BONUS EPISODE! Live from Pivot MIA: The Life Cycle of a Company with Prof. Aswath Damodaran

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Scott Galloway: Hi, everyone. This is Pivot from the Vox Media Podcast Network. I'm Scott Galloway. Today, we've got a bonus episode. It's a presentation from NYU's Aswath Damodaran, given at Pivot MIA on February 15th. Aswath's speech was one of the conference's most discussed events. Have a listen. He's outstanding.

Aswath Damodaran: I'm going to start my session by talking about something completely tangential. I had to teach all day in New York yesterday at my regular class. Back in the classroom. I took the late night flight. I got into Miami at 10 o'clock. I took the cab. I got out. It was 10:45 at night. And as I was walking into the hotel, there was a whole group of people whose nights were just beginning. They were all young. They were very hip. And to me, they looked partly dressed, but no, that might be just... And I got a reminder that I was getting old. Because if I went out at 10:45 and my night got started then, I know exactly what I'd be doing today. I'd be crashed and burned today. I'm getting old, but it's not a choice, right? Growing old is mandatory. Growing up is optional. And that's going to be the launching plan for what I want to talk about today.

I teach two classes. I teach a corporate finance class and a valuation class. By itself, you say, what the heck does that even mean? Like MBAs come in and say, what's the difference between the two classes? I tell them the truth. It's the same class. I give it different names. That way it looks like I'm teaching two different classes. But the truth is that in corporate finance, I talk about businesses from the inside out. How do you run a business? How do you increase the value of a business? In valuation, I look at the same companies from the outside in. It's got to be much more passive, right? I've got to value Peloton given the people running Peloton, not based on what I wish it were run like.

And in both these classes, I find myself looking for things that explain the cross-section because you can talk about anecdotal evidence. I've never used a case in 40 years of teaching, because to me, it's an insane misuse of my time. I've got 45,000 live cases in front of me, every publicly traded company. Why would I go back to 1988 and let some Harvard Business School professor tell me what happened then, especially when I know the outcome?

So I'll give you one of the structures I find incredibly useful in understanding why companies do what they do, and more importantly, in pinpointing when companies do things they shouldn't be doing. Just like human beings, companies go through a life cycle. Let me describe the life cycle. You have a business idea, a brilliant idea, a startup. You're like a baby, right? You need constant care and attention, not to mention capital. You make it through the startup years, and let's face it, the mortality rate for businesses and companies is far higher than the mortality rate for human beings. Two-thirds of startups don't make it through year two. Great business ideas don't make it.

But let's say you make it. You're now a toddler company. What do toddler companies do? They fall, they get up, they fall, they get up, sometimes they fall and don't get up. If you make it through the toddler years, you get what I call a bar mitzvah moment. You know the bar mitzvah moment is if you're Jewish, this is when you're told you are now grown up, even though you're not. Companies go through this, and many companies are not quite ready for the bar mitzvah moment, because they're so used to being kids, somebody else taking care of everything.

If you make it through the bar mitzvah moment, you become a teenager company. You know what teenagers do, right? I have four kids. Thank God they're all through the teenage years. But every morning, here's what teenagers do. They look in the mirror and say, I have lots of potential. What can I do today to screw it all up? So when you have a teenage company, don't expect it to act rationally.

Some of you might know I bought Tesla in June of 2019. Why did I buy it? Because it was a particularly good time to buy it. Because Elon had been doing some crazy things in the months leading up to, including things like tweeting out "$420 funding secured." Every word in that tweet was a lie. But it kind of caught up with them. Stock price had dropped. I valued Tesla for a long time. I've always wanted the company in my portfolio. So at $180 per share, it looked good. And I bought it. And at the time that I bought it, I wrote a post saying, I'm buying Tesla because I think it's undervalued, but I also am buying it with open eyes. I'm buying a corporate teenager. And what I mean by that is if you buy a company like Tesla, be ready for some frustrating things happening. Like what? Your CEO getting up and tweeting about a diver in Thailand. Come on. Or taking $2 billion in cash and buying Bitcoin. You've got one of the great stories of all time. Why the heck would you destroy that? But you've got to take it as part of the parcel.

