The Four: The Hidden DNA of Amazon, Apple, Facebook, and Google - Scott Galloway
August 19, 2018
Over the last 20 years, four technology giants have inspired more joy, connections, prosperity, and discovery than any entity in history. Amazon, Apple, Facebook, and Google are the four most influential companies on the planet. Just about everyone thinks they know how they got there. Just about everyone is wrong.
Whether you want to compete with them, do business with them, or simply live in the world they dominate, you need to understand the Four.
But before we get to the CliffNotes (as always) here's an adorable dog using his stylish Mac book to do his searching on Google, his friending on Facebook, and his shopping on Amazon. Granted he got a little tired of all that activity and needed to take snooze.
The Four are responsible for an array of products and services that are entwined into the daily lives of billions of people. The Four are engaged in an epic race to become the operating system for our lives. The prize? A trillion-dollar-plus valuation, and power and influence greater than any entity in history.
One or two seemingly minor product features separated the other Four from their packs and turned them into world conquerors—Jobs’s design and Wozniak’s architecture for the Apple II; the rating and review system for Amazon; photos at Facebook; and the elegantly simple homepage and the fact that advertisers weren’t allowed to influence search results at Google (organic search).
Amazon eases the pain of drudgery—getting the stuff you need to survive. No great effort: no hunting, little gathering, just (one) clicking. Their formula: an unparalleled investment in last-mile infrastructure, made possible by an irrationally generous lender—retail investors who see the most compelling, yet simple, story ever told in business: Earth’s Biggest Store. The story is coupled with phenomenal execution. The result is a retailer worth more than Walmart, Target, Macy’s, Kroger, Nordstrom, Tiffany & Co., Coach, Williams-Sonoma, Tesco, Ikea, Carrefour, and The Gap combined. More Than 50% of Shoppers Turn First to Amazon in Product Search. For perspective: Forty-four percent of US households have a gun, and 52 percent have Amazon Prime. Wealthy households are more likely to have Amazon Prime than a landline phone. Half of all online growth and 21 percent of retail growth in the United States in 2016 could be attributed to Amazon. When in a brick-and-mortar store, one in four consumers check user reviews on Amazon before purchasing.
Apple: It counts among its congregation the most important people in the world: the Innovation Class. By achieving a paradoxical goal in business—a low-cost product that sells for a premium price—Apple has become the most profitable company in history. Apple Captured 79% of Global Smartphone Profits in 2016.
Facebook: As measured by adoption and usage, Facebook is the most successful thing in the history of humankind. There are 7.5 billion people in the world, and 1.2 billion people have a daily relationship with Facebook. Facebook (#1), Facebook Messenger (#2), and Instagram (#8) are the most popular mobile apps in the United States. The social network and its properties register fifty minutes of a user’s typical day. One of every six minutes online is spent on Facebook, and one in five minutes spent on mobile is on Facebook. For perspective, The US automobile industry created economic value of approximately $231,000 per employee (market cap/workforce). This sounds impressive until you realize that Facebook has created an enterprise worth $20.5 million per employee . . . or almost a hundred times the value per employee of the organizational icon of the last century.
Google: Google is a modern man’s god. It’s our source of knowledge—ever-present, aware of our deepest secrets, reassuring us where we are and where we need to go, answering questions from trivial to profound. No institution has the trust and credibility of Google: About one out of six queries posed to the search engine have never been asked before.
Investment Strategy: Investing Back into the Business for Competitive Advantage:
Until now, the contract companies have with shareholders is: give us a few years and tens of millions of dollars and then we’ll begin returning capital to you in the form of profits. Amazon has exploded this tradition, replacing profits with vision and growth, via storytelling. The story is compelling and simple—the power couple of messaging. The Story: Earth’s Biggest Store. The Strategy: Huge investments in consumer benefits that stand the test of time—lower cost, greater selection, and faster delivery. Thanks to a rate of growth that reflects a steady march toward this vision, the market bids Amazon stock higher and provides the firm with exceptionally cheap capital. Most retailers trade at a multiple of profits times eight. By comparison, Amazon trades at a multiple of forty. In addition, Amazon has trained the Street to hold them to a different standard—to expect higher growth but lower profits. That enables the company to take the (substantial) incremental gross margin dollars it earns each year and plow more capital back into the business. By purposefully managing their business at breakeven, Amazon has built a firm approaching half a trillion dollars in value, that has paid little corporate income tax.
