The New York University professor Scott Galloway is deeply critical of companies that used profits during the bull market for stock buybacks, describing bailouts of such firms as “capitalism on the way up and socialism on the way down.”
He told Insider’s Sara Silverstein that every large government program was designed to maintain the wealth of baby boomers at the expense of younger generations.
Galloway predicts that Amazon will be the fastest-growing healthcare company in the world by 2025. It’s no accident, he says, that the company is investing a lot of money in better COVID-19 testing.
Galloway says the second-most-disruptable industry, after healthcare, is education. He expects the top institutions to see a dip and come back stronger but says many second-tier universities may never reopen.
The professor recommends taking a gap year if you are supposed to start your undergraduate or business-school program this fall. He expects it to be “a terrible year for the end consumer, as we, as academics try to maintain this hallucination that we can continue to charge what we’re charging for a totally substandard experience via Zoom.”
Galloway, who has started nine companies, says there hasn’t been a worse time to own a small business than right now in the past 10 or 15 years. The entrepreneur also says, however, that in about six to 12 months there will not have been a better time to start a small business in the past decade or so.
Asked about the future of the media business, Galloway said sometimes it’s darkest before it’s pitch black, adding, “It’s about to become pitch black in the world of ad-supported media.”
Scott Galloway is a marketing professor at the New York University Stern School of Business and the author of “The Four: The Hidden DNA of Amazon, Apple, Facebook, and Google” and “The Algebra of Happiness: Notes on the Pursuit of Success, Love, and Meaning.”
His new weekly show, “No Mercy, No Malice with Professor Scott Galloway,” will premiere on Vice TV on May 7 at 10 p.m. ET.
Following is a transcript of the video.
Sara Silverstein: Professor Galloway, you’ve been talking a lot about how we have capitalism on the way up, and socialism on the way down. Can you explain that thesis, and what do we do about it?
Scott Galloway: Good to be with you, Sara. Yeah, so effectively, when we have an 11-year bull market, we have rugged individualism and privatized most of the gains. And then once we hit obviously an exogenous shock, and this is a formidable shock, you have CEOs who have taken 96% of their free cash flow to buy back stock when times were good, inflating their own compensation, claiming that we’re all in this together.
And when you have capitalism on the way up and socialism on the way down, that’s cronyism. And if we’re going to have socialism, then let’s have universal pre-K and universal healthcare. But if we’re going to have capitalism when times are good, we need to have capitalism when times are bad. And quite frankly, I think a lot of these businesses need to fail. And I think the approach we should be taking is that I think we should be protecting people, not companies.
Silverstein: And will we see a change in some of the ways that we pay frontline workers, such as grocery-store clerks or things like that at the end of all of this?
Galloway: Yeah, I hope so. It’s a little bit … I mean, there’s a lot going on here. At 8 p.m. every night, we lean out our windows, and we applaud our frontline healthcare workers, and that is warranted and a wonderful thing, or at 7 p.m.
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But at 8 p.m. or 6 p.m., we don’t lean out and honor our frontline essential workers, the people putting your food in the back of your seat, or delivering your groceries, or working in a meat-processing plant to ensure that the supply chain is safe for food. And I think it’s this ongoing, what I’ll call quite frankly, this implicit war against the poor. And that is, the downside to believing you live in a meritocracy is that billionaires deserve it. And the downside or the ugly part of that is that if someone is bagging groceries at 8 or 9 bucks an hour, that it’s their fault, that they don’t deserve to make a living wage.
And there’s a wonderful opening line in the book “The Little Prince,” that, “What is essential is invisible to the eye.” And ideally coming out of this, we’re seeing that some of our essential workers shouldn’t be invisible, and they should be making more money. What I would like to see is that I do think that it makes sense for some people, just as healthcare workers to put themselves, in a limited amount of harm’s way, but they should do it out of greed, not fear.
And that is, when I was coming out of college, I contemplated joining the Navy because I could make a good living and putting yourself in harm’s way when the compensation, or the rewards, the trade-off there is worth it. So we’d like to see our frontline workers, and our essential workers, go to the warehouses, quite frankly, out of greed as opposed to fear. And I think there needs to be legislation, minimum wage. There’s all kinds of things we can do. But yeah, hopefully, we’ll come out of this with a greater appreciation for our frontline workers, instead of just calling them essential, and then treating them, and paying them really poorly.
Silverstein: And in reality on the other side of this, will we have more leveling, or will we have more inequality do you think?
