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DownloadHow do you gain a career edge in a world dominated by Big Tech? "The Four," namely Apple, Google, Facebook and Amazon, are worth over $5 trillion combined. What makes them so incredibly successful?
Scott Galloway, a serial entrepreneur and professor at New York University Stern School of Business, breaks down the winning strategies of "The Four" to offer critical lessons on business, career advancement and value creation in the digital age.
"The Four Horsemen:" Apple, Google, Amazon and Facebook, are extraordinary companies that in many ways define our lifestyles. They have generated unprecedented wealth, powered cutting-edge innovation and accelerated the digital economy. What were the strategies that fueled their meteoric growth? What do their scale and influence mean to the future of business and the economy? How do we build successful careers in the digital age defined by these four mega-corporations? Read on and find out.
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By being virtual, Amazon scales to hundreds of millions of customers across retail segments without having to build hundreds of stores or hiring thousands of employees.
The world's marketplace
Amazon Marketplace is an online network, which enabled sellers to gain access to the world's largest e-commerce platform. Customers got to choose from millions of products without Amazon having to invest in additional inventory. Amazon, tracking the purchase data, could enter and dominate any segment the minute it became lucrative. Traditional retailers did not respond to the Amazon e-commerce threat until it was too late, and in 2016, US retail grew at 4%, while Amazon Prime grew at over 40%. Amazon's growth is inversely correlated with the rest of the sector. This means that Amazon's cost of capital continues to decline while it increases for other retailers.
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Zero click ordering
Leveraging technology and unrivaled user information, Amazon will soon deliver products without even the need for a customer to place an order. Amazon Go, a cashless convenience store, allows customers to buy without a checkout line. Sensors scan the items as a customer walks out and automatically charges their Amazon account. This move put over three million cashier jobs at risk in the U.S. With Amazon Echo and Alexa, the company now has unparalleled access to the private conversations of millions of people worldwide. It will leverage these insights to deliver products without the need to order. Mom-and-pop shops and malls simply cannot compete.
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The power of a story
Amazon has had access to cheap capital for a longer time than any other business in recent times. This is because of its prowess in storytelling. Amazon's story is that it's building Earth's biggest store. By making progress toward this vision, Amazon has trained the market to hold it to a different standard – higher growth, lower profits and no dividends.
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Cheap capital fuels moonshots
Amazon leverages the cheap capital to run small, ambitious experiments that offer the possibility of disproportionate returns. As Jeff Bezos famously wrote in Amazon's first annual letter, "Given a 10 percent chance of a hundred times payout, you should take that bet every time." The company also invests its cheap capital of building advantages that other retailers with more expensive capital cannot match. In 2015, Amazon was willing to lose $5 billion in shipping fees to ensure single day delivery, a proposition that Walmart and Macy's are unable to match.
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While the world sees Amazon as an e-commerce giant, it has quietly become a cloud company. Amazon Web Services contributed 52% of Amazon's total operating income in Q3 2015. Amazon Media Group made over $10 billion in revenue in 2018, making it the third-largest digital media property after Google and Facebook.
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Luxury is irrational and sexual as it taps into the combined human need for transcendence and being more attractive to potential mates. While Apple has always exemplified great design, its transformation into a luxury brand began with the iPod, a branded carryable product. Scarcity is the key to Apple's success. Apple ensures that only the top one percent of the world can afford their products. In 2015, the iPhone was luxury marketing at its best, becoming a way for people to show membership in the top percentile. The iPhone accounted for only 18.3 % of smartphone sales but garnered a stunning 92% of industry profits.
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Five key attributes of luxury
Five key attributes that make Apple a luxury brand:
Jobs' decision to position Apple as a luxury brand is one of the most consequential in business history. Beyond market dominance and premium margins, it has extended the life of the Apple brand. The iPhone may not be the best phone forever. But Apple's positioning as a luxury brand and its 500 plus retail stores in premium locations across 18 countries presents a formidable moat to competitors.
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No media firm in history has had Facebook's scale and ability to target users. Over two billion users have created profiles with years of personal content. People spend 50 minutes a day on Facebook properties, including Instagram and WhatsApp. This is because Facebook taps into our core desire for relationships and connection.
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Dominating advertising
Unlike physical products that degrade with time, the more people use Facebook, the more valuable the service becomes because of network effects and personalization based on data. Firms like Facebook and Google have incredibly detailed profiles of their users, offering unparalleled opportunities for advertisers to micro-target users. Facebook also has access to the world's best ad and tech talent. Over 2000 former employees of WPP, the world's largest advertising firm, have migrated to Facebook or Google. Google and Facebook control over 51% of the global mobile ad spend.
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This advertiser's paradise is a privacy nightmare. Facebook uses phone audio and records browsing history, and tracks users across millions of websites, apart from the reams of data users willingly share. Deleting Facebook does not protect privacy. The site has already created a detailed data profile that it uses to allow advertisers to target former users across the web using Pixel, apart from Instagram and WhatsApp usage.
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World's largest media company?
Facebook is likely to become the world's largest media company, but with a twist. Unlike Netflix, which spends billions of dollars on original content, Facebook has two billion users toiling to create free content. With its global reach, vast capital and data capabilities, Facebook will conquer analog and digital media.
