The $160 Billion Video Game Industry Explained

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 [email protected]. 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.

• 0:00Scott Galloway?

  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%. We need to fall back in love with the unremarkables. Let's love the unremarkables. Let's start here. Go, go, go!

• 0:43Scott Galloway?

  Welcome to the 36th episode of The Prof G Show. In today's episode, we speak with Yost Vajduna. Yost Vajduna! Where's Margaret Vestia? Anyway, anyway, Yost 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 a $160 billion industry. Anyway, Yost shows up and illuminates us. He gives us the 411. He drops some knowledge. Okay, what's happening?

• 1:26Scott Galloway?

  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, the most interesting factoid that I found, approximately 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?

• 2:11Scott Galloway?

  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, the most, most interesante thing about this filing. They also showed a $700 million loss on 2.5 billion in revenue for the first nine months of the year, despite a Q3 profitable quarter. So in contrast, 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

• 2:51Scott Galloway?

  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, 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 find a vaccine that doesn't need to be frozen to negative 700 degrees Celsius, whatever's going to happen at some point. The terrible thing about crises, including pandemics, 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

• 3:35Scott Galloway?

  want to own, 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 rip back 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.

• 4:19Scott Galloway?

  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, 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 is the global awareness to generate unrivaled demand. What do you do? You go on Google, it's an incredible font of information. And if you type in Orlando Hilton,

• 4:58Scott Galloway?

  Orlando Holiday Inn, Orlando Four Seasons, you see, 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 is 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

• 5:43Scott Galloway?

  that can't afford to spend 800 bucks a night out of Four Seasons. What is, what is the global brand with the most relevance? Hands down, hands down, Airbnb. And market valuation has a habit, has a habit of footing to awareness and share. And that's 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.

• 6:19Scott Galloway?

  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, 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?

• 7:04Scott Galloway?

  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 trade at a 20-plus multiple of revenues. Airbnb projects 2021 revenues of $5 to $6 billion, yielding a credit card-like valuation, if you will, of $100 and $120 billion. Supposedly, it's going public at $30 billion, or the valuation they're going to raise between $1 to $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. Another exciting business developments.

• 7:49Scott Galloway?

  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

• 8:31Scott Galloway?

  space you occupy, double down on content, which takes capital where it's, what's the easiest or cheapest source of that capital? Cancel the goddamn dividend. The move to the 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, are you the spineless, sackless people we think you are? 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

• 9:13Scott Galloway?

  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 claimed 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 going, it's being leapt forward. The future is being pulled forward, good and bad. The

• 9:57Scott Galloway?

  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, 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, these aren't decisions or IQ tests. 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.

• 10:41Scott Galloway?

  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, 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? Dunno, dunno. If it's not, 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, right? Called Time Warner, that is being assaulted by tanks, overrun by tanks from Cupertino and from Seattle.

• 11:25Scott Galloway?

  Simply put, all of a sudden, media has been featureized. 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, oh, 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 is 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

• 12:09Scott Galloway?

  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 Reed, 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 this affiliate and advertising fees from Pfizer and diabetes medications and the Calm app. Anyways, anyways, speaking of streaming services we like,

• 12:52Scott Galloway?

  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, it's the impenetrable Maginot Line. Variety Reporter, that's some World War II humor. Variety Reporter, the Netflix has around nine 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

• 13:36Scott Galloway?

  expect that. She did not see that move on the table. No, no, no. Rook's seven to pawn eight. I don't know what that means, but nobody, nobody was, 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'm wondering, 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 2020. According to Forbes, that is the smallest or the most anemic quarterly increase since 2016.

• 14:19Scott Galloway?

  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 Time Warner, if you're 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? 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?

• 15:03Scott Galloway?

  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 Joss van Drenen.

• 15:22Scott Galloway?

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• 16:07Scott Galloway?

  You can download the Built app and join the membership for where you live at joinbuilt.com/propg. That's J-O-I-N-B-I-L-T.com/propg. Use our link so they know we sent you.

• 16:22Scott Galloway?

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• 17:05Scott Galloway?

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• 17:43Scott Galloway?

  Welcome back. Here's our conversation with Yost Vandrunen, a colleague at the NYU Stern School of Business and the author of "One Up: Creativity Competition and the Global Business of Video Games." I first met Yost 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 $1 billion. 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

• 18:27Scott Galloway?

  at NYU Stern around the video game industry, which, by the way, is enormous. Anyways, here's our interview. Okay, Yost, where does this podcast find you?

• 18:37Speaker 02

  I'm in Brooklyn, Fort Greene, in the basement.

• 18:40Scott Galloway?

  Nice. So Yost, our professor, Vandrunen, teaches a very popular course.

• 18:46Scott Galloway?

  What's the course called, Yost?

• 18:49Speaker 02

  The Business of Video Games.

• 18:50Scott Galloway?

  There you go. So that's why we have Yost on. So let's start there. Give us a kind of video games for dummies overview of the industry.

• 19:00Speaker 02

  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

• 19:42Speaker 02

  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, you know, 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.

