook, I think it's going to be an interesting couple of years because you're going to see this unfold very quickly. If it doesn't melt down, it's going to happen really fast. And those are the signs, the huge investments in meta. You don't think that's a forward leaning, I'm going to, is that a facelift? I think the problem is they call themselves metaverse, but there's still a social media platform that makes the money on online advertising. So if they really mean that they're going to shift their business model to essentially make, I'd like to see what they do. Maybe there are things they've planned that I don't see yet.

Yeah. But unless I see that, it's just a name change. You're still a social media platform. You just change your name to meta to make it look like you're a different business. It's like Alphabet, right? Right. Now, Google did it because they wanted to make it look like a multi-business company. The reality is search. The search box is what drives. It's basically like Snow White and the Seven Dwarfs,

right? You've got the search box that delivers all this stuff, and you've got the Seven Dwarfs who eat up your cash flows and earnings. And until that changes, I still call them Google, until I actually see the rest paying off. And you may do that. Let me ask you about one other question, then let's get like two quick questions for the audience because we've got to get to lunch, and this is fascinating. He's an amazing actor.

Don't you want to go back to school now? I swear to God. We talked about Microsoft buying, which gaming has the biggest ability to go into this metaverse. People are already in a metaverse in a lot of ways with gaming. When you look at something like Microsoft,

a very much older company than any of them, they seem most canny to me in terms of that. They did do this acquisition, which is a warning signal for you. I'm usually not a fan of acquisitions, but I did like the Microsoft acquisition of Activision because partly it builds into something, the story they've been building up to over the

last decade, it's tough to remember, but 10 years ago, Microsoft was a software company. It lived from Office upgrade to Office upgrade, but even in Office and Windows, they shifted away from being a software company to a subscription company. I don't know about you, but most people now use Office and Windows or Office 365 platform. They bought LinkedIn, which again, at the time, people said, why would you do that? They built a platform. And what they're getting with Activision is not the games. I mean, in fact, the day after they did it or an hour after they announced this, I got a call from somebody, maybe a Wall Street Journal reporter saying, you know, is this a sign that Microsoft is going after Nintendo and Sony? I said, for a $2 trillion company,

what's the benefit of going after that market? It's small pickings. They have much bigger ambitions here. They're buying a platform. And as they see, their future competitors are not Nintendo and Sony. It's going to be, you know, Roblox and Facebook and the other players who can potentially come after them with gaming solutions.

So Facebook is telling the truth. That's where I would expect them to see actions. Are they going into that part of the business? I have two more quick questions. Apple then seems innovative for a bunch of old guys. They're pretty innovative. You know what I like about Apple is if you think about how much cash they've had for the last decade, and all the suggestions that people give for it, buy Tesla, buy Netflix,

because the reality is Apple has so much cash. They can buy Greece. They can pretty much buy whoever they want. Yeah. What has always impressed me about Apple is the discipline they've shown not to do any of those things. Yeah. Right. And I think that that's why I've owned Apple over the last decade is because I like that discipline because, you know, they, they've, for a while they were becoming, I think, too smart for, they were the iPhone company. Yeah. And I think the services business is giving them at least some room to think about what to do when the iPhone is no longer the franchise that it is.

So I think with Apple, what I would be keeping my eye on is this is going to be a very tough franchise to replace. The greatest cash cow in history. But I like the way they're approaching. They're not in a hurry. They're not going out and buying things. the way they're approaching. They're not in a hurry. They're not going out and buying things. And hopefully time will be enough of an ally that they can find ways of replacing the iPhone franchise. And they're also creative as a bunch. No one thought AirPods would be this successful. So last question, then let's get to two quick questions from the audience, or maybe three,

but really quick. We have Airbnb CEO Brian Chesky tomorrow. He's closing the conference. I have a lot of regard for him. I think it's a really interesting business. What would be your worry for him? My worry is that, you know, you built the intermediary business from Uber on. Intermediary businesses have advantages. They can scale up quickly. You know, think of Uber and how quickly they grew. But like any business that scales up quickly, the question is, how do you build stickiness into your business model, right? That's the key. I mean, with ride sharing, how do you build stickiness into your business model, right? That's the key. I mean, with ride sharing, it's not worked. Uber and Lyft, I am not

loyal to either one. I go with the cheaper fare every single time. With Airbnb, the question is, how do you build stickiness in the model? And there are ways of doing it. Maybe you're collecting data on your users that you can then use to give them the right rental because you've learned about them. But that's, I think, the challenge that Airbnb faces because it's succeeded in the first part, which is disrupting the hotel business or hospitality business. The second phase is building up stickiness in the model that will keep up. In other words, it's like climbing over a moat, getting in and then trying to dig and make the moat deeper because the moat was very shallow. That's why you made it through quickly. Right.

But now you've got to make the moat deep again. And the question I would have is what are you doing to make this a sticky business where others don't come in and try to take away? Right. And you can start to build margins and actually make money off this business. Oh, great. Okay, quick questions. Very quick. Go ahead.

