Episode 36, The atomic number of Krypton 36 is a perfect score on the ACT, I took the SAT three times such that I could get in the 80th percentile, but I didn't have great grades either. Yet the University of California, Los Angeles and Berkeley led an unremarkable kid in. Why? Because we hadn't lost the fucking script back then. Higher ed is about not taking the one percent and turning them into billionaires, but taking the other 99 percent, i.e. yours truly and giving them a shot at the one percent.

We need to fall back in love with the unremarkably. Let's love the unremarkable. Let's start here. Go, go, go.

Welcome to the thirty six episode of The Proff show and today's episode, we speak with Joost van Dreunen on June. Where's Margarets Vasti? Anyway, anyway, Joost teaches at NYU Stern School of Business. He's a colleague and is the author of One Up Creativity, Competition and the Global Business of Video Games. He is a really interesting blue flame thinker. He's probably, I think, one of the key academics in the world right now in video games. And of course, NYU Stern, we sort of woke up and realized we had the top academic in one hundred and sixty billion dollar industry.

Anyways, Joost shows up and illuminates us. It gives us the four one one. He drops some knowledge of what's happening. The IPO Get Down has been waiting for us. Finally, inside Airbnb, drop their S-1 They are going public, it looks like, in December. Some of the interesting things in the filing, the most interesting, the most interesting factoid that I found approximately 91 percent of all traffic to Airbnb get this 91 percent is coming through direct or unpaid channels during the nine months ended in September 30th.

Twenty twenty nine of ten customers are not coming through the stranglehold of Facebook and Google. Who else can say that? Can Amazon say that? I don't think so. Can any consumer brand I don't care if you are Marriott or Chanel, can anyone claim that they are get 90 percent of their traffic through non big tech channels? Think about the customer acquisition costs, how much lower they're going to be than everybody else who has to go out and pimped themselves and start paying rents to Google or Facebook.

I thought that was the most interesting and most most interesting thing about this filing. They also showed a 700 million dollar loss on two and a half billion in revenue for the first nine months of the year, despite a Q3 profitable quarter. So in contrast, in contrast, Jordache also filed to go public. Jordache lost a shit ton of money last year, lost a lot less this year. But here's the difference. Here's the difference. Airbnb is going public despite a pandemic.

DoorDash is going public because of the pandemic. And who do you want to own? Who do you want to own? Assuming, assuming that the pandemic at some point ends, whether it's just it burns out because we're so fucking incompetent that at some point it runs out of hosts or in fact, that we find a vaccine that doesn't need to be frozen to negative 700 degrees Celsius, whatever is going to happen at some point. The terrible thing about crises, including pandemics, is that they always happen.

We pretend this hasn't happened before. It happens all the time. We just decided we didn't want to be prepared for it. The wonderful thing about these crises is that they always end. So who do you want to own when this thing ends? I think you want to own I think you want to own Airbnb. The IPO announcement comes at a moment when we have record breaking covid-19 cases and hospitalizations all at the same time. Moderna Jun Fizer. In the race to produce a successful vaccine, Moderna announced that it's covid-19 vaccine proved to be 95 percent effective.

That's exciting. An airline, hotel and crew stocks all like the sound of it. You saw an incredible rip back of the beach stocks and a decline in the pandemic trade, although I personally think the pandemic trade is the way to go for the next two months because like everything that has happened in this pandemic, it's going to take longer than we would like. Despite the pandemic taking a toll on revenues, I believe Airbnb has the potential to be the most valuable hospitality firm in the world on the IPO, on the IPO and one of the ten strongest brands in the world.

Think about this. What other brand? What other brand has 40 million people on the platform right now and more people in the Airbnb platform that live than live in California? And they have seven million listings worldwide. That's more than Marriott International Hilton Intercontinental Hotels. Wyndham Hyatt combined more impressive and singular. Airbnb is the only hospitality brand that is the global awareness to generate unrivaled demand. What do you do? You go on Google. It's an incredible font of information.

And if you type in Orlando, Hilton, Orlando Holiday in Orlando, Four Seasons, you see you see a fraction of the searches for Orlando, Airbnb, name the city, name the destination with a suffix Airbnb, and it dominates what people are searching for. See above. Ninety one percent of their traffic is free, is free. Why? Because this is the strongest brand in the history of hospitality.

How can I say that? Singapore Airlines, amazing brand. It's a regional brand. Delta, an incredible brand. It's regional. You know, think about Delta if you live in Rome, Four Seasons, an amazing brand that's global. Fair point. Fair point. But it's not relative. To ninety seven percent of the population who can't afford to spend 800 bucks a night out of four seasons, what is what is the global brand with the most relevance?

Hands down, hands down. Airbnb and market valuation has a habit, has a habit of footing to awareness and share, and that share sharing awareness. The one brand, the most valuable firm in hospitality, the most valuable. I don't care if you're an airline. I don't care if you're your hotel. I don't care if you're a resort. The most valuable firm in that space will be the one with the biggest brand. And that brand is Airbnb.

What else is the mother of all moats around Airbnb? Simple. If we had ten million dollars, you and me, if we had ten million dollars, we could start a ride hailing company in Denver. That is with ten million bucks. We could get enough supply. That is drivers. We could get enough to man, that is people who want to ride hailing by advertising, I don't know, Google or Facebook or on billboards.

