The Worm Has Turned

For the past decade, the loudest arguments waged regarding the Four (Amazon, Apple, Facebook, and Google) were about which CEO was more Jesus-like or should run for president. These platforms brought down autocrats, were going to cure death and put a man on Mars, because they are just so awesome. Media outlets were coopted into serving as the investors relations departments of the Four while drinking up the biggest lie in modern business — “Information wants to be free.” They let big tech crawl, parse, and resell their IP, catalyzing an extraordinary transfer in wealth from the creators to the platforms.

Curing, rocketing, leaning in — no more. The worm has turned against big tech, and it’s overdue. The tipping point was the recent revelation that Mark Zuckerberg had unwittingly become Vladimir Putin’s bitch. However, each firm has its own links to the dark side and is about to face the same scrutiny and standards the rest of business endures.

It’s. About. Fucking. Time.

Below is a rundown of where the Four are most vulnerable, some thoughts on how they should address the issues (note: they haven’t asked me), and some predictions. Also note: they’re not bad people. Statistically, I’m pretty sure each firm has about the same ratio of good to bad people. We live in a system, capitalism, where people in the workforce naturally put their oxygen masks on first before helping others. Sounds awful, but as Churchill said about democracy, “It’s the worst form of government, except all the others.”

Every CEO’s greatest commitment, I’d say 70%, conservatively, is to the share price — and 30% to everything else (employees, citizenship, environment). “I purchased my Southampton home with the proceeds from options on our stock, which had skyrocketed due to a more ethical supply chain and the best employee benefits package.”

Said. No. CEO. Ever.

The right ratio, and how to calibrate to that ratio, is a much longer post by an economist with more degrees and less experience with edibles (or maybe more?) than me.


Amazon

Job destruction, dominance, poor citizenship, and ability to wreck industries with a glance (Jedi mind trick) will be the call signs for a breakup of Amazon.

Amazon needs half the employees that traditional retailers need to support the same level of sales, meaning annual growth of $20B will result in destruction of 50,000 retail jobs. Amazon can wreak havoc in an industry, before it’s actually in that industry. For example, Kroger has shed almost a third of its value since Amazon acquired a competitor one-eleventh the size of Kroger — Whole Foods.

Since 2008, Walmart has paid $64B in corporate income taxes, and Amazon has paid $1.4B.1 In addition, Amazon has set off the mother of all bidding wars announcing a second HQ. This is shaping up to be the information age version of an IOC host city competition for the Olympics, replete with year-long intoxication (we won!) followed by a decades-long hangover — people like me (profs) only more credible (most profs) bellowing about the true costs.

Prediction: Amazon has already decided what city it wants to be in (NYC) and is flirting with other metros to demonstrate it’s beautiful to strangers, and extract tax breaks and giveaways from Gotham. The opportunity to detonate a (perceived) prosperity bomb in Manhattan could inspire the Mayor to match the best deal Amazon matures.

This. Would. Be. Stupid.

The selection of a firm’s headquarters usually comes down to one thing: where does the CEO want to live or spend more time … full stop. L2 leased 25,000 sq ft, a $10M+ commitment, on Broadway and Astor, as it met the one and only criteria — walking distance from the founder’s home (NYU Faculty Housing).

NYC also has the benefit of being the best decision. Amazon needs to be near, and attract, the best and brightest young talent. The best and brightest want to live in SF or NYC, with LA a distant third and everywhere else not on the map. No little girl dreams of moving to St. Louis, or even Austin, when she grows up. Note: both AWESOME cities (now, cue me with a huge shit-eating grin).

There are two forms of shark repellent Amazon can use against regulators or Senators who wake up, look in the mirror, and say “Hello, Mr. President.” They are circling. You have a three-year (or maybe less) reprieve, as Trump lacks the credibility, and his team the collective IQ, to muster much of a scuffle with one of the Four. The administration going after the Four would be Mayweather/McGregor redux: a lot of bluster followed by a methodical shit kicking of the redhead. So, back to what they should do:

1. Spin AWS business (break themselves up).
2. Change approach to second HQ search (tax themselves).

“Ask not what your country can do for you, but what you can do for your country.”

— JFK

Amazon should move their second HQ to Detroit and commit to revitalizing the heart of America. Not asking for billions in tax breaks, but committing to invest billions in a city that has great engineering talent and a cost of living and brand that could appeal to young people if Amazon detonated a prosperity bomb. This would starch Amazon’s hat white and keep regulators at bay for several years. Sure, maybe the firm pays no meaningful taxes, but if they save / rejuvenate Detroit, we’ve cut out the middleman (government) and achieved the same thing taxes are meant to do — finance social good. Sticking your hand out, Amazon, is small-ball strategy. Jeff, you’re needed in Detroit … not on Mars.

Apple
Apple is likely, at this point, the least at risk from government intervention. The best brand with the most likable CEO of the bunch, Apple feels vulnerable as Alexa kicks the shit out of Siri on the playground in full view of everyone. Their tax avoidance feels like old-economy corruption (General Electric) and is easily solved — pay up when a nation’s tax collectors come calling. The firm has more cash on hand than the value of the Russian stock market, so it can afford to settle or pay to avoid confrontations with governments. I believe Apple got off easy waving its middle finger in the face of the government when we (gasp) wanted into the phone of a terrorist. I’d suggest complying with the law moving forward. Note: I always get a ton of hate mail on this one. So, maybe I’m wrong on this. Maybe….

Prediction: The Apple Watch has jumped the shark. Similar to the Netflix series The Crown, it looks good, and we wanted to like it, but probably won’t invest in season 2.