Normal business thinking: If we can borrow money at historically low rates, buy back stock, and see the value of management’s options increase, why invest in growth and the jobs that come with it? That’s risky. Amazon business thinking: If we can borrow money at historically low rates, why don’t we invest that money in extraordinarily expensive control delivery systems? That way we secure an impregnable position in retail and asphyxiate our competitors. Then we can get really big, fast.
Without capital-hungry stores, Bezos could invest in automated warehouses. Scale is power, and Amazon was able to offer prices no brick-and-mortar retailer could afford. He offered deals—to loyal customers, to authors, to delivery companies, to resellers agreeing to run ads on their own websites.
Amazon & Specialty Retail - Bright Spots During the Retail Decline:
In 2016, retail could largely be described as the crazy success of Amazon and the disaster that is the rest of the sector, with a few exceptions. The death of retail begins with margin erosion, and ends with endless promotions and sales. You can buy a little time with sales, but the story almost always ends badly. Brick and mortar’s troubles have been laid at the feet of digital disruption. There is some truth to that. However, digital sales are still only 10–12 percent of retail. It’s not stores that are dying, but the middle class, and the stores serving them. Most that are located in, or serving, middle-class households are struggling. By comparison, stores in affluent neighborhoods are holding strong. The middle class used to be 61 percent of Americans. Now they are the minority, representing less than half the population, the rest being lower or upper income.
Consumers no longer go to stores for products, which are easier to get from Amazon. They go to stores for people/experts. There is a rebel force of innovative retailers out there who are fighting the empire: Sephora, Home Depot, and Best Buy, to name a few. These firms are zigging as Amazon zags and investing in people—beauty associates, blue shirts, geek squads, and gold canvas aprons. They couple this investment in human capital with a deft investment in technology.
Walmart was the great leveler. But most consumers don’t want to be equal; they want to be special. And a sizable fraction of the consuming population will pay a premium for that attention. That fraction also tends to be the consumers with the most disposable income. The march toward “more for less” created a vacuum for consumers looking for expertise and a social signal of something aspirational about their lives. Hence the rise of specialty retail, which enabled mostly affluent consumers to focus on an exclusive brand or product regardless of price. The retailer that truly defined the specialty retail era was The Gap. Rather than spending money on advertising, The Gap invested in store experience, becoming the first lifestyle brand. You felt cool shopping at The Gap.
The internet is the fastest-growing channel in the largest economy in the world, and Amazon is capturing the majority of that growth. Fast-forward to 2016—U.S. retail grew 4 percent, and Amazon Prime grew 40 percent plus. In the all-important holiday season (November and December 2016), Amazon captured 38 percent of online sales. The next nine largest online players captured 20 percent combined. With retail growth essentially flat across the American economy, Amazon’s growth must be coming from somewhere. Who’s losing? Everyone.
On Amazon, Bezos realized, every page can be a store and every customer a salesperson.
In the short term, Go and Echo suggest that the company is headed toward zero-click ordering across its operations. Leveraging big data and unrivaled knowledge of consumer purchasing patterns, Amazon will soon meet your need for stuff, without the friction of deciding or ordering.
