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- [00:01]
Scott Galloway
Support for the show comes in the new season of Crucible Moments, a podcast from Sequoia Capital. What is a Crucible Moment? It's a turning point where we face a tough decision and our response can shape the rest of our lives. These decisions happen in business too, and Sequoia Capital's podcast Crucible Moments gives you a behind the scenes look, asking founders of some of the world's most important tech companies, including YouTube, DoorDash, Reddit, and more, to reflect on those critical junctures that define who they are today. Tune into season two of Crucible Moments today. You can also catch on season one at cruciblemoments.com or wherever you listen to podcasts.
- [00:40]
Ed Mylett
Think scaling AI is hard? Think again. With Watson X, you can deploy AI across any environment above the clouds, helping pilots navigate flights and on lots of clouds, helping employees automate tasks on prem so designers can access proprietary data and on the edge so remote bank tellers can assist customers. Watson X works anywhere, so you can scale AI everywhere. Learn more at IBM.com watsonx IBM let's.
- [01:09]
Polestar Ad
Create support for this show comes from Polestar. Polestar is an electric performance car brand that is focused on innovation for both cutting edge technology and design and their all electric SUV. Polestar 3 is for those unwilling to compromise. For those who believe they shouldn't have to choose between the spacious comfort of an SUV and the agile handling of a sports car. For those who need an intuitive infotainment system and a dashboard designed with minimalism in mind. Polestar 3 is for drivers who won't settle for anything less.
- [01:38]
Scott Galloway
Book a Test drive for Polestar 3@Polestar.com today's number 80,000. That's how many pounds of butter Costco recalled last month after forgetting to add milk to the ingredient list. True. Fuck. So what happens? You drink all this tequila? Seriously. Today's number 80,000. That's how many pounds of butter Costco recalled last month after forgetting to add milk to the ingredient list. Today's number 80,000. That's how many pounds of butter Costco recalled last month after forgetting to add milk to the ingredient list. True story, Ed. One day my mom caught me masturbating in the bathtub and I thought she'd be mad, Ed. But instead she just stopped buying margarine. I'm not even sure what that means. How are you Ed? How are you?
- [02:39]
Justin Theroux
I'm very well. We finally got there. Took a while. Seems like you had a pretty big night last night. No?
- [02:45]
Scott Galloway
Oh my gosh. I do some name dropping. So do you Have a posse of friends that you can just call, text at any moment. Like, what are you doing? Let's grab a drink?
- [02:53]
Justin Theroux
I'd like to think so.
- [02:54]
Scott Galloway
Yeah. Yeah. So I'd like to think so. Fuck you, man. Just take my advice. So my friend Scott Sabah used to be that guy for me in New York anyways. Died of a rare form of leukemia. But we're not gonna talk about this. This is a happy story. So now I don't have a posse of, like, textable drinking buddies, and I like to both text and drink. And so last night, hanging out, I got nothing to do, Ed. I'm in New York. I'm a C list celebrity, and I got nothing to do. And I know there's something great going on, and I also know that I'm just not a part of it. And so I text my new friend Justin Theroux of Beetlejuice fame, and I'm like, dude, what are you doing? You want to grab a drink? And he's like, I'm headed to this Hyundai Genesis reveal event. And he's like, I know, I know. Weakest flex in the world. And he's like, come. So I'm like, I'm on my way. So I went and saw the new Hyundai Genesis, which is lovely. Which is lovely. And then we're like, okay, am I gonna get a free Genesis here? Why are we here? So we're like, oh, let's go to Zero Bond. And then we text our buddy George Hahn and come out and not drink with us. I'm trying to be better about inviting people out to drink with me, even if they're in recovery. I used to think, that's it. I can no longer be friends with these people. But I'm not gonna be that way. And George is always fun. George Ozak's a little fucked up even when he's not.
- [04:11]
Justin Theroux
Yeah.
- [04:12]
Scott Galloway
So he rolls in and then. And this is totally name dropping, but I don't care. At 9:00, I know AC360 ends. So, like, at 9, 10, I text Anderson Cooper, and I'm like, brohemian Rhapsody playing now at Zero Bond. Come join us. And he's in the car. He's like, I'm in the car. I'm on my way. The four of us sat at Zero Bond and drank tequila sodas, except for George Hahn. And we had the best time.
- [04:39]
Justin Theroux
That's amazing.
- [04:39]
Scott Galloway
Oh, it's awesome. And the lesson I'm trying to take away from it is it's easy to think other people are super busy. And they are, but you never know, if you're not busy, just, like, start texting people. What are you doing? And it was, it was great to hang out with him, but what I loved about it was we're both like, we're all guys just trying to, like, find friends. And daddy went deep in the paint last night. I'm switching to tequila. According to Justin, it's a cleaner burn and not as bad a hangover. So I still feel a little bit slow today. So you're gonna have to. You're gonna have to do what I do on basically every podcast. Ed. You're gonna have to carry the show. You're gonna have to carry the show.
- [05:19]
Justin Theroux
All right, let's start with our weekly review of market vitals. The S&P 500 came down from its post election high. The dollar continued to climb. Bitcoin surpassed $90,000 for the first time.
- [05:37]
Scott Galloway
Fucking A, Ed.
- [05:39]
Justin Theroux
And the yield on 10 year treasuries increased.
