The Prof G Pod with Scott Galloway - Office Hours: Crisis Management 101, Ad-Supported Streaming Tiers, and Achieving Economic Security

Episode Date: January 18, 2023

Scott answers a question regarding Southwest Airlines’ epic failure over the holidays and explains the three things a company should consider when dealing with a crisis. He also answers a question about Hulu and the other streamers offering ad tiers, and wraps by offering advice on deciding when you’ve reached economic security.  Music: https://www.davidcuttermusic.com / @dcuttermusic Learn more about your ad choices. Visit podcastchoices.com/adchoices

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NMLS 1617539. Welcome to the PropG Pod's Office Hours. This is the part of the show where we answer your questions about business, big tech, entrepreneurship, and whatever else is on your mind. If you'd like to submit a question, please email a voice recording to officehours at propgmedia.com. Again, that's officehourspropgmedia.com. Again, that's officehoursatpropgmedia.com. I have not seen or heard these questions. By the way, it is my favorite thing about any podcast I'm on. I love Office Hours. Anyways, first question. Hello, Scott. This is Mike from Denver. As one of the thousands of travelers left stranded over the holiday season, thanks to Southwest's operational meltdown, I was wondering, when a company has an operational failure that leads to a loss of at least half a billion in revenue, if not more, how do you recover? And also, what role does the board need to be playing in this? Always appreciate your thoughts.

Thanks. Mike from Denver. Thanks for the thoughtful question. Let me start with the easy one. The board's role is to decide if they have the right guy or gal in charge. Essentially, a board does two things. They hire and fire the CEO, and they decide if and when to sell the company. Now, there's some other stuff.

Ideally, you want to enter into a situation where the CEO sees you as a resource. I think one of my many flaws as a board member, I've been on public company boards since I was about 34, is that I thought I was there to heckle and advise and instruct and send emails to the CEO. And what you realize is an effective board member is someone who has expertise and is supportive of the CEO until you decide not to be and fire the person. But until that point, you want to be supportive and you want to be invested in their success. And hopefully, you develop a strong enough relationship and they appreciate your domain expertise such that they call you and ask for advice. Which takes me to the next thing, and that is the Southwest Airlines debacle is about crisis management. And there are moments of truth where you have an opportunity to

turn chicken shit into chicken salad. And the case study that everyone talks about in business school is Tylenol. And it was this tragic thing where some madman put cyanide pills in Tylenol. Some people died after they took some Tylenol. And essentially, Tylenol or Johnson & Johnson decided to, rather than get defensive and say, this is an isolated incident, which they could have said in Napier, Illinois, or whenever it was, they cleaned the shelves or they cleared the shelves of every Tylenol bottle within like 48 hours across America, which was extraordinarily expensive, huge hit to earnings. But it restored so much faith in the brand that they actually came out of that crisis stronger. And this is a crisis. There are

only three things you need to remember in a crisis. One, you need to acknowledge the issue. It's very easy to get defensive and make excuses. No, acknowledge the issue. We fucked up. We ruined people's holidays. This is unacceptable. Unacceptable. We made a mistake. There are no excuses here. This should not have happened. That's first thing. Acknowledge the issue. Two, it's got to be the top guy or gal that needs to be communicating the apology or the issue and outlining the strategy and what they're going to do about it. One of the reasons that Exxon got in so much trouble with the Valdez debacle was the CEO couldn't be found. And they had some PR flack

talking about what they were going to do. And like, okay, where's the actual CEO? So the top guy or gal has to be the person leading the charge here and communicating. And then finally, and finally, and this is the key, you have to over-correct. You have to over-correct because that communicates how seriously you take the issue. The same thing is true in your own personal life. Crisis or when something goes wrong, it's actually an opportunity. It's an opportunity to say, we screwed up. It's not going to happen again. And this is what we're doing about it. And you have the chance to make the relationship stronger. How many times have you been in a relationship and there's an argument or something goes wrong and you both handle it

well and you come out battle tested. The muscle is damaged. And what does a damaged muscle do well that's not diseased? What does a damaged muscle do after it's strained? As long as there's not an underlying disease of resentment or character flaws, it grows back stronger. And so will your relationship with your consumer or key people in your life when you follow those three easy steps. Acknowledge the issue, top guy or gal takes responsibility, and overcorrect. Thanks for the question, Mike. Next question. Hello, Scott and team. Love the show. Love the work. I've heard a few extremely bright people say that Hulu has had some sort of special sauce in their streaming lens that has sort of set them apart.