Galloway: That’s a great question because I would argue the COVID-19, more than a real change agent, is just an accelerant of trends already in place. And what we see is, I mean quite frankly, the wealthy who are invested in the stock market appear to be just fine. If you own big tech, you’re up this year. Your stocks are actually up on the year.
And most of the bailouts I would argue aren’t really an attempt to protect people, or the people most vulnerable. And there’s some big ugly questions here. How can we be the wealthiest nation in the world and effectively 50% of our population is so vulnerable? They can’t go 30 days without a paycheck. But I would argue that these bailouts are really nothing but an attempt to flatten the curve of wealthy people, that if you look at the wealthiest cohort in America, they largely are small-business owners.
And while there’s this cartoon of a single mother who owns a cupcake bakery, who just needs some money to get to the other side, and there are some of those people, I think we’re going to find out that the majority of the $600 billion PPP package went to, quite frankly, ended up in the pockets of wealthy investors, and wealthy business owners.
And as is always the case, every large government program appears to be pulling prosperity forward from our children and grandchildren who don’t vote, to our ultimate goal as a society, and that is maintaining the wealth of baby boomers. We have lost the script. It’s OK for businesses to go out of business. We should be protecting people, not businesses. And if young people get a chance to buy real estate in Brooklyn for 500 bucks a foot, instead of a 1,000, if they get to buy Amazon at 30 times earnings, instead of 50, that’s not the worst thing in the world. Everything we do, Sara, is nothing but an attempt to maintain the wealth of baby boomers.
Silverstein: Wow, and looking at the accelerating of change in different industries, let’s start with healthcare. What change was on the forefront there that we’re accelerating through coronavirus?
Galloway: Well, if you think about it, the big tech guys that have a trillion dollars in market cap, take for example, Amazon, I think it’s about a $1.1 or $1.2 trillion market cap. They have to have a story or a narrative for doubling their stock price in the next five years; otherwise, investors will just buy Salesforce or Netflix. Which means they’re going to need to add somewhere between $100 and $150 billion a year in top-line revenue. And when you have to make those sorts of staggering incremental gains in top-line revenue, it limits you to the number of industries you can actually go after. And these have to be enormous industries that are ideally ripe for disruption. And that creates a fairly small list. So the automobile industry is a huge industry, but it’s a low-margin, difficult business. They’re probably not going to go into that.
You can zero in on a few industries, and first and foremost, the largest industry in the world that is probably the most disruptable industry is measured by the fact that it’s raised prices faster than inflation is healthcare in the United States. So it’s no accident that Amazon is announcing that they’re investing a great deal of money in building a more robust COVID-19 testing kit. You can see that just as we can get in certain areas from Amazon now your lunch in 48 minutes, I wouldn’t be surprised if Amazon starts offering more robust testing than the government, which, by the way, the US government is another huge opportunity with big revenues, as is defense. You’re going to see these companies going to education, a $10 trillion industry by 2030 that quite frankly is being disrupted as we realize that a bunch of Zoom classes for $68,000 a year is not sustainable in my business.
So I think you’re going to see Amazon and Apple going to healthcare. I think Amazon has the key resource to make a dent in healthcare, and that is they have investors who are willing to live with breakeven economics, which Apple investors are not willing to live with. So my prediction is by 2025, Amazon is the fastest-growing healthcare company in the world.
Silverstein: And tell us about education. What do you think is going to change? How’s it going to shake out?
Galloway: So, the other industry that is probably the second-most disruptable: We in academia have lost the script and see ourselves now as luxury brands as opposed to public servants. And rather than expanding freshman seats, the number of applications to Stanford has tripled in the last 30 years. The number of freshman seats has stayed the same, and every fall a head of admissions stands up, or a dean, and with pride boasts that, “We turned away 90% of our applicants,” which in my view is tantamount to the person running a homeless shelter, bragging that we turned away 90% of our applicants last night.
How many of us brag that we would never get into the university we went to if we applied today? And that’s a bad thing — that means likely your kid isn’t going to USC or UCLA, your kid is going to Pepperdine or a lesser prestigious school for the same price. And there’s been a cartel that is mostly based off a construct of a duopoly in every city, USC-UCLA, Stanford-Berkeley, NYU-Columbia, and then if you don’t get into those schools because they turn away the majority of their applicants, you go to a school just below that, but you pay the same amount.