- [05:41]
Scott Galloway
Who doesn't own a coin, raise their hand. Who doesn't own a coin, raise your hand.
- [05:46]
Justin Theroux
Shifting to the headlines, Spotify's monthly active users grew 11% to 640 million in the third quarter. The company is on track for its first year of profitability with a better than expected forecast for the fourth quarter. And shares rose 8%. Gambling company Flutter reported third quarter earnings that beat analyst expectations, with revenue up 27% from a year earlier. The company also raised its full year guidance due to strong results outside of the U.S. and shares climbed almost 7% following that earnings report. Disney's stock rose 9% after its streaming unit and studio business reported strong growth. Disney plus marked its second consecutive quarterly profit, gaining 4.4 million core subscribers. And the company also issued guidance that projects a jump in profits over the next three years. And finally, activist investor Elliot Management has built a $5 billion stake in industrial conglomerate Honeywell. That's Elliot's largest investment in a single stock. They want Honeywell to break up its aerospace and automation businesses into two separate companies. Scott, let's start with Spotify's very strong earnings. Your reactions.
- [06:54]
Scott Galloway
So its Stock is up 150% year to date, and they've raised a ton of money massively spent to essentially consolidate the streaming music market. And I would argue people say, what about Apple? What about Amazon? I think if you're into music, I just think you have to have a Spotify subscription. And occasionally people try to act alternative and like, well, I like Apple.
- [07:14]
Justin Theroux
That's me.
- [07:16]
Scott Galloway
You don't listen to Spotify.
- [07:17]
Justin Theroux
I Know, for me it's just a switching over issue. I know it's a better platform, but it's just a pain to switch over.
- [07:22]
Scott Galloway
Oh, I think they do such a good job. But they've taken a page out of the Netflix book and they've overspent. But for the first time it appears to be working. And they appear to be kind of hitting the same sort of escape velocity that Netflix hit about, I don't know, seven, eight years ago or five years ago, where they really are the default player in subscription music. And paid subscribers jumped 12% to 250 million. The profit margin reached 31%. That's up 26%. That knocked on Spotify was it was basically a music co op passing through all the revenues of the artists. And now it appears they have so much power that they're probably cutting better deals in terms of revenue share or lack thereof. And Spotify, get this, since 2015, last nine years, has seen its revenue grow Eightfold and it struggled to achieve full year profitability because it kept reinvesting. But that has changed. This year it's gone into profitability, which is like putting an investor's lips around a crack pipe. It means you can't take it away. And to get there again, I think the CEO took a page from Netflix playbook, emphasizing tighter cost discipline. The company has also cracked down on password sharing and raised prices twice in the past year. I think basically they are on fire. If this is like Netflix, it's still could triple or quintuple from here if they have the kind of market power I think they have because Netflix supposedly had other competitors. But did they really? Did they really, Ed? So I've always loved Spotify. It was my stock pick of like 2021 or something and it went nowhere for three years. It was flat for the longest time.
- [08:53]
Justin Theroux
You were just so early.
- [08:54]
Scott Galloway
That's it. I was early, Ed. I wasn't wrong. I was early. Yeah, that's what my ex wife used to say. You know, it's not bad. You're just early all the time. I'll be here all week. Try the veal. Okay, so get on Spotify and use their AI dj. It is fucking amazing. It is so good. It has figured out that every song for me should either be Tom Petty or Tom Petty or Elo or occasionally Calvin Harris to make me feel like I'm not a hundred years old. And it just works. I'm convinced. My whole thing, Ed, is choice is a bad thing. I only want things where there is no choice. And I love Spotify AI because a lot of times when I'm home and I'm on prescription grade pharmaceuticals and I want to dance, I don't know the perfect dance music. And Spotify figures out, you know, I think at what time what my mood is, it's really powerful.
- [09:48]
Justin Theroux
I'm glad you mentioned the AI dj because I think the thing that I've been thinking about with Spotify right now and what they're really good at is unlike a lot of other tech companies that just come out with these kind of meaningless product updates that no one really cares about, I feel like every product update from Spotify, the users just love. So they have video podcasts now which they've sort of doubled down on recently to compete with YouTube. And there are now more than 300,000 video podcasts across Spotify. That's another great product update. They have podcast comments now, basically opening up comment section. And then I think the best thing that they did from a product perspective was Spotify wrapped, which was sort of the year end review of all the stuff you've been listening to. And you know, when they did that, it exploded, it went viral. Apple Music ended up having to copy them and they have just a worse version of it. Clearly the engineers there, the product managers, they're very scrappy. They're constantly figuring out new ways to package and deliver this content. And I think, you know, the market's now recognizing this. As you said, stocks up nearly 150% in the past year. It's starting to look perhaps a little expensive, but in this case I think it's warranted. This is just a great quarter and I agree with you. I think this is a great company and clearly they're doing something right from a management perspective. And let's move on to flutter now. So this is a gambling company. They own brands like betfair and Sky Betting and Paddy Power. If you're from the UK, you'll recognize those names. But in the US they also own FanDuel. And the story of this earnings report is all about America. So US revenue jumped 51% to $1.3 billion. A big source of revenue was the NFL. The CEO said that betting activity. I found this quite staggering betting activity on some of the NFL games that are happening right now, higher than betting activity on last year's Super Bowl. So sports gambling is absolutely soaring. And if you want to ride that wave, this is the stock flutter entertainment.