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Billions of users turn to Facebook and Google for news, and yet they don't want to be seen as media companies. One reason is that media companies get much lower valuations than technology companies. A more substantial reason is being a media company comes with significant responsibility, including editorial objectivity, fact-checking and journalistic ethics, instead of allowing the News Feed algorithm to optimize for clicks. Facebook abdicates this responsibility by labeling itself as a platform and not a publisher.
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Three and a half billion times a day, people turn to Google to answer their most intimate questions. No company has the credibility and user trust that Google has. Google's defining features have been the elegantly simple homepage that reassures users of the site's legitimacy and the fact that advertisers could not influence organic search results. By separating organic results from paid ads, Google enjoys having both credibility and ad revenues.
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The click economy
Google's knowledge of our queries, emails, photos and other data helps it create intimately detailed user intelligence that powers its advertising. Its auction formula for advertising, where customers set prices, has earned the trust of corporate customers. In Q3 2016, Google had a 42% increase in paid clicks and grew its revenue by 23%, and yet, its revenue captured per click declined 11%. Google effectively improved its product by 42%, while making it cheaper for companies by 11% from the previous year and still growing revenues. Google's unparalleled efficiency in pushing prices down makes it hard for its competitors like Facebook to keep up.
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Google's market cap is equal to the next eight biggest media companies combined. The closest equivalent to Google in the old economy was the "New York Times." However, Google extracts more value from the "Times" journalists than the "Times" itself. In handling search, Google can get a far better profile of the "Times" readers than the "Times" and, therefore, serve targeted ads.
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The knowledge moat
The fun name, simple homepage, organic search results and charismatic founders made Google attractive to users and seemingly unthreatening to competitors until it was too late. Behind the curtain, Google organized all of the world's information, every byte of productive info, on the web. Google's control over knowledge is unsurpassed and barriers to entry formidable. While Apple pursues immortality by becoming a luxury brand, Google has done the opposite by becoming a public utility, ubiquitous and invisible. This, by the way, puts it in the perpetual risk of antitrust suits and regulation.
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According to evolutionary psychology, brands target either the customer's brain, heart or genitals. The organ targeted determines strategy and outcomes.
Brain
The brain calculates and analyses trade-offs within milliseconds leading to rational purchases and lower margins. Amazon targets the brain by offering more for less. It runs an extremely efficient supply chain, brings down supplier prices and offers customers great deals. Revenue emerges from economies of scale in a winner-takes-all market that allows only one giant player. Google infinitely amplifies our analytical capabilities and memory to dominate the knowledge industry. It is the sole winner in the low-margin, winner-takes-all knowledge economy.
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Heart
The heart is driven by the need to love, nurture and care for others. Connecting to the heart gives margins and brand loyalty. However, Google and Amazon have signaled the end of the brand era, offering reviews and ratings that push customers to make rational choices. Facebook appeals to our hearts by connecting us to friends and loved ones to gain behavioral insights and ad revenue.
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Genitals
Sex and mating rituals overwhelm the brain's rational choices, making people irrational and, often, more generous. Luxury brands understand this and tie their business to their primal needs. A customer spends more because the act of spending is related to taste, privilege and desire. LVMH commands more value than Goldman Sachs. Apple appeals to our sexual instincts to extract irrational margins. Apple's brand message screams that owning an Apple product will make the user look more elegant, intelligent, rich and sexually attractive.
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What does it take to become the "fifth horseman?" Here are the eight factors that matter:
Emerging giants need a differentiated product. Product differentiation can occur anywhere across the value chain from the origin of materials to the distribution channel. While it may look like the value of technology companies comes from the addition of features, it actually comes from removing friction and reducing the time taken to complete the tasks.
Google captures the market's imagination with its compelling vision to "organize the world's information." This gives the company access to cheap capital, which can be invested in hiring world-class talent, pursuing moonshots and building structural advantages that competitors simply cannot match.
Building a product that appeals to people across borders is a key component of a digital giant. Investors reward proof of global reach with cheap capital.
Perception is a company's reality. The less likable the company, the sooner it'll face unsavory attention from media, watchdog groups and regulators. But companies perceived as good actors, like Google or Apple, enjoy longer immunity.
All four companies from Galloway's book control their distribution, which allows them to tailor the entire user experience. Apple's signature move was not the iPhone, but expanding into retail with Apple Stores.
The most valuable companies over the last decade are experts in data collection, processing and use. This results in an unprecedented level of granular customer understanding leading to better revenues.
A company's ability to attract top-notch talent depends on its ability to be seen as a career accelerant. Managing brand equity among employees is even more critical than managing customer reputation. The company with a better team gets access to cheaper capital and innovations and pulls away from the competition.
All of "the four" are headquartered in cities with at least one world-class engineering university. Furthermore, 75% of large firms are located in global supercities.
There has never been a better time to be exceptional or a worse time to be average. The global job market powered by LinkedIn searches means that a 10% difference in skill can lead to 10 times the rewards. Here are Galloway's insights to succeeding in the digital economy:
At the end of the day, the "Four Horsemen" are not just businesses; they have transformed the world through reshaping how we communicate, where we spend our money and what we expect from technology in the 21st century. Understanding the strategies of the "Four" is critical to value creation and careers in the forthcoming decade.
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