And we'd have a small little Denver dog ride hailing dooby dooby dooby, which means something entirely different anyway. Anyway, we could do it. If you wanted to start an Airbnb though, in Denver. What do you need? You need local supply, but you need global demand because ninety seven percent of the people staying in your rented apartments are from somewhere other than Denver. So this is an enormous moat. So how do you value this site? I think the only firms I can think of that have a global demand supply and brand equity of Airbnb and also enjoy an asset light, high margin business are the credit card companies which trade at a twenty plus multiple of revenues.

Airbnb projects twenty twenty one revenues of five to six billion, yielding a credit card like valuation, if you will, of one hundred and one hundred and twenty two billion. Supposedly it's going public at 30 billion or the valuation they can raise between one to three billion and 30 billion.

Full disclosure, I do not own any stock, but I am going to lie, cheat and steal to try and get some of the stock. I want to see what happens to it on day one, how much it pops. But I think this is a great buy another exciting business developments.

Let's check in on the mouse. That's right. Disney reported their Q4 earnings last week. Parks experiences and product revenues for the quarter decreased sixty one percent to two point six billion. Hello. Ouch. While its direct to consumer and international revenues for the quarter increased forty one percent to four point nine billion. Now, remember, the company faced pressure to double down on streaming after activist investor Dan Loeb, total gangster total gangster, urged the company to cancel its three billion dollar annual dividend payments and focus on its streaming service.

This is really interesting. Most activists typically show up and through financial engineering, say increase the dividend, stock a pop in the short term and then I'm out of here. Dan is saying, no, you need to command the space you occupy double down on content, which takes capital where it's what's the easiest or cheapest source that capital cancels a goddamn dividend. The move to the Rundell here could be unprecedented. The company announced that it would put a pause and forgo its semiannual dividend payment in January.

And Disney's board members say this is due to the ongoing impacts of covid-19. No, it's not.

No, it's not. They're testing the waters. Hey, shareholder base. Are you are you the spineless, you know, sockless people we think you are? Do you see the opportunity from Disney? And by the way, what happened when they canceled the dividend or put it on pause, I should say? What happened? The stock's gone up in the last week. This gives cloud cover to a bunch of companies who have fantastic assets but need to double down on those assets, for example, AT&T, and reinvest in the content of command, the space they occupy.

They claimed they were pausing it because of covid-19 and the company's decision to invest in its direct consumer initiatives. In that same earnings report, Disney revealed that its one year old Disney Plus had surpassed seventy three million subscribers.

Oh my gosh. I think that's the population of Germany, up from sixty one million subscribers reported it in August. Disney didn't expect to hit these numbers until twenty twenty for the pandemic as an accelerant, not a change agent. And the bottom line is Kobe was stupid, so I went out of business faster. Disney plus is gangster and it's going it's being left for the future is being pulled forward good and bad. The company's market cap is around a quarter of a trillion.

Two hundred fifty six billion. We talked about this last week with Tom Rogers, total gangster. And I'll say it again. Disney has the potential to create the ultimate Rundell with all of its assets. What's interesting, could AT&T have the ultimate Rondeau? What's a Rundell? A Rundell is an IQ test. You have do you have Netflix? Yeah, I have a credit card. My IQ is over 80. Do you have Amazon Prime? Yeah, I have a credit card in my IQ is over 60.

Right. These aren't, these aren't decisions or IQ tests or an effective recurring revenue bundle. It's easy to say that, but it has to be an IQ test. It has to be so compelling, meaning you have to have the assets to pull it off. Disney probably does have the assets, but they need to deploy them. They need to. Unleash the mouse and make them all part of a recurring revenue bonus, which you've talked about here, does AT&T, does AT&T, CNN, HBO, Warner, Cartoon Network, do they?

I don't know. That's a tough one. They're powerful, but are they powerful enough to make it an IQ test? Dunno. Dunno if it's not.

If it's not, what do you have here with AT&T and Time Warner? You have an amazing hundred and fifty billion dollar business, AT&T that's regulated. That's a duopoly. AT&T and Verizon, that's flat to increasing. OK, and then you have a 30 billion dollar business, right. Called Time Warner that is being assaulted by tanks, overrun by tanks from Cupertino and from Seattle. Simply put, all of a sudden, media Izmit feature ised. It's used to sell handsets and paper towels, which can be monetized at a greater multiple.

So you have content players coming in and spending, oh, I don't know the defense budgets of Canada and Australia on content, basically dumping content the same way the Chinese dumped steel in an effort to consolidate the market. And you have Time Warner, who has told you to be innovative, but give me my EBITA sitting there thinking, all right, how do we compete against content companies have zero cost of capital.

What should they do? What should they do? They should either double down and make this literally a bundle that no one can resist a Rundell and I'm not even sure they can get. There are a lot of that is do they have the shareholders to put up with a serious decline. And I've done that kind of massive reinvestment of the dividend and amazing content across HBO so that they could exit the advertising industrial complex where to watch amazing content from Fareed Zakaria, one of my professional role models.

Seriously, they get twenty three cents for pelting. Nine or eleven minutes of ads are of opioid induced constipation, meaning the Time Warner values my time at a buck an hour. Well, thanks, Time Warner for that. But find a way to charge me to charge me a buck an hour to watch Fareed, and I'll absolutely pay that. And they could go there, but they don't have to go through the valley of death, of getting rid of all of this affiliate and advertising fees from Pfizer and diabetes medications and the Common App anyways.

Anyways, speaking of streaming services, we like Netflix is testing out a linear channel. That's right. You heard me a linear channel in France.