- [12:03]
Scott Galloway
I'm uncomfortable with all of this, but the reality is the fastest way to scale your company with high margin revenue is to have some sort of tap into some sort of addictive weakness of the species. And this is doing that. Having gambling on your phone and having it be so frictionless is really, I think, really troubling. But at the same time, it's a great. There's just no getting around it. It's a great business. FanDuel has almost. They control almost half the market. They have 46% market share. Americans spent a record 120 billion on sports wagers in 2023. That's up 28% from 2022. This year, sports betting is expected to surpass 150 billion.
- [12:43]
Justin Theroux
150. I just want to emphasize that $150 billion in sports bets, that's a crazy number.
- [12:52]
Scott Galloway
No, yeah, it's huge. People, you know, it's fun and I mean, it really is. Passing out crack. $50 free for your first bet, right? Free money for your first bet.
- [13:02]
Justin Theroux
It's also just such a shame that like, the most ascendant companies and assets right now are just totally unproductive in terms of the actual real economy. Like, I wish that the best performing assets were actually productive. This is not societally productive.
- [13:19]
Scott Galloway
Well, the only thing I'll wrap up with is people will say, well, Scott, investing in the stock market is gambling. This is no different. No, it is different. If you invest in the stock market and you don't trade over time, you're going to make money. When you gamble, if you enjoy it, fine. Just like the way you enjoy drinking alcohol or buying tennis shoes. It's consumption. This is consumption. It's not investing. And be clear, keep track of how much psychic enjoyment you're getting because in terms of money, you're going to walk away from the table eventually, over time with less money.
- [13:48]
Justin Theroux
Let's move on to Disney earnings. Very solid quarter. Not much really jumped out to me apart from the fact that this is the second quarter in a row where the streaming business has been profitable. So last quarter was the first time that streaming was profitable. And we said, well, maybe they've got this whole streaming thing figured out. I think this earnings report confirms it. They have finally figured out streaming, which is essential for Disney because the traditional TV business is essentially in free fall. Just this number here from the earnings report. Operating profit on that traditional TV business was down 38% this quarter. And that's despite all of the election spending and that's despite owning abc. So they need streaming to work out. And it looks like that's what's happening.
- [14:34]
Scott Galloway
It's doing really? Well, I think the movies are important. The movies are meaningful, the revenue from the parks meaningful. But from the market perspective, the results of the streaming division are profound. And the streaming division had a great, great quarter. I like it because I like Bob Iger and this is going to give him a chance. Like he was stupid enough to go back to Afghanistan, but on a second tour he's going to get another medal pinned on his uniform. He's going to get to leave this combat zone called traditional media a hero again.
- [15:02]
Justin Theroux
You'd analogize Disney with Afghanistan.
- [15:05]
Scott Galloway
Well, ad supported media right now.
- [15:08]
Justin Theroux
Point taken.
- [15:08]
Scott Galloway
Yeah, I mean it is hand to combat. And the thing about Disney, they're one of the survivors because they have this singular positioning around family and unbelievably deep ip and it's starting to pay off. And also it's paying off for them because they stood the test of time through. What is this walking through the desert, if you will, of consolidation. And for the first time in two years, Netflix is no longer increasing their spend so every other company doesn't have to follow them down this rabbit hole of unsustainable spend. And there's also pricing power. Netflix is kind of creating a elevating the ceiling around pricing. And they're raising their prices, which gives everyone cloud cover to raise their prices. I think it's good for Disney, good for Bob Iger, good for the planet. I think it's a great company. I hope it stays independent and it was one of my stock picks last year at Disney and Warner Brothers, so we'll see. But yeah, I think good for them. Congratulations. Great quarter.
- [16:00]
Justin Theroux
Move on to Elliot's investment activist investment in Honeywell, which is this industrial conglomerate. I think this is interesting for two reasons. One, it's Elliot's biggest single company investment ever, $5 billion. So this is a very high conviction bet. And two, what they are suggesting from an activist perspective is right out of the Prof. G Markets playbook. Specifically, this is all about the conglomerate tax, which you've talked about a lot on this podcast, which is that conglomerates tend to get these slightly depressed valuations because investors don't really reward diversification. What they really care about is focus and growth. And that's a lot harder to do when you're, when you're operating multiple businesses. Honeywell is a great example of that because their aerospace business and their automation business, they're two very different things. And oftentimes when one has performed, the other has lagged and vice versa. So I think this is a great idea from Elliot Split them up. Have an aerospace company, an automation company. The only question I would have is, are the partners at Elliot Management listening to this podcast? Because if they are, we deserve some credit and we deserve a cut.