• 20:22Scott Galloway?

  So a couple of things jumped out. The first is $160 billion. So domestic box office, I think, is $5 or $7 billion. How big is the cable bit? I mean, that's, 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, cable? I think it is bigger than cable television, isn't it?

• 20:50Speaker 02

  It's in on a country level basis, it's it's the third largest entertainment industry in the US, 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 spend currently and it's as it is. So it's been it's a fascinating business in a general way.

• 21:32Scott Galloway?

  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, you know, peaceful coexistence, all-out 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?

• 21:53Speaker 02

  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, you know, 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, Walmarts and so on. And so those relationships tend to all kind of, they're all in it together, right? So they, out of a $60 game, a publisher will get 24 bucks, a platform will get 12 and a retailer will get 12.

• 22:37Speaker 02

  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, right? And so now ostensibly I have, you know, the

• 23:17Speaker 02

  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 economics have shifted. So the negotiating power of the creators 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.

• 23:38Scott Galloway?

  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 3 and 12% of their revenues by just charging them that 30% first year, 20% second year. They're basically heads you win, heads you lose, tails I win. They're making money across every streaming video platform. Is it the same in the gaming industry?

• 24:05Speaker 02

  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

• 24:44Speaker 02

  some iterations to it, but mostly it's one solid five to seven year generation. In Apple's universe, they, you know, they have that planned obsolescence. So you have a new device every year and then Apple does not. Then give people subsidies or you know, start investing in exclusive content because they don't care about that, right? 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, you know, by comparison, Sony and Nintendo and Microsoft, they sell fifty to a hundred million devices of their of their consoles. And that's about it. You know, their money

• 25:28Speaker 02

  really comes from selling the software. And so then they are much more willing to negotiate with the creative community to say, well, what what can we help you build so that we both can be successful? Whereas Apple, they're really just rent seeking in that context.

• 25:40Scott Galloway?

  So talk about big tech. Talk about over the last five years, much less ten 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?

• 25:56Speaker 02

  The short answer is yes. So you have to imagine that the largest US publisher, Activision, Activision Blizzard acquired King Digital back in 2014 for what, six billion dollars? Sorry, four billion dollars. And so what they did was basically buy into a mobile part of the ecosystem. And 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 Activision bought in. They bought the biggest publisher at the time. And they did that really just to have access to that

• 26:40Speaker 02

  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, you know, 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 selling titles, boxes at their stores, they're willing to kind of work on the margins, they're willing to promote

• 27:23Speaker 02

  and subsidize and give you shelf space, all this stuff. And all of that is incorporated into the strategy and the relationship and the contracts 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 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 the 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.

• 28:06Speaker 02

  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.

• 28:20Scott Galloway?

  Last five years, who have been the biggest winners in terms of increasing stakeholder value or power currency in the video gaming sector, and who have been the biggest losers?

• 28:29Speaker 02

  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-bombs by these newcomers from particularly China. So companies like NetEase and particularly Tencent have been incredibly successful, right? So and the 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

• 29:14Speaker 02

  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. And you so you see this shift in power dynamics between legacy publishers in a traditional product sense, slowly accommodating to new economics. And then, you know, the 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 after gaming now, too. And it's purely because they were able to kind of sneak in under the radar because the legacy publishers were slow to move.

• 29:58Speaker 02

  So while they've been very successful in raising their own share price and, you know, their market cap valuations, at the same time, you know, they totally left a door open for, you know, on a global scale, a whole bunch of competitors to move in.

• 30:11Scott Galloway?

  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 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.

• 30:39Speaker 02

  Okay, so the biggest thing about, so you understand platform economics, right? So and the way that that can be set in 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 is coming out, the new 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, you know, do things that we couldn't do before.

• 31:23Speaker 02

  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 on the, you know, 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 in many ways. 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, you know, can we build more immersive experiences?

• 32:06Speaker 02

  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, you know, very obviously you move into a conversation about ownership and consolidation because it's to everybody's benefit to then own all this stuff, right? So Microsoft, to make its new Xbox, we're interested, they buy a bunch of stuff, Sony does the same, and Nintendo has been experimenting and rolling out a whole bunch of innovative indie content.

• 32:47Speaker 02

  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 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 going to have a harder time this time because they're not as well equipped to deal with the overall digitalization in the industry. So you see Microsoft doing really well, for instance, with subscription models,

• 33:29Speaker 02

  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, you know, much more vulnerable to everybody else.

• 33:54Scott Galloway?

  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?

• 34:20Speaker 02

  Here's an example. There's a company called VEN, 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 just 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 can get lost, right? And so they say, well, we want to also do esports.

• 35:05Speaker 02

  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'm going to spend my time on a game, I really want to know in advance if the game is any good. And 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,

• 35:47Speaker 02

  purchase intent, user acquisition, and sort of 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 Lil Nas X the other day, and there 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

• 36:29Speaker 02

  and promote their new sing single, and we're going to have a whole show around it. And so 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 will call it the metaverse, right, this persistent online space. And so the lesson really would be to start early, in the same way that we've seen television, and specifically like soap series were subsidized by 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

• 37:13Speaker 02

  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 be, and the first foray into it will be in the live streaming category.