Oh, my gosh. Oh, my gosh. Alert. I don't know. Alert the I'm trying to come up with something French that is not incredibly disparaging of it.

It's the impenetrable Maginot line. Variety reporter that's a world war to human Variety reported. The Netflix has around nine million subscribers in France and is calling this test feature direct. Direct is only available to subscribers and can only be accessed via a Web browser. This channel will air TV series and films that are already on Netflix is library, but in a linear format, meaning anyone watching on the direct channel will be watching the same thing.

Oh my God. Mind blown the Queen's Gambit the little. She did not expect that she did not see that move on the table. No, no, no. Room seven to pawn eight. I don't know what that means, but nobody nobody was saw this move coming. Netflix said in a statement that it's testing this feature out in France because traditional TV consumption is very popular. Many viewers like the idea of programming that avoids having to choose what to watch.

I wonder France, if they watch TV with their arms crossed and say, I don't like it anyway. Netflix subscriber growth slowed down a bit after seeing record numbers at the start of the pandemic and only gained two point two million paid subscribers between July and September twenty twenty, according to Forbes, that is the smallest or the most anemic quarterly increase since twenty sixteen. Despite that, Netflix gained more subscribers during the first nine months of twenty twenty than all of twenty nineteen.

The company currently has just under two hundred million subscribers worldwide.

Netflix. Oh my gosh.

How do you if your Time Warner, if your only streaming video platform, how do you compete with people who own the rails, who own the rails like an apple, or can throw just so much capital at the thing because their mid-life crisis boss wants to take his new girlfriend to the Emmys and is willing to spend three hundred fifty million dollars for each Emmy versus 70 million at HBO. How do you compete? How to compete? And then how do you compete with a company that's going to spend twenty billion dollars on content this year?

What does that mean? It means that HBO is going to launch one new series or an original movie every week this year. But guess what? Guess what? Netflix is launching one every day.

It is such a wonderful time to have a really, really wonderful couch and edibles.

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Welcome back, here's our conversation with Joost van Dreunen, a colleague at the NYU Stern School of Business and the author of One Up Creativity Competition in the Global Business of Video Games.

I first met Joost when he came to he basically said, I'm a professor at NYU. I love the work. You're doing it all, too. And he's been very open. And he said, I'm going to start a company that does what L2 does. But for video games, I sold out to twenty seventeen and then he sold his company to Nielsen, which looked at the video gaming industry. He sold it in twenty eighteen. So he is I don't him a mini me because as far as I know he sold his company for a billion dollars, but he's a really impressive guy and we woke up and when you know, we have one of the great blue flame thinkers at NYU Stern around the video game industry, which, by the way, is enormous.

Anyways, here's our interview. OK, Joost, where does this podcast find you?

I'm in Brooklyn for Green in the basement. Nice. So Joost are Professor van Dreunan and teachers are very popular course on what's the course called, Joost?

Yes, the business of video games. There you go. So that's why we have your star on. So let's start there. Give us kind of video games for Dummies overview of the industry.

So the games industry in a nutshell, has transitioned from the fringes of entertainment to become a mainstream form of how people spend their time. And it has done so while every other media and entertainment industry sort of collapsed on top of itself.

And so the nutshell, the summarized version goes something like this. Over the last decade, the industry has really blossomed as a result of digitalisation and the popularization of the smartphone. So the industry moving away from a product model to a service model has allowed it to really grow. So today it's about one hundred and sixty billion dollars worldwide. And consumer spending, it's two and a half billion people that play games regularly every day, every week.

Most of us will remember a time when, you know, you try to shove a cartridge into a Nintendo entertainment system or you're fiddling around with your Gameboy. So nowadays we have a new generation of Xbox, syas X, the new PlayStation five. We have cloud gaming on the horizon. And so all that kind of amounts to an industry that as we see news and video and music and wrestling and struggling with digitalisation or this move to the Internet, you see the games industry thrive.

So it's always been an interesting topic for my class and in other conversations to figure out what makes them so different.

So a couple of things jumped out. The first is one hundred and sixty billion. So domestic box office I think is five or seven billion. How big is the cable bill? I mean, that's even though we all know about video games and anyone with kids at home is exposed to video games, I feel as if the business press relative to the size of the industry, it doesn't get nearly the oxygen it deserves. I mean, a hundred and sixty billion dollars.

What are some analogies here? That's a bigger industry than what cable? I think it is bigger than cable television, isn't it?

It's in on a country level basis. It's it's the third largest entertainment industry in the U.S. right behind cable TV and ad based broadcast TV. But it's definitely bigger than radio in all its formats and music, video and so on. Newspapers, magazines, of course, globally, it's the same size roughly as the sports business.

And so if you add it all up, all of the different sports and varieties and flavors and all of the different sponsorships, of course, that's a business that makes a lot of its money indirectly, whereas games is pure, direct consumer spent currently, and it's as it is. So it's been a it's a fascinating business in its own right.

So in traditional media, you have the content guys and you have the cable or the distribution and sometimes they're vertical. But there's a tension and, you know, peaceful coexistence all out war. What is the relationship like between the biggest content players? Who are they and the biggest distributors and how many of them are vertical?

So. There's three main components to that traditionally, so you'd have to the game publishers, big content creators to do all the marketing, they create all the confetti and glitter. Then there's the platform holders to the Nintendo, Sony and the Microsoft that sit in the middle and sell the devices and create an install base against which content creators then say, I'm interested, they have enough users out there, we're going to build something that works with their box. And then, of course, there's the retailer's Best Buy, GameStop, Wal-Mart and so on.

