The Prof G Pod with Scott Galloway - Office Hours: Market Corrections, Zoom’s Next Move, Why Location Matters, and Escaping the Big Five

Episode Date: June 28, 2021

Scott answers a question about the next economic slowdown, which he thinks is imminent. He also shares his thoughts on what Zoom needs to do to maintain its valuation in a post-pandemic world, why it���s still important to be based near your customers, and what to do if you want to escape the clutches of the Big Five tech companies. 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 Prop G Show'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 officehoursatprofgmedia.com. First question. Hi, Scott. Noah from Chicago here. Like many people, I'm wondering about what feels like an upcoming market correction. Vast amounts of capital flooding the economy, fundamentally overvalued assets, explosive housing prices, and increased speculative investments recall the market environments precipitating past corrections and recessions. However, as was the case during

nearly all past booms, the justification of this time is different feels compelling. Namely, that there is not a specific leverage-driven asset bubble dominating recent market growth. Aside from inflation risk, what am I missing as a potential trigger for the next acute economic slowdown? Noah from Chicago, a thoughtful question. And Noah is responding to, I think, what I said on my other podcast with my co-host Kara Swisher that I predicted in the last six months we were going to see a correction in the market. Noah, I would argue that there's probably more smart people who actually have domain expertise, economists, or maybe they have a lack of domain expertise, depending on your viewpoint, that side with you, that there's more positives that will kind of

overwhelm the negatives and keep this good time going. My skepticism comes from a lot of different places or my belief that we're due for a correction and maybe even a severe correction. One, I'm angry and depressed and tend to see things as half full, not half empty. And by the way, I get a lot of predictions about the market wrong and stocks. I get a lot of them wrong, especially when I say stocks are overvalued, then they shoot up 40 or 50%. By the way, sell Tesla is what I said when it was at 50 bucks a share. Anyway, so why do I think that? Every five years, on average, every five years since the beginning of the Dow, the market gives up about or draws down about 20%, correct, 20% or more. That hasn't happened in 12 years now. Just statistically, I think we're due. You said except for inflation. Well, you don't need more than inflation. Inflation is

running at about 3% this year. And what I see is that I own some rental properties. I can't get over how much you can raise rents right now. Not to say we're going to do that. Every time I go into a grocery store, every time I order oat milk, every time I order my new on tennis shoes, or I just can't get over the inflation at the gas pump, rentals. What did we decide to do at NYU post-pandemic? I know, let's raise tuition again. So it just strikes me everywhere you look. And people will say, but Amazon is deflationary. Actually, I think that's a myth. Amazon levies these incredible taxes on their third-party retailers. If you want to be anywhere on Amazon, meaning do you want to be anywhere in e-commerce, you have to be on Amazon. And if you want to be successful on Amazon, you have to be

part of their search algorithm, and you optimize for their search algorithm by basically spending a ton of money on Amazon through their media group using their fulfillment. That means another 25% to 45% of your margin goes to Amazon, increasing the price you have to charge on Amazon. And then the only way you continue to get listed in their search returns, and what is the second largest search engine in the world, and that's Amazon, is you have to guarantee, and they will enforce this, that you will not sell your products for less anywhere else, even if you find a platform that doesn't charge you those useless fees and you could charge less,

what I think is inflationary. I think we're gonna find that Amazon is not as deflationary as everybody thinks. Anyways, I see prices going up everywhere. Interest rates go up. Fixed income will be more attractive. As a percentage of GDP, we have never seen the value of stocks

represent this much since, you guessed it, 1999. We've never seen this level of inflation in a low interest rate environment until, you guessed it, on the precipice of other crashes. In addition, we've been bailing out everything. And I find when you bail out companies, all you're doing is instead of having controlled burns and letting some businesses and some sectors suffer, which, by the way, creates opportunity for younger people that went their shot at opening up their own restaurant and sifting through the carnage and getting space for 50 cents on the dollar and buying that used stove, cooking stove for 50 cents on the dollar or getting people for less, whatever it might be. The only way you create disruption or opportunity is occasionally if you let the winds of disruption gale. So all you do when you have this massive bailout is you create more brush, more dry brush and more accelerants such that when the fire is ignited, whether it's through low interest rates or we forget about an exogenous event, some sort of

terrorist attack, a natural disaster. And then people, the markets, I think, are looking for an excuse to take Apple down to 25 times earnings, which, by the way, would be a historical high for Apple if it weren't for the fact it's trading at 38 times earnings right now. Some of the shit out there, the Palantirs, the Virgin Galactics, the DoorDash, Jesus Christ, the valuations here make no sense. And I think at some point, the market's going to look for an excuse to peace out and take these stocks way down. Now, having said that, even if they incurred a 20% correction, even if the Dow were to go down 6,000 points, it still, historically speaking, wouldn't be in a bad place. Keep in mind,

