Ted Audio Collective Hi everyone, you're listening to After Hours.
I'm Yang Mi, and I'm here with me here in Felix.
Hi guys. Hey Yang Mi, we're coming tonight from New York City again.
So if you hear the street sounds below, that's all that is, don't be distracted by it.
Guys, you know what?
I think we should start out by thanking everyone out there who has written us.
Yes, really amazing.
I have to say, we started this podcast on a bit of a whim.
We thought, let's just do it.
And I think we've all been really surprised and delighted by the amount of engagement we've had.
I mean, listeners right from everywhere.
I got some email via LinkedIn also, and people are in Asia, Latin America, and Europe.
So I think the audience is more global than I had anticipated when we first started the project, which is really wonderful.
I think it's been enormously gratifying, but even more so, these are really thoughtful considerations.
They're not just kind of dashing off, oh, you should talk about X.
It's actually a really thoughtful email where they're saying, look, this triggered a thought in my mind, and I think you should do something more on this.
Exactly. That's really fantastic.
There's something to be said for sparking people's thinking, which is kind of what we're interested in doing in general.
So it's nice to hear that happening in a different way.
Yeah, it's really been fantastic.
So thank you all, and continue to write in.
We're at Harvard After Hours at Gmail.
We love it. So tonight, we have a couple of really good topics, right?
We do. I mean, we have to talk about this data breach that Marriott announced, so we'll talk about that.
And Meheer, you brought in another topic?
Well, there was this occasion most recently where Microsoft actually passed Apple in terms of market capitalization, and it made a lot of headlines.
And I think the question I wanted to ask you is, what's behind that, and is there anything behind it?
Beautiful. Okay, great.
Okay, so Meheer, you wanted to talk about Apple and Microsoft.
Yeah, so very recently, Microsoft passed Apple in terms of market capitalization.
And I'm in general kind of blasé about these things because I think they're kind of arbitrary ways to understand the world, and these things happen.
They don't necessarily mean anything.
But on this occasion, I thought we should talk a little bit about it because in some sense, Microsoft has been a bit of a sleeper over the last five years.
So is this a story about what's going right at Microsoft?
Or is this a story actually about what's going wrong at Apple?
Because the reality, of course, is that Apple's market capitalization has fallen by 20 % over the last month.
So what is this a story about for you?
So to me, it's first and foremost a story about Microsoft.
I mean, for so long, we've been so down on Microsoft.
I mean, you remember all the jokes we made about Microsoft.
And so it was a sense that this is a classic example of a legacy company.
And now, I think mostly as a result of their engagement Azure and their engagement in cloud, they have a new business that is growing very quickly.
And what you see in the market valuations is essentially changed expectations about the growth profile of the company.
I agree with Felix.
What's interesting about Microsoft, and I think surprising when people saw the story, is Microsoft remains a smaller business than Apple by far.
But not all revenues create equal.
So if you look at Microsoft's revenue, a huge chunk of that is recurring revenue, which is always nicer than transaction revenue.
But in addition, it's the best kind of recurring revenue because it's B2B recurring revenue.
It's these big contracts with S &P 500 companies, which means these are companies that don't change their vendors that often.
So a huge amount of inertia in that revenue stream, which I think the market waits very, very differently.
In addition, as you said, I think their cloud strategy is really quite phenomenal, what they've done with their cloud strategy.
There was a moment in time where Amazon and AWS was running away with the market.
They're still the biggest.
I think they have about 50 % of the market.
But they're running away with it.
And what Microsoft did, what I think was really smart, but also played to its strengths, was it differentiated itself from AWS by doing what AWS wouldn't do.
In other words, if a company want to put their stuff on the cloud with AWS, they really had to give up their on -premise data centers.
There are a lot of companies that are not comfortable doing that.
So Microsoft comes in with an offering that offers this really unique way you can integrate moving to the cloud, but you can keep your on -premise data centers.
And they found that there are so many companies out there that that's exactly what they're looking for, to the point that I think AWS recently announced they too were going to offer this kind of integration.
But it's just a really nice case of a company not trying to do the me too thing.
But what Microsoft historically has always done really well is the boring stuff.