You make it through the teenagers. You know, the peak of your life. You know what the peak of your life looks like? Those people yesterday leaving at 10:45. Peak of your life, you can go to bed at 3, wake up at 6 and be a fully functioning human being. Enjoy it while it lasts. It doesn't last that long because after the peak of your life comes middle age. And let's face it, none of us liked that day. I don't know what the exact year was, 30, 32. You wake up and say, I'm not young anymore. Even if you don't say it, your body will tell you, you're not young anymore. You're middle-aged. Enjoy middle-age because there are worse things coming down the pipe at you, right? After middle-age comes old age. After old age comes dementia. After dementia comes death.

One of the first things I do when I look at a company is I try to put it in the life cycle. Think about your favorite company or your least favorite company. Ask yourself where it falls in the life cycle because here's why it matters. How you move through the life cycle is a function of what kind of business you're in. If you think about how quickly you can climb the life cycle, if you're a capital intensive infrastructure business, it takes a long time to climb the life cycle, right? You've got to build assembly plants. You've got to build capacity. It might take you 30, 40, 50 years. And along the way, you're complaining about how long it took you. But here's the advantage of taking a long time to build up your life cycle. Once you've got to the top, it becomes much more difficult for people to come up because it took you a long time. It takes them a long time. You stay at the top for an extended period because you took a long time getting there. And then when you decline, the decline is slow. You still don't like it, but you decline slowly. The quintessential 20th century company, the successful 20th century company. That's what the life cycle looked like.

Think of how long it took Ford to go from being a startup to a mature company. Think of how long it stayed at the top. We forget that GM and Ford had an extended run at the top, and they've been in decline for a while. The reason I bring that up is one of the things that I think we all need to think about is the 21st century company life cycle. I describe tech companies as aging in dog years. Basically, a 25-year-old tech company is like a 100-year-old manufacturing company.

And I'll give you two contrasting examples. Where would you put GE in the life cycle right now? Do you guys like The Walking Dead? This is a Walking Dead company. It's a zombie company. The only stories you can tell are about how quickly the end will come on, how painful it's going to be, right? But it had a great run. 125 years. Don't shed any tears for GE. It's a corporate entity. It's lived its life. And the end is coming. But it took 125 years.

When was Yahoo founded? 1992. $100 billion company in seven years. By 1999. Glory days lasted about five years. The day Google went public, Yahoo's slide started. And by 2015, it was gone. 23 years from start to finish. And there's nothing anybody could have done to stop this slide. I remember when Marissa Mayer was hired with a great deal of fanfare to be CEO of Yahoo. And what was she given as a mission? Turn Yahoo around. And anybody with any sense looking at this from the outside knew that this was a suicide mission. There's no way Yahoo was getting market share. I mean, how much would you pay for a search engine that nobody searches on with a mail program that's used only by people over the age of 60? Not much.

And Marissa had a different problem, which is she ran Yahoo, but was like controlling the outhouse of a building where much of the value came from things she didn't control. You know what I'm talking about, right? The bulk of Yahoo's value towards the end came from a 21% holding in Alibaba and a 34% holding of Yahoo Japan, which is a publicly traded company on its own. The way I described it when I talked about when she became CEO is I said, what happens in any given day at Yahoo is driven more by what Jack Ma is doing at Alibaba that day than anything that Marissa Mayer can do here.

I'm going to talk about the implications of this compressed life cycle, because everything we know in business and finance was designed for the 20th century company. I'll give you a personal example of what we do in finance that I think we need to rethink. Have any of you done a discounted cash flow valuation? Just a show of hands. When you think about a discounted cash flow valuation, you project cash flow for a certain point in time, then you get really tired and you stop. And then you estimate what's called a terminal value, basically saying, I am too tired to go past year five or ten, I'm going to estimate a terminal value. You know what we assume in terminal value calculations? That your company would go on for how long? Forever. And the reason we justified it is forever is a reasonable approximation if you can last 60 years. So when you value the GEs of the world and the Fords of the world, forever you could get away with. But when you're valuing the Yahoos of the world where you know even when they're successful that this will not last that long, the question is when you get to year 10 when you're valuing Airbnb, do you assume that Airbnb will go on forever? Do you factor in the reality that you're talking about a much more compressed life cycle? I would argue everything we know in business and valuation was designed for the 20th century, and it's time we started rethinking how we approach valuation, how we make business choices, because the world has changed.