- [17:11]
Scott Galloway
100%. Yeah, no doubt. Check coming our way. Yeah, I like this stuff. Like sometimes when a stock gets below a certain amount, this the, you know, the hole is less than the sum of its parts. And that's, that's the strategy here. So stock's up 12% year to date, but the industrial sector ETF is up 25%. So it's underperformed the market. And then it's kind of one of these themes among old economy companies is growing by shrinking. And that is, we've talked about this. The market rewards deconglomerization. GE's breakup. In April, GE Aerospace stock had risen more than 25% and GE Vernova shares have risen more than 20%. Honeywell trades at 27 times earnings, while GE Aerospace trades at 32 times earnings. So I wouldn't be surprised if they decide to do this themselves or come up with some sort of extra dividend that gives Elliot their pound of flesh. The guy who handled Elliot better than anyone was Marc Benioff. And they showed up and said, you're spending too much money. And rather than the traditional, you have insulted me, good sirs, and circle the wagons and hire lawyers and proxy solicitors and comms people to shitpost the activists, they say, okay, we can learn from you. Marc Benioff uses his cloud cover to cut costs. AI came in and Salesforce stock is now at an all time high. And essentially what you do as an activist investor is you just show up with a big stake and say, we're here and if the stock goes up on its own, if we're wrong and the stock goes up on its own, fine, we'll sell and congratulations, you win. If it doesn't, then you need to do what we say or we're going to start nominating directors. So you get a little bit of a free call option if the stock is cheap enough. So I like these things. I think they go through a cycle where they conglomerate and they deconglomerize anyways. Aerospace and automation, do they need to be in the same umbrella? And it's this basic notion of CEOs love to diversify by having a bigger company and diversify or smooth out their earnings when again, investors don't need CEOs to do that for them. They can diversify on their own. So I like this.
- [19:08]
Justin Theroux
We'll Be right back after the break with a look at one of ChatGPT's first victims. If you're enjoying the show so far, be sure to give Profg Markets a follow wherever you get your podcasts.
- [19:27]
Scott Galloway
Support for Prof. G Markets comes from Found Small business owners know that keeping things running smoothly takes work and a whole lot of apps. One for tracking expenses, another for staying on top of your taxes, and another for payroll management. Just switching back and forth between them must eat up practically half your day. If you're looking for a way to take some of the busy work off your plate and handle all of those tasks in one place, you might want to check out Foundation Found is business banking. Designed for small business owners just like you, Found lets you manage your financial tasks effortlessly, all in one easy to use app. The platform can help you manage your money, track your spending, invoice your clients, and even handle your taxes so you can focus on running your business. Plus Found says you'll save hundreds or even thousands of dollars on bank fees and app subscriptions because their platform has no hidden fees. You can try Found for free at found.com profg Listeners can sign up for Found for free today at F O u n d dot com. Profg. Found is a financial technology company, not a bank. Banking services are provided by Piermont bank member fdic. Found's core features are free. They also offer an optional paid product. Found Plus Support for the show comes from the new season of Crucible Moments, a podcast from Sequoia Capital. Did you know that YouTube started as a dating site? Probably not, because it didn't go well. So how did the company pivot from that failure to become the household name it is today. On this season of Crucible Moments, they're going to give you an inside look at that story and more, offering an unvarnished history of some of tech's influential companies told by the founders themselves. You can Hear how losing $35 million led the founder of ServiceNow to start his own company, or how a Reddit founder ended up returning to the company just to save the site from itself. Hosted by Roulev Botha of Sequoia, Crucible Moments provides a behind the scenes look at some of the most tumultuous and defining milestones in tech history. He connects with the founders and they reflect on those pivotal inflection points and how sometimes those moments of turmoil become moments of triumph. Tune into Season two of Crucible Moments now. You can also catch up on season one at cruciblemoments.com or wherever you listen to podcasts. Support for property markets comes from Vanta, proving trust is more important than ever, especially when it comes to your security program. Vanta helps centralize program requirements and automates evidence collection for frameworks including SoC2, ISO 27001, HIPAA, and more. So you can save time and money and build customer trust. And with Vanta, you get continuous visibility into the state of your controls. Join more than 8,000 global companies, including Atlassian Flow Health and Quora, who trust Vanta to manage risk, improve security in real time. Now that's a new way to GRC. Learn more advanta.com markets that's vanta.com markets.
- [22:30]
Justin Theroux
We'Re back with profg markets. More than a year ago, chatgpt took a bite out of a leader in the edtech space. Chegg, a textbook and homework help provider, was a big winner during COVID as learning moved online. And then the AI hype cycle began. And Chegg was one of the first companies to say that ChatGPT was stifling its growth. Eighteen months later, the company is telling the same story. Chegg's earnings last week showed revenue, subscribers and web traffic all fell by double digits in the latest quarter. The company is also laying off 21% of its workforce, its second round of big job cuts this year. Scott Chegg was still blaming ChatGPT for its problems on its latest earnings call. It has lost half a million paid subscribers since the launch of that product. Shares are down around 99% from 2021, erasing $14.5 billion in value. And according to the Wall Street Journal, bond traders doubt this company will be able to pay its debts. Is it safe to say that ChatGPT has claimed its first victim?
