Scott Galloway, professor at New York University and founder of L2, presented his assessment of winners and losers in technology and media at DLD17 on February 1, 2017.

The Changing Basis of Market Value

Traditional market valuation has rested on two factors: user growth and engagement. Galloway argued that this model is changing. Only 13 companies in the S&P 500 have outperformed the index five years in a row. He described the economy as becoming "winner-take-all."

Most of the companies that succeed share one feature. They are algorithmically driven. They collect data from consumers, learn from it, and update the product automatically. Each new user improves the product for every other user.

Galloway grouped companies by two dimensions: the number of data-gathering sensors, and the ability to learn from that data and self-improve. Companies that score high on both dimensions are winning.

Algorithms and Product Design

• Mass customization is losing. Consumers did not want to design their own Nike shoes. They want companies to predict products they will want before they know it themselves.
• Connected devices are winning. Galloway cited Hoover as an example of a product that improves for all users as more people use it.
• Uber is rising. Uber's valuation is about to pass that of Volkswagen. Volkswagen and Porsche are now worth about the same as Uber.
• Spotify is winning. It uses a user's playlists and preferences to build playlists for friends.
• Pandora is losing. Galloway described poor ad targeting on its ad-supported service. He received an advertisement for a GNC product aimed at men over 40 while at the gym. The ad promoted treatment for low libido and sluggishness. He said he could not determine whether the targeting was exceptionally good or exceptionally bad.

Fast fashion applies the same logic to apparel. Galloway called it a lesson in intelligence and receptors. He said Amazon is taking "all the oxygen out of the room" in retail. Fast-fashion companies have grown substantially in about ten years, outpacing the revenue growth of some of the most established retailers.

Algorithms and Political Polarization

Galloway identified a loser in the use of algorithms to shape content. An algorithm learns user preferences and pushes users toward one position. A progressive user who clicks more on left-leaning articles will see more of them on Facebook or Google. This increases the user's left-leaning views, which leads to more clicks on similar content.

Subscription Models

Most subscription businesses collect information once, at sign-up. They do not adapt iteratively. Galloway characterized this as a weakness.

Customer Acquisition and Valuation

Galloway cited several cases of high acquisition costs and valuations:

• Dollar Shave Club. Unilever acquired the company for $1 billion. Galloway said the company spent$312 per user and about $6 million per employee. Its revenue multiple was 5x. He said it was spending more than Gillette on television advertising. He described the acquisition as likely the largest write-down of 2016.
• Jet.com. Galloway identified Jet.com as the largest write-down of 2016 in technology. He cited $12.5 million per employee and a valuation six times revenue. The company spent$5 million per week on advertising, or about $100 to acquire each customer. Galloway said it would need a$20 billion valuation to break even. He described the Walmart acquisition at $3.5 billion as an expensive investment made by a company in a "midlife crisis."
• A shared-workspace company. Galloway described a company that subdivides office space, adds a coffee bar, and lets members move in and out easily. He said it is not worth $435,000 per user.

Retail and Human Capital

Galloway said that as companies automate and remove humans from operations, some of the strongest retail performers will invest in human capital. He named Best Buy, whose employees wear blue shirts, and Apple as examples.

He said businesses with little human interaction are at risk. Grocery stores are "very ripe to be disrupted." He added that luxury and premium brands, including Rolex, Nike and Samsung, risk losing their margins if they do not increase human involvement at the point of purchase.

Virtual Reality and Wearables

Galloway called virtual reality the largest "head-fake" in technology over the past ten years. He said he is the first to declare it dead. He placed it alongside 3D printing, mass customization, wearables and the Internet of Things. He predicted that investors who assume Mark Zuckerberg has better judgment on the technology will lose money. He showed a chart of Oculus Rift shipments relative to other items. The chart did not show absolute figures in the draft.

Galloway also predicted that Fitbit will go out of business. He said technology companies underestimated how difficult it is to convince people to wear devices.

He said the stocks of 3D printing companies are overhyped. He described China as the most effective manufacturing source for the goods consumers want, produced at low cost and speed.

Advertising and Google

Galloway described Google as the original example of the algorithmic model. Each search improves the system. Each user's ability to identify relevant information helps others do the same.

Google reduced its cost per click by 11%, which drew negative press. Galloway said the reduction allowed Google to grow revenue 20% over the previous 12 months. Competitors such as newspapers, search engines and television must compete with a company that improves daily and lowers prices.

He argued that digital advertising has overtaken television advertising. Digital marketing is joining newspapers and television in structural decline, unless a company is Facebook or Google. Facebook and Google accounted for 103% of industry growth, meaning the rest of the industry declined. Galloway predicted that many of the 3,500 ad tech companies that have raised more than $10 million in venture capital will face anxiety and failure over the next 24 months.

Facebook, Instagram and Snapchat

Facebook plans to make the camera its main sharing tool. Zuckerberg made this statement in November 2016. Two months earlier, Snapchat had described itself as a camera company rather than a social company. Galloway predicted that Facebook's next product will resemble Snapchat. He expects Snapchat to be one of the biggest losers of 2017. He added that the market needs a third major player.

Galloway said Facebook is focused on Snapchat and that Facebook is trying to enter retail through buy buttons. He tracks how many brands maintain a presence on each network.