I'm going to tell you why it's so useful for me to use the corporate life cycle. I'm going to give you my corporate finance class compressed into a minute. And you know what? The rest is all fluff anyway. When you think about its core, what corporate finance is about, it's about three groups of decisions that every business has to make. The investment decision, where you decide what projects to take, what acquisitions to make, what to invest in. The financing decision, where you try to decide what mix of debt and equity you use to fund those investments. And the dividend decision, where you reap the harvest of all the good decisions you've made in the past.

Now, when we teach corporate finance, we act as if all three decisions are equally important. You have to pay just as much attention to all three. But that's a lot. If you're looking at a young startup, let's say you take Airbnb, not quite a young startup, but a young company. Which decision of these three decisions drives Airbnb's value the most? The investment decision. Everything else is a side story, right? In fact, I'll save you the trouble on how much debt Airbnb should have. No debt. How much dividend can it afford to pay? Are you kidding me? You're losing money. You have negative cash flows. It's all about the investment decision. So I ask you, who's the CFO of Airbnb? I don't know, and I don't care. The CFO of a young startup might as well be the janitor, basically. You're the guy that everybody ignores and walks by. Because really, what are you going to do? You're not going to make this company great again.

As you mature, though, you're going to see your investments start to get less lucrative. So in a sense, you're past that greatness. Now you start thinking about, maybe there's something I can do to lower my cost of capital. Anytime a company talks about lowering the cost of capital, it's a signal. You're middle-aged. Young companies, when you're making 35% returns on your project, who cares whether your cost of capital is 12% or 10%? But there will be a time when you care, and your financing decision comes to the core. Mature companies. You get past mature, you get past middle-aged, you get to be a declining company. Guess what do you care about? How do I return cash? The dividend decision comes to the core. Sometimes just looking at what a company is focused on will tell you a little bit about where they are in the life cycle. And you can think about where a name change will come in here. And I'll let you think about that. And what it tells you about the future of a company. But that's something to factor in. Every action, not just financial, is telling you something about where the company sees itself in the life cycle.

Now, of course, as all of this is happening, your earnings and your cash flows are changing. Early on, you're a young company. You're going to lose money. It's a feature, not a bug. You're building a business model. Your cash flows are going to be even more negative. Why? Because not only are you losing money, you're investing for the future. Of course, this is what people call cash burn. They wring their hands. Oh, my God, the company has so much cash burn. If it's a young company, it better have a lot of cash burn because if it isn't, then it's not a young company. That's another thing to look at. If you see a company with negative cash flows that claims to be a mature money-making company, something is not in sync in this story.

Now, a lot of companies, if you have enough negative cash flows long enough, don't make it. That's the survival issue. But if you do, here's what I should expect to see. Your margin should start to improve. Your cash flows will go from negative to positive. Why? Because you have to reinvest less in your growth opportunities. In fact, your cash flows turn positive when you start to turn less optimistic about future growth because you're reinvesting less. And then in those mature years, your cash flows are at their peak. And then you're going to decline, your cash flows start to go down. So just as you see a company age, you're going to see its cash flows reflected as well.

I don't do consulting. I'm too lazy and too opinionated. And I wouldn't say much. I'd go into a company and say, what do you want us to do? Act your age. More money is wasted by companies trying not to act their age than any other single set of actions out there. When Walmart bought Flipkart, an Indian online retailer about five years ago, $21 billion, I called it the most expensive facelift in history. Because let's face it, Walmart is an old company. It's a very good company. Don't take it badly. Being old is not a bad thing. At least they've made it through. They want to be young again. Why? Because they're competing against a company that seems to have found the fountain of everlasting youth. And I won't name the company. It's the most expensive facelift in history. And therein lies a reason why companies keep trying to be young again.