And so those relationships end to all kind of they're all in it together. So they out of a 60 dollar game, a publisher will get twenty four bucks a platform. We'll get 12 and the retailer will get 12. And then the remainder sort of carved up between the developer and, you know, in a traditional sense.

Also, the distributors like to the men in the van kind of firms, that has shifted dramatically because of digitalization, because now no longer are you working with GameStop. I'm sure you've been reading about GameStop and the traditional way of doing retail. It's now about Apple. It's now about steam.

And so you have these digital distributors and they tend to be vertically integrated where me as a as a creative firm, I can just sign up, I can release my title, my game on their platform. But they didn't handle everything for a 30 percent cut. And so now ostensibly, I have, you know, the benefit of making 70 percent of everything. At the same time, I am entirely beholden to this one gatekeeper that gives me access to my customer base.

So the economics issue. So the negotiating power of the creatives has diminished to some degree unless you're very, very large.

And so that has been an interesting point of tension in the industry over the last few years and that the choke point there has been Apple because they own the rails. They're the ones that are. Are they placing? If I look at streaming video, it just strikes me if you look across Hulu, Netflix, Disney, Plus, Apple gets between three and 12 percent of their revenues by just charging that 30 percent first year, 20 percent second year. They're basically heads.

You win heads, you lose tails. I went there making money across every streaming video platform. Is it the same in the gaming industry? Mm hmm. Yeah, so in terms of games, the App Store is 90 plus percent, just video games. It's better than some Google Play or whether it's on the website or. They make about 11 billion dollars a year, the difference with traditional the conventional platform holders is that Apple doesn't really reinvest that money back into the ecosystem.

So if Microsoft and Sony push out a new console, which they're currently doing, and it's all very interesting, but so what they're doing is they spent a lot of money on marketing. They're subsidizing a lot of development because they want there to be great content for their platform. So the people will buy the new box and that box will last them about seven years with some iterations to it. But mostly it's one solid five to seven year generation in Apple's Université.

You know, they have that planned obsolescence. So you have a new device every year.

And then Apple does not then give people subsidies or, you know, start investing in exclusive content because they don't care about that. But for the same reason that Google and Facebook and Amazon also, don't they really see it as something that's a complementary assets to their larger business of selling phones? And it helps them cell phones, obviously, whereas, you know, by comparison, Sony and Nintendo, they sell 50 to 100 million devices of their of their consoles.

And that's about it. You know, their money really comes from selling the software. And so then they are much more willing to negotiate with the creative community to say, well, what what can we help you build so they both can be successful, whereas Apple, they're really just rent seeking in that context.

So talk about big tech, talk about over the last five years, as much as 10 years just in the last five years, it feels as a big tax power has grown exponentially. Has that impacted the video gaming industry as much as it's impacted? So streaming video or e-commerce? The short answer is yes. So, you know, you have to imagine that the largest US publisher, Activision Activision Blizzard, acquired King Digital back in 2014 for about six billion dollars, sorry, four billion dollars.

And so what they did was basically buy into a mobile part of the ecosystem of mobile had been the big growth segment in the industry. You have conventionally you have three categories console gaming, PC gaming and mobile gaming. Mobile gaming just went bonkers. And so Activision bought in. They bought the biggest publisher at the time.

And they did that really just to have access to that audience and to have access to that technology and the IP. And so they feel that the little pie chart of how many people they reached and what the makeup of that audience was, all of them now are suddenly in that same strategy, beholden to Apple and Google, because those are really the only two platforms.

And really it's it's Apple for most of them that that makes most of the money. But the retail relationship, which, you know, you know all too well between a creative firm and these platform holders is very different than traditional conventional retailers. Right. And by which I really mean if GameStop and Wal-Mart, they're into, you know, selling titles, boxes at their stores, they're willing to kind of work on the margins. They're willing to promote and subsidize and give you, you know, shelf space, all this stuff and all of that is incorporated into the strategy and the relationship and the context that they make with an Amazon and Apple.

Those companies increasingly will pass out all of these bits and features, saying it's required that you have an account manager. You have to have, you know, this much money for marketing available. So they have all these requirements and they start to charge all of those things separately as line items rather than one big agreement. And so that's very annoying for creative firms, especially big ones, because they're not used to being treated this way. So it puts them on the back foot.

At the same time. They have no choice but to go through them because that's the access point to the massive audience of mobile gamers. So in other words, you have all of a sudden you have these big time legacy publishers that are now sitting in a very different spot at the table, having to negotiate much harder with these new retail relationships that they didn't have before. So that's a that's a point of friction.

Inevitably, last five years, who have been the biggest winners in terms of increasing stakeholder value or power currency in the video gaming sector?

And who have been the biggest losers? That's a good question.

So the the biggest winners in my mind will always be the content creators and so the top line IP holders that we all know and love, whether that's fantasy role playing games, sport games or what else have you, those tend to do really, really well. At the same time, I think it's also important to note that these legacy publishers have been totally timebombs by these newcomers from particularly China. So companies like Nettie's and particularly Tencent have been incredibly successful.

So and the and the reason for all this would be the legacy publishers, because they are used to doing things in a certain way. They have this sort of mental inertia about embracing new technologies. They look at it saying, well, I'm used to have my console relationships. I'm happy with my retail partners. I'm not chasing mobile down as fast as everybody else. We're just going to wait and see. But in the process, of course, they lost a lot of momentum, allowing a lot of new companies to enter into the space.

