The Prof G Pod with Scott Galloway - The $160 Billion Video Game Industry Explained

Episode Date: November 19, 2020

Joost van Dreunen joins Scott to give the lowdown on the video game industry. We hear about the trends, the major players, and predictions around live streaming, user-generated content, advertisers entering the space, Big Tech’s role, and Asia’s influence on the global games’ economy. Joost teaches at NYU’s Stern School of Business and his book, One Up: Creativity, Competition, and the Global Business of Video Games, is out now. Follow Joost on Twitter, @joosterizer. (18:00) Scott opens with his thoughts on Airbnb’s IPO, Disney’s earnings, and Netflix testing out a linear channel in France.  This week’s Office Hours: why Amazon gets hit with antitrust before other big retailers, the value of experiential retail, and who should fix remote learning. (46:00) Related Links:  Read: AirbnBaller Watch: Airbnb: A $100 Billion Story  Have a question for Prof G? Email a voice recording to [e-mail]. Learn more about your ad choices. Visit podcastchoices.com/adchoices

Episode 36, the atomic number of Krypton. 36 is a perfect score on the ACT. I took the SAT three times such that I could get in the 80th percentile, but I didn't have great grades either. Yet, the University of California, Los Angeles, and Berkeley let an unremarkable kid in. Why? Because we hadn't lost the fucking script back then. Higher ed is about not taking the 1% and turning them into billionaires,

but taking the other 99%, i.e. yours truly, and giving them a shot at the 1% and turning them into billionaires, but taking the other 99%, i.e. yours truly, and giving them a shot at the 1%. We need to fall back in love with the unremarkables. Let's love the unremarkables. Let's start here. Go, go, go. Welcome to the 36th episode of The Prof G Show. In today's episode, we speak with Joost van Junen.

Joost van Junen, where's my great vest here? Anyway, anyway, Joost teaches at NYU Stern School of Business. He's a colleague and is the author of One Up, Creativity Competition, and the Global Business of Video Games. He is a really interesting blue flame thinker. He's probably, I think, one of the key academics in the world right now in video games. And of course, NYU Stern, we sort of woke up and realized we had the top academic in $160 billion industry. And he was shows up and illuminates us. He gives us the 411. He drops some knowledge. Okay, what's happening? The IPO, get the hound, has been waiting for us finally inside. Airbnb dropped their S1.

They are going public, it looks like, in December. Some of the interesting things in the filing, the most interesting factoid that I found,ately 91% of all traffic to Airbnb, get this, 91% is coming through direct or unpaid channels during the nine months ended in September 30th, 2020. Nine of 10 customers are not coming through the stranglehold of Facebook and Google. Who else can say that? Can Amazon say that? I don't think so. Can any consumer brand, I don't care if you're Marriott or Chanel, can anyone claim that they are getting 90% of their traffic through non-big tech channels? Think about the customer acquisition costs, how much lower they're going to be than everybody else who has to go out and

pimp themselves and start paying rents to Google or Facebook. I thought that was the most interesting thing about this filing. They also showed a $700 million loss on two and a half billion in revenue for the first nine months of the year, despite a Q3 profitable quarter. So in contrast, DoorDash also filed to go public. DoorDash lost a shit ton of money last year, lost a lot less this year. But here's the difference. Here's the difference. Airbnb is going public despite a pandemic. DoorDash is going public because of the pandemic. And who do you want to own? Who do you want to own, assuming that the pandemic at some point ends, whether it's just it burns out because we're so fucking incompetent that at some point it runs out of hosts, or in fact that we is that they always happen. We pretend this hasn't happened before. It happens all the time. We just decided we didn't want to be prepared for it. The wonderful thing about these crises is that they always end. So

who do you want to own when this thing ends? I think you want to own Airbnb. The IPO announcement comes at a moment when we have record-breaking COVID-19 cases and hospitalizations, while at the same time, Moderna joined Pfizer in the race to produce a successful vaccine. Moderna announced that its COVID-19 vaccine proved to be 95% effective. That's exciting. And airline, hotel, and cruise stocks all like the sound of it. You saw an incredible ripback up of the beach stocks and a decline in the pandemic trade, although I personally think the pandemic trade is the way to go for the next two months because like everything that has happened in this pandemic, it's going to take longer than we would like, despite the pandemic taking a toll on revenues. I believe Airbnb has the potential to be the most valuable hospitality

firm in the world on the IPO, on the IPO, and one of the 10 strongest brands in the world. Think about this. What other brand, what other brand has 40 million people on the platform, right? So more people on the Airbnb platform that live in California, and they have 7 million listings worldwide. That's more than Marriott International, Hilton, Intercontinental Hotels, Wyndham, Hyatt combined. More impressive and singular, Airbnb is the only hospitality brand that has the global awareness to generate unrivaled demand. What do you do? You go on Google, which is an incredible font of information. And if you type in Orlando Hilton, Orlando Holiday Inn, Orlando Four Seasons, you see a fraction of the searches for Orlando Airbnb. Name the city, name the destination with a suffix Airbnb, and it dominates what people are searching for. See above 91%

of their traffic is free. Is free. Why? Because this is the strongest brand in the history of hospitality. How can I say that? Singapore Airlines, amazing brand. It's a regional brand. Delta, an incredible brand. It's regional. You don't think about Delta if you live in Rome. Four Seasons, an amazing brand that's global. Fair point, fair point, but it's not relevant to 97% of the population that can't afford to spend 800 bucks a night out of four seasons. What is the global brand with the most relevance? Hands down, hands down, Airbnb. And market valuation has a habit of footing to awareness and share. And that share and awareness, the one brand, the most valuable firm in hospitality, the most valuable, I don't care if you're an airline, I don't care if you're a hotel,

I don't care if you're a resort, the most valuable firm in that space will be the one with the biggest brand. And that brand is Airbnb. What else is the mother of all moats around Airbnb? Simple. If we had $10 million, you and me, if we had $10 million, we could start a ride hailing company in Denver. That is with 10 million bucks, we could get enough supply, that is drivers. We could get enough demand, that is people who want ride hailing by advertising on, I don't know, Google or Facebook or on billboards. And we'd have a small little Denver dog ride hailing, right? Duber, duber, dubage, which means something entirely different. Anyway, anyway, we could do it. If you wanted to start an Airbnb though, in Denver, what do you need?

