Markets taken by big tech's Jedi mind tricks: Scott Galloway

Scott Galloway, outspoken academic and expert on big tech, says "Jedi mind tricks" and "consensual hallucination" are responsible for some huge market valuations, and warns Silicon Valley giants will entrench their dominance in the post-pandemic world.

In an interview ahead of his appearance at the Sohn Hearts & Minds investment leaders event next month, the author of The Four backed the Australian competition watchdog's code to force Google and Facebook to pay for content.

"It is time [Google and Facebook] played by a fraction of the same rules that the companies whose content they grab and chop up and monetise for a buck and give you back a nickel," Mr Galloway, an NYU marketing professor, said.

He said the pandemic had undoubtedly played into the hands of the four tech giants: Apple, Amazon, Facebook and Google.

"Whenever there is a culling of the herd, the elephants that survive have more foliage to feed back," Mr Galloway said.

Amazon, he said, "feels like it was invented in central casting for a pandemic", while Facebook and Google would "likely emerge from this pandemic not with 60¢ of the digital dollar, but 80¢".

Retailers could not compete with Amazon's access to cheap and abundant capital and he had told boards that had sought his advice that they faced an existential threat as a result.

"They expect me to spread some magic pixie dust on the desk and talk about innovation and the power of the brand and my basic answer is, 'you can't'."

Mr Galloway recounted how an Australian retailer asked him how it could counter the imminent arrival of Amazon.

"I said, 'you need to increase your lobbying budget by tenfold. You want to keep them off your shores because you will not be able to compete with a company that is willing to lose 10 to 20¢ on the retail dollar'."

Apple's genius

While the dominance of big tech was a permanent structural feature of the post-pandemic world, he had his doubts as to whether the increased valuations – measured by multiples of earnings or revenue – were warranted.

Apple's share price, for instance, is up over 50 per cent this year, far outpacing its earnings growth. But the market was rewarding the increased share of Apple's recurring revenue from 10 to 23 per cent, Mr Galloway said.

"Apple has executed a Jedi mind trick and is now no longer thought of as a transactional company but a recurring revenue company," he said.

"The marketplace has decided that companies with recurring revenues are better insulated from these types of shocks, and it has taken their multiple [higher]."

Consensual hallucination

One tech stock Mr Galloway admits he hass got wrong is Tesla, which he calls his "Waterloo".

Tesla was the top performer from the 2019 Hearts and Minds stock ideas, but Mr Galloway has branded the valuation – which exceeds that of the top four carmakers combined – as "consensual hallucination" .

"It's just a car company, it bends steel," he said.

He also believes the rise of the so-called Robinhood day traders that have stormed into the market boosted Tesla's share price.

Another call Mr Galloway said he had got wrong was Afterpay, which has stormed into the United States.

Mr Galloway was of the view that the likes of Amazon and Square, in observing the success of the buy now, pay later sector, would dip into their deeper pockets and muscle out Afterpay.

"To their credit they have executed really well," he said. "We need more companies like that that are innovators and maintain momentum."

Where Mr Galloway has strong conviction is on the need to break up big technology companies and he has advocated an overhaul of anti-trust regulation. Competition had to be fostered in a range of industries, not just tech, he said.

The Australian competition watchdog's code of conduct will order the tech giants to share revenue with media publishers of content that appears on their platforms. That includes Nine, the publisher of The Australian Financial Review.

Journalists went to great lengths to gather information, check facts, avoid publishing misinformation and to remain civil, he said.

"That shit's expensive. If you guys can figure out a way to have information that has veracity, information that doesn't undermine science, information that doesn't tear the fabric of our society, Google and Facebook should be able to do it with what is several hundred times the cashflow.

"If they can't, they need to be regulated."

This article was originally posted on The Australian Financial Review here.

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