And you so you see this shift in power dynamics between legacy publishers and a traditional product since slowly accommodating the new economics and then the the real winners, of course, then being the companies like Tencent, Nixon and some of the big firms over there. Alibaba is going hard after after giving to and it's purely because they were able to kind of sneak in under the radar because the legacy carriers were slow to move. So while they have been very successful in raising their own share price and their market cap valuations, at the same time, you know, they told you left the door open for, you know, on a global scale, a whole bunch of competitors to move in.

And if you think about. So this industry. Well, my kids are checking Walmart and Amazon every day and been unable to get the new five. There's so much so much excitement lately about new consoles coming out. Give us your sense of just someone in the industry of how you know what's coming out, what's exciting about it, and some predictions around if and how it changes the ecosystem. It's all I'm hearing about in my household right now, and I just don't understand it that well.

OK, so far, the biggest thing about so you understand, but Freakonomics by own and the way that that can be said and ecosystem. So unlike every other category in games, the console releases, they dramatically change the hardware specifications or ostensibly do so every generation. Mm hmm. And so you've been hearing for a long time about, oh, the PlayStation five coming out, the new Xbox Series X is coming out. And it's all very excited and it's exciting because it makes it so that now we have new capability.

And so for a lot of traditional console audiences, this is the new thing. And so now we have four K graphics. We can really just do things that we couldn't do before. And so this is sort of a hardware upgrade that happens simultaneously across the entire space, both for the consumers as well as the creatives. So that's what makes it exciting, right? It's sort of the launch of a whole new category. Of course, this is relatively speaking, you know, it is a big step compared to, say, mobile mobile gaming goes up, but it's not really that big of a deal.

Every iteration of the new iPhone on the one hand.

On the other hand, PC gaming, of course, is more open in terms of hardware specs. And so a new console is sort of a mid spec PC in many ways. But what it does, it creates a lot of marketing momentum, a lot of creative energy, and that's where you start to see new games coming in. And so that's where the excitement live, saying you can be built more immersive experiences. Can we have more, you know, believable characters and these in-depth narratives around all kinds of scenarios.

And so you see, for instance, Sony spending a ton of money on content acquisition, buying, you know, very specific studios to build a particular IP out for them. Microsoft is doing to say that I just spent a billion dollars in Zenimax Media. And then, of course, you know, very obviously you move into a conversation about ownership and consolidation because it's to everybody's benefit to do and own all this stuff. So Microsoft to make its new Xbox more interesting.

They buy a bunch of stuff. Sony does the same as Nintendo has been experimenting and rolling out a whole bunch of innovative indie content. So there's all these different strategies in the market so that there's enough consoles and there's enough money being spent and to kind of grow the overall pie. And it's a it's a fascinating because every time you have a new console release, it sort of resets the clock. We start in zero again. And the question is, OK, last cycle and the eighth generation, the PlayStation four was about a two to one ratio to the Xbox One.

Can they do it again? Can Sony once again, you know, sell two to one units to Microsoft? And my expectation is that they're going to have a harder time this this time, because it's they're not as well equipped to deal with the overall digitalization in the industry. So you see Microsoft doing really well, for instance, with subscription models. They have game pass and they're moving into the cloud very aggressively, or Sony is doing a fantastic job in terms of its content rollout, but it doesn't seem as future proof currently as as its competitor.

So it's a really interesting reset of the industry, whereas it's been they've been the dominant one for years. And then because of this hardware reset, they are now open to being much more vulnerable to everybody else.

Talk about. The opportunity for different types of content on these platforms, so someone has said to me, you should teach a class or do one of your decks on Twitch or you're seeing just non-traditional content. You don't think of streaming through these platforms. What is what should different media and content creators and IP creators be thinking about, around how they leverage some of these new channels and these enormous audiences? Here's an example.

There's a company called Then, which is built by people that used to work at blizzard and ride games to these big, well-known game companies that were vague, that are very big in EA Sports and live streaming. And I'll take a step back. Live streaming, I mean, things like Twitch or life streaming on YouTube where people are watching other people play video games on the Internet. And it's either just some jovial banter and some, you know, funny person with blue hair sort of clicking away and have a good time or it's competitive where it's the best players from two countries trying to win.

So in that category, you don't see that a lot of game companies going to get lost. And so they said, well, we want to also do EA Sports. We also want to do live streaming.

It's become an accommodation with regards to marketing. So you have to imagine, like if I want to spend 60 bucks on the game, if I want to spend my time on a game, I really want to know in advance that the game is any good. So so that creates sort of a consumer uncertainty because I don't know if I want to have a good time. I'm standing at the GameStop. I'm holding the box. I guess it's a good game.

And so that kind of uncertainty then, of course, makes the market less efficient. Live streaming answers, all those questions. I can just watch some dude play whatever game for 20 minutes and decide whether or not I want to play this. You know, I could play this game for free, probably. Right. And so it changes dramatically how we create awareness, purchase intense user acquisition and sort of answer to answers, to fundamental questions with regards to entertainment and audiences, non gaming industries and other entertainment markets.

You see them starting to dip their toe in it. So there was a concert with a little X the other day and there was the Travis Scott sort of experience where you have these music artists that are releasing their new titles, their new songs in a fortnight or in a roebuck's, and they're trying to do this cross promotion, just cross pollination of different formats where they see a persistent synchronous audience in a you know, in an online space and say, you know what, we're going to just announce it.