• 37:33Scott Galloway?

  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.

• 37:58Speaker 02

  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 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 happens. And so

• 38:42Speaker 02

  entertainment has always relied on advertisers. And so we're going to see advertisers come into the game space full force in the next three to five years. There's no doubt. And then it's everywhere from like soda brands to like big companies just owning publishers outright. The second piece would be big tech is going to be a huge scourge when it comes to the games industry. So it's going to be.

• 39:05Scott Galloway?

  Consistent with their behavior and impact across the rest of the world?

• 39:10Speaker 02

  So I'm surprising you, I know. It's just, it's just going to be.

• 39:14Scott Galloway?

  They're not going to be a source of good? They're not going to be a positive influence?

• 39:20Speaker 02

  No.

• 39:21Scott Galloway?

  Yo, come on!

• 39:23Speaker 02

  You heard it here first. It's the, 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're gonna, you see it now. Look, I love the teams at Amazon and Google because, you know, these are people that come from the games industry still, right? 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 when it comes to like their cloud gaming services. I've been playtesting 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 shit?

• 40:06Speaker 02

  And so for all those reasons, I think big tech is going to have sort of a, 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.

• 40:19Scott Galloway?

  Yeah.

• 40:19Speaker 02

  That's another 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, 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. Digitalization has afforded China and all these other, like South Korea, all these other countries, India is probably next to really become big. And, you know, their, their harboring is 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, they're going to eat the world, right? And so you see this huge shift already in terms of how those, where those companies make their money, right?

• 41:04Speaker 02

  So historically, Asia makes most of its money outside of Asia. No longer the case. It's all inside of Asia now, and they're only focused on their own markets. Maybe with some, you know, neighboring geographies, over time, there's only going to shift. And you're, 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, which, you know, 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 sub, subcategory where people use it for marketing and they hang out and they watch AOC, kind of have a cool time for an afternoon.

• 41:48Speaker 02

  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, I guess, fourth prediction. So Twitch is really sort of well positioned there. YouTube would do really well, but, you know, all of them are sort of, 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, and, you know, the IPO for a company like Roblox, which is coming up. Is sort of a vignette with regards to user-generated content.

• 42:29Speaker 02

  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, you know, how they are perceived by others in a digital environment. So you extend that same logic of how do we present ourselves in the in the 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, 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

• 43:12Speaker 02

  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 Star Trek over the years, too. People want to not just consume it, they want to, you know, it's much more memetic. So they want to become it.

• 43:32Scott Galloway?

  Yost Vandruna 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. Yost, stay safe. We'll be right back. Support for the show comes from Vanta. As AI adoption grows, so does your company's security risks and requirements. New frameworks, audits, and vendors keep piling on, but your team isn't getting any bigger.

• 44:14Scott Galloway?

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• 44:59Scott Galloway?

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• 45:20Scott Galloway?

  It's time for Office Hours, the part of the show where we answer your questions about the business world, big tech, higher education, and whatever else is on your mind. If you'd like to submit a question, please email a voice recording to [email protected]. First question.

• 45:36Speaker 03

  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 seller's 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.

• 46:20Speaker 03

  So please explain why what Amazon is doing is any different. Thanks.

• 46:25Scott Galloway?

  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 advised 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, you know, better promotions, whatever you want to call it.

• 47:09Scott Galloway?

  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 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

• 47:51Scott Galloway?

  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 or returns 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,

• 48:36Scott Galloway?

  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, used to be a public service and the stations, 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, 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.

• 49:20Scott Galloway?

  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 Bean Town. Is that what they call it? Bean Town? Bean Town? Anyways, Boston. Thanks, John. Next question.

• 49:48Speaker 04

  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 a measurable 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 successors 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.

• 50:32Scott Galloway?

  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.

• 51:14Scott Galloway?

  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 Froze Mansion or the Museum of Ice Cream, what they've figured out, what they've figured out is scarcity. And then as I see at 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. Do I, 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?

• 51:59Scott Galloway?

  Because of scarcity, it's going away. So which is 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 2,000 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.

• 52:42Scott Galloway?

  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.

• 52:59Speaker 05

  Hey, Scott. Marshall Berman, Livingston, New Jersey. Love the show. With the majority of students in K through 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?

• 53:26Scott Galloway?

  Marshall from New Jersey. Thanks for the thoughtful question. This is a really important question. And I would argue, I was 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 to 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 there on the road. The economy's 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.

• 54:11Scott Galloway?

  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, 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.

• 54:55Scott Galloway?

  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 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,

• 55:40Scott Galloway?

  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 through 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

• 56:24Scott Galloway?

  is taking the 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 cash flow 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 his sophomore year to Lane 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.

• 57:08Scott Galloway?

  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 in education, that's Uncle Sam.

• 57:33Scott Galloway?

  Our producers are Caroline Shager and 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 Show from Section 4 and the Westwood One Podcast Network.

• 57:56Speaker 06

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