just 13 years ago, we were at 5,000, so we'd only be up 4x in the last 13 years. I'm just very skeptical that the market can maintain sort of what I'll call steroid, non-organic pumping that the Fed and that CNBC are engaged in. We've seen a crazy amount of capital entering the economy. Despite the pandemic, according to TechCrunch, investors poured a record $156 billion in U.S. startups in 2020, around $428 million each day of the year. You mentioned an increase in speculative investments. Bloomberg reported venture capital funds have put $17 billion into companies that operate in the cryptocurrency space so far this year. I wouldn't be surprised if crypto is at the heart, whereas the spark of kind of a correction, which is my way of saying

a crash, that's the most in any single year and almost equal to the total amount raised in all previous years combined. Think about that. One year versus everything to date. U.S. home prices were up a little more than 13% in March from the same time a year ago, up 13% despite record low interest rates. What the fuck, Noah? What the fuck? We are in uncharted waters here. I think, I don't know. I feel nervous.

Then again, that just might be my chemistry. And usually when guys like me say that the market's due for a crash, we're right, but you got another 40 or 60% of gains over the next 24 months. You know you're right when you're predicting a correction. It's eventually going to happen. But are you like my colleague, Nouriel Roubini, who's basically been predicting crashes every six months for the last 20 years? It's that old adage that economists have predicted 55 of the last six recessions. Anyways, I'm just skeptical. Now, what does that mean? What does that mean? I am delevering. I am putting more money into private companies, not because they're a better value, but because I don't enjoy the indigestion of watching stocks marked every day. I get opportunities to invest privately. And also, I am de-risking. I'm trying to diversify. I'm at a point in my life where I finally have some financial security, but I don't have another 40 years to make it back if I lose it. So I'm trying to diversify into different asset classes, although that is difficult because everything

seems somewhat correlated. But I'm de-risking. I'm not buying stocks on margin. I'm trying to diversify away from tech because I am so over-invested in tech, whether it's my podcast, whether it's my company, Section 4, my ed tech startup, whether it's the fact I own a shit ton of Airbnb and lemonade, I'm just too tied to the fortunes of the NASDAQ. I once looked at my net worth and it literally traces over the NASDAQ. And I'm trying to get off that NASDAQ rollercoaster because it's thrown me up a couple of times into a Ferris wheel where it has chewed me up into a million little pieces and everyone around me starts throwing up, including myself, my dead, chopped up self. Oh, my God. What a metaphor. Reminds me of Six Flags Magic Mountain where I would go and have the best time and immediately go home and throw up.

Thank you for the question. Next question. Hi, Scott. Anil from Ottawa, Canada here. I love the show, both on Mondays and Thursdays. My question for you today is about Zoom video. What do they do next? Is it a major acquisition or merger, something like buying Logitech and owning the end-to-end work-from-home stack? Is it building some kind of sophisticated AI platform that actually helps the human beings who use their product to become better communicators? Or maybe it's getting into chats and messages and taking on Microsoft Teams and Slack more directly. How does Zoom video move from becoming the pandemic darling

into the hybrid darling? Neil from Ottawa, thanks for the kind words. So no doubt about it, Zoom's growth in the pandemic was just exceptional. NPR reported that Zoom had 300 million users per day by April of 2020. Think about that. Population of US using Zoom every day, 30 times the amount just four months earlier. Think about that. How's your business? Well, it's up 30-fold since COVID-19. According to the BBC, Zoom's profits increased from about 22 million in 2019 to 671 million in 2020. Wow. There you go. Well done, everybody. Cheers to you. Zoom sales in the last three months of 2020 were up 370% compared to the same period of 2019. The company expects sales to keep growing more than 40% in 2021. Here's the bottom line, right? Words out that Zoom works. There's no

doubt about it. They've been a beneficiary here. They have about $110 billion market capitalization. So Zoom is either going to have to go vertical or horizontal. They're either going to have to acquire a telco, go vertical and go into equipment, figure out a way to get some sort of other communications device or decide that they're about work collaboration and find a bunch of kind of Slack-like or Teams-like competitors or apps they can roll up. Being a pure play video conferencing platform is not gonna, I don't think it's gonna justify or support $110 billion market capitalization. So one of two things is gonna happen.

They're either going to start acquiring companies and offer a full suite of like collaboration tools or go vertical, would it be horizontal, into Telco itself and say, we're connecting people with all your video and voice communication and texting needs. I mean, if they bought something, what is the kind of the distant second to, say, a WhatsApp and got into messaging?

