Don’t Bust Up Big Tech: Scott Galloway is Wrong
Disclosure: The we.st team and I do not own stocks in any of the companies mentioned in this article.
Don’t Bust Up Big Tech: Scott Galloway is Wrong
Scott Galloway’s article “Silicon Valley’s Tax-Avoiding, Job-Killing, Soul-Sucking Machine” in Esquire magazine is an anti-capitalist, logic-defying, self-interested tirade against the most successful U.S. businesses in recent history. And although Galloway purports to be making an argument in favor of domestic competition and American startup success stories, his failure to appreciate the broader, longer-term consequences of his proposal is anti-American.
Galloway’s Esquire article is an offshoot of his recent book: “The Four: The Hidden DNA of Amazon, Apple, Facebook, and Google.” Galloway’s overarching beef is that Amazon, Google, Facebook, and Apple — i.e., “The Four” — are modern-day monopolies and dominate our economic landscape. According to Galloway, “these behemoths enjoy unfettered economic domination and hoard riches on a scale not seen since the monopolies of the gilded age.”
“We must bust up big tech,” he writes. However, as the article unfolds it becomes clear that the argument hides capitalist intentions (i.e., making investors money) behind populist rhetoric (i.e., Galloway’s proclaimed cause of stopping the steamrolling, monopolizing, elitist, and corrupting ways of Big Tech).
This brings me to my point of contention. I rarely speak out to condone a fellow thought leader or business professional, but I am compelled to set the record straight with this one. Galloway’s attacks on his entrepreneurial adversaries are astounding and ill-conceived, particularly from someone of his standing as a professor at NYU and former entrepreneur.
Diversity and debate are the hallmarks of an educated public and a robust democracy. People’s perspectives and opinions need to be challenged, especially in youth. But if the points being argued are false or misleading, it’s inculcation, not education — and that’s not OK. Scott Galloway’s Esquire article borders on Trumpian “Fake News.”
More than a visionary with a sudden case of acute myopia, Galloway is a successful entrepreneur, investor, and professor who is widely acknowledged in his field. He admits that he’s “benefited enormously from big tech,” both in helping companies succeed on the heels of Google and Amazon but also through his direct investments in Amazon and Apple stock. If I had his career, I’d be stoked. But in this article, Galloway appears neither stoked nor sensible, and his arguments do not reflect reality or his experience.
What’s up with Galloway? He is obviously angry, and his argument is a bitter, emotional one. Many aspects of his message are misleading, at best. At worst, his argument is dangerous, as I’ll argue here.
Big Tech Bashing Hits the Bestseller List
Apparently, keeping chickens in the backyard is the latest elite trend in the San Francisco area, second only to Big Tech backlash. Everyone seems to be jumping on the bashing bandwagon (even the companies themselves), and Galloway is just one of many who are decrying these organizations on one ground or another. There are plenty of reasons to fear Facebook, Apple, Amazon, and Google, but not for the reasons stated in Galloway’s argument.
Galloway’s argument overlooks the essential truth that there is tremendous opportunity for incumbent organizations to better structure themselves to compete against the Big Four. What’s more, there is room in the market for startups to build competitive products if they can find VCs with the fortitude to invest against incumbents. Finally, his bitter and narrow focus on Apple, Amazon, Google, and Facebook diverts attention away from the far more troubling root-causes of issues that will not (and cannot) be addressed by a fall-back reliance on U.S. antitrust laws.
Galloway has a specific thesis backing his argument that The Four need to be broken up, but he spends some time in his piece discussing other arguments and concerns with Big Tech. Let’s take a closer look at the most successful American businesses in recent history, known to Galloway as “Silicon Valley’s Tax-Avoiding, Job-Killing, Soul-Sucking Machine(s),” to find out how inimitable these companies really are — and to explore the consequences of buying into arguments that I find to be short-sighted, self-serving, misleading and narrow.
The “Destruction of Jobs” Argument
“The destruction of jobs by The Four is significant, even frightening,” writes Galloway. He also acknowledges, however, that we’ve been here before.
With every technological advancement, jobs are destroyed. For example, the U.S. lost about 5.6 million manufacturing jobs between 2000 and 2010. According to a study by the Center for Business and Economic Research at Ball State University, 85 percent of these job losses are attributable to technological change — largely automation.