And we’ve all raised our prices in lockstep and preyed on the hopes and dreams of the middle class to charge what is the most ridiculous high-margin, expensive product that translates to debt on young people, which results in having a hamstrung economy where young people don’t buy houses, they don’t start businesses, because they are literally crushed with student debt.
But here’s the thing, the jig is up. People are recognizing that a bunch of Zoom classes without the campus experience is not worth $18,000, much less $58,000 or $68,000. So what we’re going to see, unfortunately, is we’re going to see a strengthening of the already strong. I believe that MIT in 10 years will welcome 30,000 students, not 3,000 in their freshman class, and they’ll do it with technology. They’ll likely partner with big tech who will build very robust programs. These are the strongest brands in the world.
People say Apple is the strongest brand in the world. Nobody donates a $100 million to Apple to have their name on the side of a building on the Apple campus. The strongest brands in the world are academic, or university institutions. And the top 20 or 50 will have a dip. They will come back stronger. And who gets crushed here is the two-tier universities that may not survive.
So I believe that NYU is probably not going to open in fall, as it would normally, because of the threat of a relapse. But you’re going to see a lot of universities, whether it’s a university like Drexel, or Pace, or even a Fordham, I think schools like that may never reopen. We’re about to see the disruption in education we’ve been predicting for decades.
Silverstein: Wow, and in the retail space, I’m sure that it seems like a lot of those will also not reopen after this. Who is most at risk? How much retail do we expect to see curbed during this period?
Galloway: Yeah, so I’ve been presenting to a lot of different boards and investors about retail, and this is an example of where it’s an accelerant, not really a change agent. And it doesn’t sound that dramatic, but essentially department stores who were in the bottom of the seventh inning of their life are now in the bottom of the ninth, especially retail apparel. I think we saw J. Crew file today. We’re going to see Ann Taylor, and we’ll see some surprises.
There is a chance, Sara, and I know you’re not as old as I am, but we could see the unthinkable: The Gap could go out of business. We could see the Gap go away, or go into bankruptcy, so specialty retail apparel, department stores.
There is a bright side of that — we’re about to see online grocery go from 2% of grocery to 10%, so that’s literally a transition of about $60 to $100 billion in commerce go from terrestrial to online, which will create a series of opportunities for logistics and services companies to help deliver your groceries, whether it’s cold storage, whether it’s automated, or robotics, and warehouses, whether it’s Prologis, the REIT that does logistics. But the REITs that own real estate, they had primarily serviced or hosted as tenants, those big large-format grocery stores, those will be challenged. But the retail is going to be, I would argue dramatically, reshaped.
That’s not to say that everyone will lose. Sephora, Restoration Hardware, truly outstanding experiential specialty retail will actually thrive, because after the culling, the fewer elephants have more foliage to fight over. But the two biggest winners here, I mean the two biggest winners who could have never imagined this scenario was, say Donald Trump said: “I own Amazon and Walmart stock, and I want those stocks to double. What could I do? I know, I know, I’ll put massive stimulus in the hands of every consumer, and Amazon and Walmart will garner a greater share of that stimulus than any other organizations in the world. And just to ensure their stocks double, I’m going to close down, I’m going to have the mandatory closure of 98% of their competition.” I mean literally Amazon and Walmart shareholders couldn’t have thought this up in their wildest dreams.
Silverstein: And what does commercial real estate look like then? What happens to all the retail space in the future?
Galloway: Well, so people are saying what happens to a company like Simon or Brookfield, and my feeling is that if your primary value-add [inaudible] a mall with department stores, or retail in general as a means of value out of that real estate, you’re in trouble.
But at the same time, I think that the rumors of the death of places like Simon are greatly exaggerated, only because that asset class there is the ground those businesses sit on, and that if you look at Simon, or some of the other high-end mall companies, they own some of the best real estate in America. And whether it’s converted to mixed-use residential, because you can imagine people are going to think about spending more time, if it’s going to be converted to some sort of mixed-use, it makes it easier to commute to work for the A, B sessions. I think those companies will be fine. I think you need to evaluate commercial real estate in the context of the value of the underlying real estate.
Now offices, I mean, who knows what’s going to happen there as we rethink? I mean, both of us are working from home, and it’s a substandard experience, but it’ll get a little bit better, and it’ll start to eat into our willingness to pay 60 bucks a square foot to commute into midtown, or wherever Business Insider’s office … or actually, I’ve been to your offices. I’ve got to imagine that Business Insider is going to need less office space next year, regardless of the vaccine or not. So commercial real estate, the question is not what happens? The question is how ugly is it going to get?