And then this artist is going to come out and promote their new singing single and we're going to have a whole show around it. And so in some ways, we're at the very first stages of conventional media, started to incorporate these interactive elements in these online universe elements. Some people will call it the metaverse, but is persistent online space. And so the lesson really would be to to start early in the same way that we've seen television and specifically like soap series were subsidized by detergent makers back in the day.

And so they spent an entire daytime genre purely with their own subsidies. We're going to see the same thing in gaming, inevitably, but it might not be this year or next year. But inevitably, we're going to see some of the 70 billion dollars currently being spent on broadcast television sort of move into the game space. And from there, it's going to dramatically change what it means to play games.

And I believe in many ways that there's going to be the first foray into that will be the live streaming category.

So you're considered probably, at least in academia, the bluest flame thinker around this hundred and sixty dollars billion industry. Go out on a limb here, make some predictions. And one, three or five years. Well, we'll have you back on the pod. Say you got this one right. You got this one wrong. Make put yourself out there and say how you think this industry is going to change or what impact it might have on other industries.

So the first one, so I say, OK, so let's do them in order. So I think because of the size of the industry and the popularity of the industry, we're going to see advertising creep in as a viable revenue model. Not today, not yet. At least we see some game companies doing it. But there is no doubt in my mind that like every other form of media, entertainment advertisers are going to want to subsidize and get a piece of it.

They just haven't really grown out of believing that games are scary or make you violent.

Right. But in fact, it's Facebook and social media and Fox News that have done to our parents what they thought video games would do to us. But that never happens. And so entertainment has always relied on advertisers. And so we're going to see advertisers come into the game space, full force in the next three, five years, there's no doubt. And that is everywhere from like soda brands to like big companies just owning publishers out.

Second piece would be big tech is going to be a huge scourge when it comes to the games industry, so there's going to be consistent with their behavior and impact across the rest of the world.

So I'm surprising you. I know it's a it's just it's just going to they're not going to be as sure.

They're not going to be a source of good. They're not going to be a positive influence now.

Yeah. Come on.

Yeah, you're there first. It's the. But it's it's the economics. Right. So they're putting so much money into the ecosystem that it creates all these false expectations. And you kind of you see it now. Look, I love the teams at Amazon and Google because, you know, these are people that come from the games industry still, but sort of just hired a bunch of people away and they're smart, intelligent people. But just the DNA tells you which direction they're headed.

And it just means we're going to see a whole lot. All this is going to be this buffet of mediocrity when it comes to like their cloud gaming services. I've been play testing both of them, and it's just really boring. You know, like this does not get me excited at all. And it's all predicated on this idea, like, well, we're really good at tech and content. Well, who cares, right? Who gives a shit?

And so for all those reasons to think big tech is going to have sort of it's going to push back some of the evolution and innovation industry a few years because they're going to build up these expectations that they're that no one's going to actually deliver on. Yeah, that's not one. And it's got to be, of course, like, you know, there's this this whole thing between Japan and China really becoming this massive, you know, gravity point in the world side used to really be that North America was the big deal.

That's where the economics make the most sense than the Japanese, of course, and Nintendo, Sony. They would export a whole bunch of their content and their consoles over digitalization as a favor to China and all these other Southbury, all these other countries. India is probably next to really become big. And, you know, they're they're hard being as the protagonist there. I like to Tencent in the next sense, they are going to do really well.

They're going to buy everything and they have been buying everything and they're going to they're going to eat the world. Right. And so you see this huge shift already in terms of how those where those companies make their money. So historically, Asia makes most of its money outside of Asia, no longer the case. It's all inside of Asia now. And they only focus on their own markets, maybe with some, you know, neighboring geographies over time, there's only going to shift.

And you sure you're going to start to see that the U.S. is going to be a second or third tier markets in a global game's economy, which will be interesting, which, you know, because there's a lot of trade agreements being written, there's a lot of sort of political stuff that you could put against it. So creatively, what does that mean for content?

What would that look like? And then live streaming will be probably bigger than gaming itself. So right now is sort of a subset of subcategory where people use it for marketing and they hang out and they watch AMC kind of have a cool time for an afternoon. That's going to be the category that's that's bigger than actual playing games in that universe. As I look at as you have watching YAF playing and then, yes, of course, like the the money that you commit to it.

So watching gaming is going to be a massive, I guess, fourth prediction. So Twitch is really sort of well-positioned there. YouTube would do pretty well. But, you know, all of them are sort of all of them are kind of owned already.

So it's kind of boring, which brings me to, I guess, the fifth sort of big driver. And, you know, the IPO for a company like ROBLOX, which is coming up, is sort of the vignettes with regards to user generated content inherent to the instinct to play sort of part and parcel to it is the idea that you want to take ownership of it. But your kids, I'm sure as they play all these games, they spend a lot of time sort of tweaking what their character wears with funny dances.

It can do you know, how they are perceived by others in a digital environment. So you extend that same logic of how do we present ourselves in a digital environment and say, well, I want to build stuff, I want to take ownership of this in Minecraft. My seven year old figured out how to set up a land, the land based gameplay with his upstairs neighbor, and they're building stuff together. And that's the big thing to do.

It's not actually beating a boss or passing a level. They're building stuff. And so, you know, something like a roebuck's where you enable players not just to play the game, but play with the game. That's going to be a huge category, which it's all very early for a lot of people, especially in conventional entertainment. It's coming in the same way that you've seen fan art for Star Wars and Star Trek over the years. Two people want to not just consume it, they want to you know, it's much more memetics, so they want to become it just fun.