According to the Financial Times, U.S. factories have been gradually replacing human labor with robots, a trend that will be exacerbated by 3D printing and robotics. According to Solís, a senior fellow at Brookings, “we are producing more with fewer people.”
The actual facts are that the tech sector is one of the fastest growing sectors in the U.S. economy and is forecast to be for the next eight years.
Note that the “Software developers, applications” category is among the highest paid and highest growth job sector. The Four are not softening the market — they are strengthening it by providing world-class training to the world’s next tribe of entrepreneurs who will replace today’s incumbents (see the amazing success of the PayPal mafia / aftermath if you need evidence of this behavior).
- 10.4 million U.S. jobs were created across all 50 states by the internet ecosystem in 2016. 86% of them are outside major tech hubs.
- 51% of Amazon’s paid units are sold by third-party sellers, including 300,000 SMBs in the U.S., more than 140,000 SMBs of whom surpassed $100,000 in annual sales.
- 70% of small- and medium-sized businesses on Facebook state that the platform helps them attract customers.
- Apple distributes 2.2 million apps and 40 million songs (as Scott cites in his own article).
- Google Play distributes over 3.5 million apps and 35 million songs.
If anything, these platforms create jobs.
Also troubling with respect to how Galloway presents this argument: his narrow focus on the potential job destruction (or lack of job creation, as the case may be) perpetuated by The Four takes attention away from the more significant issues of job displacement from global trade and the larger, more foundational impact technology will have on our broader workforce (which is much greater than the sum of The Four’s employee pool).
Galloway doesn’t address this broad issue, nor does he explain why the fledgling startups who would be given a chance to compete in the event of a Big Tech antitrust breakup wouldn’t leverage existing and emerging technologies to streamline their workforce and automate everything possible — and more.
Pandora’s Box is already open. Few (if any?) rational companies are going to forego the heavy use of technological advancements in the name of employing more human beings. Name ten — I’ll wait.
The “Market Cap Per Employee” Argument
Galloway takes aim at The Four for employing fewer workers while simultaneously increasing their respective market cap. “The economic success stories of yesterday,” Galloway writes, “employed many more people than the firms that dominate the headlines today.”
“Procter & Gamble, after a run-up in its stock price in 2017, has a market capitalization of $233 billion and employs ninety-five thousand people, or $2.4 million per employee. Intel, a new-economy firm that could be more efficient with its capital, enjoys a market cap of $209 billion and employs 102,000 people, or $2.1 million per employee. Meanwhile, Facebook, which was founded fourteen years ago, boasts a $542 billion market cap and employs only twenty-three thousand people, or $23.4 million per employee — ten times that of P&G and Intel.”
Here’s the most recent data on this one:
And here’s the greater context which Scott Galloway completely avoids:
As the data demonstrates, if Galloway was truly concerned about the market cap per employee then his focus would be on the Energy, Financial, and Healthcare sectors. However writing about busting up Phillips 66 doesn’t sell as many books and magazines as writing about busting up Facebook.
TO BE CLEAR: I am not defending Facebook. I am debunking Scott Galloway’s argument.
As far as P&G is concerned, it was founded in 1837, is 180-years old, and has been firing staff on an annual basis while the Big Four companies continue to grow.
Here’s P&G’s data:
Compare that with Facebook:
Facebook had 15,724 employees in the third quarter of 2016, its fifth year as a public company. In comparison, FedEx averaged 10,000 full-time equivalent employees in 1982, its fifth year as a public company. According to a report from the Progressive Policy Institute, Amazon attained 300,000 workers in its 20th year as a public company in 2016, the fastest rate seen in the U.S. to that point. General Electric had only 41,000 workers 20 years after its founding in 1892. Google beat that in 2012, only eight years after going public in 2004.
Scott Galloway is making the argument that old, inefficient companies that are firing employees are better for society than new, efficient companies that are creating jobs and providing investors with outsized returns. This is not the logical conclusion of any rational businessperson, let alone an investor, entrepreneur, business professor, and self-professed expert and industry prognosticator.
