Office Hours: Crisis Management 101, Ad-Supported Streaming Tiers, and Achieving Economic Security

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

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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• 1:26Scott Galloway?

  Welcome to the Prop G Pod's Office Hours. This is the part of the show where we answer your questions about business, big tech, entrepreneurship, and whatever else is on your mind. If you'd like to submit a question, please email a voice recording to [email protected]. Again, that's [email protected]. I have not seen or heard these questions. By the way, it is my favorite thing about any podcast I'm on. I love, I love Office Hours. Anyways, first question. Hello, Scott. This is Mike from Denver.

• 1:56Speaker 02

  As one of the thousands of travelers left stranded over the holiday season, thanks to Southwest's operational meltdown, I was wondering, when a company has an operational failure that leads to a loss of at least half a billion in revenue, if not more, how do you recover? And also, what role does the board need to be playing in this? Always appreciate your thoughts. Thanks.

• 2:23Scott Galloway?

  Mike from Denver, thanks for the thoughtful question. Let me start with the easy one. The board's role is to decide if they have the right guy or gal in charge. Essentially, a board does two things. They hire and fire the CEO and they decide if and when to sell the company. Now, there's some other stuff. Ideally, you want to enter a situation where the CEO sees you as a resource. I think one of my many flaws as a board member, I've been on public company board since I was about 34, is that I thought I was there to heckle and advise and instruct and send emails to the CEO. And what you realize is that an effective board member is someone who has expertise and is supportive of the CEO until you decide not to be and fire the person. But until that point, you want to be supportive and you want to be invested in their success. And hopefully, you develop a strong enough relationship

• 3:08Scott Galloway?

  and they appreciate your domain expertise such that they call you and ask for advice. Which takes me to the next thing, and that is, the Southwest Airlines debacle is about crisis management. And there are moments of truth where you have an opportunity to turn chicken shit into chicken salad. And the case study that everyone talks about in business school is Tylenol. And it was this tragic thing where some madman put cyanide pills in Tylenol. Some people died after they took some Tylenol. And essentially, Tylenol or Johnson & Johnson decided to, rather than get defensive and say, this is an isolated incident, which they could have said, in Napier, Illinois, or whenever it was, they cleaned the shelves or they cleared the shelves of every Tylenol bottle within like 48 hours across America, which was extraordinarily expensive,

• 3:52Scott Galloway?

  huge hit to earnings. But it restored so much faith in the brand that they actually came out of that crisis stronger. And this is a crisis. There are only three things you need to remember in a crisis. One, you need to acknowledge the issue. It's very easy to get defensive and make excuses. No, acknowledge the issue. We fucked up. We ruined people's holidays. This is unacceptable. Unacceptable. We made a mistake. There are no excuses here. This should not have happened. That's first thing, acknowledge the issue. Two, It's got to be the top guy or gal that needs to be communicating the apology or the issue and outlining the strategy and what they're going to do about it.

• 4:34Scott Galloway?

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

• 5:18Scott Galloway?

  wrong and you both handle it well and you come out battle-tested? The muscle is damaged and what does a damaged muscle do well that's not diseased? What does a damaged muscle do after it's strained? As long as there's not underlying disease of resentment or character flaws, it grows back stronger and so will your relationship with your consumer or key people in your life when you follow those three easy steps. Acknowledge the issue, top guy or gal takes responsibility and over-corrects. Thanks for the question, Mike. Next question.

• 5:49Speaker 03

  Hello, Scott and team. Love the show, love the work. I've heard a few extremely bright people say that Hulu has had some sort of special sauce in their streaming lens that has sort of set them apart. Also, I hear a lot of negative points of view thrown at the multitude of streaming services now starting to lean more into an ad tier and ad-supported tier.

• 6:19Speaker 03

  Is it possible that that in itself is Hulu's special sauce? Is it just that simple? And even though it doesn't seem intuitive that that's what we, the customer, would want, Hulu has proved that it is. And if so, what does that say for Netflix, Disney, and others?

• 6:37Scott Galloway?

  Ed, thanks for the question. I love the streaming market. I think it's exceptionally interesting, and I love television. I think television is the great art form of our age. And if you don't partake in edibles and have a really nice couch and watch a shit ton of TV, you are denying what is, or you're ignoring what is the great art form of our age. That's where the money is. That's where it is all gone. It used to be that the best and brightest or the most incredible actors ended up on the big screen. Now they don't. They end up in the small screen, specifically in The Mandalorian, or in Euphoria, or, I don't know. What's something else I'm watching? I watch White Lotus, too. Started slow, started slow.

• 7:17Scott Galloway?