Innovation and Risk Taking:
Innovating on Lots of Little Bets: Bezos bifurcates Amazon’s risk taking into two types: 1) Those you can’t walk back from (“This is the future of the company”), and 2) Those you can (“This isn’t working, we’re out of here”). Bezos’s view is that it’s key to Amazon’s investment strategy to take on many Type 2 experiments—including a flying warehouse or systems that protect drones from bow and arrow. They’ve filed patents for both. Type 2 investments are cheap, because they likely will be killed before they waste too much money, and they pay big dividends in image building as a leading-edge company. Shareholders love these stories; it makes them feel like they’re part of an exciting adventure. Plus, every once in a while, they actually pan out and they pay out big. Bezos, like any great leader, has the ability to explain a crazy idea in a way that makes it seem less crazy but practical. Wait, that’s obvious—how did we not think of that? The really crazy shit isn’t stupid, it’s “bold.” Yeah, a floating warehouse sounds crazy the first time you hear of it. Now, ponder the cost of leasing and running a traditional terrestrial warehouse. What are its biggest expenses? Proximity and rent, respectively. Now, think again about a floating warehouse. Not so crazy, right? Making Type 2 investments also desensitizes Amazon’s shareholders to failure.
Great success only comes with significant, even existential, risk. As Bezos wrote in Amazon’s first annual letter, in 1997, “Given a 10 percent chance of a hundred times payout, you should take that bet every time.” Needless to say, most CEOs don’t think this way. Most won’t even take risks that have less than a 50 percent chance of success—no matter how big the potential payoff. This is a big reason why old-economy firms are leaking value to new-economy firms.
“Failure and invention are inseparable twins. To invent you have to experiment, and if you know in advance that it’s going to work, it’s not an experiment”, as Bezos also wrote in that first annual letter. Most uber-wealthy people have one thing in common: failure. They’ve experienced it, usually in spades, as the path to wealth is fraught with risks, and often those risks end up being, well, risky. A society that encourages you to get up after being beaned in the head, dust off your pants, step back into the batter’s box, and swing harder the next time is the secret sauce for printing billionaires. The correlation is clear. America has the most lenient bankruptcy laws, attracts risk takers, and, as you might guess, has most of them. Twenty-nine of the fifty wealthiest people on the planet live in the United States, and two-thirds of unicorns (private companies with $1 billion–plus valuations) are headquartered here.
If you google “biggest mistakes in business history,” the majority of results are risks that firms failed to take, such as Excite and Blockbuster passing on acquiring Google and Netflix, respectively. History favors the bold. Compensation favors the meek. As a Fortune 500 company CEO, you’re better off taking the path often traveled and staying the course. Big companies may have more assets to innovate with, but they rarely take big risks or innovate at the cost of cannibalizing a current business. Neither would they chance alienating suppliers or investors. They play not to lose, and shareholders reward them for it—until those shareholders walk and buy Amazon stock. Most boards ask management: “How can we build the greatest advantage for the least amount of capital/investment?” Amazon reverses the question: “What can we do that gives us an advantage that’s hugely expensive, and that no one else can afford?”
The death of brand, at the hand of Amazon
Consumers are willing to price-compare several brands, and Amazon gives them just that opportunity. On the website, and with Alexa, Amazon can first offer up their private label products to consumers. This trend shows the need for true IP and differentiation: otherwise just a commodity with a race to the bottom.
Amazon owns the consumer data and can enter any business (begin selling products themselves) the moment a category becomes attractive. To outrun competitors and reinforce the core value of selection, Amazon introduced Amazon Marketplace, letting third parties fill in the long tail. Sellers got access to the world’s largest e-commerce platform and customer base, and Amazon was able to balloon its offerings without the expense of additional inventory. Amazon Marketplace now accounts for $40 billion, or 40 percent, of Amazon’s sales. Sellers, content with the massive customer flow, feel no compulsion to invest in retail channels of their own. Amazon benefits with having the largest store, and collection the largest amount of consumer data.