You need local supply, but you need global demand because 97% of the people staying in your rented apartments are from somewhere other than Denver. So this is an enormous moat. So how do you value this thing? I think the only firms I can think of that have a global demand supply and brand equity of Airbnb and also enjoy an asset light high margin business are the credit card companies, which traded a 20 plus multiple of revenues. Airbnb projects 2021 revenues of 5 to 6 $6 billion, yielding a credit card-like valuation, if you will, of $100 and $120 to billion. Supposedly, it's going public at $30 billion, or the valuation they're going to raise between $1 and $3 billion at $30 billion. Full disclosure,

I do not own any stock, but I am going to lie, cheat, and steal to try and get some of the stock. I want to see what happens to it on day one, how much it pops. But I think this is a great buy. And other exciting business developments. Let's check in on the mouse. That's right. Disney reported their Q4 earnings last week. Parks experiences and product revenues for the quarter decreased 61% to 2.6 billion. Hello, ouch. While its direct-to-consumer and international revenues for the quarter increased 41% to $4.9 billion. Now, remember, the company faced pressure to double down on streaming after activist investor Dan Loeb, total gangster, total gangster, urged the company to cancel its $3 billion annual dividend payments and focus on its streaming service. This is really interesting. Most activists typically show up and through financial engineering say, increase the dividend, stock will pop in the short term, and then I'm out of here. Dan is saying, no, you need to command the space you occupy, double down on content, which takes capital. What's the easiest or cheapest source of that capital? Cancel the goddamn dividend. Rundle here could be unprecedented. The company announced that it would put a pause and forego its semi-annual dividend payment in January. And Disney's board members say this is due to the

ongoing impacts of COVID-19. No, it's not. No, it's not. They're testing the waters. Hey, shareholder base, are you the spineless, sackless people we think you are? Or do you see the opportunity from Disney? And by the way, what happened when they canceled the dividend or put it on pause, I should say? What happened? The stock's gone up in the last week. This gives cloud cover to a bunch of companies who have fantastic assets, but need to double down on those assets, for example, AT&T, and reinvest in the content and command the space they occupy. They claim they were pausing it because of COVID-19 and the company's decision to invest in its direct-to-consumer initiatives.

In that same earnings report, Disney revealed that its one-year-old Disney Plus had surpassed 73 million subscribers. Oh my gosh. I think that's the population of Germany, up from 61 million subscribers reported in August. Disney didn't expect to hit these numbers until 2024. The pandemic is an accelerant, not a change agent. And the bottom line is Quibi was stupid, so it went out of business faster.

Disney Plus is gangster, and it's being leapt forward. The future is being pulled forward, good and bad. The company's market cap is around a quarter of a trillion, $256 billion. We talked about this last week with Tom Rogers. Total gangster. And I'll say it again. Disney has the potential to create the ultimate rundle with all of its assets. What's interesting, could AT&T have the ultimate rundle? What's a rundle? A rundle is an IQ test.

Do you have Netflix? Yeah, I have a credit card and my IQ is over 80. Do you have Amazon Prime? Yeah, I have a credit card and my IQ is over 60, right? These aren't decisions or IQ tests. So an effective recurring revenue bundle, it's easy to say that, but it has to be an IQ test. It has to be so compelling, meaning you have to have the assets to pull it off. Disney probably does have the assets, but they need to deploy them. They need to unleash the mouse and make them all part of a recurring revenue bundle, which we've talked about here. Does AT&T, CNN, HBO, Warner,

Cartoon Network, do they? I don't know. That's a tough one. They're powerful, but are they powerful enough to make it an IQ test? Don't know. Don't know. If it's not, what do you have here with AT&T and Time Warner? You have an amazing $150 billion business, AT&T, that's regulated, that's a duopoly, AT&T and Verizon, that's flat to increasing. Okay. And then you have a $30 billion business called Time Warner that is being assaulted by tanks, overrun by tanks from Cupertino and from Seattle. Simply put, all of a sudden, media has been featurized. It's used to sell handsets and paper towels, which can be monetized at a greater multiple. So you have content players coming in and spending, I don't know,

the defense budgets of Canada and Australia on content, basically dumping content the same way the Chinese dump steel in an effort to consolidate the market. And you have Time Warner who was told, yeah, be innovative, but give me my EBITDA, sitting there thinking, all right, how do we compete against content companies that have zero cost of capital? What should they do? What should they do? They should either double down and make this literally a bundle that no one can resist, a rundle.