  By the way, that show is literally a masterclass in labor law violations. I'm, maybe it's because I'm going to sue you over how many a much times, but if like everybody here is just waiting to be sued by their employees for harassment or what have you. But anyways, can you imagine I'm a ton of fun to watch a streaming video program with? Anyways, it's staggering. Let's talk about Hulu. I don't think there's anything differentiated about Hulu. If I were to pick a platform that will be absorbed into another platform or combined, it's Hulu. The Handmaid's Tale was kind of their, I think their biggest hit. So they went season seven, eight, and nine and tried to figure out new horrible things to do to the Gilmore Girl. It's gone way beyond the original book.

• 8:01Scott Galloway?

  Hulu doesn't really have a center of gravity. You know, if you think about Disney, Disney's family, right? If you think about Netflix, it's we've got the most money and are going to have the most programming. Amazon is a different type of tonnage. It's like Walmart. But they really don't have a hit or I'd call a center of gravity. Now, as it relates to advertising, I think this is a big mistake. Hulu ad-supported tier is $7.99. About 57% of Hulu subscribers use the ad-supported plan. So they've kind of soaked up the people who say, I'll pay a little bit, but I don't want to pay the full, the full monty here and I'll endure ads. The 2021 ad revenue was $2 billion. A total Hulu subs is about $47 million.

• 8:41Scott Galloway?

  Netflix, however, just launched an ad-supported tier in November of last year. So just what about two months ago at $6.99. And get this, 0.2% of US Netflix subscribers were on the ad-supported tier after its first month. What does that mean? Means it's not working, folks. Means they're likely going to cancel it, or that's what my prediction would be. In sum, I think the key to Netflix and the exciting thing about HBO is that it is uninterrupted storytelling. My favorite, maybe my favorite program of all time is Six Feet Under. It really made me feel something. I'm fascinated with the finite nature of life. It kind of informs my atheism. And Six Feet Under did an amazing job of probing that theme every show.

• 9:25Scott Galloway?

  It was about a mortuary and the different people would come through or it would talk about people's lives right before they died. Anyway, it came on to Bravo or something. I thought, oh, great, I'll watch it. And then when I tried to get through a single episode of Six Feet Under, interrupted by this bullshit telling me I had opioid-induced constipation or that I needed a light beer or I wanted to drive a South Korean car, it just literally ruined it. So uninterrupted storytelling makes that story better. And you immediately degrade the quality. And so the revenue basically takes you off your center of gravity. And that is uninterrupted storytelling. So I just think there's limited instances where this is going to work. And I think it directly attacks at the brand of Netflix.

• 10:07Scott Galloway?

  I think the whole point of Netflix and the whole point of HBO is its uninterrupted storytelling. So I hate this ad tier. And I think the numbers already reflect that it's not working. It seems like it's sort of working for Hulu. I think Hulu gets absorbed. For Netflix and HBO, I don't think it's, I don't think it's working. So anyways, thank you for the thoughtful question. And as I said, the key to being happy, relationships, working out, forgiving yourself. But also, also close fourth, more television and edibles. You heard it here.

• 10:42Scott Galloway?

  We have a quick break before our final question. Stay with us.

• 10:50Scott Galloway?

  Welcome back. Question number three.

• 10:52Speaker 04

  Hi Scott. My name is Mary. I'm in my mid 30s and live in Boston, Massachusetts with my husband and two young kids. Both me and my husband are working really hard to build and sell careers and family priorities. I'm leading an engineering team at a big tech company and my husband is a pharmacist. You've mentioned a couple of times the importance of prioritizing building financial security for your family, which really resonates with me. For most families, years of building this security overlap with early years of their kids, which leads to hard parental choices and personal sacrifices. This difficult trade-off is something my family deals with.

• 11:36Speaker 04

  My question is, when and how did you decide that needed security is in place for your family so that you can slow down on building it and reallocate more time and resources to your family, friends, and yourself? What framework were you using or was there a specific financial goal or target that you used for yourself? Thank you.

• 12:01Scott Galloway?

  Mary, that's a really thoughtful question and it's something I think a lot about. And I think it's something a lot of people think about. And we're not supposed to talk about money because rich people create this, I don't know, this mythology or this bullshit zeitgeist that people aren't supposed to talk about money. We live in a capitalist society. You either chose to live here or you just do live here through no fault of your own. And Bob Dylan said, "Money doesn't talk, it swears." And I find that if you don't have money, it swears at you. And that is you're constantly reminded of how hard it is in America if you don't have money. So it sounds to me like you are making the requisite trade offs. You can have it all, you just can't have it all at once.

• 12:42Scott Galloway?

  And the reason why I have a lot of balance now is I made huge sacrifices and so did my partner. My partner was working at Goldman Sachs, getting up at 5:30 with two babies at home. And I was starting a business, I would go to work at, you know, eight. Actually, that's probably not true, probably eight thirty, I'm not a morning person. And I would work till seven, come home for half an hour for bath time and then jet back to work and work till 11. I'm not exaggerating, I'd work all day Saturday and then Sunday I would go in just to make sure that, you know, rally or provide emotional support for the people who are working all day on Sunday. Because I think that's what you gotta do in a startup. So it sounds like you have a great job, it sounds like your husband has a great job. And just to be clear, it comes at a huge cost.