The “Productivity is Increasing, but Salaries are Stagnant” Argument
As of 2017, the tech industry employed around 7.3 million people, and the median annual wage for computer and information technology occupations was around $82,000. The average wage in Silicon Valley has grown by an inflation adjusted CAGR of 1.18% over the last 17 years. This is nearly flat meaning that the tech sector Scott decries is suffering from stagnant wages that have been evident since the early 1970s.
Productivity growth and hourly compensation growth, 1948 to 2016
For full context, the change started long before the tech sector hit the big time in the late 1990s. For full context, here are the start dates for five Big Tech companies.
- Microsoft — April 1975
- Apple — April 1976
- Amazon — July 1994
- Google — September 1998
- Facebook — February 2004
If Scott is truly worried about the wage gap, there are much better targets than the Big Tech companies. By comparison, the retail trade sector employs approximately 15.9 million people (over double Big Tech) at an average hourly wage of $18.41, or $29,772 a year given the average weekly hours: 64% less than the tech sector pays.
The first Walmart opened in 1962, and in 1970 the company went public and began its meteoric rise. A perfect representation of the graphic. Walmart employs 2.2 million people. While the retail giant just raised its minimum wage to $11 dollars an hour, the company still actively prevents employees from forming unions that would give them greater collective bargaining power.
To top it off, a study from the Economic Policy Institute says Walmart’s imports from China cost the United States 400,000 jobs. Walmart’s 2017 sales surpassed $500 billion for the first time, making it almost three times bigger than Amazon. Amazon has “300-ish” Whole Foods stores, Walmart has 4,700 stores. Ninety-five percent of U.S. consumers shopped at one of Walmart’s 4,700 stores or on its website in 2016.
Where’s Galloway’s call for a Walmart breakup? There isn’t one (and my $0.02 — there shouldn’t be one). Consequently, Galloway’s article reads like a sensationalist argument against zeitgeist technology brands. Ultimately, it feels like the article intends to scare luddites into buying his book and regulators into breaking apart these companies so he can make money as an author and investor, respectively.
The “Tax Evasion” Argument
In the Esquire piece, Galloway states the following: “Between 2007 and 2015, Amazon paid only 13 percent of its profits in taxes, Apple paid 17 percent, Google paid 16 percent, and Facebook paid just 4 percent.” Meanwhile, the average tax rate for the S&P 500 was 27 percent.
Galloway’s data is misleading in terms of tech company tax avoidance and the subsidies these companies receive. But before I address the facts, let me make one thing clear: I support our public sector and healthcare workers. I support free education. And I have the highest levels of respect for and volunteer my time to support those who defend our freedom, liberty, equality, and safety. I pay my taxes. As does Amazon and many of these companies.
When Bloomberg calculates corporate contributions using the effective tax rate for the last three years, Amazon is the model citizen. Sure, Walmart pays a lot more in taxes than Amazon, but that’s because Walmart’s pre-tax income since 2008 has been over $200 billion, according to Bloomberg. Amazon’s profits have been less than $11 billion. Small corporate income = small corporate income tax bill.
Galloway, of course, does not endorse the notion that Amazon is a model of compliance with corporate taxes. In addition to blasting Amazon for tax avoidance, he frames Chicago’s offer to let Amazon keep $1.3 billion in employee payroll taxes as an example of government folding in the face of Big Tech.
In actuality, Amazon is asking its next home state, be it Chicago or elsewhere, to provide a tax exemption for their employees so that, in return, Amazon would invest $5 billion in the area where it builds its HQ2 and hire up to 50,000 workers. Amazon employees in Seattle earn an average salary of $159K; that represents a significant amount of income that employees pump back into their local economy.
An anchor company like Amazon amplifies the local tech ecosystem. Such a magnet will draw additional tech talent to the area — engineers, architects, and product managers who are difficult to find in non-tech locations. These employees are likely to build startups themselves, further contributing to local economic development in the area. Cities such as Austin, Boulder, Boston, Seattle, and Las Vegas are examples of what a tech ecosystem can do for a city.
Chicago’s population is shrinking as people are leaving the area in search of jobs, so $1.3 billion is a small price to pay for a $5 billion dollar headquarters, 50,000 high-paying jobs, and a startup ecosystem. But, I’ll let you decide.