And I'm not even sure they can get there. A lot of that is, do they have the shareholders to put up with a serious decline in EBITDA and that kind of massive reinvestment of the dividend and amazing content across HBO, such that they could exit the advertising industrial complex where to watch amazing content from Fareed Zakaria, one of my professional role models, seriously, they get 23 cents for pelting nine or 11 minutes of ads

around opioid-induced constipation, meaning that Time Warner values my time at a buck an hour. Well, thanks Time Warner for that, but find a way to charge me, to charge me a buck an hour to watch for read, and I'll absolutely pay that. And they could go there, but they would have to go through the valley of death of getting rid of all of those affiliate and advertising fees from Pfizer and diabetes medications and the Calm app. Anyways, speaking of streaming services we like, Netflix is testing out a linear channel. That's right. You heard me, a linear channel in France. Oh my gosh. Oh my gosh. Alert the, I don't know, alert the, I'm trying to come up with something French that is not incredibly disparaging.

It's the impenetrable Maginot Line. Variety reported, that's some World War II humor. Variety reported that Netflix has around 9 million subscribers in France and is calling this test feature direct. Direct is only available to subscribers and can only be accessed via a web browser. This channel will air TV series and films that are already in Netflix's library, but in a linear format, meaning anyone watching on the direct channel will be watching the same thing. Oh my God. Mind blown. The Queen's Gambit, the little, she did not expect that. She did not see that move on the table. No, no, no. Rook seven to pawn eight. I don't know what that means, but nobody, nobody saw this

move coming. Netflix said in a statement that it's testing this feature out in France because traditional TV consumption is very popular. Many viewers like the idea of programming that avoids having to choose what to watch. I wonder if France, if they watch TV with their arms crossed and say, I don't like it. Anyway, Netflix subscriber growth slowed down a bit after seeing record numbers at the start of the pandemic and only gained 2.2 million paid subscribers between July and September of 2020. According to Forbes, that is the smallest or the most anemic quarterly increase since 2016. Despite that, Netflix gained more subscribers during the first nine months of 2020 than all of 2019.

The company currently has just under 200 million subscribers worldwide. Netflix, oh my gosh, how do you, if you're a time warner, if you're on any streaming video platform, how do you compete with people who own the rails, who own the rails, like an apple, or can throw just so much capital at the thing because their midlife crisis boss wants to take his new girlfriend to the Emmys and is willing to spend $350 million for each Emmy versus $70 million at HBO. How do you compete? And then how do you compete with a company that's going to spend $20 billion on content this year? What does that mean? It means that HBO is going to launch one new series or an original movie every week this year. But guess what? Guess what? Netflix is launching one every day. It is such a wonderful time to have a really, really wonderful couch and edibles.

Stay with us. We'll be right back for our conversation with Jos van Droonen. Support for this show comes from Constant Contact. You know what's not easy? Marketing. And when you're starting your small business, while you're so focused on the day-to-day, the personnel, and the finances, marketing is the last thing on your mind. But if customers don't know about you, the rest of it doesn't really matter. Luckily, there's Constant Contact. Constant Contact's award-winning marketing

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Go to ConstantContact.ca for your free trial. ConstantContact.ca 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. Welcome back. Here's our conversation with Joost van Droonen, a colleague at the NYU Stern School

of Business and the author of One Up Creativity Competition in the Global Business of Video Games. I first met Joost when he came to, he basically said, I'm a professor at NYU. I love the work you're doing at L2. And he's been very open. He said, I'm going to start a company that does what L2 does, but for video games. I sold L2 in 2017, and then he sold his company to Nielsen, which looked at the video gaming industry. He sold it in 2018. So he is, I don't want to call him a mini-me, because as far as I know, he sold his company

for a billion dollars. But he's a really impressive guy. And we woke up, and wouldn't you know, we have one of the great blue flame thinkers at NYU Stern around the video game industry, which, by the way, is enormous. Anyways, here's our interview. Okay, Joost, where does this podcast find you? I'm in Brooklyn, Fort Greene, in the basement. Nice. So Joost, our professor, von Drunen, teaches a very popular course on, what's the course called, Joost?

The Business of Video Games. There you go. So that's why we have Joost on. So let's start there. Give us kind of video games for dummies overview of the industry. So the games industry, in a nutshell, has transitioned from the fringes of entertainment to become a mainstream form of how people spend their time and it has done so while every other media and entertainment industry sort of collapsed on top of itself and so the nutshell the summarized version goes

something like this over the last decade the industry has really blossomed as a result of digitalization and the popularization of the smartphone. So the industry moving away from a product model to a service model has allowed it to really grow. So today it's about $160 billion worldwide in consumer spending. It's about 2.5 billion people that play games regularly, every day, every week.

Most of us will remember a time when, you know, you try to shove a cartridge into a Nintendo entertainment system or you're fiddling around with your Game Boy. So nowadays we have, you know, a new generation of Xbox Series X, the new PlayStation 5. We have cloud gaming on the horizon. And so all that kind of amounts to an industry that, as we see news and video and music kind of wrestling

and struggling with digitalization or this move to the internet, you see the games industry thrive. So it's always been an interesting topic for my class and in other conversations to figure out what makes them so different. So a couple of things jumped out. The first is 160 billion. So domestic box office, I think it's $5 or $7 billion. How big is the cable? I mean, even though we all know about video games and anyone with kids at home is exposed to video games, I feel as if the business press, relative to the size of the industry, it doesn't get nearly the oxygen it deserves.

I mean, $160 billion. What are some analogies here? That's a bigger industry than what? I think it is bigger than cable television, isn't it? On a country-level basis, it's the third largest entertainment industry in the U.S., right behind cable TV and ad-based broadcast TV. But it's definitely bigger than radio in all its formats and music, video, and so on.