They can speak to big company CTOs and CIOs.
They speak that language, and they've gone in there, and they've made real inroads.
It's really been quite something to see.
And I think it matters in a context early on the cloud scene, promising, but risky.
Who knows? Is it going to pan out?
I recently had a conversation with a chief technology officer of a really large company, and he described the incredible battle he had to convince the board to move to the cloud.
We forget now because it seems so natural, of course, but it wasn't like that.
The moment it becomes really important, the really big companies are going to move towards a dual sourcing strategy, which means you don't want just Amazon.
Microsoft is clearly the number two.
Can we talk about one other thing with respect to Microsoft?
And that is the contrast in the corporate image under Sacha Nadella.
So of course, Bill Gates ran the company for a long time.
It was his company, and then it became Steve Ballmer's company, Steve Ballmer, a guy that was essentially a salesman, you know, loud, blustery.
And now you have this guy, Sacha Nadella, who is by all accounts the most low -key, understated, high -EQ kind of leader coming in.
And to me, it's just an indication of how, you know, I think it was a couple of episodes ago we were talking about the Savior CEO and Carlos Ghosn.
This is the contrast.
This is someone who comes in and says, it's not about me.
We've got to begin to shift our business.
And he's done really transformative things without making it about him.
I find it rather extraordinary.
There is this kind of anti -Ballmer, I mean, the opposite of Ballmer thing that he embodies.
He's kind of got this guru -like calm.
And I think there's something to that, too, in terms of just changing the disposition of the company and its willingness to do things completely differently.
I think it's a recipe or it's the lesson, I guess, in part is for boards to be a little bit more radical in their thinking.
Boards are inherently very conservative.
But I think in this case, in part, I think Gates played a large role in this.
They were able to say, no, let's go a totally different way.
And that turned out to be, I think, very, very powerful.
Can we talk about Apple also?
Yes. You mean the iPhone company?
That is essentially their number one issue.
It's an amazing product, has had an amazing life.
And it's not clear what's next.
I mean, when you look at the way the service business evolves over time, it's quite nice.
I think all these initiatives now in the health space are quite nice.
But is there anything that feels like it's really going to move the needle for a company the size of Apple?
I think I'm skeptical.
Yeah. I mean, Apple is going to be a very powerful company for a long time still.
Having said that, I would encourage our listeners to just pay attention to a few things that are kind of going on beneath the surface of Apple that I think are really interesting, and signs that this is a very different Apple than the Apple of even three or four years ago.
So first of all, of course, the news that they are no longer going to be reporting unit sales with their iPhone.
The only reason you ever do that, of course, is because those numbers are going to look as good.
But putting even all of that aside, because that's kind of the obvious thing.
If you start to look beneath the surface, so for example, it's begun to drop some of its prices in Asia.
Apple has always had pricing power, and it has never had to resort to any kind of reduction in pricing in order to prop up sales.
So this is really sort of unprecedented for the iPhone.
But the second thing is it's always viewed itself as kind of this exceptional company in marketing and in business at large.
There are two ways that you think about your magnetism as a brand.
One is pull, which is you're so magnetic, you can bring customers to you.
And the second is push, where you're pushing your product on.
And Apple has epitomized the pull brand.
It is the Prestige brand.
It has never relied on other channels because it's had full confidence that it can always bring people to its stores, just channels.
They have just struck a deal with Amazon to sell its products on Amazon.
This is the world's most powerful Prestige brand selling on Amazon before the holiday season.
Imagine how much it hates Apple to have to give a cut of its profit margins to Amazon.
I mean, think another sort of quiet announcement was the announcement that they are going to launch Apple Music on Amazon Echo.
Again, they're going to pay Amazon.
These moves are somewhat unprecedented.
I am very, very surprised.
I really believe that the era of Apple exceptionalism is coming to a close.
And we are beginning to see Apple behave like many companies behave.
But the other real sign of potential vulnerability is this lawsuit, is the Apple versus Pepper antitrust lawsuit.
And depending on how that comes out...
That's right. So Apple has made a big fuss about the fact that as its iPhone sales have begun to level off, it's going to be able to accrue a greater percent of its revenue from services.