Also, I hear a lot of negative points of view thrown at the multitude of streaming services now starting to lean more into an ad tier, an ad-supported tier. Is it possible that that in itself is Hulu's special sauce? Is it just that simple? And even though it doesn't seem intuitive that that's what we, the customer, would want, Hulu has proved that it is. And if so, what does that say

for Netflix, Disney, and others? Ed, thanks for the question. I love the streaming market. I think it's exceptionally interesting and I love television. I think television is the great art form of our age. And if you don't partake in edibles and have a really nice couch and watch a shit ton of TV, you are denying what is, or you're ignoring what is the great art form of our age. That's where the money is. That's where it is all gone. It used to be that the best and brightest or the most incredible

actors ended up on the big screen. Now they don't. They end up in the small screen, specifically in The Mandalorian or in Euphoria or I don't know. What's something else I'm watching? I watch White Lotus too. Started slow, started slow. By the way, that show is literally a masterclass in labor law violations. Maybe it's because I'm a CEO of a company much times, but everybody here is just waiting to be sued by their employees for harassment or what have you. But anyways, can you imagine? I'm a ton of fun to watch a streaming video program with. Anyways, it's staggering. Let's talk about Hulu. I don't's staggering. Let's talk about Hulu.

I don't think there's anything differentiated about Hulu. If I were to pick a platform that will be absorbed into another platform or combined, it's Hulu. The Handmaid's Tale was kind of their, I think their biggest hit. So they went season seven, eight, and nine and tried to figure out new horrible things to do to the Gilmore Girl. It's gone way beyond the original book. Hulu doesn't really have a center of gravity. If you think about Disney, Disney's family, right? If you think about Netflix, it's we've got the most money and are going to have the most programming. Amazon is a different type of tonnage. It's like Walmart, but they really don't have a hit or I'd call a center of gravity. Now, as it relates to advertising, I think this is a big

mistake. Hulu ad-supported tier is $7.99. About 57% of Hulu subscribers use the ad-supported plan, so they've kind of soaked up the people who say, I'll pay a little bit, but I don't want to pay the full monty here, and I'll endure ads. The 2021 ad revenue was $2 billion. Total Hulu subs is about $47 million. Netflix, however, just launched an ad-supported tier in November of last year, so just, what, about two months ago, at $6.99. And get this, 0.2% of U.S. Netflix subscribers were on the ad-supported tier after its first month. What does that mean? It means it's not working, folks. It means they're likely going to cancel it, or that's what my prediction would be. In sum, I think the key to Netflix and the exciting thing about HBO is that it is uninterrupted storytelling. My favorite,

maybe my favorite program of all time is Six Feet Under. It really made me feel something. I'm fascinated with the finite nature of life. It kind of informs my atheism. And Six Feet Under did an amazing job of probing that theme every show. It was about a mortuary and the different people would come through or it would talk about people's lives right before they died. Anyway, it came on to Bravo or something. I thought, oh, great, I'll watch it. And then when I tried to get through a single episode of Six Feet Under interrupted by this bullshit telling me I had opioid-induced constipation or that I needed a light beer or I wanted to drive a South Korean car, it just literally ruined it. So uninterrupted storytelling makes that story better. And you immediately degrade the quality.

And so the revenue basically takes you off your center of gravity, and that is uninterrupted storytelling. So I just think there's limited instances where this is going to work, and I think it directly attacks at the brand of Netflix. I think the whole point of Netflix and the whole point of HBO is it's not working. It seems like it's sort of working for Hulu. I think Hulu gets absorbed. For Netflix and HBO, I don't think it's working. So anyways, thank you for the thoughtful question. And as I said, the key to being happy, relationships, working out, forgiving yourself, but also, also close forth, more television and edibles. You heard it here. We have a quick break before our final question. Stay with us. Welcome back. Question number three. Hi, Scott. My name is Mary. I'm in my mid-30s and live in Boston, Massachusetts with my husband and two young kids. Both me and my husband are working really hard to balance our careers and family priorities. I'm leading an engineering team at a big tech company, and my husband is a pharmacist. You've mentioned a couple times the importance of prioritizing building financial security for your family, which really resonates with me.

For most families, years of building this security overlap with early years of their kids, which leads to hard parental choices and personal sacrifices. This difficult trade-off is something my family deals with. My question is, when and how did you decide that media security is in place for your families so that you can slow down on building it and reallocate more time and resources to your family, friends, and yourself? What framework were you using or was there a specific financial goal or target that you used for yourself?

Thank you. Mary, that's a really thoughtful question, and it's something I think a lot about, and I think it's something a lot of people think about. And we're not supposed to talk about money because rich people create this, I don't know, this mythology or this bullshit zeitgeist that people aren't supposed to talk about money. We live in a capitalist society. You either chose to live here or you just do live here through no fault of your own. And Bob Dylan said, money doesn't talk, it swears. And I find that if you don't have money, it swears at you.

And that is you're constantly reminded of how hard it is in America if you don't have money. So it sounds to me like you are making the requisite trade-offs. You can have it all. You just can't have it all at once. And the reason why I have a lot of balance now is I made huge sacrifices. And so did my partner. My partner was working at Goldman Sachs, getting up at 5.30 with two babies at home.

And I was starting a business. I would go to work at, you know, 8. Actually, that's probably not true, probably 8.30. I'm not a morning person. And I would work till 7, come home for half an hour for bath time, and then jet back to work and work till 11. I'm not exaggerating. I'd work all day Saturday. And then Sunday, I would go in just to make sure that, you know, rally or provide emotional support for the people who are working all day on Sunday, because I think that's what you got to do in a startup. So, it sounds like you have a great job.