Silverstein: And a lot of these things are accelerating change that you talk about, but restaurants, it seems like a lot of restaurants maybe owned by maybe independent, and that they’re going out of business, or might be during this period. Is that an acceleration or is that something that’s going to come back? What are you look at the restaurant industry?
Galloway: It depends. I mean, this has so many second-order effects. So, you and I live in New York, and part of the charm of New York, or living downtown, is density. The magic of Manhattan is its density, which has all of a sudden become a negative in a post-corona world. And some of our favorite restaurants are a function of density, where you go into a small space, and you have people literally almost elbow to elbow. Those restaurants are really going to struggle. And we saw, there was a fantastic article by the woman who owned a great restaurant in the East Village called Prune, talking about how the market has basically just moved away from her. I think you’re going to see just the complexion of restaurants move away.
We had slowly over the last 30 years transitioned from Americans spending more money on restaurants than they were spending on groceries. That is about to revert back, and people are going to spend more money on grocery than on eating out.
Because one of the wonderful things about eating out was, quite frankly, was the density, being in a hip place that creates … I mean, I don’t know if you’ve ever been to Cafe Select or Jack’s Wife Freda downtown. I don’t know if it’s the same experience when we’re all in small groups, 6 feet from one another, and I don’t know if the economics make sense any longer.
Now does it reemerge with ghost kitchens? Does delivery have new oxygen? I don’t know. But you’ve got to think that small businesses, especially restaurants, are going to be hit pretty hard through this. We’re going to have a reshaping of almost all hospitality based on distancing.
Silverstein: And a lot of people are rethinking their careers right now. You started a lot of businesses. Is now a good time to start a business?
Galloway: So I would argue it’s a terrible time to have a small business right now because we’re having a shock and demand is strikingly down. And if I were in charge of the stimulus, I would be putting money in the hands of consumers’ pockets, not businesses’ pockets. Because what small businesses need now is not to be told to hold on to employees. They should be, in my opinion, laying off employees. But we need to create more demand. We need to put more money in the hands of middle- and lower-income consumers who spend it all. It’s a terrible time. There’s never probably … there hasn’t been a worst time to own a small business in the last 10, 15 years.
In about six to 12 months, there will not have been a better time to start a small business in the last 10 or 12 years, because starting a business in the depths of a recession is a great time to start a business. Good people are less expensive. Real estate is less expensive. Your resources, your raw materials, all the things you need to do to build a new business are a lot less expensive. And in addition, when you come out of a recession, companies are much more willing to try new things. You have the wind at your back.
I’ve started nine businesses. Generously, I’m three, two, and four [win, lose, push]. And if I look at the data around what has distinguished the winners from the losers, the only thing I can determine is which part of the economic cycle I started the business in. And when I started a business in 2010 coming out of a recession, when I started a business in 1992 coming out of a recession, those businesses succeeded. When I started businesses in a boom time, in 1999 or in 2006, those businesses almost always failed.
The DNA imprint of a company that you put around low cost, being scrappy — not wallpapering over your idea with consensual hallucination that it’s working because you have access to cheap capital — in 12 to 24 months, this will be the best time to be an entrepreneur. Right now, it’s tough. There’s just no getting around.
Silverstein: And what do you think WeWork will look like, or will they be able to make it through this period?
Galloway: Oh no, WeWork is already dead. I mean, the brand will live on, because it’s a global brand, but it’ll be a series of bankruptcies based on how it’s structured. Masayoshi Son made a ridiculous offer overvaluing the company to bail out existing investors, benchmarking Adam Neumann to save face. He’s been given face-saving cover with the novel coronavirus. They have walked from the deal. WeWork is a zombie. It’s the walking dead.
Now whether whoever ends up buying the brand, because there’s value there, of the 500 locations, probably 100 to 200 on a unit economic basis makes sense. But WeWork as we know it, as are probably somewhere between a quarter and a half of SoftBank’s portfolio, including some of their other real-estate investments, whether it’s Oyo, or Opendoor, or Compass are kind of the walking dead right now.
But WeWork is a spectacle, but it’s not historic. It’s going to go away. The brand will survive, but all the equity will be wiped out. And them walking away from this signed deal is really unprecedented. We usually don’t see that, so that’ll be interesting to see how that plays out in the courts. But WeWork makes for great Netflix documentaries, but it’s basically over, and it’s in the rearview mirror.