Amazon’s retail platform just may have been the Trojan Horse that established the relationships and brand later monetized with other businesses. Amazon did not turn its first profit until Q4 2001, seven years after its founding, and has dipped in and out of profitability ever since. In 2015, Amazon spent $7 billion on shipping fees, a net shipping loss of $5 billion, and overall profits of $2.4 billion. Crazy, no? No. Amazon is going underwater with the world’s largest oxygen tank, forcing other retailers to follow it. In the past few years, Amazon has traded on this brand equity, leveraging it to extend into other businesses, and has expanded into other, simply better (more profitable) businesses. These additional businesses include:
Amazon Web Services (AWS): Analysts predict that AWS could reach $16.2 billion in sales by the end of 2017, making it worth $160 billion—more than the company’s retail unit. In other words, while the world still thinks of Amazon as a retailer, it has quietly become a cloud company—the world’s biggest.
Advertising: 55 percent of product searches start on Amazon (vs. 28 percent on search engines such as Google).This shifts the power, and margin, from Google and retailers to Amazon.
Washington Post: Bezos turned the Post toward the web with a vengeance. Its online traffic doubled in three years, leapfrogging the Times. And the Post developed a content management system that it’s now leasing to other news outlets. According to the Columbia Journalism Review, this CMS could generate $100 million a year.
Content Creator & Platform: Development of Amazon exclusive content for Amazon Prime members, and distribution platform of non-exclusive content. Ideas for content are given the budget for a pilot, and then viewers are asked to vote online for which series get greenlighted.
Ocean Transportation – Fulfilment by Amazon (FBA): In 2016, Amazon was given a license to implement ocean freight services as an Ocean Transportation Intermediary. So, Amazon can now ship others’ goods. This new service, Fulfillment by Amazon (FBA), won’t do much directly for individual consumers. But it will allow Amazon’s Chinese partners to more easily and cost-effectively get their products across the Pacific in containers. The shipping market, (mostly) across the Pacific, is a $350 billion business, but a low-margin one. The biggest component of the operating cost comes from labor: unloading and loading the ships and the paperwork. Amazon can deploy hardware (robotics) and software to reduce these costs. Combined with the company’s fledgling aircraft fleet, this could prove another huge business for Amazon.
Entering Physical Retail: Why should Amazon, the king of online retail, get into multichannel retail? Because e-commerce doesn’t work, isn’t economically viable, and no pure e-commerce firm will survive long term. On the front end of the e-commerce channel, the cost of customer acquisition continues to rise as consumers’ loyalty to brands erodes. You have to keep reacquiring them. In 2004, 47 percent of affluent consumers could name a favorite retail brand; six years later that number dropped to 28 percent. That makes pure e-commerce play increasingly dangerous. Nobody wants to be at the mercy of Google and disloyal consumers.
Amazon is building the most robust logistics infrastructure in history. Amazon’s storefronts will effectively be warehouses that support Amazon’s, and other retailers’, last-mile problem. Amazon’s fulfillment costs have grown 50 percent since Q1 2012. That’s not sustainable, unless Amazon can garner membership fees and charge others to use its infrastructure, which is exactly where the company is headed. Overnight delivery firms FedEx, DHL, and UPS have raised their prices an average of 83 percent over the last decade. And since the advent of tracking thirty years ago, there hasn’t been much innovation in the overnight space. DHL, UPS, and FedEx are worth a combined $120 billion. Much of this value will leak to Amazon over the next decade, as consumers trust Amazon more, and the Seattle firm can boast the largest shipper in the United States and Europe—itself—as its first client.
Acquisition of Wholefoods Supports Amazon’s Mission of being within an hour of as many people as possible: Amazon now offers everything you need, before you need it, delivered in an hour to the 500 million wealthiest households on the planet. Every consumer firm can pay a toll to access an infrastructure less expensive to rent from Amazon than to build itself. Nobody has the scale, trust, cheap capital, or robots to compete.
Jobs made taking risks Apple’s first option: through that shift, transforming Apple into the biggest company ever, after the risk-averse years under John Sculley, Unlike every other Fortune 500 CEO, Steve Jobs punished careful thinking, and history recorded the results. Eventually, Apple would drop “computer” from its corporate name in recognition that the concept of the computer was anchored in the past. The future would be about stuff, from music to phones, powered by computers. The customer could carry these branded products around, even wear them. Apple began its march toward luxury.
