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US tech giants on track to structurally lock in ‘competitive edge’

US tech giants are on track: not just to soar through the pandemic, but to structurally lock in their competitive edge well beyond COVID-19. What is more, there will be a tsunami of reallocated capital across the economy, creating huge winners and losers that investors should get ahead of if they don’t want to miss out.
Ticky Fullerton
The Australian
 • 
Oct 28, 2020

US tech giants are on track: not just to soar through the pandemic, but to structurally lock in their competitive edge well beyond COVID-19. What is more, there will be a tsunami of reallocated capital across the economy, creating huge winners and losers that investors should get ahead of if they don’t want to miss out. So says Scott Galloway — entrepreneur, digital marketing guru and best-selling author of The Four, ahead of his keynote speech at this year’s Sohn Hearts & Minds Investment Conference.


Galloway’s reputation for sharp analysis of big tech puts him in high demand. In 2017, he ­famously predicted Amazon’s move to take over Whole Foods in the US. He also readily accepts he has been wrong on occasion. And despite being deeply invested in big tech, he wants them broken up by regulators.


Like many of us, the professor of marketing strategy at NYU Stern School of Business marvels at the trading levels of the FAANG stocks, at a time of very low interest rates. “Big tech has become more about the narrative than the numbers. Apple really hasn’t increased its earnings much in 18 months, but its stock price is up 120 per cent. The market looks at Apple and says, where is it going to be in 10 years? We’re willing to take it from a price to earnings multiple that typically averages 12 to 16, to 38 times. We really haven’t seen that before.”


More disturbing is Galloway’s observation that through the pandemic, the tech giants’ position relative to their peers has grown even stronger through viral disruption. “Whenever there is the culling of the herd, the elephants that have survived just have more foliage to feed off. Facebook and Google will likely emerge from this pandemic not with 60c on the digital dollar but 80c, because we are probably going to see one in 10, one in five media companies that compete for those dollars go out of business.”


Amazon feels like it was invented for a pandemic. “Central casting” he quips, “whether it is being deemed an essential retailer, whether it is stimulus that put billions of dollars in the pockets of consumers or whether it is the federally mandated closure of 98 per cent of the competition.” Folk stuck at home absorb massive data loads feeding into Amazon Web Services and watch streaming services. A truly captive market.


“It’s a perfect storm for these guys. Facebook and Google benefit from an oncoming consolidation. I think the incredible froth of multiples is cyclical, I think the increase in their competitive advantage is structural.”


With the possible exception of China’s Ant Financial, which on Tuesday announced the world’s largest IPO at $US34bn ($47.7bn), Galloway says Amazon is now in an unassailable position relative to its competition. He remembers meeting the head of one of the biggest Aussie retailers, who asked him what to do as Amazon headed for Australian shores.


“I said you increase your lobbying by tenfold and you lobby to keep them off your shores, because once they are there you will not be able to compete with a company that is willing to lose 10c, 20c on the retail dollar. Not one of your retailers will respond that aggressively.”


Ruslan Kogan might disagree, but the point is made. It is a feedback loop of infinitely cheap capital, value to the customer and aggressive, forward-leaning investment that no one can match, argues Galloway. Look no further than Amazon’s May 1 earnings call. Investors were expecting $US2bn in earnings. “If you’re a shareholder in Amazon, you may want to take a seat,” CEO Jeff Bezos told them.


“He said: ‘I’m not giving you any earnings, I’m taking all of that money and I’m investing it in the earth’s first vaccinated supply chain’,” Galloway recalls. “There will be different protocols, increased compensation, PPE equipment. A driver, supplier, a retailer, a customer: if you want the most COVID-19 free work environment, there’s only one company in the world that brings you this vaccinated supply chain and it’s Amazon.”


The Amazon backer also believes that tech ­giants have grown far too powerful and break-up is the only effective solution to oxygenate the economy. “What we have in the US is a small number of companies that have basically overrun government. It’s not only bad for the economy, it’s a key step towards tyranny, where basically government is no longer a countervailing force for private enterprise to co-conspire.”


The Four in Galloway’s book slide towards the four horses of the Apocalypse. Galloway wants the US government to radically overfund regulatory bodies like the Department of Justice and Federal Trade Commission in America and to rewrite the rule book on anti-trust: moving away from a test around consumer harm and prices and back to a test around market power.


“It’s no accident that in the US, traditionally 15 per cent of companies are less than a year old, now it’s less than 7 per cent,” says Galloway. He is hopeful the recent DoJ antitrust suit against Google, which is fairly narrow in scope, will progress, but the election outcome is key.


He points to an unholy alliance between the Trump administration and Google and Facebook. “The odds of a possible break-up are three to five times more likely with a well funded and more thoughtful administration around tech, the Biden-Harris administration. Trump has shown just a mix of inconsistency, incompetence and underfunding that transfers advantage to big tech.”


Galloway applauds Australia’s efforts to take on Google and the tech giants, but warns that such efforts can backfire. “There are more full-time lobbyists working for Amazon in DC than there are senators. That means the legislation ends up being shaped and crafted so that it actually entrenches their competitive position.


“I was on the board of the NY Times for two years and the first thing I suggested in the first board meeting was that we shut off Google. Effectively Google and Facebook have shown up with a dump truck to every media outlet in Western democracy and just taken cash out of it, because they play by a different set of rules and frankly because they’re smarter, have better engineers, they’re more aggressive and because the public tolerate this because of this growing idolatry of innovators.”


Of interest at Sohn will be other question that preoccupies Galloway: What’s next? “Remote: Peloton, Zoom, that’s already happened. COVID-19 is this gigantic earthquake offshore and its basically creating tsunamis, dramatic reallocations of capital that you want to get in front of.”


Galloway is already invested in three picks: “The move from commercial to residential, the move from traditional hospital and doctors’ offices to home and remote health — you are going to see in the US $US4-5 trillion in expenditure funnel through different distribution channels, that is going to create massive winners and losers. And then on campus learning to remote. Those three you want to get in front of as an investor.”


This article was originally posted on The Australian here.

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