Getting back to the broader point, over 99 companies have a worse record of avoiding taxes than Amazon, Apple, and Google. Facebook didn’t even make the list of recent worst offenders. According to the Institute on Taxation and Economic Policy, the following 18 companies paid no federal income tax between 2008 and 2015:
- Pepco Holdings
- American Electric Power
- PG&E Corp.
- Ryder System
- Wisconsin Energy
- Duke Energy
- NextEra Energy
- International Paper
- Xcel Energy
- CMS Energy
- Amos Energy
- Sempra Energy
- General Electric
- Eversource Energy
Sure, Galloway concedes that General Electric is engaged in substantial tax avoidance, but there’s a theme here, and it’s not just endemic in the tech industry. Many of the largest companies, across sectors, pay less in taxes than The Four.
What’s more, none of The Four are on the tax subsidy list. Why does Galloway not include any of the highly questionable and illusory sectors such as energy, health, and finance? With respect to the finance sector — perhaps Scott is turning a self-serving blind eye as he advertises: “I’ve raised close to $1B (VC, PE, hedge funds) for firms I’ve started and other projects.”
I’ll concede that the Big Four do build headquarters outside the U.S., because this country had (until very recently) the highest corporate income tax rate among the 34 industrialized OECD countries and the third highest corporate income tax rate in the world. The combined marginal tax rate is 39 percent in the U.S., while the average across 173 countries, as cited by The Tax Foundation, is around 30 percent. It’s simply a reality that the U.S. must compete when it comes to tax-haven counties like Ireland and Singapore.
When it comes to taxes, Galloway suggests that breaking up Big Tech will broaden the tax base. His take is that these firms have so much clout, they can manipulate any tax system. Surely, then, the problem is the tax system and the law, not the companies.
And even if the tax system isn’t working well and we, as a country, want to retain more corporate taxes and curb corporate tax credits, isn’t this an issue for corporate America broadly? Making this about Big Tech and The Four only serves to divert attention from the bigger issue and limit our focus to a small band of potential tax avoiders.
This type of argument is precisely what is harming America: alarming facts constructed in such a manner that the result is misleading bullshit.
Like Scott’s next argument…
The “Wealth Creation for the Few” Argument
According to Galloway, The Four have created $2.8 trillion in market value over the past 40 years, yet the middle class has seen its share of income [going to the middle 60% of households] decrease seven points.
Scott makes no effort to demonstrate any causality between these two points — because there is no causality. This argument structure is akin to “The earth has gotten hotter; at the same time, marriages aren’t lasting as long,” hoping that you take away that global warming shortens marriages. It’s utter nonsense.
First off, those who have invested in Apple, Amazon, Google, or Facebook, either directly or through Wall Street, have made a lot of money. A. Lot. Of. Money. But that, after all, is the very nature of investing in something that performs well. Galloway knows this because he is an experienced venture capitalist, hedge fund manager, and investor, not least because as he admits in his bio: “the appreciation of Amazon and Apple stock restored economic security to my household after being run over in the Great Recession.”
The broader issue, of course, is the oft-cited but less-understood relationship between corporate wealth distribution and the health of the American middle class. The middle class is the bedrock of a stable, democratic and capitalist society, and the economic decline of the American middle class is real. However, the issue is far more multifaceted and nuanced than simply attributing fault to the market cap of four companies.
The recently released World Inequality Report, the first research study to comprehensively examine wealth and income inequality trends across rich and emerging countries over the course of 40 years, demonstrates that divergences in inequality are the result of policy choices and institutional changes — not openness to trade or digitalization.
Globalization, automation, low minimum wages, a lack of innovation in incumbent companies, a poor public education system, failure to adequately prepare U.S. students for the current and future workforce (e.g., Scott Galloway’s teachings), and reduced employee bargaining power are all factors that have contributed to the decline of the middle class. To blame social woes on the recent fortunes of four Big Tech companies irresponsibly diverts much needed attention from the facts.
We have researched the plight of the U.S. middle class and, for those who wish to delve further, read a full tear down of our findings here.
Trust Busting the Big Four — Monopolies in Our Midst?