The truth is most of their service revenue right now, which continues to grow, is coming from their app store.
And so what this lawsuit about is whether or not the rents they're collecting from their app store are too high and they're taking advantage of their monopolistic power.
Depending on how this thing plays out, it could potentially cut right into the heart of their service strategy.
And it's a really delicate moment, I think, for the company.
I think all of you guys put your fingers on all the right things.
I would just add first.
I mean, we knew they were going to fall down back to earth, right?
They're never going to be an exceptional company forever.
And then the question really just is how do you manage that?
And I actually take these moves that you mentioned, actually, they become heartening.
Like, maybe they're thinking about it in a smart way.
The second thing to say is, I think on the services revenue, we should just be clear.
It's $10 billion a quarter now.
It's growing at 35 % per year.
It's astounding. And, you know, we talked about it.
But, here, let me say, most of that is the app store.
You know what's the second biggest chunk of that is?
It comes from Google.
It comes from Google paying Apple to be on Safari.
Right, but I don't know if I should take that to be good or bad.
That strikes me as being a manifestation of how powerful the network of iPhone users they've created is.
True, but I think the narrative, which I think is not quite correct, is that Apple's being really successful at selling things like music and other things.
Oh, that's true. For sure.
And I think that hasn't happened yet, which doesn't mean it can't happen.
But I do think, actually, your larger point is a really interesting one.
And I think I might agree with you that it will be interesting to watch Apple make this turn.
We shouldn't expect Apple to be the same Apple as it was five, ten years ago.
They should be able to move to this new era.
And I think it'll be a testament to Tim Cook's ability to be able to navigate the company.
Part of what strikes me as so interesting about these changes is, I think, when companies come under pressure, the way Apple is under pressure now, you do a bunch of activities.
And I think they help first and foremost financially.
And they tend to make matters worse concerning the core problem.
So, the moment I'm on Amazon, yes, of course.
Am I going to sell more phones?
Absolutely. That's why I'm doing it.
I'm giving up a little bit of margin, but overall, that's okay.
Does it reinforce the notion that the iPhone is not that special?
It's just on that same page like everyone else?
Yes, of course. Same thing, I think, with the Google relationship.
You know, it's like, oh, it's really nice.
Google understands it's really valuable to be on the Apple phone.
But the moment the Apple phone is no longer the wonderful iPhone that it once was, that Google relationship is going to be less important because Google will pay less.
But let me just flip it on its head, which is, I mean, all of this is a manifestation of the fact that Apple and iPhone still have a lot of room to grow in becoming a more mass -market product, right?
Meaning we might miss, oh, it's no longer going to be an elite, cool product.
But guess what? There's 70 % of the market they can penetrate.
And if they get a little bit more of that...
Do you think they can?
That's really tricky, I think.
That's really tricky, I think.
Well, I think we have to be open to the idea that Apple will be different.
And it's going to fall back down to Earth, and then it's about managing that.
And maybe that's pretty okay and maybe smart, rather as opposed to just trying to stay where they are, which is an elite brand in the stratosphere.
Maybe they have to fall back down to Earth in a thoughtful way.
Can companies thrive by being slightly less prestige and sort of finding this new level at which to exist?
100%. And I hope they're able to do that.
But I got to tell you, I've been an Apple user for a long time.
It's a little bit sad for me personally because this has been an exceptional brand, like truly exceptional.
And even some of the arrogance they've displayed over the years, because of their confidence that they can change the dongles.
Anytime they want to change the power cords, change anything, remove the hard drive, get rid of all the ports, they can do whatever they want because of their power.
There was something really magnificent about that sort of attitude of exceptionalism.
And so to see them acting more like any other company now, it's a little bit sad.
The comment that you made at the beginning of the show here about the pros and cons of looking at market valuations of companies, we know so much of these valuations are just growth expectations.
And then I think once you manage to the value of the company and these growth expectations, you are in a position where, oh my God, we reduce the price a little bit, we make it a little bit less exclusive.
And I think I am, as an investor and as a consumer, I'm so nervous about these moves.
Because I think often in the pursuit of growth, you give up the very thing that made you special to begin with.
Alright, so on Friday Marriott announced a data breach of its Starwood reservation system.