There's an entire ecosystem out there that tells you you can be young again. You know what's in the ecosystem? I mean, if you're a human being, it's plastic surgeons and personal trainers. The equivalent? They're consultants and bankers. You can be young again. All you need to do is adopt an acronym. EFA, EVA, CFROI, ESG. Name the acronym, you adopt it, you're going to be young again. And then they ask you to do expensive things. You want to go do an acquisition. I think the M&A process is the most destructive process across the world, across corporations. But if you think about why the process keeps going, there's a reason. You can be young again. Just this one big acquisition, you'll be young again. So act your age. If you're a young company, go out and reinvest money for the future. Don't talk about positive earnings and cash flows. That's not what I'm investing in you for. Make sure you invest for future growth. If you're a mature company, don't keep trying to tell me you can grow at 20% a year because then you're going to do things you shouldn't be doing. And if you're a declining company, just accept the fact that your best days are behind you.

Scott Galloway: We'll be back in a moment with more from Aswath Damodaran at Pivot MIA.

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Scott Galloway: Welcome back. We now return to our bonus episode from Pivot MIA.

Aswath Damodaran: I actually do a session called the Theocratic Trifecta. You know what the Theocratic Trifecta are? Sustainability, stakeholders, and ESG. Half of all business schools have, every class has one of those three words in the title. Because I think they're all marketing a myth, which is if you do these things, you can live forever. And I'm reminded of the Egyptian pharaohs who had the same dream. So you know what they did, right? After they died, they got wrapped up in blankets or bandages, got put into tombs with all their favorite things around them. And guess what? They died anyway. So think about that when you think about all these things that supposedly matter.

As I said, the other class I teach is valuation. And I'll tell you one of the things that troubles me about how valuation has evolved over the last four years is almost all valuation has become financial modeling. It's become a gigantic Excel spreadsheet. And I'm a great believer that if you want to do valuation, you've got to think about the story that underlies the numbers. Otherwise, all you have is a collection of numbers. But if you look at how critical stories are across the life cycle, here's what you're going to see. When you have young companies, it's all about story. You know why, right? There are no numbers. Now that story can be a good story. But as you age as a company, the shift is towards numbers. So if all you do is value mature companies, you can do everything on Excel spreadsheets. But if you try to do that in the Airbnbs and the Ubers and the Paytms of the world, it's not going to work because you're trying to impose a number-driven valuation on a valuation where it's all about story.

And as you go through this process, guess what? The amount and the type of uncertainty you're going to face is also going to shift. With young companies, you're at maximum uncertainty. And you don't have a crutch. You know what the crutches usually are, right? Let's look at the ratios. There's nothing there. It terrifies people. So you know what the response is? They don't try to value these companies. Most people who put money in these companies have stopped valuing the companies. What about those VCs? They price companies based on what? Users, downloads, subscribers, because they've given up. Their argument is there's too much uncertainty. But it's the reality.

Early on, when you think about valuation, it's all about getting the story. And guess what? Your story is going to be wrong. What percentage of the time? 100% of the time. But that's okay. You don't have to be right to make money. You just have to be less wrong than everybody else. Remind yourself of that reality because you'd be amazed at how many people stop because they feel too uncertain. I say, you think you're alone? You think you're special? Everybody feels uncertain, including the people running the company. What makes you think you're going to solve that by building an Excel spreadsheet?

So early on, it's getting the story right. I tell people I love valuing young companies. I find them fun because not only can you tell a story, but there's going to be differences in stories. You take an Airbnb or an Uber or a Palantir and I go across the room. My guess is we'll tell very different stories. And you know how this is going to play out. There's going to be far more disagreement about valuation with young companies than about older companies. In fact, the analogy I give is when you value a young company, it's like when people start writing books and they die. And then somebody else is brought in to finish the book. I know it's a morbid thought. When you're a young company, it's like the person starting the book died in chapter one, and you now get to write the remaining 34 chapters. When I'm asked to value Coca-Cola, it's like the author died in chapter 34 of the book, and I come in and write chapter 35. There's not much room to run. With older companies, the differences in the narrative are going to get smaller. There's going to be less disagreement.