Newspapers, magazines, of course. Globally, it's the same size roughly as the sports business, right? So if you add it all up, all of the different sports and varieties and flavors and all of the different sponsorships, of course, that's a business that makes a lot of its money indirectly, whereas games is pure direct consumer spent currently as it is. So it's a fascinating business in its own right. So in traditional media, you have the content guys and you have the cable or the distribution, and sometimes they're vertical.

But there's a tension and a peaceful coexistence all at war. What is the relationship like between the biggest content players, who are they, and the biggest distributors and how many of them are vertical? So there's three main components to that traditionally. So you'd have the game publishers,

big content creators to do all the marketing. They create all the confetti and glitter. Then there's the platform holders, right? So the Nintendos, the Sonys, and the Microsofts that sit in the middle, that sell the devices and create an install base against which content creators then say, I'm interested, they have enough users out there,

we're going to build something that works with their box. And then of course, there's the retailers, Best Buy, GameStop, Walmart, and so on. And so those relationships tend to all kind of, they're all in it together, right? So out of a $60 game, a publisher will get 24 bucks, a platform will get 12, and a retailer will get 12. And then the remainder is sort of carved up

between the developer and, you know, in a traditional sense, also the distributors, like the man in the van kind of firms. That has shifted dramatically because of digitalization, because now no longer are you working with GameStop. I'm sure you've been reading about GameStop and the traditional way of doing retail. It's now about Apple. It's now about Steam. And so you have these digital distributors, and they tend to be vertically integrated where me as a creative firm, I can just sign up, I can release my title, my game on their platform, but they then handle

everything for a 30% cut. And so now ostensibly I have the benefit of making 70% of everything. At the same time, I am entirely beholden to this one gatekeeper that gives me access to my customer base. So the negotiating power of the creatives has diminished to some degree, unless you're very, very large. And so that has been an interesting point of tension in the industry over the last few years. And the choke point there has been Apple because they own the rails. They're the ones that are... Are they placing... If I look at streaming video, it just strikes me. If you look across Hulu, Netflix, Disney plus Apple gets between three and 12% of their revenues by just charging that 30% first year, 20% second year,

they basically heads you win heads, you lose tails. I went and they're making money across every streaming video platform. Is it the same in the gaming industry? Yeah. So in terms of games, the App Store is 90 plus percent just video games, right? Whether that's on Google Play or whether that's on the Apple App Store. They make about $11 billion a year. The difference with traditional,

the conventional platform holders is that Apple doesn't really reinvest that money back into the ecosystem right so if microsoft and sony push out a new console which they're currently doing and it's all very interesting but so what they're doing they spend a lot of money on marketing they're subsidizing a lot of development because they want there to be great content for their platform so the people will buy the new box and that box will last them about seven years with some iterations to it, but mostly it's one solid five to seven year generation. In Apple's universe, they have that planned obsolescence. So you have a new device every year, and then Apple does not then give

people subsidies or start investing in exclusive content because they don't care about that. For the same reason that Google and Facebook and Amazon also don't. They really see it as something that's a complementary asset to their larger business of selling phones. And it helps them sell phones, obviously. Whereas, by comparison, Sony, Nintendo, Microsoft, they sell 50 to 100 million devices of their consoles. And that's about it.

Their money really comes from selling the software. And so then they are much more willing to negotiate with the creative community to say, well, what can we help you build so that we both can be successful? Whereas Apple, they're really just rent-seeking in that context. So talk about big tech. Talk about over the last five years, much less 10 years, just in the last five years, it feels as if big tech's power over the last five years much less 10 years just in the last five years it feels as if big tech's power has grown exponentially has that impacted the video gaming industry as much as it's impacted say streaming video or e-commerce the short answer is yes so you know you have to imagine that the largest u.s publisher activision activision blizzards

acquired king digital uh back in 2014 for about six billion dollars um sorry four billion dollars and so what they did was basically buy into a mobile part of the ecosystem right mobile had been the big growth segment in the industry you have conventionally you have three categories console gaming pc gaming and mobile gaming mobile gaming just went bonkers and so activation bought in they bought the biggest uh publisher at the time and they did that really just to have access to that audience and to have access to that technology and the ip and so they filled out the little pie chart of how many people they reached and what the makeup of that audience was. All of them now are suddenly in that same strategy beholden to Apple and Google, because those are really the only two platforms. And really it's Apple for most of them that makes most of the money. But the retail relationship,

which you know all too well, between a creative firm and these platform holders is very different than traditionally with conventional retailers. Right. And by which I really mean, if GameStop and Walmart, they're into, you know, selling titles, boxes at their stores, they're willing to kind of work on the margins. They're willing to promote and subsidize and give you, you know, shelf space, all this stuff. And all of that is incorporated into the strategy and the relationship and the context that they make. With an Amazon, an Apple, those companies increasingly will parse out all of these bits and features saying it's required that you have an account manager, you have to have,

you know, this much money for marketing available. So they have all these requirements and they start to charge all of those things separately as line items rather than one big agreement. And so that's very annoying for creative firms, especially big ones, because they're not used to being treated this way. So it puts them on the back foot. At the same time, they have no choice but to go through them because that's the access point to that massive audience of mobile gamers. So in other words, you have, all of a sudden you have these big time legacy publishers that are now sitting in a very different spot at the table, having to negotiate much harder

with these new retail relationships that they didn't have before. So that's a point of friction, inevitably. Last five years, who have been the biggest winners in terms of increasing stakeholder value or power or currency in the video gaming sector and who have been the biggest losers in terms of increasing stakeholder value or power or currency in the video gaming sector? And who have been the biggest losers? That's a good question.