So if you remember two years ago, Marriott acquired Starwood, which includes brands like Sheraton, Weston, W.
And once the acquisition was complete, Marriott became the largest hotel company in the world, alright?
They announced a data breach of the Starwood reservation system, and apparently this system has been compromised since 2014.
I know, a long time.
Long time, yeah. Although just recently discovered the full extent of it.
Yes, it was just discovered about two months ago, and it was just announced now.
And it's the nature of the data that was compromised that I think is really disconcerting.
So it's not just names and addresses and dates of birth.
But it also includes travel details, importantly passport numbers.
Passports, yes. Passport numbers.
That was the terrifying part.
They have my passport, I think I know.
Exactly, and in many cases they believe credit card numbers.
This is one of the largest data breaches in history.
I think the Yahoo one was bigger.
It was even bigger, yeah.
But if you think about that Yahoo breach, a lot of that was kind of garbage information.
Think of how many people have a Yahoo email account.
Doesn't matter, yeah.
Equifax was the closest.
Equifax was the closest one, but that was 143 million.
This one involves half a billion people.
It's astounding. And all around the world, too.
Half a billion people.
Once they made this announcement, they did all the things that we are now accustomed to seeing companies do.
They apologized. They said something like, we care deeply about your information.
They're giving everybody a year of credit monitoring, and then they outline the steps that you can do to protect yourself.
So I want to start with two questions for you guys.
Number one, how in the world does this kind of thing happen?
And then number two, what do you think of the response?
Well, let me get started on the first one.
Sometimes I wonder if the question is, we should be shocked if it doesn't happen.
You know, and by that I mean, this is a very new set of technological issues.
There's a cat and mouse game being played with hackers all around the world.
And I find it terrifying, and I've previously voiced the desire to go off the grid.
But... Which, of course, didn't happen.
Right. But I guess I'm not exactly sure whether we should be surprised by the occasion of it or the lack of it.
And the related point is that I think with GDPR coming in, these new privacy regulations that came out of EU, there's a big burden on companies to report quickly.
I think the reporting of it is going to happen more and more and more.
Like a Friday afternoon data breach news story is going to become a weekly thing.
Part of our daily life.
I find it as interesting to think about where it doesn't happen.
If you know nothing about data breaches, you would think, you know, what do you hack?
Of course, you hack the financial system.
Right. You hack the banks.
And interestingly, that we have not seen to the extent that one might expect.
You would think you go after small mom and pops because they don't really have the technical capabilities to protect themselves.
By and large, I think at least the ones that have been disclosed, we see these really massive breaches.
We don't really see sort of medium -sized breaches.
And I think it's interesting to think about why is this?
Why is probably the most attractive target?
Banks seem to be relatively safe.
They seem to be able to contain.
Even given the technological challenges, they seem to be able to do relatively well.
If you look at big companies, there are really two domains where you don't see happening.
Financial institutions, but also large tech firms.
So I'm really talking about financial information.
Like when you see lots of financial influence.
So you would think Uber would be a prime target for hackers because of the amount of financial information that flows through that system.
You would think Amazon would be.
I think I'm a little bit less generous than you, Mehear, in how I think about it.
There are two things that really jumped out at me when I read this story.
One was most of this information was not encrypted.
Except for the credit card information.
And then even the two keys to unencrypting, the credit card information, were all stored together.
These things, I don't even know anything about data and security.
And I know that that just sounds really, really bad.
The second thing is that they made this acquisition and they didn't catch an indeligence.
This to me is an indication that when they did that due diligence, they did not do their job.
Because a part of that was going into their systems and doing an audit of how secure all that stuff is.
And the fact that it wasn't revealed then, I think is a real indictment of the company.
I mean, one interesting part of the context is that they thought of the Starwood system as a legacy system.
They always wanted to phase it out.
So maybe part of what went wrong in the due diligence process is that you looked at it and you said, Oh my God, this is way behind the curve.
Probably on many dimensions, including security.
And then you made the big decision, okay, we're going to phase it out.
The phase out takes years.
And I think that's how they missed a really big hole.
What do you think about the response that Marriott came out with?