One final point. If you read the Harvard Business Review, stop. Don't read it anymore. It'll ruin your brain because it gives you all these... I mean, let's face it. Everybody who goes to Harvard Business School is a CEO in waiting, right? You're treated as, you're going to be a CEO someday. Let's teach you all the skills. And of course, one of the things Harvard Business Review likes to do is write articles about what a perfect CEO is. If you don't believe me, go to McKinsey. In fact, think of these as the twin demons driving the great CEO myth, right? McKinsey has supplied more CEOs than any other consulting firm in history, like 60% of S&P 500 CEOs at one point in time were McKinsey CEOs. And they all talk about this mythical great CEO. It's a complete lie. Because you know what the right CEO for your company is? It depends on where you are in the life cycle.

When you're a young startup, who do you want? A visionary, a storyteller. You want Steve the visionary. Of course, I picked Steve for a reason. But let's say you make it through that model. You're now a company that actually has to convert this idea into a business. You want somebody who's more of a pragmatist, right? You can't just have storytelling. You've got to have somebody who takes the business idea and says, you know what, I'm willing to compromise on these things. It's called Paula the pragmatist. I'm trying to be as non-sexist as I can be, so I'll change the names of the CEOs as I go along here.

Then you get into high growth. You're building your business now, right? It's not just the idea, it's building a business. You want Bob the builder. You make it through that. You're now a growth company, but easy growth is gone. You've got to become a bit of an opportunist. You've got to find new markets, new products. You're Oscar the opportunist. And now you've made it to middle age. You're a mature company. You're playing defense. You need Donna the Defender. And then you're going to decline. You know who you want running your company? You want Larry the liquidator. If you don't, go on Google, look up Larry the liquidator. You know who you're going to see a picture of, right? You want Danny DeVito running your company, not Gregory Peck. You don't want a guy with big vision. You want a guy who's very focused on getting you out of businesses, liquidating. You don't want people with big ambitions running declining companies.

You don't want Larry the liquidator running a young growth company. For a brief time, remember when Travis Kalanick had to leave Uber for lots of different reasons, and they were looking for a CEO, and briefly they looked at Jeff Immelt? My response was, are you guys out of your mind? I mean, to begin with, we can debate what Jeff did at GE and whether it was good or bad. But even if he thought he did a good job at GE, bringing him in as CEO at Uber would have been the worst possible choice you can make. It would have been the wrong person for the company.

So a couple of days ago, I did my latest valuations of the FANGAM stocks. They fascinate me because you think about storytelling and life cycles. Each of them has a fascinating story. And one of the questions is, where did they fall in the life cycle? If you get a chance, I mean, Amazon is a company I've valued every year since 1997. Talk about a book that never ends, right? Each time you think you're getting to the ending chapter, they figure out a way to make this... It's like a sequel on top of a sequel on top of a sequel. It's like Pirates of the Caribbean, part 55. And Johnny Depp is still alive, and he's still drunk, and he's still doing all the things he did. I mean, this is a company that started off as an online retail company. By 2010, it looked like it was getting old. But it found a second wind. It became a disruption platform.

There are some companies, and this is what gives people hope, that find reincarnation. Apple in 2000, right? Steve Jobs, a legend because of that. And these become case studies. And then what? Consultants and users, do you want to be the next Apple? Do you want to be the next Microsoft? Come on. What company does it? But the reality is they're the exceptions, not the rule. And we have to remember that anytime we see a company saying, I'm the next Apple. How many times have you heard people say, I'm the next Amazon? I've gone well beyond where I should. So I'm going to stop there and turn to the Q&A.

Scott Galloway: When we come back, Aswath speaks with Kara. That's in a moment.

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Scott Galloway: Welcome back. Here's the rest of Aswath Damodaran's speech at Pivot MIA.

Aswath Damodaran: So we're going to stand. We're going to stand since you're so lively.

Kara Swisher: You look pretty good for a dead guy. I got to say. People think I'm tough on tech. Hello. Nice to meet you. So good to meet you. You're my date, I think. So this is a really fascinating story. I want to talk specifically about a couple of companies. And then I'd love some questions from the audience. So we, in the agreement, talked about Facebook and the stock that was off. Can you talk about this compressed life cycle? I completely agree with you. They go, AOL went from much shorter and shorter. Yahoo. I've seen them all. And I'm actually working on a book on Silicon Valley. And I forgot all the companies that have just died along the way. And they were big and they were important, et cetera, et cetera. Very few survived. So can you talk about where these big companies are now? Because they're sort of in the crosshairs of Washington. They're too big, et cetera. I think Facebook in particular is at a fascinating cusp in where it is in the life cycle. One is, if you look at the most recent earnings report, the number that I think freaked people out the most was the number of users dropped for the first time in Facebook's history. Though people sometimes forget why it dropped. It wasn't because of regulation. It wasn't because of governments. It was Apple's privacy restrictions on its devices, which actually reminded me of the Godzilla versus King Kong movies, right?