Simplicity is an obsession at Apple. Simplicity entails sleek appearance and ease of use—when the interaction with an object sparks delight, brand loyalty increases.
Apple Strategically Became a Luxury Brand:
Apple decided to pursue scarcity & luxury to achieve outsized, irrational profit. Since men are wired to procreate aggressively, the caveman in us hungers for that Rolex, or Lamborghini—or Apple. Luxury products make no sense on a rational level. Steve Jobs’s decision to transition from a tech to a luxury brand is one of the most consequential—and value-creating—insights in business history. Technology firms can scale, but they are rarely timeless. On the other hand, Chanel will outlive Cisco. As early as the Macintosh, Apple realized it wanted off the tech train and moved away from the ethos of offering more each year for less money (Moore’s Law). Apple’s business today is to sell to people goods, services, and emotions—and being more attractive. Apple delivers those factors via semiconductor and display technology, powers them with electricity, and wraps them in luxury. It’s a potent and intoxicating blend that has created the most profitable company in history.
Its self-expressive, luxury brand appeals to our need for sex appeal. Only by addressing our procreative hungers could Apple exact the most irrational margins, relative to peers, in business history and become the most profitable firm in history. Apple’s marketing and promotion have never been traditionally sexy. The message is not that owning an Apple product will make you more attractive to the opposite (or same) sex. Rather—and this is common with great luxury brands—the message is that it will make you better than your sexual competitors: elegant, brilliant, rich, and passionate.
It’s easier for luxury brands to permeate geographic boundaries than mass market peers. With the global elite everyone in the room speaks the same language (literally and figuratively), wears Hermès, Cartier, or Rolex, has kids at Ivy League schools, and vacations in a coastal town of Italy or France or St. Barts. However, fill a room with middle-class people from around the world, and you have diversity. They eat different food, wear different clothes, and can’t understand each other’s languages. It’s anthropology on parade. The global elite, by contrast, is a rainbow of the same damn color. Mass market retailers who sell to the middle-class, including Walmart and Carrefour, have to hire ethnographers to guide them in local markets. But luxury brands, including Apple, define their own universe.
Apple Physical Retail:
The Case for Opening Physical Retail doors: Drexler recognized that while television could broadcast a brand’s message, physical stores could go much further. They gave customers a place to step into the brand, to smell it and touch it. Jobs understood, as none of his peers did, that whereas content, even commodity products, might be sold online, if you wanted to sell electronics hardware as premium-priced luxury items, you had to sell them like other luxury items. That is, in shining temples, under brilliant lights, with ardent young “genius” salespeople at your beck and call. Apple’s stores sell nearly $5,000 per square foot. Number 2 is a convenience store, which lags by 50 percent. It wasn’t the iPhone, but the Apple Store, that defined Apple’s success.
Facebook is all about emotion. It has long been known that people exist in groups of a finite and specific size. The numbers repeat themselves throughout human history, from the size of a Roman legion to the population of a medieval village, to our number of friends on Facebook. These numbers have a very human source: we typically have one mate (2 people), the people we consider very close friends—as the joke goes, people who will help you move a body (6 people), and the number of people we can work with efficiently as a team (12), up to the number of people we recognize on sight (1,500 people). The unseen power of Facebook is that it not only deepens our connections to those groups, but by providing more powerful, multimedia lines of communication, it expands our connections to more members. This makes us happier; we feel accepted and loved. It’s easy to be skeptical about Facebook, especially with all of the self-promotion, fake news, and groupthink spread on the platform. But it’s also hard to deny it nurtures relationships, even love. And there is evidence that these connections make us happier.
Advertising – Targeted Scale:
Historically, in marketing, scale and targeting have been an either/or proposition. No other media firm in history has combined Facebook’s scale with its ability to target individuals. Each of Facebook’s 1.86 billion users has created his or her own page, with years’ worth of personal content. If advertisers want to target an individual, Facebook collects data on behavior connected to identities. This is its advantage over Google—and why the social network is taking market share from the search giant. Powered by its mobile app, Facebook is now the world’s biggest seller of display advertising.