• 13:24Scott Galloway?

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

• 14:08Scott Galloway?

  Being rich, the definition of rich is that your passive income is greater than your burn. So I have a close friend who runs a large division at an iconic bulge bracket investment bank. Oversees, I don't know, 700 people, makes five to eight million dollars a year, depending upon the year. Between his ex-wife, his master of the universe lifestyle, his net jets fractional aircraft ownership, his alimony, his child support, I'm pretty sure he spends almost all of it. And I can tell you that he spends nights staring at the ceiling, thinking if the music stops here, I am fucked. And then there's my father, who between social security and his pension from the Royal Navy, makes fifty eight thousand dollars a year and he spends forty two. My dad is the cheapest man in history.

• 14:52Scott Galloway?

  And he's rich. He's still saving at the age of 92. So when do you know when to slow down? When one of you has the kind of career that's producing enough income and you've established enough savings that between that person, that one person's income and between the growth and wealth, if you will, and the dividends and the passive income or the rental rates or the rents you get on rental properties, or you see you have enough stocks that if they're growing at, say, four to eight percent a year, that you are well beyond covering your nut. And that often takes into your 40s and 50s. And sometimes you never get there. At some point, at some point, I think when the kids

• 15:35Scott Galloway?

  kind of get into what I call seven, eight, nine, you gotta figure out a way for both of you to spend more time with the family. You gotta figure it out. I would argue zero to five, there's a lot of research that says those are formative important years. I quite frankly, I don't buy it, especially for the man. I think we play almost no role in the child's development, zero to two. A lot of people would argue with me and say that's not true. You know, I don't know. I don't think those were the years for me to be involved. I'm very involved now as my 15 year old is going through puberty and discovering himself and discovering the world. I spend a lot of time with them and that luxury, and it's amazing, is a function of the sacrifice you're making now. So when

• 16:18Scott Galloway?

  do you know economically when to slow down? When you're at a point where the trajectory of hopefully one of you really gets out ahead, or and/or you have enough money that your passive income is headed towards something greater than your burn. And the other thing here is an arbitrage. You live in a very high cost city. Is there an opportunity to do a lifestyle arbitrage? 12 years ago, I was living in Manhattan with two young boys. And I was making a really good living. I was making probably $200,000 or $300,000 a year as an academic, maybe a little bit more. And my partner was making a couple, we, half a million dollars a year in current income. And we were broke. We were, we were broke living in Manhattan on a half a million dollars a year. And, okay, cry me a river

• 17:03Scott Galloway?

  or a symphony of the tiniest violins in the world. But I'm like, I don't want to make a half a million dollars to feel broke all the time, working my ass off and I feel broke. So we moved to Florida. Where our lifestyle expenses were kind of cut by 30 or 40% and we got a 13% reduction in taxes and we were able to do that because my partner was at a point where they were going to leave Goldman Sachs and do their own thing. I had a job where I would just commute to New York. I would commute Sunday night to Thursday, which was quite frankly tough on me in terms of a lifestyle standpoint. But we were able to take that money, call it another 100 grand a year in lifestyle and tax savings and invest it. And we did. We did. What you don't want to do is do a lifestyle arbitrage and take that money

• 17:46Scott Galloway?

  and use it for additional consumption. That's where it takes real discipline. Most people will always raise their standard of living to how much current income they're making. And the key to wealth is being a bit of a stoic and having the discipline to take real money. We took that 100,000 plus a year and we put it into rental properties and stocks. As you get older, the benefits of a city become one dimensional. And that is, it's all about professional opportunities. So if you have professional opportunity in a lower cost domain, you're not going to be able to take advantage of the wonderful things of a city when you have kids, when they get older, because what happens is you're not going out, you're not social, you're not taking advantage of the amazing bars and parties and cool things or mating opportunities in New York, because what you're about, what you're about is your kids. And so you just want to be in a nice area with good schools

• 18:31Scott Galloway?

  and a nice social setting and basically it becomes all about the kids. Anyways, I would consider a lifestyle arbitrage because it sounds like both of your jobs are portable. It's a great question. There's no one path. You have to decide the right path for you, but there's just some basics. Forgive yourself, acknowledge everything's a trade off. You're making the right trade off. Work your ass off. Get money. Save. Live below your lifestyle and then start to ramp back and spend more time with your family as you believe the trajectory of your income and your investments create passive income or an income trajectory that's greater than your burn. Thanks so much for the question, Mary, and good luck to you and yours. That's all for this episode. Again, if you'd like to submit a question, please email a voice recording to [email protected].

• 19:26Speaker 05

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• 20:02Speaker 06

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• 20:10Speaker 07

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