Kara Swisher: The only thing that brings down Godzilla is King Kong, and Facebook met a King Kong big enough to bring them down. So at this point, it's clear that they're not a growth company. I think that anybody who invests in Facebook thinking 20% growth is coming back is barking up the wrong tree.

Aswath Damodaran: The real question is whether they're at some steady state where they can grow five, six percent. I valued it at an 8% growth a year, which is way below the historic norms. But there's another story you can tell, which is this is the beginning of the end, that the slide has started, that you're going to go from being middle-aged to in decline, essentially over a period of three, four, five years, because we've seen that happen. I hope that's not the case, because I now own Facebook shares. But I think that there's a very real chance that that could happen. So I'm going to keep my eye on what the numbers look like. And I'm also going to look at what they do, because that's going to be revealing. Inside the company, they should see signs of a meltdown much quicker than we do.

Kara Swisher: So the metaverse, when they decided to change their name... In fact, I was on the show the day after they did it, and I sold my Facebook shares then. I said, there's no good reason for a company to change its name. You either go into witness protection.

Aswath Damodaran: Well, that's what they were seeking. Basically, you're trying to say, look, it's like when Philip Morris renamed itself Altria, saying, "Well, we're not going to be toxic anymore." Guess what? You still sell cigarettes. It's not going to go away. So I think with Facebook, it's going to be an interesting couple of years because you're going to see this unfold very quickly. If there's a meltdown, it's going to happen really fast. And those are the signs, the huge investments in Meta.

Kara Swisher: You don't think that's a forward-leaning move? That's a facelift?

Aswath Damodaran: I think the problem is they call themselves Metaverse, but they're still a social media platform that makes its money on online advertising. So if they really mean that they're going to shift their business model, I'd like to see what they do. Maybe there are things they've planned that I don't see yet. But unless I see that, it's just a name change. You're still a social media platform. You just change your name to Meta to make it look like you're a different business. It's like Alphabet, right?

Kara Swisher: Right. Now, Google did it because they wanted to make it look like a multi-business company. The reality is? Search.

Aswath Damodaran: The search box is what drives it. It's basically like Snow White and the Seven Dwarfs. You've got the search box that delivers all this stuff, and you've got the seven dwarfs who eat up your cash flows and earnings. Until that changes, I still call them Google until I actually see the rest paying off.

Kara Swisher: Let me ask you about one other question. Let's get two quick questions to the audience because we've got to get to lunch. This is fascinating. He's an amazing actor. Don't you want to go back to school now? I swear to God. We talked about Microsoft buying Activision, which has the biggest ability to go into this metaverse. People are already in a metaverse in a lot of ways with gaming. When you look at something like Microsoft, a very much older company than any of them, they seem most canny to me in terms of that. They did do this acquisition, which is a warning signal for you.

Aswath Damodaran: I'm usually not a fan of acquisitions, but I did like the Microsoft acquisition of Activision, because partly it builds into a story they've been building up to over the last decade. It's tough to remember, but 10 years ago, Microsoft was a software company. It lived from Office upgrade to Office upgrade. But even with Office and Windows, they shifted away from being a software company to a subscription company. I don't know about you, but most people now use Office and Windows on the Office 365 platform. They bought LinkedIn, which again, at the time, people said, "Why would you do that?" They built a platform. And what they're getting with Activision is not the games. In fact, the day after they announced this, I got a call from a Wall Street Journal reporter saying, "Is this a sign that Microsoft is going after Nintendo and Sony?" I said, for a $2 trillion company, what's the benefit of going after that market? It's small pickings. They have much bigger ambitions here. They're buying a platform. And as they see it, their future competitors are not Nintendo and Sony. It's going to be Roblox and Facebook and the other players who can potentially come after them with gaming solutions. So Facebook is telling the truth. That's where I would expect them to see actions: are they going into that part of the business?