I mean, it's everything you expect, right?
I think in part, you know, striking how even a day or two after the story breaks, it's not really a story anymore.
We all have gotten so used to.
And part of the routine is exactly what does the company say.
We're very sorry. We wish it didn't happen.
At least they didn't make the Equifax mistake of trying to make a business out of the fact that you just had a major problem in your IT security member.
They tried to sell if you have private.
And then they also tried to, if you took the worst business idea of the decade.
And if you took their credit reporting class, then you gave up the rights to sue them.
Which is amazing. That was so textbook.
I like so bad. I feel like where is the outrage?
So, for example, think about the heat that Facebook took and continues to take because it enabled Cambridge Analytica to have access to information for 50 million users.
And this is non -financial information.
Yep. Okay? We're talking half a billion people and the kind of information that can really ruin lives.
I mean, this is exactly what you need to ruin someone's credit to steal someone's identity.
Passport numbers and credit card numbers.
And this is completely gone from the front pages now.
Let me try to sort of develop a theory here.
I remember reading a study by McAfee, the software security firm, maybe two or three years ago.
And they tried to, on the dark -knit, they tried to buy credit card information.
And they wanted to find out how expensive is that actually to sort of get a sense of what are the economic incentives to acquire that kind of information.
And the part that blew me away, that really surprised me, is if you have all the information intact, a credit card is probably worth about $40.
Almost nothing. A good set of credit card data.
With the security code included.
If you don't have the security code, and it's a little more valuable in Europe than it is in the United States, but it's not, you know, if you had asked me before, I would have thought tens of thousands of dollars.
So, one of the ideas I think is that there are now secondary systems in place, fraud detection by credit card firms, that are actually pretty good.
And so, perhaps a completely different way of thinking about this whole issue is that we don't want hotel companies to do frontline defense.
They're always going to be horrible.
They don't have the IT staff.
It's just like there's no promise that they ever get this right.
What we want is secondary systems.
Two -step verification.
Now, I need to steal your credit card, and I need to steal your cell phone, which, you know, that's really hard to do.
Or if you do that, you get it for one person, that's not really valuable.
And so, maybe the whole idea that every company needs to shore up its systems in a way that really, you know, makes it defensible against the most sophisticated hacking, we're never going to get there.
But if we think in compliments, let's have two things, let's have three things, let's have your fingerprint and a bunch of information, then I think the issue might be not that relevant.
Yeah. I think that also, especially on the payment system side, is really interesting, right?
So, I think it's going to be about the payment systems and their ability to protect data, because that's where they have to be really careful.
And that's where I really care more than at the Marriott level.
I care at the Marriott level, particularly because of the passport.
The passport is like super scary.
But doesn't that just mean we need two -step verification for passport?
You go to the airport, it's no longer good enough to just show your passport.
There's got to be some other thing.
Well, yeah, I think there we also rely heavily on penalties, right?
I mean, that's the other thing that's lurking in the background, in my mind, which is, I think this came out because of GDPR.
I think you're going to see breaches come out more because of GDPR, which is both because of you have to notify.
And the penalties, they're, like, up to 4 % of revenues.
So, there's no joke.
In the case of Europe, yes.
In the Europe, but I think there's an extraterritorial aspect to it, right?
If you're doing business in Europe, you are under the web of GDPR.
So, I think that's the other thing that's happening here.
But that's interesting because we haven't yet, because it's so new, GDPR, we haven't yet seen those imposed, right?
One of the things they say you should always do to protect yourself as a consumer is you should lock your credit.
You should put a freeze on your credit.
Have you done that, by the way?
So, that's my question.
Have you done that?
Yeah, I have done that after Equifax.
Wait, are you talking about, like, shutting down?
What are you talking about?
Shutting off a credit card?
You should put a freeze on your credit stuff so nobody can access your credit.
For how long did you do it?
I just unlock it temporarily when I need something.
Oh, I see, I see. I hear, freeze your credit.
I think I'm not the only one who doesn't know.
You should say something about how you do that.
You just go online and you just lock it.
Go online for the listeners in the United States.
There are three important credit agencies.
And every time someone wants to open a credit card account, entities need access to your credit history.