Silverstein: And one of our viewers wants to know if they were supposed to start an MBA in 2020, should they postpone it until 2021?
Galloway: I probably would. I’m getting a lot of these calls from parents and from existing students, if you’re halfway through your graduate program, the primary value add of education is not education. It’s certification. So if you’re halfway already to your certification, just tough it out, and get the degree, and get on with your life. But if you’re contemplating showing up for fall as an undergrad, or thinking about an MBA, I think this is a wonderful time to take a gap year, because we as academics need a year to figure this out. Marginal costs accounting for professor in person is marginal. On Zoom, he or she is just awful. And the unfortunate truth around academia right now is because of tenure, the teaching, and the experience hasn’t kept pace with the price increases, and that has been laid bare and naked by these Zoom calls.
So if you’re showing up, I think this is a wonderful time to consider a gap year. I think, and this is a terrible … this is what is going to create the absolute implosion in education, which I think will be good. I think a lot of students, and a lot of parents are going to rethink the value proposition and decide to defer, take a gap year.
I think a gap year is a wonderful idea for 18-year-olds. There’s a lot of evidence showing that if your kid takes a gap year, he or she is more likely to graduate when they come back with better grades. They need a little bit more seasoning, a little bit more maturity. So I think a gap year in deferring. 2021 is going to be what I would call a disruptive but a terrible year for the end consumer, as we as academics try to maintain this hallucination that we can continue to charge what we’re charging for a totally substandard experience via Zoom. So yeah, I would say next year is a good year to do something else.
Silverstein: And for people who are struggling right now, who want to figure out — do you have any advice for people in how to make the most, or find opportunity during this period for their careers?
Galloway: Yeah, so we’re going to need a bigger boat. I mean, a lot of that is situational, and I would argue that this is a fantastic time to really reevaluate if there’s an opportunity to pivot into something you want to do, or where the puck may be headed.
I think for example, if you think about sectors, just purely economic growth, having the wind at your back, I think education and medicine are going to be extraordinary businesses over the next 10 years, because what we’re experiencing is what I would call the great dispersion. And that is, if you think about COVID-19, somewhere between 90% and 99% of the people who we’ll find have antibodies had COVID-19, contracted it, endured it, and then moved on, or survived from it without ever having entered a doctor’s office, or even a hospital. So we’re finding that we can, in fact, distribute healthcare and education away from the physical space of hospitals, doctor’s offices, and university campuses.
That creates so much opportunity in terms of delivery systems, whether it’s online education, or whether it’s telemedicine. But I think figuring out a way to get in the midst of what will be the largest transition of revenues from one channel, a campus, or a hospital, doctors-based business, which is literally multitrillions of dollars go through those channels, to digital. I’d want to be right in front of that switch. So I think those are two fantastic sectors.
I think it’s a great opportunity to do some online learning. I think it’s a good opportunity to think about potentially your own business in six or 12 months, but it’s situational. A lot of it comes down to resources. Someone with rich parents, who’s willing to say, “Just go to university and hang out,” that person’s in an entirely different opportunity set than a single mother, who has to make a living and put her… it’s situational.
I would argue that this is ideally an opportunity, in some ways, if you, in fact, can pay your mortgage, if you, in fact, are healthy, to rethink how you want to position yourself for the next several years. I don’t think we’re doing any favors when you keep people’s jobs in companies that won’t be economically viable post-corona. I think what we need to do is do what Germany or Canada does, and that is protect people, give them unemployment, extended unemployment, and give them the opportunity to reevaluate the landscape, and where they want to be. So, I would say it’s a fantastic opportunity for reflection around what it is you want to do, and where you think the puck is headed, so to speak.
Silverstein: And before I let you go, Scott, can you give me an idea of what your outlook is for the media industry?
Galloway: Sure. So look, it’s just accelerating everything. The little guys are getting crushed. I mean, I predicted that Quibi was dead on arrival. I think it is dead on arrival. I think ad-supported linear television, as I’m about to premiere on Vice, so do as I say, not as I do. Your ad-supported media is going to continue to struggle. We’ll probably have the two largest radio companies go Chapter 12, and that is they’ll go Chapter 11 again.
The only ad-supported media that’s going to gain share, it’s going to be Facebook and Google. They’re going to go from 62 cents on the dollar of every digital dollar spent to 72 cents, and we’re going to see more chaos in the media sector. So quite frankly, sometimes it’s darkest before it’s pitch black. It’s about to become pitch black in the world of ad-supported media. I am not here with a message of hope.
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