Otherwise, they're going to throw up in terms of the stock price, and it'll be cut to just a mere $40 or $50 million. But the problem is they're really not an acquisition target, because if it's trading at $110 billion market cap, you have to pay $140 or $150 to pay them out, to take them out. That is, I mean, keep in mind, WhatsApp was purchased for, I think, $19 billion, and everyone thought that was crazy. I don't know what Salesforce bought Slack for,

but there's just very few companies that can afford to acquire Zoom unless it were to give up 60% vision for kind of a full stack, connecting people, communications, work collaboration. It's interesting. It's really a fork in the road. Are they work collaboration or are they communications? So they've got to pick a lane. And then I think they've got to go shopping in a big way because that $110 billion valuation is just extraordinary, extraordinary. So they either do that, they either start making acquisitions and show that they're more than just this kind of COVID-driven video conferencing tool and go into work collaboration or into communications or telco, or their stock will drip down to the point at some point someone will come in and acquire them. Anil from Ottawa. Anil from Ottawa. Anil, I love that name. Anil from Ottawa,

Canada. Thanks for the question. We'll be right back. The Capital Ideas Podcast now features a series hosted by Capital Group CEO, Mike Gitlin. Through the words and experiences of investment professionals, you'll discover what differentiates their investment approach, what learnings have shifted their career trajectories, and how do they find their next great idea? Invest 30 minutes in an episode today. Subscribe wherever you get your podcasts. Published by Capital Client Group, Inc.

What software do you use at work? The answer to that question is probably more complicated than you want it to be. The average U.S. company deploys more than 100 apps, and ideas about the work we do can be radically changed by the tools we use to do it. So what is enterprise software anyway? What is productivity software? How will AI affect both? And how are these tools changing the way we use our computers to make stuff, communicate, and plan for the future? In this three-part special series, Decoder is surveying the IT landscape presented by AWS. Check it out wherever you get your podcasts.

Welcome back. Next question. Hi, Prof G. Love your show. My name's Ruth and I'm based in the Bay Area, San Francisco. I'm not going to tell you where I'm from originally because I know you like guessing the accent. My question is about SaaS businesses and particularly those companies coming from other markets and wanting to land and expand in the United States. In the past, we've said that it's really important to be physically located, say, near your customers. But my question to you is, has COVID changed that? Do you as a business need to be physically located in the United States to be successful here? Ooh, you issued a challenge to me. I'm not good at this. I couldn't tell if that was Australian or South African. I think that was Australian. It'd be actually, I don't think it's South Africa.

I think it's Australia, but you live somewhere else for a little while. Anyway, there's a part of my brain, I used to be fantastic at doing accents, and that part of my brain has just died. I used to be able to do my father unconscious. And a Scottish accent, oh my gosh, hello. Hello, ladies. They love it when the dog brings a little glass Ouija twang into the repertoire.

But now I just sound like I'm having an epileptic seizure or a stroke or something when I try and do accents. That's weird, that part of my brain has died. Along with the sympathy part or the confidence part or the mentally stable part of my brain, that's also died. Anyway, Ruth from San Francisco, I do think that relationships are a function of proximity.

And if you're trying to break into the U.S. market, whether it's having lunch with PR people or reporters or pressing the flesh with potential investors or employees, it is very hard to build a business of any size without having a physical presence, Zoom or not. So I would say that unless you are going to put kind of boots on the ground in the U.S., it's never going to be a big business for you. And also just being here, absorbing the culture makes you more empathetic or understanding or in touch with the marketplace here and just makes you better at the product. Going to conferences, we all can't wait to get back. First time in my life, I'm looking forward

to going to conferences. By the way, when I walk around conferences, inevitably one or person is like, Prop G, and they come up and they high five me and it makes me feel really nice and it makes me feel really important. I love it. Anyway, Ruth from San Francisco, you have clearly moved from the Southern Hemisphere. I'll go there. I know you're from the Southern Hemisphere. I know you're from the Southern Hemisphere, but you got to be here. And obviously they're smart enough to figure it out. Anyways, Ruth, let me know if you wouldn't mind where you're from and email me and let me know what business you're working for. I'm just sort of captivated by the Ruth from the Southern Hemisphere. That's right, Ruth. That's right. Email the dog. Thanks for the question. Question number four.