Kara Swisher: I have two more quick questions. Is Apple then? Seems innovative for a bunch of old guys. They're pretty innovative.

Aswath Damodaran: You know what I like about Apple is, if you think about how much cash they've had for the last decade and all the suggestions that people give for it — buy Tesla, buy Netflix — because the reality is Apple has so much cash. They can buy Greece. They can pretty much buy whoever they want. What has always impressed me about Apple is the discipline they've shown not to do any of those things. And I think that that's why I've owned Apple over the last decade, because I like that discipline. For a while they were becoming, I think, two smartphones. They were the iPhone company. And I think the services business is giving them at least some room to think about what to do when the iPhone is no longer the franchise that it is. So with Apple, what I would be keeping my eye on is this is going to be a very tough franchise to replace. The greatest cash cow in history. But I like the way they're approaching. They're not in a hurry. They're not going out and buying things. And hopefully time will be enough of an ally that they can find ways of replacing the iPhone franchise. And they're also creative. No one thought AirPods would be this successful.

Kara Swisher: So last question, and then let's get to two quick questions from the audience, maybe three, but really quick. We have Airbnb CEO Brian Chesky tomorrow. He's closing the conference. I have a lot of regard for him. I think it's a really interesting business. What would be your worry for him?

Aswath Damodaran: My worry is that you built the intermediary business from Uber on. Intermediary businesses have advantages. They can scale up quickly. Think of Uber and how quickly they grew. But like any business that scales up quickly, the question is, how do you build stickiness into your business model? That's the key. With ride sharing, it hasn't worked. Uber and Lyft, I am not loyal to either one. I go with the cheaper fare every single time. With Airbnb, the question is, how do you build stickiness in the model? And there are ways of doing it. Maybe you're collecting data on your users that you can then use to give them the right rental because you've learned about them. But that's the challenge that Airbnb faces, because it's succeeded in the first part, which is disrupting the hotel business or hospitality business. The second phase is building up stickiness in the model. In other words, it's like climbing over a moat, then trying to dig and make the moat deeper, because the moat was very shallow. That's why you made it through quickly. But now you've got to make the moat deep again. And the question I would have is, what are you doing to make this a sticky business where others don't come in and try to take away? And you can start to build margins and actually make money off this business.

Kara Swisher: Great. Okay, quick questions. Very quick. Go ahead. I know we're going to go to lunch then.

Audience Member 1: So oddly enough, my name's Larry and I work for Yahoo. My boss asked me to bring back some stories to tell the rest of the company when I get back. So maybe you could give me an answer to what the hell Verizon and Apollo was thinking over the past few years.

Aswath Damodaran: I think every telecom company, not just Verizon, look across the board. They know that their old way — I mean, basically they made money for a long time as quasi-monopolies by essentially saying, "Where are you going to go?" And I think they recognize the business is shifting. It's becoming more competitive. This is all becoming part of this entertainment business where Netflix has kind of set the agenda of throwing money at content and hoping that something good happens on the other side. In fact, when I think of Netflix, I think of a hamster wheel. You make more content, you sign up more users, then you go to the markets and look how many more subscribers, and you go back and create even more content. And I think all of the companies in this space — Disney on the entertainment side — are all on that hamster wheel now. They've said, "This is the way to go. Look how successful Netflix has been." If you're going to get on this hamster wheel, you need an exit route. And with all of these companies, my advice is, I don't mind you spending money in large amounts to get into this space, but you better be thinking about how you finally figure out a way to get out. You can't keep throwing money at this and hope that something good will happen. And I don't see yet with AT&T or Verizon a plan of how exactly, after they've got these platforms and spent all this money, how do you monetize this? How do you live off the fat? Because if you keep throwing money, eventually your cash flows are going to blow up on you. And I don't think the telecom companies clearly have an idea of what to do. They just want to go to the Oscars. And Tim Cook has fantastic cheekbones and convinced them.

Kara Swisher: Thank you, professor. Very enjoyable.