Drona teaches at NYU Stern School of Business and is the author of One Up Creativity, Competition and the Global Business of Video Games. There's also a startup advisor, an investor and previously was the co-founder and CEO of Super Data Research, which was acquired by Nielsen in twenty eighteen. He joins us from his home in New York Yose. Stay safe. We'll be right back. You know, that episode in A Clockwork Orange, where the protagonist is forced to watch a screen with his ears, eyes peeled back or so to the top of his eyelids?

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Dotcom slash property. It's time for office hours, the part of the show where we answer your questions about the business world, big tech, higher education and whatever else is on your mind, if you'd like to submit a question, please email a voice recording to office hours at Section four dotcom. First question.

Hey, Scott Galloway, John from Boston. You often talk about the need for antitrust action against big tech like Amazon. As you know, the E.U. and FTC here in the U.S. are investigating Amazon's online marketplace, specifically how Amazon uses third party sellers data to sell its own goods or create private label competitive products to sell on its site. I see the benefit to Amazon, but how is this any different from what Wal-Mart, Target, Kroger, Costco, Best Buy and other dominant retailers have done for over 20 years?

Like Amazon, retailers emphasize private label brands because they carry a higher gross margin and drive customer loyalty. So please explain why what Amazon is doing is any different. Thanks, John, from Boston.

That's a thoughtful question. And the short answer is they're not doing anything different. They're just doing it so well that it's basically sucking the oxygen out of the room for all the other players. So I advise Levi Strauss and Co. in the 90s and one of the kind of big pushes, if you will, Ed Levi Strauss and company, was they need to establish direct channels, specifically start selling on the Internet. And J.C. Penney's threatened to pull all to basically boot Levi's out of the J.C. Penney's channel if they dared to go direct with their own stores or selling them on their website.

Despite the fact that J.C. Penney's launched their own Arizona brand, which was a billion dollar brand, and they put it up front, better lit, you know, better better promotions, whatever you want to call us. You're absolutely right. Retailers have been going vertical and launching their own private label brands for a long time. But typically, typically, there is an ecosystem where the key brand creates halo for the for the private label brand. So, yeah, they're not doing anything differently.

They're just doing it at such a scale and they're doing it with such insight into data that there really isn't a partnership here. And that is they essentially create this avatar of a consumer and they watch every move this consumer makes and they see what is it about those batteries that they like, what kind of batteries. And at the moment, they figured out the moment they figured out we can get more margin from our own products, we kick those guys off or we just keep increasing even worse, we keep increasing their rents.

You've got to spend more on Amazon Media Group. You got to spend more for us to fulfill it for you. You've got to spend more for us to unpack the package, pick and pack or return or handle your returns so that you get to a point where you are so used to the volume you might be getting through Amazon, but it becomes unprofitable. You start to do a deal with the devil and you begin this inexorable downward spiral as Amazon sees everything you and your consumers are doing.

And you're right, they're just better at it. So I think this is so unhealthy, if you will, that we need to return to aggrandisement form of antitrust where congratulations, you're so good at what you do that you are making it difficult for small firms to get out of the crib and you're prematurely euthanizing big firms. You've become so dominant because you own the rails just as Facebook and Google. I get very angry at them for polarizing society by putting people into the far left or the far right.

That's nothing that CNN or Fox aren't doing. They have been polarizing our nation and ripping at the fabric of America for a long time. And they figured out it's absolutely the best way to build a news business. News used to be used to be a public service and the station's broadcast stations lost money on it, but they felt it was important. And then in came CNN and Fox and found, well, if we anger people with news, we can make a lot more money.

And then and then Twitter and Facebook took their business models and used data and processing power to scale it.

So, look, what we have is a dumpster fire and private label at Costco and Wal-Mart. What we have on Amazon, where we have it, Facebook and Google is a nuclear mushroom cloud. But yeah, conceptually speaking, I acknowledge the point they're doing the same thing. It's just that Facebook, Google and Amazon are doing it at such a scale that it's creating markets that are much less robust, much less competitive. Thank you so much for that thoughtful question, John, from Beantown.

So what they call it Beantown. Beantown, anyways, Boston. Thanks, John. Next question.

Hello. Protg Zilkha calling from Australia. Love your work. Keep the bat. Ussery coming. You called Apple going into bricks and mortar retail the most gangsta move in the last twenty years. You've described Disney's parks like Galaxy's Edge has assets that bring immeasurable value to their hypothetical Rundell. You've long praised brands for effectively deploying analog moats around the digital castles. But I'd love to hear your perspective on experience as part of the broader marketing mix, particularly with digital and physical.

Worlds meet her successes like Audy City in London, Night Rise in China or Sonus and Google's New York show Aliya's, or do they point a way forward for brands? Thanks, Scott.

I think that this pop up, what you call experiential retail, is incredibly valuable in the short run.

I think of it as like marketing. And I don't think of it as a business channel where you've seen those when you go into a Sephora, when you go into a Nike town, when you go into what Samsung should be. And that's the opportunity around Samsung, you see retail that is increasingly more experiential. Consumers don't go to stores or products that go for people or for an experience. They're going to best buy for a person who is knowledgeable about five, although the goddamn thing is sold out.