So the biggest winners, in my mind, will always be the content creators. And so the top line IP holders that we all know and love, whether that's fantasy role-playing games, sport games, or what else have you, those tend to do really, really well. At the same time, I think it's also important to note that these legacy publishers have been totally T-bombed by these newcomers from particularly China. So companies like NetEase and particularly Tencent have been incredibly successful, right? So, and the reason for all this would be then, you know, legacy publishers, because they are used to doing things in a certain way,

like they have this sort of mental inertia about embracing new technologies. They look at it saying, well, I'm used to have my console relationships. I'm happy with my retail partners. I'm not chasing mobile down as fast as everybody else. We're just going to wait and see. But in the process, of course, they lost a lot of momentum,

allowing a lot of new companies to enter into the space. So you see this shift in power dynamics between legacy publishers in a traditional product sense, slowly accommodating the new economics, and then the real winners, of course, then being the companies like Tencent, Nexon, and some of the big firms over there. Alibaba is going hard after gaming now too. And it's purely because they were able to kind of sneak in under the radar because the legacy companies were slow to move. So while they have been very successful in raising their own share price and their market cap valuations,

at the same time, they totally left a door open for, on a global scale, a whole bunch of competitors to move in. And if you think about, so this industry, well, my kids are checking Walmart and Amazon every day and been unable to get the new PS5. There's so much excitement lately about new consoles coming out. Give us your sense of just someone in the industry of how, you know, what's coming out, what's exciting about it, and some predictions around if and how it changes the ecosystem. It's all I'm hearing about in my household right now, and I just don't understand it that well. Okay. So the biggest thing about, so you understand platform economics, right?

So and the way that that can reset an ecosystem so unlike every other category in games the console releases they dramatically change the hardware specifications or ostensibly do so every generation and so you've been hearing for a long time about oh the playstation 5 coming out the new x Xbox Series X is coming out. And it's all very excited. And it's exciting because it makes it so that now we have new capability, right? And so for a lot of traditional console audiences, this is the new thing. And so now we have 4K graphics. We can really just do things that we couldn't do before.

And so it's sort of a hardware upgrade that happens simultaneously across the entire space, both for the consumers as well as the creatives. So that's what makes it exciting, right? It's sort of the launch of a whole new category. Of course, this is relative speaking. It is a big step compared to, say, mobile. Mobile gaming goes up, but it's not really that big of a deal every iteration of a new iPhone. On the one hand. On the other hand, PC gaming, of course, is more open in terms of hardware

specs. And so a new console is sort of a mid-spec PC, you may realize. But what it does, it creates a lot of marketing momentum, a lot of creative energy. And that's where you start to see new games coming out. And so that's where the excitement lives, saying, can we build more immersive experiences? Can we have more, you know, believable characters and these in-depth narratives around all kinds of scenarios?

And so you see, for instance, Sony spending a ton of money on content acquisition, buying, you know, very specific studios to build particular IP out for them. Microsoft is doing the same. They just spent $8 billion

on ZeniMax Media. And then, of course of course you know very obviously you move into a conversation about ownership and consolidation because it's to everybody's benefits to then own all this stuff right so microsoft to make its new xbox purchasing they buy a bunch of stuff sony does the same and nintendo has been experimenting and and and rolling out a whole bunch of innovative indie content so there's all these different strategies in the market so that there's enough consoles and there's enough money being spent and to kind of grow the overall pie and it's a it's a fascinating because every time you have a new console release it sort of resets the clock we start at zero again and the question is okay last cycle in the eighth generation the playstation 4 was about a two to one ratio to the xbox one can they do it again can sony once again you know

sell two to one units to microsoft and my expectation is that they're gonna have a harder time this uh this time because it's they're not as well equipped to deal with the overall digitalization in the industry so you see see Microsoft doing really well, for instance, with subscription models, and they have Game Pass, and they're moving into the cloud very aggressively. Whereas Sony is doing a fantastic job in terms of its content rollout, but it doesn't seem as future-proof currently as its competitors. So it's a really interesting reset of the industry, whereas they've been the dominant one for years. And then because of this hardware reset, they are now open to being much more

vulnerable to everybody else. Talk about the opportunity for different types of content on these platforms. So someone has said to me, you should teach a class or do one of your decks on Twitch, or you're seeing just non-traditional content you don't think of streaming through these platforms. What should different media and content creators and IP creators be thinking about around how they leverage some of these new channels and these enormous audiences? Here's an example. There's a company called Venn, which is built by people that used to work at Blizzard and Riot Games, two of these big, well-known game companies that are very big in esports and live streaming. And I'll take a step back.

Live streaming, I mean things like Twitch or live streaming on YouTube, where people are watching other people play video games on the internet. And it's either just some jovial banter, it's some, you know, funny person with blue hair, sort of clicking away and having a good time. Or it's competitive, where it's the best players from two countries trying to win. So in that category, you then see that a lot of game companies kind of get lost, right? And so they say, well, we want to also do esports.

We also want to do live streaming. It's become an accommodation with regards to marketing right so you have to imagine like if i'm going to spend 60 bucks on the game if i want to spend my time on a game i really want to know in advance if the game is any good and so so that creates sort of a consumer uncertainty because i don't know if i want to have a good time. I'm standing at the GameStop. I'm holding the box. I guess it's a good game. And so that kind of uncertainty then, of course, makes the market less efficient. Live streaming answers all those questions. I can just watch some dude play whatever game for 20 minutes and decide whether or not I want to play this.