Galloway claims that The Four have aggregated more economic value and influence than nearly any other commercial entity in history. According to Galloway, these companies together boast a market capitalization of $2.8 trillion (the GDP of France) and a staggering 24 percent share of the S&P 500 Top 50, close to the value of every stock traded on the Nasdaq in 2001.
Galloway’s reasoning is largely based on an insane multiple for platforms in the tech sector. Wall Street assigns the multiple to the company, so it seems as if Galloway’s critique is really leveled at Wall Street, not the companies. It makes sense that Wall Street would flock to (and thereby increase the stock price of) companies that are consistently evolving their products, services, and industries while consistently growing above double-digits.
Galloway is a proud member of Wall Street, having helped raise $1B for VCs, private equity, and hedge funds. Some self-reflection would be ideal.
Slaying Startups & Crushing Older Companies
“Since the turn of the millennium,” writes Galloway, “firms and investors have fallen in love with companies whose ability to replace humans with technology has enabled rapid growth and outsize profit margins. Those huge profits attract cheap capital and render the rest of the sector flaccid. Old-economy firms and fledgling start-ups have no shot.”
But Apple, Amazon, Facebook, and Google are not invincible. Amazon is only four-percent of US retail. Facebook is already in decline in terms of U.S. consumer share (#DeleteFacebook), and Shareaholic reports that “Facebook’s share of all visits to a sample of 250,000 websites has dropped from 30.9 percent in the second half of 2016 to 18.2 percent in the last six months of 2017.” And older companies still have game.
Walmart is experimenting with open source e-commerce platforms, buying augmented reality companies, securing patents for drones, pursuing AR/VR and automation, and spending $3 billion acquiring Jet (and in the process acquihiring a CEO whose last company was bought by none other than Amazon). All of these are components in their huge digital transformation.
Target recently blew Wall Street’s expectations away, growing their digital channel by 29% YOY. This year, Target is aggressively enhancing their shopping experience, acquiring Shipt to help it develop its same-day delivery capability which has already launched in the Twin Cities. Target recently announced that it is spending $7 billion over the next three years “on improving its e-commerce and stores” and it has created accelerators to bring startups and the startup ethos into their culture and buildings. In the interest of full disclosure and with a bit of pride, I’ll admit that my team and I created the accelerator — Go team!
There are countless other examples, but the takeaway is that it is way too early to write off these “Old-economy firms”. There are big changes afoot as we enter the Fourth Industrial Revolution, and there will be plenty of precarious jostling in the Peloton to stay with the leader pack.
Control over Content & Distribution
Furthering his claim that The Four are modern-day monopolies, Galloway makes several arguments, including that “each of the Four has content and distribution that dwarfs a combined AT&T-Time Warner.”
To begin with, content is saturated. There’s audio, video, user-generated, studio-generated, mobile, television, live video … need I go on? What I’m trying to say is that there’s a lot of room for a lot of people to say a lot of things over a lot of diverse channels.
Let’s look at Amazon first. The 64 percent share that Galloway attributes to Prime users is not all Amazon Prime Video. Cut Cable Today notes that 20 percent of Prime users don’t stream videos, and over 90 percent signed up primarily for the two-day free shipping. Also, the NFL deal he cites it not unique; the NFL has had similar deals with Twitter, Hulu, and more. In 2017, about 26 million Prime members watched Amazon Prime Video, according to calculations from Reuters. , according to Statista.
YouTube had one billion active users each month, according to the Huffington Post.
Now let’s turn to Apple. Galloway cites that Apple is set to spend $1 billion on original content in 2018. The company controls 2.2 million apps and set a record in 2013 when the number of songs it sold on iTunes hit 25 billion. He also cites that Apple’s library now includes 40 million songs which can be distributed across the company’s one billion active iOS devices, televisions, and video offerings.
But Galloway is confused, or at least confusing. The company controls a platform on which 2.2 million apps have been built. That platform has generated hundreds of thousands of jobs and hundreds of billions in revenue for companies including Amazon, Facebook, Google, and Microsoft. The platform provides customers with unprecedented selection, and the customers reward the platform by buying what they want.
I could go further on that point, but let’s consider Facebook, instead.