Thanks very much. They're going for experiences. These big burse experiences, this pop up experiential retail is really interesting. It has to do with duration. So this pop up, if you experience or retail, which has taken a big hit and covid, which was like the frozen mansion or the Museum of ice cream, what they figured out, what they figured out is scarcity. And that, as I see it, Ben and Jerry's and I know it's a 10 year lease.

I know I can get ice cream the next weekend, whereas I see the Museum of Ice Cream is in Miami for just 90 days or 16 weeks. They always extend it and I end up spending seventy two dollars per person, no jokes. And my kids can have pistachio ice cream, supposedly explore their imagination by jumping into a pool of plastic balls. Why do I go? Why do I do this? Why do I have ice cream and have them jump into a ball pit for 72 dollars because of scarcity?

It's going away. So which is to a certain extent, this experience or retail isn't not only about the experience, it's about the finite nature of it. I remember going to an HBO pop up at South by Southwest and there were lines around the block. And while I thought it was wonderful, I think the thing that made it special was it was only going to be there for five days.

So, yeah, this is part of a marketing budget. They're not self-sustaining. The future of retail is something so special or so efficient, and that is it's a small ghost kitchen as multipolar. That's only a thousand square feet, a small two thousand square foot canara that has pickup as delivery has click and collect whatever you want to call it, and it becomes just remarkably efficient or a distribution hub as much as a retail center or it's a place it just surprises you and delights you, a Nike town or a Sephora.

And if you want to spend, there'll be some marketing allocation around experiential high impact, if you will, pop up retail.

Thanks for the call. Last question.

Hey, Scott Marshall Berman, Livingston, New Jersey. Love the show. With the majority of students in K through 12 taking some form of online education, which of the four big tech players Amazon, Apple, Google, Microsoft, do you think are going to take the lead and end up having the best online education platform for the future?

Marshall from New Jersey, thanks for the thoughtful question. This is a really important question and I would argue about this today.

I was on MSNBC this morning with Stephanie Roll, who I love, who I love, talking about stimulus and TPP. And I think we have just gotten this so wrong, 750 billion dollars, a small business, a third of them.

The money probably got to the right place and there's some cupcake bakery or small business and needed a bridge. I think for most of them it's done one or two things. It's either been a peer and that is the business we've just kicked the can down the road. The economy is reshaping. That business isn't going to survive. We hear so many sob stories about local restaurants going out of business. We're changing the way we consume food. A lot of restaurants should go out of business.

And by the way, they say, well, 10 million people are employed by restaurants. Yeah, OK. Get the money to those ten million people, not to the restaurants, and then let the ten million people decide what restaurants should stay in business. Anyway, I was on MSNBC and we were talking about the TPP and it just struck me that we've got it all wrong. That's 750 billion dollars shouldn't go to the wealthiest cohort in the world and that a small business owners, that's seven hundred fifty billion dollars should have gone to schools.

Why? Because small business having to reshape or go out of business is really meaningful. It's terrible, but that's capitalism. What's profoundly what's profoundly tragic is the fact that 50 percent of low income kids have all of a sudden vastly underperform, fallen off the map in terms of math as it relates to middle income gets typically typically lower income kids and public schools track with upper income kids around math. But as we've gone to remote learning, because lower income kids may not have an iPad, or maybe they're worried about their iPad getting stolen, or maybe they don't have broadband, or maybe mom has to go to work and can't sit home with them and help them do online learning.

We are losing a generation of young people and beyond. How I just like. Morally fucked up, that is, it's just stupid for a second karmically, we're going to lose a generation of doctors, we're going to lose a generation of fantastic leaders in public service and for our armed services, we're going to lose. We're going to be less likely to find vaccinations in the future. We are letting a generation the real impact of this pandemic, I think, is going to be felt softly and insidiously with a lost generation of kids.

So I think your question is really important. And I don't think we can hope that Big Tex shows up with all their innovation and better angels, of which there are almost none and solve that problem. I think it has to be solved by government. I think they absolutely should be bailing out K through 12 schools.

In terms of the individuals, Apple has a great brand in education. Google threatened to do something noble with their CERT program. By the way, Senator, I personally told me about it on Pivot. I'm hoping it's not a head fake and that they weren't playing with my emotions because I haven't heard much about it, because I will go gangster on their ass is not that they think about me every day. I just don't think they think about me at all, which makes sense.

But anyways, I really hope that Google has taken this certification seriously that they promised. But yeah. Could big tech come together? Wouldn't it be wonderful if these guys took a fraction of their cash flow and adopted schools and regions and said, we have got to figure out a way to make sure there isn't a lost generation of kids?

A 19 year old trapped at home and can't return for a sophomore year. Tulane is a nuisance. A nine year old trapped in home who can't get back to public school.

That is a tragedy. That is a that is the collapse of a high school. So I'm not answering your question. I use it as a as an opportunity to do a bunch of virtue signalling and riff here. But I don't see Amazon, Apple, Google or Microsoft stepping up to the plate, and I'm not sure they should. We have a tendency to hope that innovators are going to show up and save us. They're not they're going to show up and do amazing things and make a shit ton of money for them and their shareholders.

We need the greatest force of good in history to show up and ensure that we don't lose a generation. And that's a source of good. That's source of prosperity. That's a source of progress and education. That's Uncle Sam. Our producers are Caroline Chagrinned, and Drew Burroughs if you like what you heard, please follow, download and subscribe. Thank you for listening.

We'll catch you next week with another episode of the Prop Jesus show from Section four and the Westwood One podcast network.