Hi, Prof G. Big fan of the show. This is Val from Colorado. I wanted to ask, is it possible to remove myself from the big five companies and still have access to good technology? Maybe you'll say these companies are too big and too pervasive in society to get away from them. This all started with me canceling Amazon Prime after getting more and more pissed off at Bezos as a person and Amazon's takeover of the world. I also switched from Google to Neva after hearing your episode with its co-founder. I have the cheaper $400 Apple iPhone SE and I will use it until it dies. But then what? Are there comparable smartphones out there not made by these companies? What do you think? Are there

viable alternatives to supporting these companies without dropping completely off the digital and virtual planet? Thanks so much. Val from Colorado. So I hope if I had daughters, I hope they grow up to be thoughtful, compelling people such as yourself. It's clear you are a thoughtful, intelligent, articulate person. I don't know what made me think of that. I regret, I have two sons, and I regret not having a third and hoping that it was a daughter. I was so glad to have two kids and be done. And I just felt very fortunate that both my sons are healthy. And I'm naturally a pessimist. And I thought, oh my gosh, if we have a third, who knows what it'll be like. And I have some friends who have children, as a lot of families do, $8 trillion, according to The Wall Street Journal.

That accounts for nearly a quarter of the total value of the companies in the S&P 500. It's turning into the S&P 500. There are alternatives. The problem is monopolies are very good at making alternatives less robust. So in smartphones, it's basically with Android, you get a free phone that molests your privacy, pulls 1,200 data points a day. iOS, more elegant, but costs a lot. There's Samsung. There's a great phone, unfortunately, from Google. But yeah, big tech is basically a concentration of duopolies, triopolies, and monopolies.

There are options. I appreciate you mentioning Neva. It took me a while to get used to Neva. It's amazing how hardwired your brain can become to a type of user interface. But after using Neva for about two weeks in the beta, I have found it's actually a better search engine, which is rewarding, that takes you to the best place for your query, not necessarily. If you really think, if you really notice Google searches or Google queries or Google returns, a lot of times it's how do we take you somewhere else that someone is paying more money for? And I find Neva is a little, I don't know, pure. I'm just more times it's how do we take you somewhere else that someone is paying more money for? And I find Neva is a little, I don't know, pure.

I'm just more confident it's taking me to the right place. Yeah, but I think it's a challenge. I think what you can do, Val, is vote for people in Colorado and senators, Senator Michael Bennett, your senior senator now. Encourage him and vote for people who believe in antitrust. Because I think the only way you're going to get viable, I don't think DuckDuckGo is a viable option. I've used it, I just don't think it's very good. And I think very few of these companies have the technology and the heft to compete and access to the cheap capital. So if you want more options, we got to create them through antitrust. And that is we got to spin YouTube. If Google was

forced to spin YouTube at the first offsite of YouTube management, they'd say, hey, how do we get our own golf streams? And I say, I don't know. I know. Let's start text-based search. And before you know it, there'd be another competitor to Google. And then Google on their first offsite after YouTube had spun and become an independent company, they're like, well, how do we get our second golf stream? And they say, I know, let's create a video search engine. And overnight you'd have two really robust search engines and then a subscription search engine started by the way, by the lead engineers from Google and YouTube, Neva.

So you'd have three instead of what was, we had six months ago, effectively one, and you'd have two video search platforms. So instead of coordinating with each other, they would be competing. So in other words, how do we get to more choice instead of presenting you with like a bunch of shitty choices outside of the monopolies and the duopolies?

It's through antitrust. It's a very thoughtful question, Val. I am working hard to give you more choices. We are all over those people. You know who's going to give you more choices? You know who's going to get you a better phone, a bunch of different search engines, and maybe even a social network that doesn't prey on the self-esteem of your daughters? Lena Kahn, a London-based, a Pakistani descent, Yale academic,

who is 32 fucking years old and is a total gangster, total gangster. And whether Bezos knows it or not, she is sitting next to him on that fucking dildo he calls a rocket as he explores the deep space nine of his midlife crisis. She is coming for his bitch steroid ass. Don't know how I got here. Don't know how I got here. Anyways, thanks for the question, Val. 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. Our producers are Caroline Chagrin and Drew Burrows. Claire Miller is our assistant producer. If you like what you heard, please follow, download, and subscribe.

Thank you for listening to The Prof G Show from the Vox Media Podcast Network. We will catch you on Thursday. Hey, it's Scott Galloway, and on our podcast, Pivot, we are bringing you a special series about the basics of artificial intelligence. We're answering all your questions. What should you use it for? What tools are right for you? And what privacy issues should you ultimately watch out for? And to help us out, we are joined by Kylie Robeson, the senior AI reporter for The Verge, to give you a primer on how to integrate AI into your life. So tune into AI Basics, How and When to Use AI, a special series

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