You can block that access.
Go to their website, you get a password, and then you can use that password to unfreeze your credit, say, if you wanted to take out the mortgage or if you wanted to apply for it.
Okay, just in case anyone nasty is listening to this, by the time it's aired, I will have done this.
I just want to be clear.
Okay, guys, I have a pick for you.
So as you know, Crisper's been in the news.
Did you guys hear about that story?
The Chinese scientist?
Oh, yes, yes. Oh, my God.
Has claimed to use Crisper technology to gene -edit twin girls.
And I have to tell you, it's just the whole scientific community, including in China, by the way, is just in an uproar about this.
And what's really disconcerting is, if you talk to any Crisper expert, they don't disbelieve it because they say, this is so completely within reach.
Anyway, I was talking about this with one of my sons, and he was confused about Crisper, so I sent him a link, and that's my recommendation.
The link was to a podcast by Vox, and it's a podcast called Today Explained, and it's the November 30th episode, which is called Humans 2 .0.
And in that episode, in about 20 minutes, Joss Fong, who is the science reporter for Vox, and she's excellent, she's just really good.
In about 20 minutes, she explains Crisper technology in the most easily accessible way, including its extraordinary potential, as well as some of the scarier aspects of this thing.
We've got to do a show on this.
Yes, so if you want a quick primer on Crisper, I would direct you to that one episode of the podcast.
Felix? In one of the last episodes, we talked about Netflix, and we talked about the globalization of Netflix, and how that sometimes implies that we now get to see Japanese shows and South African shows, and I just started watching one of these shows.
It was originally produced for German television, and it's a show called Babylon Berlin.
And what's really interesting about it is, it's set in 1929 during the Weimar Republic, and so it's an interesting detective story, but I think this show does such a good job at giving you a sense of just the openness of that period.
You look at 1929, and the world can go in 500 radically different ways.
In Russia, you have Stalin versus Trotsky, where you don't quite know what's going to happen there.
In Germany itself, you have this democracy that seems incredibly fragile.
You have women participating in the economy in ways and at numbers that were just completely unprecedented, upending the world of men at work.
And so all of this happens at the same time as you follow this detective story.
It's shot beautifully.
So if you have a chance, and if you're interested in global content on Netflix, Babylon Berlin.
Oh, that sounds fascinating.
I'm always up for a good detective TV show.
I'm so sorry it's not British.
Or Japanese. I'll make do.
So you might remember my Japanese rent a family pic.
How could we forget?
So there is this great article in Reuters, a great photo essay about a company in Korea called The Prison Inside Me.
And so this is a company that allows people to check themselves into a prison for several nights and to experience what a prison is.
And this has actually become a serious business in Korea.
The story is filled with quotes that are just...
It's a working prison?
It's not with prisoners or...
It's not with real prisoners, but you go into a prison and you are treated like a prisoner and you are fed in that way and you're housed in that way and you're living in what was once a prison.
And the neat thing about the story is it has all these incredible quotes.
I know, I know. I wish our listeners could see our facial expressions.
You know, I think what's interesting is the quotes from the people who go.
So here are a couple of the quotes, which is prison gives us a real sense of what true freedom is.
And the point is their lives have become kind of prisons and so they go to a prison to escape their lives, giving away their cell phones and just giving away everything.
So it's kind of like this mind -boggling essay, and it's a photo essay too by the way, about modern alienation and kind of makes you just wonder, people have to go to prison to discover freedom.
But it also made me realize that in my own life, like there are these times, I once stated an ashram, which is really no different in some ways, it's like a very stripped down living.
And it was spectacular.
So I think, I guess it made me wonder, maybe this isn't as crazy as I first thought it was.
And so it's a Reuters article and it's a photo essay and I recommend it highly.
So as a Korean American, I feel like I need to explain this somehow.
Absolutely no insight.
Other than to say that this is not just a Korean or Asian phenomenon, as you say, like there's a long tradition in many cultures of exposing yourself to some form of deprivation.
But okay, so that's your recommendation?
The article, not the actual experience.
Okay. All right. So that's it for tonight.
Thanks everyone for listening.
This is After Alex.
Okay. Where do you find this stuff?