- [23:32]
Scott Galloway
It's really interesting. So if you look at the industries that were supposed to be disrupted by AI, I've been predicting it'd be healthcare. It was supposed to be education. It hasn't happened in education. Actually, the top hundred universities are stronger, stronger than they've ever been. And I'm so confident about disruption. I started an edtech company and quite frankly, it just hasn't panned out. Chad came in people, it was a Covid darling. People, a lot of people trapped indoors taking courses. But it's off 99%. And some of this is not their fault or, you know, the market. Market dynamics will trump individual performance. But this company was going to get cut in half. Now Wiseman cut by 99%. I just think that comms here is terrible. I think to blame ChatGPT is to say ChatGPT is our enemy. Okay? You're fighting an enemy. This is the Albanian army taking on the Third Reich right now. So if you identify that ChatGPT is coming for us and they're our enemy, it's like, okay, that's too bad. And we understand, and you're right, it's their fault. But you're fucked. Because if, in fact, you're right and they're your enemy and they've identified this as a space they want to go after, or that consumers are using agents to help them with their studies or essentially find the same utility they were finding for you at a higher price, we see no reason why that problem won't get just worse. The interesting thing here is what you said about the debt. I'd love to know what the debt is trading at, because I believe someone is going to make real money here. And who is that? I think a distressed credit investor is going to come in and buy the bonds. And if they do in fact, blow their covenants and the thing goes into bankruptcy, I think whoever owns the bonds will come in, cut a lot of costs, say this is no longer a growth company, this is a distressed asset. But they do have. Revenues have fallen 18%. Subscribers have fallen 20%, which means they still have 80% of their subscribers. So this is probably still a pretty decent company. It's just that somebody's going to have to come in here, massively cut costs and recognize we're no longer a growth company, we're a company in decline. But if we can cut costs faster than the decline, we're still going to have something here. And they probably have invested a massive amount of money. I don't know what the market cap is, but if it's off 99%, that means it's like 100.
- [25:51]
Justin Theroux
It's 170 million.
- [25:52]
Scott Galloway
Okay. I'd be curious how much debt they have, but I would think distressed credit investors are looking at those bonds and saying, okay, can I own this company for tens or hundreds of millions of dollars and say it's probably worth a couple billion dollars to someone else? They have a subscriber base who are still paying companies not going to zero. The best investments I have ever made have been pulling bankrupt companies out of bankruptcy at a very low price in things like consumer products or the Yellow Pages, and then consolidating or seeing if there's other acquisitions of other distressed companies in the space, cutting costs faster than the revenue declines. And you can usually pick them up really cheaply. And then you can make a lot of money. And the analogy I always use is that in 1999, people knew Blockbuster was going away. So you could buy a blockbuster franchise for two and a half times its cash flow. They did go away, but it took another 12 years. So if you bought companies at two and a half times cash flow and they went another 12 years, you made a lot of money. And I think that's the case here. So I look at this and I think, okay, that's interesting. First kind of public chatgpt victim, although there's probably others, not as obvious, but I actually think a distressed credit investor is probably looking at the bonds right now.
- [27:08]
Justin Theroux
Yeah, you mentioned there are probably others. I mean, I looked into this, I really couldn't find many. And I'd be interested to know, maybe our listeners can identify some companies that have really gotten crushed by AI. But I do find it interesting because there was all of this catastrophizing and speculation around how AI was going to put all these companies out of business. It was going to take all these jobs. And here we are two years into this revolution and the big victim of AI is chegg, which is just like a kind of irrelevant company. Barely any employees at all. I mean, they cut 20% of the workforce, but that's only around 300 employees who are losing their jobs to AI, I guess. And so I just, it's interesting to me, and I'm a little surprised at how undestructive AI has proven to be. So I guess the question that I would pose to you, which companies or which sectors do you think are going to get hit by AI as hard as chegg just has, or is the AI catastrophizing just too overblown?
- [28:17]
Scott Galloway
Well, first off, anyone in customer service, right, gets hit pretty hard. But if I were to look at large sectors of companies, there's software as a service, and we decided that as a palindrome, it'll be service as a software. So travel agencies, publicly traded travel agencies. I wonder how real estate agent, you know, real estate agencies are going to fare in a world of AI. I don't know. That's a super interesting question around. Who are ChatGPT's next victims?
- [28:47]
Justin Theroux
Yeah, I mean, it feels like the entire economy has figured out a way to get AI on their side.
- [28:52]
Scott Galloway
I like that.
- [28:52]
Justin Theroux
Or at the very least, they've made it seem that way. And I guess the big mistake by chegg was saying AI is not on our side. As you said, AI is our enemy. But I mean, I look at the rest of these companies and no one's been taken to the woodshed by AI the way we thought. Unless I'm just missing something massive here.
- [29:13]
Scott Galloway
What I find is if you're really worried about something, it usually doesn't happen because you prepare for it. It's when you don't see the comet coming. You know, no dinosaur thought, oh, I'm really freaked out about a meteor hitting Earth. That wasn't their biggest worry. Although I don't know how anxious dinosaurs were to begin with.
- [29:31]
Justin Theroux
They were struggling with mental health.
- [29:32]
Scott Galloway
Yeah, yeah. Who knows, right? I know. Being the prospect of being eaten while you're sleeping or while you're drinking from water that is still my favorite. TikTok is the little cheetah comes up to the watering hole for a little refreshment and it's such a peaceful little water hole until an 18 foot croc takes that bitch into the water. And I mean, I just never get sick of that. And whenever I see an animal drinking at a water hole, I'm like, okay, here we go. Anyways, I don't know where I was going with that. Crocodiles. It's the stuff you don't see coming. What do you think? What do you think? What sectors do you think are going to be most disrupted by AI?