You know, I could play this game for free probably right and so it changes dramatically how we create awareness purchase intent user acquisition and sort of answer to answers the fundamental questions with regards to entertainment and audiences non-gaming industries and other entertainment markets you see them starting to dip their toe in it so there was a concert with little nas x the other day and there was the was the Travis Scott sort of experience where you have these music artists that are releasing their new titles, their new songs in Fortnite or in Roblox.

And they're trying to do this cross promotion, this cross pollination of different formats where they see a persistent, synchronous audience in an online space and say, you know what, we're going to just announce it and then this artist is going to come out and promote their new singing single and we're going to have a whole show around it and so in in some ways we're at the very first stages of conventional media starting to incorporate these interactive elements and these online

universe elements some people call it the metaverse right this persistent online space and so the lesson really would be to to start early in the same way that we've seen television and specifically like soap series were subsidized by you know detergent makers back in the day and so they spin an entire daytime genre, purely with their own subsidies. We're going to see the same thing in gaming inevitably, right? It might not be this year or next year, but inevitably we're going to see some of the $70 billion currently being spent on broadcast television sort of move into the game space.

And from there, it's going to dramatically change what it means to play games. And I believe in many ways that there's going to dramatically change what it means to play games. And I believe in many ways that there's going to be, and the first foray into it will be in the live streaming category. So you're considered probably, at least in academia, the bluest flame thinker around this $160 billion industry. Go out on a limb here, make some predictions that in one, three, or five years we'll have you back on the pod and we'll say, you got this one right, you got this one wrong.

Put yourself out there and say how you think this industry is going to change or what impact it might have on other industries. So the first one, so okay, so let's do them in order. So I think because of the size of the industry and the popularity of the industry, we're going to see advertising creep in as a viable revenue model. Not today, not yet at least. We see some game companies doing it,

but there is no doubt in my mind that like every other form of media and entertainment, advertisers are going to want to subsidize and get a piece of this. They just haven't really grown out of believing that games are scary or make you violent right but in fact it's facebook and social media and fox news that have you know done to our parents what they thought video games would do to us right that

never happened and so entertainment has always relied on advertisers and so we're going to see advertisers coming to the game space full force in the next three or five years it's there's no doubt and that it's everywhere from like soda brands to like big companies just owning publishers outright um the second piece would be big tech it's going to be a huge scourge uh when it comes to uh the games industry so there's going to be... Consistent with their behavior and impact across the rest of the world. So I'm surprising you, I know.

It's just going to be... They're not going to be a source of good. They're not going to be a positive influence. No. Yos, come on. You heard it here first. But it's the economics, right? And so they're flooding so much money into the ecosystem

that it creates all these false expectations. And you see it now. Look, I love the teams at Amazon and Google because these are people that come from the games industry still. They sort of just hired a bunch of people away. And they're smart, intelligent people. But just the DNA tells you which direction they're headed and it just means we're going to see a whole lot this is going to be this buffet of

mediocrity uh when it comes to like their cloud gaming services i've been play testing both of them and it's just really boring you know like this does not get me excited at all and it's all predicated on this idea it's like well we're really good at tech and content well who cares right who gives a and so for all those reasons i think big tech is going to have sort of it's going to push back some of the evolution and innovation industry a few years because they're going to build up these expectations that they're that no one's going to actually deliver on yeah that's not one and it's going to be of course like you know there's this this whole thing between japan china really becoming this

massive you know gravity point in the in the world so it used to really be that north america was the big deal that's where the economics make the most sense then the japanese of course nintendo sony they would export a whole bunch of their content and their consoles over um digitalization is a for the china and all these other like south k Korea, all these other countries, India is probably next to really become big. And, you know, they're harboring as the protagonist there, like the Tencent and the Nexons, they are going to do really well. They're going to buy everything and they have been buying everything and they're going to eat the world, right? And so you see this huge shift already in terms of where those companies make their money, right? So historically, Asia makes most of its money outside of Asia.

No longer the case. It's all inside of Asia now, and they only focus on their own markets. Maybe with some neighboring geographies. Over time, that's only going to shift. And you're going to start to see that the US is going to be a second or third tier market in a global games economy, which will be interesting, because there's a lot of trade agreements being written and there's a lot of sort of political stuff that you can put against it. So creatively, what does that mean for content? What will that look like? And then live streaming will be probably bigger than gaming itself. So right now it's sort of a

subcategory where people use it for marketing and they hang out and they watch AOC kind of have a cool time for an afternoon that's going to be the category that's that's that's bigger than actual playing games and in that universe as I look at it you have watching you have playing and then you have of course like the the money that you commit to it so watching gaming is is going to be a massive uh I guess, fourth prediction. So Twitch is really sort of well positioned there. YouTube would do really well. But all of them are kind of owned already, so it's kind of boring.

Which brings me to, I guess, the fifth sort of big driver. And the IPO for a company like Roblox, which is coming up, is sort of the vignette with regards to user-generated content. Inherent to the instinct to play, sort of part and parcel to it, is the idea that you want to take ownership of it, right? Your kids, I'm sure, as they play all these games, they spend a lot of time sort of tweaking what their character wears, what funny dances it can do, how they are perceived by others in a digital environment.

