Post-Corona: From Crisis to Opportunity (P1)

What will the world of business look like after the coronavirus pandemic? The pandemic will accelerate every trend by a decade and redefine entire industries. Foundational sectors like healthcare, education and transportation are on the verge of unprecedented disruption as the market rewards innovators like Tesla with massive valuations.

Scott Galloway, a professor at NYU Stern School of Business, presents a clear-eyed overview of this great transformation, the new business environment, Big Tech’s dominance, and who stands to win and lose in this new age.

TOP 20 INSIGHTS

1. Ecommerce’s share of U.S. retail, which had been growing by one percent every year, jumped by 11% within eight weeks of the pandemic hitting the United States. The strong performance of big companies fueled the U.S. stock market recovery. However, medium companies declined, and smaller companies got hit the hardest. While the S&P registered growth by mid-July 2020, mid-caps were down 10%, and small caps dropped by 15%. Brands that were already going down, like JCPenny and Neiman Marcus, got hit the hardest.
2. A large portion of the stimulus capital that entered U.S. capital markets went towards innovative firms. Tesla’s valuation exceeds Toyota, Daimler, Volkswagen and Honda combined, even though it will manufacture only 400,000 cars rather than 26 million cars manufactured by the other four in 2020.
3. Sectors will witness market consolidation around innovators or market giants with solid balance sheets, high-value assets, cheap debt and low fixed costs. Firms like Costco, Honeywell and Johnson and & Johnson, which have $11 billion, $15 billion and nearly $20 billion respectively in their bank accounts, will have their pick of assets and customers when weaker competitors shut down.
4. A company’s survival depends on the sector’s health and its position within it. Non-dominant companies within weak sectors must leverage current assets to pivot to new lines of business. Thryv Holdings, America’s largest yellow pages company, used its relationship with thousands of small businesses to pivot into Customer Relationship Management.
5. Companies must become capital-light and move to a variable cost structure by leveraging other people’s assets. Uber rents space in other people’s cars driven by non-employees. So when revenue went to zero during the pandemic, Uber’s costs went down by 60- 80%. Despite the hospitality industry taking a huge hit, Airbnb is well-positioned to take a more significant industry share.
6. 82% of corporate leaders plan to allow partial remote work, and 47% intend to offer full-time remote work in their organizations. But remote work has its share of drawbacks. Serendipity is key to innovation, and presence strengthens accountability. Companies must offer creative perks like home office supplies and grocery debit cards to support remote work.
7. After Covid, more employees will demand work from home from their organizations. Individuals with salaries over $100,000 will have an easier time making the demand. This will create a higher separation of classes after Covid. 60% of jobs that pay over $100,000 can be done from home compared to just 10% of jobs that pay below $40,000.
8. The Brand Age, where companies sold mass-produced products for irrational margins by creating emotional associations through advertising, has ended. The Product Age powered by online discoverability has begun. When advertising spends return, they will flow towards online platforms. Facebook and Google will account for 61% of the digital ad market in 2021.
9. There are primarily two digital business models. Companies sell products for a profit or monetize their users. Android offers cheaper, privacy-invasive smartphones, while iOS demands a premium for a product that respects privacy. As privacy becomes more central, these models will become incompatible. Apple will abandon Google search even when Google pays $12 billion every year.
10. Post Corona, Amazon, Google, Facebook, Apple, and Microsoft’s market dominance will only grow stronger. Big Tech makes up 21% of the value of all publicly traded companies. Amazon and Apple added Disney, AT&T/Time Warner, Fox, Netflix, Comcast, Viacom, MGM, Discovery and Lionsgate to their market capitalization between Jan 2019 to February 2020.
11. Big Tech companies leverage their market dominance to create flywheels — virtuous cycles that generate growth without proportional costs. Apart from rapid delivery, Amazon Prime offers video streaming to increase the time spent on its platform. Apple dominated the wearables business (Apple Watch, AirPods and Beats) with $20 billion in revenue in 2019 because its flywheel connects phones, watches and wearables, an advantage that Rolex or Bose cannot compete against.
12. Big Tech has transformed entire industries into features. Amazon has outperformed FedEx and made the delivery industry into Prime feature. The media industry, worth hundreds of billions of dollars, will become a customer acquisition vehicle for Apple and Amazon’s core business.
13. Massive market capitalization also creates problems for tech giants. Investors expect Big Tech companies to add nearly a trillion dollars in revenue over five years. Only a few sectors can provide that growth: Healthcare, Life Insurance and Education. Big Tech firms will have to enter these markets and compete with each other.
14. Amazon’s signature move is to transform cost centers into revenue heads. It does this by leveraging its scale and access to limitless cheap capital to make massive investments that others just cannot match. Amazon built the best data center capabilities in-house and sold them to other companies through Amazon Web Services(AWS). It leveraged its warehouse and distribution expertise to launch Amazon Marketplace.
15. Amazon has more customer insight than any insurance actuary. It can leverage that to foray into insurance. Further, it can enter healthcare and offer telemedicine services through Alexa as the pandemic has removed regulatory bottlenecks. Combined with its retail, pharmacy and wearables, Amazon can offer an integrated healthcare product to rival hospitals.
16. Companies must find ways to create recurring revenue models by offering bundled services. As a product manufacturer, Apple should have taken a hit during the pandemic. However, it had transitioned into a software company with recurring revenue through massive investments in iCloud, Apple T.V., Apple Cloud and Arcade. Recurring revenue contributed 23% of Apple’s 2019 revenue, cushioned it from the pandemic and doubled its valuation.
17. Most products depreciate. To dominate, companies must build Benjamin Button products that become more valuable with every use. The Benjamin Button effect is the result of more user data and network effects. Spotify adds more users every year, attracting more artists and giving the company more data to improve its personalization. Similarly, Netflix’s recommendations improve each time a user watches a movie or a T.V. show.
18. Evolutionary psychology says that brands can appeal to customers in three ways. They can target the “brain,” the “heart,” or “genitals.” Brands that appeal to the brain make rational claims of higher value or lower prices like Amazon. Companies like Facebook tap into the heart’s instinct to care for friends and family. Finally, brands can appeal to the sexual instinct to feel more attractive to sell premium products at irrational margins like Tesla.
19. Academia, healthcare and insurance are waiting for disruption. Industries are open to disruption when there is a dramatic increase in price without a corresponding increase in value, a heavy reliance on brand equity or customer ill-will. College tuition has increased 1400% over 40 years without significant value addition. The average family coverage premium has increased 54% in 10 years.
20. After Covid, Big Tech will move into academia. Clayton Christensen predicted that 50% of colleges and universities would go out of business in the next 10 to 15 years. Big Tech firms may partner with academia to offer 80% value of a four-year degree to thousands at 50% of the cost. MIT and Google could jointly design a $50,000 two-year program that enrolls 100,000 students to generate $5 billion every year.