Galloway claims that Facebook owns a “torrent of content” created by its 2.1 billion monthly active users. He claims that the company reaches 66 percent of U.S. adults through its site and apps and will spend $1 billion on original content. According to Galloway, Facebook is the world’s most prolific content machine, dominating phones worldwide.
But 400 hours of video are uploaded to YouTube every minute, which means that Google actually has more video content than any other entity on earth. Google also controls the operating system on two billion android devices.
Galloway gets one thing right here, which is the intense competition within the content space. But that refutes his theory, because it seems improbable that a company can have monopoly-like power but also be engaged in intense competition with others.
Beyond the Reach of U.S. Antitrust Regulations — China and Russia Rising
Galloway has lots of dislikes when it comes to The Four, but I believe only one real reason for his argument: shareholder value. Scotty wants to make more money. To do so, he is singling out these companies because they have the highest potential of incremental shareholder value were they to be broken up.
His feeling is that breaking up Big Tech will create more jobs and shareholder value. According to Galloway, when “Ma Bell” was broken up, the result was “a torrent of shareholder growth in telecommunications.” Galloway also points to Microsoft’s recent highs, wondering if Amazon and Amazon Web Services may be worth more as separate firms.
Galloway’s article hides capitalist intentions behind populist rhetoric. What’s so disheartening about this approach is that his recommendation (break up Big Tech) will actually damage the people his argument is purportedly constructed to protect (the American middle class).
You’re already familiar with the data I presented, showing that Amazon, Apple, Google, and Facebook are excelling at creating jobs. What’s more, these companies are young: they will continue to create more jobs. Forcibly deconstructing these large tech companies would certainly create more jobs, but in China and Russia, not in the United States.
If you think Russian meddling in the U.S. election with paid advertisements on Facebook is disconcerting, you should be terrified of our social platforms being built and run by puppet corporations controlled by the Chinese government (Tencent’s WeChat is Facebook’s largest and most capable competitor). Breaking up Facebook will only invite WeChat into the U.S., and WeChat’s users are much more voracious than their Facebook counterparts.
Then, consider the rapid ascent of Chinese e-commerce platforms. Alibaba, Amazon’s largest and most capable competitor, recently hired Target’s head of HR. Galloway rails against Amazon buying Whole Foods; imagine Alibaba (a.k.a. the Chinese Government) buying one of America’s most beloved retail brands. And Chinese and Russian search engines (Baidu and Yandex, respectively) are drooling at the prospect of a Google torn apart.
We are in a technology war with China, and China is winning. Statistics from a recent CB Insights article show that China is investing far more in artificial intelligence startups than the U.S.: 48 percent versus 38 percent equity funding share.
Kai-Fu Lee, founder and CEO of Sinovation Ventures and president of the Sinovation Ventures Artificial Intelligence Institute, recently predicted in MIT’s Technology Review that the US has only a 50/50 chance of winning the AI fight against China. Not to mention, the Chinese government creates natural monopolies and was successful in cementing their domestic power position by running both Google and Uber out of its markets.
It’s bad enough that The Four themselves are routinely engaged in battle with one another, locking up resources in wars of attrition, while foreign giants such as Alibaba, Tencent, Baidu, and Yandex loom over the horizon, threatening international and domestic markets. We certainly don’t need otherwise-respected business leaders diverting our attention away from the bigger issues either.
Finally, harking back to Galloway’s concerns about the ability of startups to complete against these Big Tech players: if our country’s older and smaller companies are stagnant, should we really break up the only enterprises that are successful in the United States?
A Good Ole’ “Self-Preservation Couched in terms of Customer Protection” Argument
Why is Scott Galloway’s hyperbole so angry and aggressive?
Why is he so hypocritical when he admits, or perhaps brags, that he invested in The Fours’ stock, profited from these investments, and built companies with a similar business model? Is this a true champion of the middle class defending us from the Four Horsemen of the apocalypse? Is this a case of a luddite against progress? Is this simply a misinformed author promoting their book?
Or is this a case of a self-interested, activist investor on a PR campaign to bust up Big Tech in the name of customer protection?
I’ll let you decide.
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- Target’s Techstars and Takeoff Accelerator Programs Now Accepting Applications, Target, 2018, https://corporate.target.com/article/2018/03/techstars-takeoff-applications-open
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