So you extend that same logic of how are perceived by others in a digital environment. So you extend that same logic of how do we present ourselves in a digital environment and say, well, I want to build stuff. I want to take ownership of this. In Minecraft, my seven-year-old figured out how to set up a land-based gameplay with his upstairs neighbor, and they're building stuff together. And that's the big thing to do. It's not actually beating a boss or passing a level they're building stuff and so you know something like a roblox where you enable players not just to play the game but play with the game that's going to be a huge category which it's all very early for a lot of people especially in conventional entertainment it's coming in the same way that you've seen fan art for star wars and and star Trek over the years too. People want to not just consume it. They want to, you know, it's much more mimetic.

So they want to become it. Jos van Druna teaches at NYU Stern School of Business and is the author of One Up, Creativity Competition and the Global Business of Video Games. He's also a startup advisor and investor and previously was the co-founder and CEO of Super Data Research, which was acquired by Nielsen in 2018. He joins us from his home in New York. Joost, stay safe. We'll be right back. 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 higher education, and whatever else is on your mind. If you'd like to submit a question, please email a voice recording to officehours at section4.com.

First question. Hey, Scott Galloway, John from Boston. You often talk about the need for antitrust action against big tech like Amazon. As you know, the EU and FTC here in the US are investigating Amazon's online marketplace, specifically how Amazon uses third-party sellers' data to sell its own goods or create private label competitive products to sell on its site. I see the benefit to Amazon, but how is this any different from what Walmart, Target, Kroger, Costco, Best Buy, and other dominant retailers have done for over 20 years? Like Amazon, retailers emphasize private label brands because they carry a higher gross margin and drive customer loyalty.

So please explain why what Amazon is doing is any different. Thanks. John from Boston, that's a thoughtful question. And the short answer is they're not doing anything different. They're just doing it so well that it's basically sucking the oxygen out of the room for all the other players. So I advise Levi Strauss and Company in the 90s. And one of the kind of my big pushes, if you will, at Levi Strauss and Company was they need to establish direct channels, specifically start selling on the internet.

And JCPenney's threatened to pull all, to basically boot Levi's out of the JCPenney's channel if they dared to go direct with their own stores or selling them on their website, despite the fact that JCPenney's launched their own Arizona brand, which was a billion-dollar brand, and they put it up front, better lit, better promotions, whatever you want to call it. So you're absolutely right. Retailers have been going vertical and launching their own private label brands for a long time. But typically, typically there's an ecosystem where the key brand creates halo for the private label brand. So yeah, they're not doing anything differently. They're just doing it at such a scale and they're doing it with such insight into data that there really isn't a partnership here. And

that is they essentially create this avatar of a consumer and they watch every move this consumer makes and they see what is it about those batteries that they like, what kind of batteries. And at the moment they figured out, the moment they figured out we can get more margin from our own products, we kick those guys off or we just keep increasing, even worse, we keep increasing their rents. You got to spend more on Amazon Media Group. You got to spend more for us to fulfill it for you. You got to spend more for us to unpack, package, pick and pack, and return, or handle your returns, such that you get to a point where you are so used to the volume you might be getting through Amazon, but it becomes unprofitable. You start to do a deal with the

devil, and you begin this inexorable downward spiral as Amazon sees everything you and your consumers are doing, and you're right. They're just better at it. So I think this is so unhealthy, if you will, that we need to return to a Brandeisian form of antitrust where, congratulations, you're so good at what you do that you are making it difficult for small firms to get out of the crib and you're prematurely euthanizing big firms. You've become so dominant because you own the rails. Just as Facebook and Google, I get very angry at them for polarizing society by putting people into the far left or the far right. That's nothing that CNN or Fox aren't doing.

They have been polarizing our nation and ripping at the fabric of America for a long time. And they figured out it's absolutely the best way to build a news business. News used to be a public service, and the broadcast stations lost money on it, but they felt it was important. And then in came CNN and Fox and found, well, if we anger people with news, we can make a lot more money. And then Twitter and Facebook took their business models and used data and processing power to scale it. So look, what we have is a dumpster fire in private label at Costco and Walmart.

What we have on Amazon, what we have at Facebook and Google is a nuclear mushroom cloud. But yeah, conceptually speaking, I acknowledge the point. They're doing the same thing. It's just that Facebook, Google, and Amazon are doing it at such a scale that it's creating markets that are much less robust,

much less competitive. Thank you so much for the thoughtful question, John from Beantown. Is that what they call it? Beantown? Beantown? Anyway, it's Boston. Thanks, John. Next question. Hello, Prof G. It's Oscar calling from Australia. Love your work. Keep the badassery coming. You called Apple going into bricks and mortar retail the most gangster move in the last 20 years. You've described Disney's parks like Galaxy's Edge as assets that bring immeasurable value to their hypothetical rundle. You've long praised brands for effectively deploying analog moats around their digital castles, but I'd love to hear your perspective on experience as part of the broader marketing mix, particularly where digital and physical worlds meet.

Are successes like Audi City in London, Nike Rise in China, or Sonos and Google's New York show outliers, or do they point a way forward for brands? Thanks, Scott. I think that this pop-up, what you call experiential retail, is incredibly valuable in the short run. I think of it as like marketing. I don't think of it as a business channel. What you've seen, though, is when you go into a Sephora, when you go into a Nike town, when you go into what Samsung should be, and that's the opportunity around Samsung, you see retail that is increasingly more experiential. Consumers don't go to stores for products. They go for people or for an experience. They're going to Best Buy for a person who is knowledgeable about PS5, although the goddamn thing is sold out.