I know we're going to go to lunch. So oddly enough, my name's Larry and I work for Yahoo. Right. My boss asked me to bring back some stories to tell the rest of the company when I get back. So maybe you could give me an answer to what the hell Verizon and Apollo was thinking over the past few years. No, I think every telecom company, not just Verizon, look across the board. They know that their old way, I mean, basically, they made money for a long time as quasi-monopoly by essentially saying, where are you going to go, right? And I think they recognize the business is shifting, it's becoming more competitive, that this is all becoming part of this entertainment business where Netflix has kind of set the

agenda of throw money at content and hope that something good happens on the other side, right? I mean, in fact, when I think of Netflix, I think of a hamster wheel. You make more content, you sign up more users, then you go to the markets and look how many more subscribers and you go back and create even more content. And I think, in fact, all of the companies in space Disney on on the entertainment side that are all on that hamster wheel now they've said this is the way to go look how successful Netflix has been if you're going to get on this hamster wheel you need an exit track and with all of these companies

my advice is I don't mind you spending money in large amounts to get into this space but you better be thinking about how you finally figure out a way to get out. You can't keep throwing money at this and hope that something good will happen. And I don't see yet with AT&T or Verizon a plan of how exactly they, you know, after they've got these platforms and you spent all this money, how do you monetize this? How do you kind of live off the fat? Because, you know, if you keep throwing money, eventually your cash flows are going to blow up on you. And I don't think the telecom companies clearly have an idea of what to do. They're just following other people because they think that's

the only way to go. All right. They just want to go to the Oscars. And Tim Cook has fantastic cheekbones and convinced him. Yeah, thank you. Professor, very enjoyable. I'm one of those plastic surgeons you talked about. Neil Zuckerman, I run the media practice at BCG. How are you? Good. Good. So you've talked about Microsoft, Disney. I'll put in that mix and I'll put the New York Times. We've got Meredith coming up later. All three are companies that have reinvented themselves, transformed, whatever you want to call them. And you describe the stories as exceptions, not rules. So just is there any commonality among

the exceptions? Because I think we all want to get younger. I certainly do. And I think clients, my clients, I think the CEOs have a right to try and transform themselves and not just take age as destiny. So what's some of the commonalities among these exceptions? But be clear, you're going to die no matter what you do. I'm going to die. Yeah, well, I'll do it. Sorry. I'm teasing. I think the one thing I would say in common is that they are not in a hurry to kind of transform themselves. I mean, take Microsoft.

Satya Nadella came in. The time he came in, it was a two-hit wonder, right? Office and Windows. It had never done anything in its lifetime other than those two that actually made it money. Xbox, all of that was side stuff. He realized that this continued. Microsoft looked like GE 10 years later. And he made a good choice. The cloud business. But then rather than go buy a company in the space, he built up. He said, look, we have strengths. We have great technology

people. We know how to build a business. And he gave the Azure, the cloud business enough freedom to make mistakes and build up. And he was patient. And today, Microsoft's $2 trillion value can be traced back to that decision. So I think what they share in common is they have a plan, they're patient, and they use the strengths they have. The New York Times has been able to reinvent itself, not by going to new business, but realizing their primary strength is the content within the Times.

Whether it's a crossword puzzle that you enjoy doing every day, or the articles, you know, I think they built on their strengths in trying to reinvent themselves, and they've been patient. And that's what I think you should see in common. The companies that get into trouble, companies that throw money and say, look, I want to be in a new business. Find me green energy, if you're in a fossil fuel company.

Or find me a technology company or a telecom company. And spend as much as you can acquiring things, that's where we can we can get a head start that's i think a high risk low return strategy that doesn't seem to pay off very good very quick because we got a gretchen tibbets also an investment banker but in the media space love your thoughts on mgm amazon and blackstone's money into Candle? I think media and entertainment collectively were at this point where we have no idea where we're going, right? If you take Disney and Disney Plus, I am a little nervous about what Disney is doing with Disney Plus. It's playing the Netflix game. Next year, it expects to spend, what, $33 billion on content. It's queuing everything that Disney does as a company. And I would say in the

media and the entertainment space, collectively, companies are doing things very differently from the past, hoping that that's the right thing for the entertainment business. I don't think any of us knows what that entertainment business will look like. So I can see, I mean, if I were in this business, I would buy a bunch of options because I don't know what the winning game is, rather than put it all in, this is what's going to win and have it all get lost because I made the wrong bet. So if I were advising companies, and I don't think, with Amazon, everything is an option because Amazon has one advantage over every other company in the world. Patience is built into its DNA. You know, I've told people, look, you're competing with Amazon.

The one thing I, you know, I don't know whether Amazon will ever make money, but the one thing I can guarantee is you will never make money. It's almost a given that they will bring down the business margin's profitability by the time they're done. So the fact that you threw Amazon in the mix already makes me a little nervous

about what the end game for this business is going to look like. Because if Amazon has its say, it's going to keep margins low. It knows that you're going to lose patience and leave, and they're going to be around when this whole game plays out. Plus, they're selling toilet paper. That's exactly right. That's exactly their business. Anyway, Aswath, he's amazing. Thank you. Thanks for listening to Pivot. We'll be back next week with more episodes.