Some digital companies also lag. Twitter, for example, doesn’t know much about its customers. Millions of them have fake names, and as many as 48 million (15 percent) are bots. The result is that while the company can calculate changing moods and appetites in different areas of the planet, it struggles to target individuals.
Power of the Network Effect & User Generated Content:
The Value of the Network Effect: This is tantamount to a car that becomes more valuable with mileage. We now have a Benjamin Button class of products that age in reverse. Wearing your Nikes makes them less valuable. But posting to Facebook that you are wearing Nikes makes the network more valuable. This is referred to as “network effects” or “agility.” Not only do users make the network more powerful (everyone being on Facebook), but also when you turn on Waze, the service gets better for everyone, as it can geolocate you and calibrate traffic patterns. Where should you work or invest? Simple: Benjamin Buttons.
User Generated Content: Facebook benefits from the ultimate jujitsu move: it will likely become the largest media company on earth, and it gets its content, similar to Google, from its users. In other words, more than a billion customers labor for Facebook without compensation. By comparison, the big entertainment companies must spend billions to create original content.
Innovation & Acquisitions:
Innovation: The birthing, and killing, of new products makes Facebook the most innovative big company on earth. Less celebrated, but just as important, is Facebook’s willingness to quickly back off when it gets pushback from users or the federal government. Facebook knows that its hold on users remains tenuous. Despite the considerable effort those users have put into constructing and maintaining their pages, a sexier competitor could still draw them away by the millions—just as Facebook did to Myspace. So, when its endless monetizing initiatives piss off users—as did Beacon—the company quickly withdraws, waits, then probes somewhere else with some other innovation.
Taking from Others: Facebook & Snapchat: Facebook is developing a new camera-first interface in Ireland. It’s a clone of Snapchat. In a 2016 earnings call, Zuckerberg said, and this may sound oddly similar: “We believe that a camera will be the way that we share.” Facebook has already appropriated (that is, stolen) other Snapchat ideas, including Quick Updates, Stories, selfie filters, and one-hour messages. The trend will only continue—unless the government gets in the way.
Instagram Acquisition: One way to appreciate the brilliance of this acquisition is to look at Instagram’s “Power Index,” the number of people a platform reaches times their level of engagement. This social index reveals Instagram as the world’s most powerful platform, as it has 400 million users, a third of Facebook’s, but garners fifteen times the level of engagement.
The Dark Side of Facebook:
Fake stories are part of a thriving business. Getting rid of them would force Facebook to accept responsibility as the editor of the world’s most (or second most) influential media company. It would have to start making judgments between truth and lies. That would spark outrage and suspicion—the same kind that mainstream media faces. More important, by trashing fake stories, Facebook would also sacrifice billions of clicks and loads of revenue. Facebook attempts to skirt criticism of its content by claiming it’s not a media outlet, but a platform. This sounds reasonable until you consider that the term platform was never meant to absolve companies from taking responsibility for the damage they do.
Click Bate & Extremist News: Video with some guy in a cardigan sweater discussing, in a balanced tone, the pros and cons of free trade with Mexico. How many clicks would that get? Marketing to moderates is like fracking for gas. You only do it if the easier alternatives aren’t available. Thus, we are exposed to less and less calm, reasonable content. So, Facebook, and the rest of the algorithm-driven media, barely bothers with moderates. Instead, if it figures out you lean Republican, it will feed you more Republican stuff, until you’re ready for the heavy hitters, the GOP outrage: Breitbart, talk radio clips. You may even get to Alex Jones. The true believers, whether from left or right, click on the bait. The posts that get the most clicks are confrontational and angry. And those clicks drive up a post’s hit rate, which raises its ranking in both Google and Facebook. That in turn draws even more clicks and shares. In the best (worst) cases—we see them daily—the story or clip goes viral and reaches tens or even hundreds of millions of people. And we all step deeper into our bubbles. This is how these algorithms reinforce polarization in our society. We may think of ourselves as rational creatures, but deep in our brain is the impulse for survival, and it divides the world into us vs. them. Anger and outrage are easily spiked. You can’t help yourself but click on that video of Richard Spencer getting punched. Politicians may seem extreme. But they are just responding to the public—and the anger we are working up daily in our news feeds, our march to one extreme.