It sounds like your husband has a great job. And just to be clear, it comes at a huge cost. And my working through my 20s and 30s cost me my first marriage and my hair, and it was worth it. And I have a lot of security now and a lot of flexibility, and I'm not as stressed. And you're at a point in your life, it sounds like you have fantastic credentials. It sounds like you're hardworking. It sounds like you have a nice partnership. So if you feel guilty, I think that's understandable. But your question around when do you know when you can start turning back the throttle and start spending some more time. I always wanted to be in a position where I knew that if I got laid off or had no income for a couple of years, I'd be fine. And I wanted to make enough money. The key is saving money and then putting that money into an investment such that you can

be rich. Now, what does it mean to be rich? Being rich, the definition of rich is that your passive income is greater than your burn. So I have a close friend who runs a large division at an iconic bulge bracket investment bank, oversees, I don't know, 700 people, makes $5 to $8 million a year, depending upon the year. Between his ex-wife, his master of the universe lifestyle, his NetJets fractional aircraft ownership, his alimony, his child support, I'm pretty sure he spends almost all of it. And I can tell you that he

spends nights staring at the ceiling thinking, if the music stops here, I am fucked. And then there's my father, who between Social Security and his pension from the Royal Navy, makes $58,000 a year, and he spends $42,000. My dad is the cheapest man in history. And he's rich. He's still saving at the age of 92. So when do you know when to slow down? When one of you has the kind of career that's producing enough income and you've established enough savings that between that person, that one person's income, and between the growth and wealth, if you will, and the dividends and the passive income or the rental rates or the rents you get on rental properties, or you see you have enough stocks that if they're growing at,

say, 4% to 8% a year, that you are well beyond covering your nut. And that often takes into your 40s and 50s, and sometimes you never get there. At some point, I think when the kids kind of get into what I call 7, 8, 9, you got to figure out a way for both of you to spend more time with the family. You got to figure it out. I would argue 0 to 5. There's a lot of research that says those are formative important years. I quite frankly, I don't buy it, especially for the man. I think we play almost no role in the child's development 0 to 2. A lot of people would argue with me and say that's not true. I don't know. I don't think those were the years for me to be involved. I'm very involved now as my 15-year-old is going through puberty and discovering himself and discovering the world.

I spend a lot of time with them and that luxury, and it's amazing, is a function of the sacrifice you're making now. So when do you know economically when to slow down? When you're at a point where the trajectory of hopefully one of you really gets out ahead, or and or you have enough money that your passive income is headed towards something greater than your burn. And the other thing here is an arbitrage. You live in a very high cost city. Is there an opportunity to do a lifestyle arbitrage? 12 years ago, I was living in Manhattan with two young boys and I was making a really good living. I was making probably two or $300,000 a year as an academic, maybe a little bit more. And my partner was making a couple, half a million dollars a year in current income. And we were broke. We were broke living

in Manhattan on a half a million dollars a year. And okay, cry me a river of Symphony of the Tiniest Violins in the world. But I'm like, I don't want to make a half a million dollars to feel broke all the time. Working my ass off and I feel broke. So we moved to Florida where our lifestyle expenses were kind of cut by 30 or 40%. And we got a 13% reduction in taxes. And we were able to do that because my partner was at a point where they were going to leave Goldman Sachs and do their own thing. I had a job where I would just commute to New York. I would commute Sunday night to Thursday, which was quite frankly tough on me from a lifestyle standpoint. But we were able to take

that money, call it another 100 grand a year in lifestyle and tax savings, and invest it. And we did. We did. What you don't want to do is do a lifestyle arbitrage and take that money and use it for additional consumption. That's where it takes real discipline. Most people will always raise their standard of living to how much current income they're making. And the key to wealth is being a bit of a stoic and having the discipline to take real money. We took that 100,000 plus a year and we put it into rental properties and stocks. As you get older, the benefits of a city become one-dimensional.

And that is, it's all about professional opportunity. So if you have professional opportunity in a lower cost domain, you're not gonna be able to take advantage of the wonderful things of a city when you have kids when they get older, because what happens is you're not going out, you're not social,

you're not taking advantage of the amazing bars and parties and cool things or mating opportunities in New York. Because what you're about, what you're about is your kids. And so you just want to be in a nice area with good schools and a nice social setting and basically becomes all about the kids. Anyways, I would consider a lifestyle arbitrage because it sounds like both of your jobs are portable. It's a great question.

There's no one path. You have to decide the right path for you, but there's just some basics. Forgive yourself. Acknowledge everything's a trade-off. You're making the right trade-off. Work your ass off. Get money.

Save. Live below your lifestyle. And then start to ramp back and spend more time with your family as you believe the trajectory of your income and your investments create passive income or an income trajectory that's greater than your burn. Thanks so much for the question, Mary, and good luck to you and yours. That's all for this episode. Again, if you'd like to submit a question, please email a voice recording to officehours at propgmedia.com. Thank you. What software do you use at work? The answer to that question is probably more complicated than you want it to be.

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