Audience Member 2: I'm one of those plastic surgeons you talked about. Neil Zuckerman, I run the media practice at BCG. How are you? Good. So you've talked about Microsoft, Disney — I'll put in that mix — and I'll put The New York Times. We've got Meredith coming up later. All three are companies that have reinvented themselves, transformed, whatever you want to call them. And you describe the stories as exceptions, not rules. So what's the commonality among the exceptions? Because I think we all want to get younger. I certainly do. And I think clients, my clients, the CEOs have a right to try and transform themselves and not just take age as destiny. So what's some of the commonalities among these exceptions?

Aswath Damodaran: But be clear, you're going to die no matter what you do. I'm going to die. I think the one thing I would say in common is that they are not in a hurry to transform themselves. Take Microsoft. Satya Nadella came in. At the time he came in, it was a two-hit wonder: Office and Windows. It had never done anything in its lifetime other than those two that actually made it money. Xbox, all of that was a sidestep. He realized that Microsoft looked like GE 10 years later. And he made a good choice: the cloud business. But rather than go buy a company in the space, he built up. He said, "Look, we have strengths. We have great technology people. We know how to build a business." And he gave Azure, the cloud business, enough freedom to make mistakes and build up. And he was patient. And today, Microsoft's $2 trillion value can be traced back to that decision. So I think what they share in common is they have a plan, they're patient, and they use the strengths they have. The New York Times has been able to reinvent itself, not by going to a new business, but by realizing their primary strength is the content within the Times. Whether it's a crossword puzzle that you enjoy doing every day or the articles. I think they built on their strengths in trying to reinvent themselves. And they've been patient. That's what you should see in common. The companies that get into trouble are the companies that throw money and say, "Look, I want to be in a new business. Find me green energy if you're in a fossil fuel company. Or find me a technology company or a telecom company and spend as much as you can acquiring things, because that's where we can get a head start." That is a high-risk, low-return strategy that doesn't seem to pay off very much.

Audience Member 3: Gretchen Tibbetts, also an investment banker, but in the media space. Love your thoughts on MGM, Amazon, and Blackstone's money into Candle.

Aswath Damodaran: I think media and entertainment collectively are at this point where we have no idea where we're going. If you take Disney and Disney Plus, I am a little nervous about what Disney is doing with Disney Plus. It's playing the Netflix game. Next year, it expects to spend, what, $33 billion on content. It's staking everything that Disney does as a company. And I would say in the media and entertainment space, collectively, companies are doing things very differently from the past, hoping that that's the right thing for the entertainment business. I don't think any of us knows what that entertainment business will look like. So I can see — if I were in this business, I would buy a bunch of options because I don't know what the winning game is, rather than put it all in on "This is what's going to win" and have it all get lost because I made the wrong bet. So if I were advising companies... and I don't think with Amazon, everything is an option, because Amazon has one advantage over every other company in the world: patience is built into its DNA. I've told people, "Look, you're competing with Amazon. The one thing I can guarantee is you will never make money." It's almost a given that they will bring down the business market profitability by the time they're done. So the fact that you threw Amazon in the mix already makes me a little nervous about what the end game for this business is going to look like. Because if Amazon says it's going to keep margins low, it knows that you're going to lose patience and leave, and they're going to be around when this whole game plays out.

Kara Swisher: Plus, they're selling toilet paper.

Aswath Damodaran: That's exactly right. That's exactly their business.

Kara Swisher: Anyway, Aswath, he's amazing. Thank you.

[Applause]

Narrator: Thanks for listening to Pivot. We'll be back next week with more episodes. We all have moments where we could have done better, like cutting your own hair. Oh, yikes. Or forgetting sunscreen, so now you look like a tomato. Ouch. Could have done better. Same goes for where you invest. Level up and invest smarter with Schwab. Get market insights, education, and human help when you need it. Learn more at Schwab.com. Support for the show comes from Mercury. What if banking did more? Because to you, it's more than an invoice. It's your hard work becoming revenue. It's more than a wire. It's payroll for your team. It's more than a deposit. It's landing your fundraise. The truth is, banking can do more. Mercury brings all the ways you use money into a single product that feels extraordinary to use. Visit mercury.com to join over 200,000 entrepreneurs who use Mercury to do more for their business. Mercury. Banking that does more.