If Apple has managed to achieve a degree of immortality by converting itself into a luxury goods company, Google has accomplished the opposite: it has made itself into a public utility.
Google (and Facebook in a different context): takes advantage of the declining costs of distribution by giving its users access to a world of previously expensive information, then extracts billions in value by being the new gatekeeper. Google gives the consumer the best answer, for less, more quickly than any organization in history. The brain can’t help but love Google.
If you want to witness a small part of the staggering diversity of questions asked of Google in real time, go to google.com/about and scroll down to “What the world is searching for now.”
You can be banished from Google: Google has cast out payday lenders, white supremacists, or any firm that charges an interest rate greater than 36 percent.
The Four, of course, don’t start out as globally dominant megalodons. They begin as ideas, as someone’s garage or dorm-room project. Their path looks obvious and even inevitable in hindsight, but it’s almost always an improvisational series of actions and reactions. As with professional athletes, we tend to focus on the stories of the few who make it
Second Mover Has Its Advantages: Industry pioneers often end up with arrows in their backs—while the horsemen, arriving later (Facebook after Myspace, Apple after the first PC builders, Google after the early search engines, Amazon after the first online retailers), get to learn from their predecessors mistakes, buy their assets, and take their customers.
Every successful firm in the digital age needs to ask: How can I build and expensive competitive advantage that would take a long time for competitors to copy? Apple has done this superbly, continually investing in the world’s best brand, and in stores. Amazon, also going for moats, is building a hundred-plus expensive and slow-to-get-built warehouses.
Most companies are not, and can never be, the low-cost leader. It’s a select club that demands scale for long-term success. But what if you’re not, and do not aspire to be, the logistics king? Then your focus should migrate from the rigid calculations of the brain to the more forgiving heart. That’s the nature of passion—and the heart is one of the few forces that can override the decisions of the head. Whether it’s Christian Dior, Louis Vuitton, Tiffany, or Tesla, luxury is irrational, which makes it the best business in the world. In 2016 Estée Lauder was worth more than the world’s largest communications firm, WPP. Richemont, owner of Cartier and Van Cleef & Arpels, was worth more than T-Mobile. LVMH commands more value than Goldman Sachs.
Additionally, products driven by technology and defensible IP are the bomb.
The point is not that young companies just “steal” things to become great, but that they see value where others don’t, or are able to extract value where others can’t. And they do so by whatever means necessary
Don’t be trapped into thinking that product differentiation is about the widget you’re selling. Differentiation can occur where consumers discover the product, how they buy it, the product itself, how it’s delivered, and so on. A worthwhile exercise is to map out the value chain of your product or service from the origin of the materials through its manufacture, retail, usage, and disposal . . . and identify where technology can add value, or remove pain, from the process/experience. You’ll find that this value can affect every step—and if you happen to spot a step where it hasn’t, start a new company there. Amazon is adding technology and billions to the fulfillment segment of the consumer experience that will likely create the most valuable firm in the world. Before Amazon, ordering from Williams-Sonoma meant you would pay $34.95 to get the product in a week. Now it’s free in two days or less. The most mundane part of the supply chain ended up being the most valuable in the history of business.
If you don’t have a product that is truly differentiated, you have to resort to an increasingly dull, yet expensive, tool called advertising.
The ROI of investing in the pre-purchase process (advertising) has declined. That’s why successful brands are forward integrating—owning their own stores.