- [30:12]
Justin Theroux
This is my point. I don't think anyone's going to be, I don't think anyone's going to be hurt in the same way that Chegg did, is my view. I just, I think what's going to happen is going to be slow and we're going to figure out a way to make AI work for us. So I mean, I just find to me it's telling the fact that we're here and the big loser is this tiny company that no one cared about anyway. But you know, maybe I'll eat my words. We'll see. One detail I did find interesting though that I want to bring up. So apparently the employees of Chegg a couple years ago actually asked for an AI budget because they felt that AI would be helpful to the business, it would help with automating their answers. And supposedly the leadership denied that request. And so I feel like there are some big questions here for leaders and for managers of companies around how to innovate. Because in this case the leadership said, no, we don't need to do that. And they look stupid now, obviously. But I'm sure there are many other situations where an employee has come to leadership and said, hey, there's this new technology, we have to do it. And the manager has said, you know, thanks, but no thanks. We're going to focus on this other stuff and it probably ended up being the right decision. And the example that comes to mind for me is like the Metaverse. I mean, how many employees three years ago were going up to their managers and saying, you don't understand, Metaverse is the next big thing, we got to do it. And the guys who said no are the ones who look smart now. But in this case, if you're at Chegg, you really screwed over the entire company by not embracing AI. So I guess my question to you would be, what are some of the learnings here? For leaders, it's essentially an innovator's dilemma question. How do you correctly allocate your resources while not risking falling way behind as Chegg has done?
- [32:07]
Scott Galloway
Well, I mean, just hearing you talk, what I think is it's not sectors that'll be the losers. It'll be the companies in every sector that don't incorporate AI into their business operations. It'd be like saying, we knew that the wind tail revolution was gonna have a huge impact on the economy, but it wasn't like PCs took out the AUT, took out the restaurant business. It was the companies that didn't adapt and incorporate technology into their everyday business operations were beaten by the companies in their sector that did. I think the same is probably true here. I don't think again. I think there'll be winners and losers in every category. But will there be five or six industries that just go away? I don't know. I don't know. We'll see.
- [32:51]
Justin Theroux
We'll be right back after the break with a look at the new Department of Government Efficiency. If you're enjoying the show so far, hit follow and leave us a review on Profgue Markets.
- [33:13]
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- [34:14]
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- [35:20]
Justin Theroux
We'Re back with Prof. G Markets Donald Trump has named Elon Musk and Vivek Ramaswamy as the heads of a new entity called the Department of Government Efficiency. In a statement, Trump said the department will dismantle bureaucracy, slash regulations and expenses, and restructure federal agencies. He also called it, quote, the Manhattan Project of our time. Scott, your initial reactions to the Department of Government Efficiency, also known as D O G E A K a Doge.
- [35:50]
Scott Galloway
Well, I think the fact that they have two heads of a department on efficiency kind of says it all. And that is this makes no fucking sense. So first off, budget cuts aren't within a president's constitutional power. Only Congress controls federal spending and may or may not act on outside advice. And all of these congresspeople have districts that are all making money from federal contracts and have a lot of employees that work for the government. So, you know, you may want to slow your role here. An official government agency cannot be created without an act of Congress, so it's unclear if doja would exist within the government or outside of it. And effectively this efficiency group air quotes is more bureaucracy, not less. And look, every single administration has had something similar talking about how to eliminate bureaucracy and inefficiency in government. But let's just be real. Mandatory spending, including Social Security, Medicare and federal debt interest consumes 2/3 of the budget. So they're going to try and make find, you know, squeeze blood from a turnip that is 1/3 of the budget. Elon Musk claimed at a Trump rally in October that the federal budget could be cut by at least $2 trillion. That's just not true. To cut $2 trillion, Musk would have to eliminate both Social Security and national defense spending. And also if you did that kind of cut, you would send the economy into immediate recession because we have, what is it, about a third of our GDP center. Actually 38% is total government spending. That's actually less than Japan, which spends 42%, UK at 43, and Germany at 48. So we're spending less on government than other places. Now, granted, they would argue they get more services for their employees, so we may be in fact more inefficient. The US public sector employs 1 in 7 workers, so 14% of workers, and that's more than Germany's 13% of Mexico's 12%, but less than France's 21%. So I find this kind of a lot of jazz hands. And just to be clear, when we're talking about the person running the quote unquote efficiency department, let's look at his track record. All right, so if you look at the auto industry, you have BMW at about $1.1 million per employee. Right? You have Ford at 980,000 per employee. General Motors 1.02 million per employee. Mercedes 950,000 per employee. And who brings up the rear at $740,000 per employee? The least efficient automobile company, Tesla. So granted, he was able to maintain a minimum viable product with Twitter by laying off 80% of the employees, but he also registered an 80 plus percent decline in revenue. So anything resembling a reasonable conversation would go like this. We have to put a cap or start reducing or means testing entitlements. Not everyone should be entitled to entitlements. I should not get Social Security. I'm not sure I should be eligible for Medicare because I have the money. We are going to have to raise revenues, which is Latin for taxes. Corporate taxes are at their lowest rate since 1938. The 25 wealthiest Americans are paying somewhere between an effective tax rate, depending on who you talk to, between 7 and 16%. But they're paying less than most middle income workers. But the notion that Musk and Vivek Ramaswany are going to come in and fine $2 trillion in savings. Good luck with that. And I just also like to, I mean, I don't know if you saw, but the new Secretary of the Interior is David Hasselhoff and Jane Lynch's character from Glee is the new Secretary for Health and Human Services. I mean, this is like, this isn't even a cabinet. It's fucking Dancing with the Stars.