Instagram is, in Galloway's view, the most valuable social platform in the world. When user growth is multiplied by engagement, it outperforms Facebook. Similar content generates more traction on Instagram than on Snapchat. As Instagram extends its video product to a larger user base, with more engineers, capital and management, Galloway expects it to draw attention away from Snapchat. He predicted that Snapchat will not go public, that its momentum is slowing, and that it will be worth less in a year.

Facebook's advertising shows signs of fatigue. About 1 in 6 posts, or 17%, are sponsored, which Galloway described as the apparent maximum. Engagement across these posts fell 20% in the last six months. Facebook also disclosed metric errors, including overstated video views. Galloway said that when most errors favor the company, they are not errors.

Apple

Galloway said Apple has lost momentum. Apple reported negative year-on-year revenue growth for the first time. He questioned whether Apple remains a hardware innovator, citing the Apple Watch as an uncertain design breakthrough. He said the company's run of growth may be ending.

Apple announced plans to produce original motion picture and television content. Galloway attributed the move to a midlife-crisis mindset among executives. He said the same mindset influences many corporate decisions.

He said Apple once used algorithms effectively. Its earlier music service used download counts to recommend music, allowing users to save $15 while obtaining favorite songs. Apple has since lost significant traction in streaming music, where competitors use implicit data more effectively to update their products.

Amazon

Galloway said Amazon had the strongest strategic year among the four largest technology companies, which he called the "Four Horsemen." He cited the following:

• Hardware. Amazon's installed base of devices is growing rapidly.
• Capital. Amazon has access to the cheapest capital in modern business history.
• Logistics. Its fulfillment network can deliver almost any product within about 20 minutes to 45% of U.S. households. Galloway noted that this figure understates the company's reach, because those households account for an estimated 70% to 80% of disposable income.
• Search. In the prior year, Amazon was the starting point for, or the subject of, 44% of product search queries. One year later, this figure rose 25% to 55%. Galloway estimated that Amazon's search business could be worth as much as Google's within five to seven years.

He described Amazon's search ranking as based on product sales multiplied by search volume. Crawlers monitor competitors to ensure that Amazon's prices match or beat competing offers.

Galloway said Amazon is strong at personalization. Three people in his office saw different home pages based on their purchase histories.

He predicted that Amazon will launch a higher-tier subscription, which he called "Prime squared." Under this model, Amazon would send two boxes twice a week: one with products it expects the customer to want, and a second for items the customer returns. He predicted that Amazon Prime Plus households will rise from $1,300 a year to$10,000. He also predicted that Amazon will become the first company with a trillion-dollar market capitalization.

Galloway said Amazon holds a unique position in retail. Retail stocks usually move together. Investors assume that Amazon's growth comes directly at the expense of other retailers, so Amazon's gains are typically matched by losses across the sector.

He predicted that Amazon will become the most valuable company in the world. He expects Apple to fall to third or fourth place within a year among the Four Horsemen.

Netflix

Galloway named Netflix the biggest winner of 2017. He described it as the operating system for television, controlling the front page of the viewing experience. He cited its scale in users and revenue. He said his own Netflix home page is dominated by documentaries on war and atrocities.

Regulation and Platform Responsibility

Galloway said a new order is emerging. He predicted backlash against the Four Horsemen, which he described as having "great power" and "great negligence."

He contrasted the legal treatment of physical and digital property. A court can order a blood draw from a suspect in a driving-under-the-influence case. A judge can issue a search warrant for a home. Galloway said the same protections are not applied to iPhones or Amazon Echo devices, which he described as sacred objects. He attributed this to what he called the "idolatry of innovators," and said legislators avoid challenging Apple and Amazon.

Facebook as a platform. Galloway said Facebook presents itself as a platform rather than a media company, which he said avoids responsibility for content. He argued that companies with a fraction of Facebook's and Google's resources spend far more effort verifying the accuracy of their content. He said fake news is spreading without fact-checking.

Galloway defined a platform as a group of technologies used as a base for other applications, processes or technologies. He said successful leaders use the term to claim exemption from responsibility. He stated that he does not doubt these leaders' personal values.

He noted a perception gap. Progressives are often seen as weak but well-intentioned. Conservatives are seen as strong but harsh. Aggressive, highly successful companies are perceived as friendly, so regulators apply less scrutiny. He said that if these companies combined the traits of Ayn Rand, Darth Vader and Darwin, the result would look something like Google and Facebook.

He compared the platform argument to McDonald's. He asked whether McDonald's could claim to be a "fast-food platform" if 80% of its beef were fake and customers developed encephalitis. He said Google, Facebook and McDonald's all source, curate, distribute and endorse content, and that media companies should meet the same standard as restaurants for the consumption they provide.

Tax Structure and Satirical Example

In a satirical passage, Galloway described how an individual could reduce taxes. He outlined incorporating in Ireland, licensing intellectual property to an Irish entity, and charging the U.S. entity a licensing fee equal to its profits. He said this would reduce U.S. profits and increase Irish profits. He stated that this would lower his effective tax rate from 45% to 8%, within the 3% to 8% range he cited for Irish rates.

He also described a hypothetical decision to refuse authorities access to his classroom, even in cases involving terrorism, murder or fraud. He presented this as an example of claiming privacy protections without accepting responsibility for statements made. He added that Amazon's value would decline as a result of his own forecasts.

Summary of Predictions