Office Hours: Market Corrections, Zoom’s Next Move, Why Location Matters, and Escaping the Big Five

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

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Scott Galloway?

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• 0:48Speaker 01

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• 1:16Scott Galloway?

  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 [email protected]. Again, that's [email protected]. First question.

• 1:34Speaker 02

  Hi Scott, Noah from Chicago here. And 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?

• 2:14Scott Galloway?

  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, or 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

• 2:57Scott Galloway?

  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

• 3:41Scott Galloway?

  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

• 4:26Scott Galloway?

  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, 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 going to 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,

• 5:10Scott Galloway?

  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 in some sectors suffer, which by the way creates opportunity for younger people that went there 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

• 5:53Scott Galloway?

  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 piece out and take these stocks way down. Now, having said that, even if they incurred

• 6:38Scott Galloway?

  a 20% correction, even if the Dow were to go down 6,000 points, it's 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 million in US startups in 2020, around 428 million each day of the year. You mentioned an increase in speculative

• 7:21Scott Galloway?

  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's at the heart, or is 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. US 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,

• 8:03Scott Galloway?

  that just might be my chemistry. And usually, when guys like me say that the markets do 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 Nuriel Rabin, 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.

• 8:48Scott Galloway?

  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 almost looked at my net worth and it literally like traces over the NASDAQ. And I'm trying to get off that NASDAQ roller coaster because it's it's thrown me up a couple of times into a Ferris wheel where it has chewed me up

• 9:32Scott Galloway?

  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.

• 9:50Speaker 03

  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 and 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?

• 10:34Scott Galloway?

  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 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

• 11:18Scott Galloway?

  more than 40% in 2021. Here's the bottom line, right? Words out that Zoom works. It's, you know, it's, 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, 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 going to, I don't think it's going to justify or support $110 billion market capitalization. So one of two things is going to happen. They're

• 12:01Scott Galloway?

  either going to start acquiring companies and offer a full suite of like collaboration tools, or go vertical, whether 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. The problem is they, 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...

• 12:47Scott Galloway?

  Bought Slack for, but there's just very few companies that can afford to acquire Zoom unless it were to give up 60% to 70% of its market cap, which it will do if it doesn't become an acquirer and start offering other horizontal or vertical services. If I were Zoom, I would have the smartest bankers in the world all sharpening their pencils and looking for acquisitions and have a 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 pick a lane. And then I think they've got to go shopping in a big way because that

• 13:26Scott Galloway?

  $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 drift 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.

• 14:05Scott Galloway?

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• 14:47Scott Galloway?

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• 15:10Scott Galloway?

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• 15:22Scott Galloway?

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• 16:29Scott Galloway?

  Welcome back. Next question.

• 16:31Speaker 04

  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?

• 17:09Scott Galloway?

  Ooh, you should have challenged me. I'm not good at this. I couldn't tell if that was Australian or South African. I think that was Australian. To 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 Glaswegian 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

• 17:49Scott Galloway?

  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 US 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 you, unless you are going to put kind of boots on the ground in the US, 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,

• 18:32Scott Galloway?

  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 of the 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 gotta 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, I'm

• 19:10Scott Galloway?

  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.

• 19:23Speaker 05

  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

• 20:08Speaker 05

  off the digital and virtual planet? Thanks so much.

• 20:12Scott Galloway?

  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, that have struggled and it's just so, so hard. And so, I don't know why, how did I end up here? This is not what you asked out.

• 20:55Scott Galloway?

  Anyways, I wish I'd, one of my bigger regrets as I get older is I wish I'd had a daughter. Anyways, so, so the combined market value for the big five companies is now more than eight trillion, according to the Wall Street Journal. That accounts for nearly a quarter of the total value of the companies in the S and P 500. It's turning into the S and P five. There are alternatives. The problem is monopolies are very good at making alternatives less robust. So in smartphones, it's basically, 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 from, unfortunately, from Google. But yeah, big tech is basically a concentration of duopolies, triopolies and monopolies.

• 21:38Scott Galloway?

  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 confident it's taking me to, 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.

• 22:23Scott Galloway?

  Encourage him and vote for people who believe in antitrust because I think the only way you're going to get viable option, 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 Gulfstream? And they say, I don't, 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 Gulfstream? And they say, I know, let's create a video

• 23:07Scott Galloway?

  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?

• 23:51Scott Galloway?

  A bunch of different search engines and maybe even a social network that doesn't prey on the self-esteem of your daughters? Lena Khan, 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 [email protected].

• 24:42Scott Galloway?

  Our producers are Caroline Shager 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.

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