- [39:46]
Justin Theroux
My complaint with this is I can't tell how serious it is about the problem. And the feeling that I get is that this is mostly just a way to kind of put up a finger at the establishment. And that by putting Elon in charge and putting Vivek in charge, this is less about addressing the deficit and more about, like, owning the libs. And that, to me is a shame because this is a massive, massive problem. And everyone agrees it. Like, everyone agrees that the deficit needs to be solved and everyone agrees that it would be great to have a more efficient government. But to your point, this has been tried several times in the past. Clinton tried to do it, Reagan tried to do it, Bush tried to do it, Obama tried to do it. And the other side to it, which you also brought up, is that we need to raise tax revenue. Like, if you want to get back in the green as a government, then we need to figure out a way to raise more taxes as a percentage of our gdp. And the reality is that our nation has one of the lowest tax revenues as a percentage of GDP among all developed nations. In addition, like Vivek, Vivek has talked about getting rid of all of these government agencies. Like, he wants to get rid of the DOE and the doj. And I just, I wish he would have a sober conversation about the numbers here. If you were to get rid of every government agency apart from the Department of Defense, which is huge, if you were to get rid of all of them, you would only reduce our spending by less than a tenth. Like, these numbers are tiny. That what we spend all of our money on is, as you said, defense and Social Security and healthcare. It adds up to 75% of our entire budget.
- [41:44]
Scott Galloway
So let's talk about the Department of Education. It has about a, I think about a $220 billion budget. Some of the things they do with that money, they fund Title 1 of the elementary and Secondary Education act, which provides supplemental funding to high poverty K through 12 school districts. They have the head. They fund the Head Start program, which provides vital childcare services for many low income and rural communities across the country. The department also administers Pell Grants. Who is here speaking to you right now because of Pell Grants? Yours truly. These are investments in lower income households that couldn't go to college, which I could not have done without Pell Grants. And by the way, those are investments. They're not entitlements. They're Investments. A lot of the money that goes to seniors is welfare. A lot of things like Pell Grants and Department of Education are investments because you stop making these investments. There's a very credible argument that I end up continuing to live with my mom instead of paying a shit ton of taxes, which I do. These are forward leaning investments. Or you increase government spending on police, fire, rehabilitation, mental illness, diabetes, incarceration. I would argue the problem is we can't connect it as quickly as they'd like. I would argue the Department of Education is probably one of those departments where over the medium and long term we see a really strong return on investment. You know, Project 2025 is talking about eliminating the Department of Education which they describe as a one stop shop for the woke education cartel.
- [43:18]
Justin Theroux
Yeah, it's just like that's just an unserious proposal.
- [43:21]
Scott Galloway
Yeah.
- [43:21]
Justin Theroux
So like it's just not even about politics. It's like, can we actually have like a legitimate conversation about the problem?
- [43:27]
Scott Galloway
I don't, I don't know where I see with all of this, whether it's Roe v. Wade being overturned or this ridiculous notion about efficiency, here's who's going to get hurt. It kind of preys on the most vulnerable. Right. My kids don't need the Department of Education either will yours. But a middle class family, a family in rural America, kids who couldn't afford to go to college or junior college or need student loans are in poor school districts that don't get the funding they need because they don't have rich parents showing up and bidding $5,000 for lunch with Ed Elson or whatever at these stupid charity auctions. You know, this is again, if you reverse engineer to who really gets hurt with these policies, it's the most vulnerable. And do we need a more efficient government? Are there places to cut spending 100%. But what I would do if I were a Democrat is, and I am a Democrat is like, look, we'll go one for one you or one for two for every dollar you increase or we find in cuts you're going to raise $2 in taxes. There's been an explosion in wealth and prosperity. We keep coming up with reasons to save businesses and stimulus and ppp. Oh my God, what if businesses, what if Delta actually goes out of business but then when they're printing money, you want to lower taxes on them. So look, we need government. I do believe government is too big. When it gets to this point or even bigger than this point, it starts to crowd out private investment. I do think there's Something to the notion that we shouldn't be, whatever it is, 38% of GDP, we should be under 30%. I get it. But the only way realistically we're going to have a serious conversation is to cap increases in spending, cut in areas where we can. But also, you got to talk about the revenue side. I mean, what's next? They're going to nominate Matt Gaetz to be Attorney General. Oh, wait. Oh wait. Anyways, I'm all riled up bad.
- [45:25]
Justin Theroux
I'm going to just take the other side of this. Now though, there is a positive to this that Elon and Vivek heading up this new department. And to me it's exemplified by a tweet that was put out by the new official account for the Department of Government Efficiency that was posted on X and I really like this, they said, quote, we are very grateful to the thousands of Americans who have expressed interest in helping us. We don't need more part time idea generators. We need super high IQ small government revolutionaries willing to work 80 plus hours per week on unglamorous cost cutting. If that's you, DM this account with your CV, Elon and Vivek will review the top 1% of applicants. I love this and I love the language they're using here. And it was an incredibly popular post. I mean, people were liking it, they were commenting on it, they were saying, let's fucking go, you know, and it's a very bro y comment section. But what it has done clearly by putting Elon and Vivek in charge is they're these great marketing tools for attracting talent. Because I think previously one of our biggest issues in America has been that it's not cool to work for the government. But clearly what's happening here is whether you like Elon and Vivek or not, they're clearly making it sexier to work for the government. And that tweet, the way that they're making it exciting, that we're gonna be cutting costs in an unglamorous way, but we need the smartest people in America to help us do it. That to me is the right direction. And if using Elon and Vivek are the ways to do it, I'm actually all for it.