Thanks very much. They're going for experiences. These big burst experiences, this pop-up experiential retail is really interesting. It has to do with duration. So this pop-up, if you will, experiential retail, which has taken a big hit in COVID, which was like the Frozen Mansion or the Museum of Ice Cream, what they figured out is scarcity. And then as I see a Ben and Jerry's, and I know it's a 10-year lease, I know I can get ice cream the next weekend. Whereas I see the Museum of Ice Cream is in Miami for just 90 days or 16 weeks. They always extend it. And I end up spending $72 per person, no joke, so my kids can have pistachio ice cream, supposedly explore their imagination by jumping into a pool of plastic balls. Why do I go? Why do I do this? Why do I have ice cream and have them jump into a ball pit for $72? Because of scarcity, it's going away. So to a certain extent, this experiential

retail is not only about the experience, it's about the finite nature of it. I remember going to an HBO pop-up at South by Southwest and there were lines around the block. And while I thought it was wonderful, I think the thing that made it special was it was only going to be there for five days. So yeah, this is part of a marketing budget. They're not self-sustaining. The future of retail is something so special or so efficient. And that is, it's a small ghost kitchen, a small Chipotle that's only a thousand square feet, a small 2000 square foot Panera that has pickup, has delivery, has click and collect, whatever you want to call it. And it becomes just remarkably efficient or a distribution hub as much as a retail center. Or it's a place that just surprises you and delights you, a Nike town or a Sephora.

And if you want to spend, there'll be some marketing allocation around experiential high impact, if you will, pop-up retail. Thanks for the call. Last question. Hey, Scott. Marshall Berman, Livingston, New Jersey. Love the show. With the majority of students in K-12 taking some form of online education, which of the four big tech players, Amazon, Apple, Google, Microsoft, do you think are going to take the lead and end up having the best online education platform for the future? Marshall from New Jersey, thanks for the thoughtful question. This is a really important question. And I would argue, just thinking about this today, I was on MSNBC this morning with Stephanie Ruhl, who I love, who I love talking about

stimulus and PPP. And I think we've just gotten this so wrong. $750 billion of small business, a third of them, the money probably got to the right place and there's some cupcake bakery or small business that needed a bridge. I think for most of them, it's done one of two things. It's either been a peer and that is the business, we've just kicked the can their own road. The economy is reshaping, and that business isn't going to survive. We hear so many sob stories about local restaurants going out of business. We're changing the way we consume food. A lot of restaurants should go out

of business. And by the way, they say, well, 10 million people are employed by restaurants. Yeah. Okay. Get the money to those 10 million people, not to the restaurants, and then let the 10 million people decide what restaurants should stay in business. Anyway, I was on MSNBC and we were talking about the PPP and it just struck me that we've got it all wrong. That $750 billion shouldn't have gone to the wealthiest cohort in the world and that of small business owners. That $750 billion should have gone to schools. Why? Because small business having to reshape or go out of business is really meaningful. It's terrible, but that's capitalism. What's profoundly tragic is the fact that 50% of low-income kids have all of a sudden vastly underperformed, fallen off the map in terms of math as it relates to middle-income kids. Typically, typically, lower-income kids in public schools track with upper-income kids around math. But as we've gone to remote learning, because lower-income kids may not have an iPad, or maybe they're worried about their iPad getting stolen, or maybe they don't have broadband, or maybe mom

has to go to work and can't sit home with them and help them do online learning. We are losing a generation of young people. And beyond how just like morally fucked up that is, it's just stupid for us economically. We're going to lose a generation of doctors. We're going to lose a generation of fantastic leaders in public service and for our armed services. We're going to lose, we're going to be less likely to find vaccinations in the future. We are letting a generation. The real impact of this pandemic, I think, is going to be felt softly and insidiously with a lost generation of kids. So I think your question is really important.

And I don't think we can hope that big tech shows up with all their innovation and better angels, of which there are almost none, and solve that problem. I think it has to be solved by government. I think they absolutely should be bailing out K-12 schools. In terms of the individuals, Apple has a great brand in education. Google threatened to do something noble with their certificate program. By the way, Sundar Pichai personally told me about it on Pivot. I'm hoping it's not a head fake and that they weren't playing with my emotions because I haven't heard much about it because I will go gangster on their asses. Not that they think about me every day. I just don't think they think about me at all, which makes sense.

But anyways, I really hope that Google is taking this certification seriously that they promised. But yeah, could big tech come together? Wouldn't it be wonderful if these guys took a fraction of their cashflow and adopted schools and regions and said, we have got to figure out a way to make sure there isn't a lost generation of kids. A 19-year-old trapped at home who can't return for a sophomore year at Tulane is a nuisance. A nine-year-old trapped at home who can't get back to public school, that is a tragedy. That is the collapse of a high school. So I'm not answering your question. I use it as an opportunity to do a bunch of virtue signaling and riff here, but I don't see Amazon, Apple, Google, or Microsoft stepping up to the plate, and I'm not sure they should.

We have a tendency to hope that innovators are going to show up and save us. They're not. They're going to show up and do amazing things and make a shit ton of money for them and their shareholders. We need the greatest force of good in history to show up and ensure that we don't lose a generation. And that source of good, that source of prosperity, that source of progress and education, that's Uncle Sam. Our producers are Caroline Shagrin and Drew drew burrows if you like what you heard please follow download and subscribe thank you for listening we'll catch you next week with another episode of the prop g Where Should We Begin, which delves into the multiple layers of relationships, mostly romantic.

But in this special series, I focus on our relationships with our colleagues, business partners and managers. Listen in as I talk to co-workers facing their own challenges with one another and get the real work done. Tune into Housework, a special series from Where Should We Begin? Sponsored by Klaviyo.