While it may seem that the value explosion brought by the technology revolution comes from the addition of new features and capabilities, its greater contribution comes from removing obstacles and time killers from our daily lives. For example, paying is friction, and it is disappearing. Just as hotel checkout disappeared a decade ago, check-in will be a thing of the past in another ten years. Some of the better hotels in Europe no longer require you to sign a bill after a meal. They know who you are and will charge you. Less is more.
In the last decade, the world’s most important companies have become experts in data—its capture, its analytics, and its use. The power of big data and AI is that it signals the end of sampling and statistics—now you can just track the shopping pattern of every customer in every one of your stores around the world—and then respond almost instantly with discounts, changes in inventory, store layouts, etc. . . . and do so 24/7/365. Or better yet, you build in the technology to respond every second, automatically.
must have technology that can learn from human input and register data algorithmically—Himalayas of data that can be fed into algorithms to improve the offering. The technology then uses mathematical optimization that, in a millisecond, not only calibrates the product to customers’ personal, immediate needs but improves the product incrementally every time a user is on the platform for other concurrent and future customers.
The new marketing is behavioral targeting. And it works: nothing can predict your future purchases like your current activities. If I’m on the Tiffany website, and I have searched for engagement rings, and I have set up an appointment to purchase such a ring at a certain boutique, that likely means I am about to get married. If I’m spending a ton of time on the Audi site configuring an A4, then I am in the market for a $30,000 to $40,000 four-door luxury sedan. Thanks to artificial intelligence we now can track behavior at a level and scale previously unimaginable.
Personal Data Collection:
Google controls a massive amount of behavioral data. However, the individual identities of users have to be anonymized and, to the best of our knowledge, grouped.
Facebook can connect specific activities to a lot of specific identities. Facebook has 1 billion daily active users. People live their lives out loud on Facebook, documenting their actions, desires, friends, connections, fears, and purchase intentions. As a result, Facebook is tracking more specific identities than Google, a huge advantage when selling the ability to reach a specific audience.
Talented Workforce is Key To Future Success: a company’s ability to attract top talent requires being perceived by likely job candidates as a career accelerant. The war for tech-enabled talent has reached a fever pitch. A horseman’s ability to attract and retain the best employees is the number one issue for all four firms. Their ability to manage their reputations, not only among young consumers, but also among their potential workforce, is critical to success.
Other Companies That Could Get To The Four Status:
Alibaba: Has massive scale in one of the largest markets (China). However, a critical limitation to Alibaba’s long-term success is the company’s entanglements with the Chinese government. The government has supported its investment in a variety of ways, perhaps most substantially by severely curtailing the operations of Alibaba’s U.S. competitors in China. Western investors are willing to accept some level of government interference, but they don’t like what seems to be cheating, and the market distortions that result.
Uber has access to visionary capital and has paired it with creativity and a lack of respect for the norms around customer experience. The company can do crazy shit like that—decide to take everybody on a helicopter from an airport to a luxury hotel, or deliver kittens on Valentine’s Day. (2 million drivers), who average $7.75/hour. The firm appears to be building a vascular (last-mile) system for global business. we are seeing a celebrity death match take shape between Uber and Amazon for control of the last mile. Meanwhile, FedEx, UPS, and DHL are about to get a lesson in disruption.
Walmart may have let Amazon leap to an early lead in the race to be the dominant retailer of the digital age, but it’s not out of the race yet. With nearly 12,000 stores in 28 countries, it generated more revenue than any other company in the world in 2015, as it has every year in this century. And its 12,000 stores can be 12,000 warehouses, 12,000 customer service centers, and 12,000 showrooms.
LinkedIn: Facebook gets the bulk of its revenues from one source: advertising. By comparison, LinkedIn has three distinct sources of revenues: it sells advertising on its site; charges recruiters for upgraded access to candidates; and sells users premium subscriptions with benefits for job hunting and business development. That’s balance. These subscription revenue sources make LinkedIn unique not only with respect to Facebook, but every other major social media player.