- [47:11]
Scott Galloway
I like that. I think that's really insightful and you're absolutely right. We need to make government jobs aspirational. And if we can use two aspirational, very successful men to create that aspiration around government work. I love how you're calling balls and strikes. And I think that's true. I think that is a positive. And anything that attracts brighter human capital into government service, that is the silver lining here.
- [47:36]
Justin Theroux
Yeah, they just need to be honest about what this is all for. And if this just becomes a giant talking point to own the libs. This is not productive, Ed.
- [47:47]
Scott Galloway
No one owns me. I'm my own woman. I'm fucking Mary Tyler Moore in Minneapolis, throwing my hat into the air. You're gonna make it after all. Yeah, ask your parents, Ed. Ask your parents.
- [47:59]
Justin Theroux
I'll do that.
- [48:02]
Ed Mylett
No need to waste it. You can never tell. Why don't you take it? You gonna make it after all.
- [48:13]
Justin Theroux
Let's take a look at the week ahead. We'll see earnings from Nvidia, Target, Walmart and Lowe's. And we'll also see consumer sentiment data for November. Do you have any predictions for us? Scott?
- [48:23]
Scott Galloway
Mine is kind of weird. So a bunch of companies, smart companies, bought up these cheap and supposedly dying local news stations. Do you ever watch local news?
- [48:33]
Justin Theroux
Never.
- [48:34]
Scott Galloway
It's hilarious. It's literally hilarious. It's some guy, the weatherman is like constantly predicting hail the size of golf balls. And it's usually some older guy with good hair who makes you feel comfortable and some hot young woman who's hoping, you know, she's going to get Katie Couric's job or, I don't know, Savannah Guthrie's job someday. And the two of them have a nice pleasant banter. And basically they do the weather, they do local sports, and in between then they have a bunch of segments called this is what stupid people did in our Neighborhood Today. But these companies hemorrhage money for 20 months every two years and then for four months they have a tsunami of money that washes over them in the form of political advertising. Because the general consensus to date has been that old people vote and old people watch local news and so they quintuple their ad rates and they just rake in money for the four months leading up to the election. I think those local TV stations and their owners are about to get disrupted, as I think one of the externalities or realizations of this election is that TV generally does not work. If you want to influence 70 year old white women, which is the viewer of MSNBC, go on and you'll reach a million people. But if you want to reach 55 million 34 year old males, go on. Rogan. I think you're going to see a tsunami of capital election spending, capital transition out of local broadcast news stations or local broadcast stations into podcasts. And I Think we're about to see this cute little anomaly in the markets be dislocated or slash disrupted. I think local TV stations are about to get the shit kicked out of them and that capital election spending, which is only getting bigger and bigger, is about to flow. I already see this happening. All these people who are clearly planning to run for president are calling me and seem to be very interested in me right now in expressing their viewpoint and telling me how much they love our work. Young men, which they do. These are good people, but they're also interested in starting to come on our podcast because everyone has noticed that the technology that doesn't work is knocking on doors and that the person with the most money is not unlike in the past, necessarily the winner here. Kamala raised more money. It's the person that's smartest about media and going after media that attracts old people who have already made up their mind doesn't work. But young men who are more persuadable people go to cable tv. People go to local news or go to cable news to sanctify their religion or their positions, and their religion is their political views. People, young men go to podcasts, actually learn they're more open there. And then if you look at the numbers anyways, my prediction is the following local news stations loss is going to be podcast gains. And we're about to see these kind of tired, non innovative companies that have had this sugar high from political spending. I think that's about to come to a fairly abrupt end.
- [51:29]
Justin Theroux
Yeah. And I would also just add, I think you gotta throw social media into the mix too, because what you just described about local news channels, like here's a compilation of stupid things people did in the neighborhood this week. That's TikTok, except with presenters, so you can get the same product on TikTok. That's what TikTok is for. That's where all the young people are. And it's pretty staggering how much more money these campaigns spent on TV ads versus social media ads. They should be on TikTok and they should be on Instagram reels, which to me is going to translate to even greater profits for ByteDance and Meta. This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our associate producer is Alison Weiss. Mia Silverio is our research lead, Jessica Lang is our research associated associate. Drew Burrows is our technical director and Catherine Dillon is our executive producer. Thank you for listening to Profg Markets from the Vox Media Podcast Network. Join us on Thursday for our conversation with Jigger Shah. Only on Profg markets.
- [52:44]
Scott Galloway
And kind Reunion. You know I'm so bullish on podcasting last night. I think next year you could make, I don't know, 15, 18 bucks an hour. If you keep this up, this could get, you know, if you keep ed, just a little motivation, a little motivation. If you keep working this hard and my predictions come true, I'm going to get to buy two Ferraris.
- [53:32]
Justin Theroux
I can't wait. I cannot wait.
- [53:37]
Scott Galloway
All right, Secretary of Transportation Joe Exotic.
- [53:44]
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