Facebook
Facebook is at a seminal moment in its history and could shed half its value if it screws this up. Having your firm weaponized by foreign adversaries to undermine our election is bad … really bad. Thus far, the response has been tone-deaf. Initially, the firm puked out terms including “platform,” “First Amendment,” and “censorship.”

Martha Stewart didn’t go to jail for insider trading, but for refusing to acknowledge the issue (obstruction of justice). Zuck has responded and put out a 9-point plan. This is the stuff of $1,200/hr communications consultant groupthink. The invasion of Normandy had 7 key points of strategy (note: I just made this up).

Anyway, the video is a start, and he does reference, among other things, that they are adding 250 people across teams who will focus on security and safety. Note: I’m trying to sound reasonable. Back to the real me.

It still shocks me that the old-world media is again being big tech’s apologist. I spoke today to an NYT journalist who, as a point of discussion, made the case that Facebook is different and would have a difficult time policing all its content and serving as an arbiter of what’s OK. Yes, true … it’s called being a media company. It’s not that Facebook can’t solve these problems, it’s that Facebook can’t solve these problems and maintain its operating margins. Then so be it. No doubt, the solution will be expensive and complex — a decent description of democracy.

Zuck needs a 3, and only 3, point plan.

1. We screwed up; this is unacceptable.
2. I am personally going to ensure this is fixed, regardless of the resources required.
3. We’re assembling a “Night Watch.”

(Stay with me, serious about this.) The Night Watch will consist of several thousand employees who leverage technology to address security and safety. The Watch will be overseen by a fiduciary board of old- and new-world media execs. When complete, we will offer the services of the Night Watch to any media firm or platform (at cost) to help fend off attacks on our democracy, wherever they occur. (Similar to what Mercedes Benz did when they let other firms use their IP concerning airbags. I know this is true because I saw it in a Mercedes Benz ad.)

If the NYT can protect us from these attacks on our democracy, with $64M of annual free cash flow, then Facebook can figure it out with $12B of free cash flow. Again, this isn’t about ability, it’s about commitment (resources, margins).

Also, Zuck, you need to go a little Rambo and convince us you are not a global citizen, but an American citizen, and that you’ll fight our adversaries and not enable them (see above: Putin’s bitch). If you need any help getting your mojo around this issue, some reminders:

— Putin murders journalists.
— Putin invades his neighbors.
— Putin jails his political opponents.

Oh, and he’s wealthier than you (think we have a bingo). Finally, some other “color” on the guy owning you. He grew up in a shared apartment in St. Petersburg, is described by classmates from primary school as being quick to temper and a bully, and his colleagues in East German Intelligence describe him as a wife beater.

I worry the youth of Facebook’s workforce and CEO means they lack the historical context on the importance and responsibilities of the fourth estate in the freedoms we enjoy. Also, not sure they understand:

Russia. Is. Our. Enemy.

Google
Google is, by traditional antitrust standards, the most vulnerable to government intervention, as in many markets they enjoy a 90%+ share of search. Search is a market that is now a bigger business than the entire advertising market of any nation except the US. Google has been, in my view, more transparent and conscious (i.e., freaked out) about the scale of their own power. One only needs to imagine your face and name above a scroll of every crazy thing you’ve typed into the search field, and you start to get the whole scary thing. When God, the source of truth who’s also all-knowing, is not an invisible dude with a beard but a building in an office park where employees attempt to reduce human activity to ones and zeros and drink Pabst Blue Ribbon on weekends it’s, well … disturbing.

In the next 24 months, Google will incur the first fine in recent history that actually fucking hurts. The $2.7B fine earlier this year was the neighbor yelling at you about your dog. He got your attention, but you’re not going to lose any sleep tonight. Google lost no sleep — investors didn’t care, a speed bump. The war against big tech will escalate in Europe. Note: the possible war metaphors here are too much for me to handle, just too much.

Where the conflict escalates
The US benefits, hugely, from the Four. There are very real costs worth discussing. However, the Four are the envy of the free world, and they’re ours. There isn’t a nation that would not endure the navel-gazing to infect their countries with the innovation, wealth creation, and competition the Four bring. However, the US registers (a lot) more of this bounty than the EU. There are few buildings, programs, and hospital wings in Europe named after recent Google or Facebook millionaires. So, less of the upside, coupled with the same downside, has stiffened EU regulators’ backbone.

Prediction: EU. Will. Go. Gangsta.

Similar to the rest of the Four, Google needs to cement its position as a good citizen.

The biggest opportunity for the Four
The Four could pull off one of the greatest moments in business, addressing a huge social issue while disrupting an enormous, wildly profitable sector that hasn’t innovated in decades. One or more of the Four should launch a tuition-free university that blends offline and online learning, and charges firms to recruit. Student debt and corporate profits are at an all-time high, meaning we need to flip the model — charge firms, not students, for education.

Apple is also well suited to do this as its brand has roots in education. I estimate the economic value of credentialing is, if taken as a market, likely the largest industry in business with 80%+ gross margins. There would be several ways to create $100B+ in shareholder value and catalyze desperately needed competition. We (universities) have stuck out our chins and deserve fists of stone. Feeding like insecure vampires on the scarcity of our product (dopamine surges through our brains at faculty meetings as we revel in how impossible it is for kids to get into our programs), and preying on the hopes and dreams of families. Education used to be the upward lubricant and a social good. It’s now just one of those things.

Other than each other, there is only one thing between the Four and $1T in market value: the perception of poor citizenship. The small-ball strategies of tax avoidance, obfuscation, and the idolatry of youth and the dollar, may turn big tech into smaller tech.

Life is so rich,

1 Source: L2 analysis of Amazon 10Ks and Walmart Annual Reports

No Mercy / No Malice in Your Inbox.