Off Kilter.

Volume 37: An Epic battle for the future of capitalism.
Searching for the signal in the noise.

1. Forget parody ads, Epic versus Apple is the opening salvo in the battle for the future of capitalism.

Tl;dr: Epic throwing shade at Apple sits atop a much deeper question.

In the marketing press, the primary conversation about Epic Games taking on Apple centers on their parody of the famous “1984” Apple ad, only this time with a female protagonist, worm-ridden fruit, and a rather distinctive rainbow unicorn axe.

But to focus solely on the ad-object does a fundamental mis-service to what’s really going on here. You see, this isn’t really about an amusingly well done and on-brand parody of a famous ad at all. What we’re actually seeing is a fundamental questioning of capitalism and the form it should hold in the future.

In this case, Apple represents the status quo. Which is to say that it reflects an economy that centralizes power in the hands of powerful monopolists, where economic activity is defined not by dynamism and innovation, but instead by the continued ability of the powerful to extract monopoly or quasi-monopoly rents from society at large.

Epic Games are challenging this status quo from a perspective of economic fairness. There’s nothing socialistic or community-minded about Epic Games, they’re aggressive capitalists driven by a desire to make money. But they do hold a rather different philosophical position. Rather than laud monopoly, Epic are essentially saying they want to compete on a level playing field that allows them and others to duke it out in the heat of capitalistic battle without fear nor favor. The future they seek is one where dominant platforms like Apple do not have the power to skew competition, pick winners, and extract excess rents in the form of vehicles like their closed payment system and 30% “Apple Tax.”

Of course, monopolistic-capitalism and level-the-field capitalism aren’t the only competing ideas in the world right now. We’re also seeing a rise in what might be referred to as values-driven capitalism, as illustrated by the increase in B-Corps and Public Benefit Corporations. And finally, we suffer from the blight of crony-capitalism, as personified by the fossil fuel industry and its exceedingly shady ties to government and the financial services industry and their continuing ability to socialize losses.

Add this all up in a blender and it’s clear that we’re in the first or second inning of the battle for the future of capitalism, which fundamentally means it’s the battle for the future of our societal and economic system. Will the monopolistic status quo survive, and if it does, at what cost? Will level-the-field capitalism shave the edges off and release a burst of much needed economic dynamism and innovation? Will values-based capitalism emerge from the trough of disillusionment and create a genuine and meaningful impact? Or will we continue to be beset by the scourge of politically connected cronyism? These are all fundamental questions and for the first time I can remember they’re all being asked at the same time.

2. Who ‘ya gonna trust? Clorox and Lysol, probably.

Tl;dr: Boring cleaning brands find themselves in uncharted territory.

If you’d have told me in January of this year that the most desired corporate partnerships in August would be aligning your brand with cleaning products like Clorox and Lysol I’d have told you to go and take a lie down somewhere because you are clearly not well.

But a global pandemic later and here we are. As airlines, hotels, cruise ship operators, retailers, rental car services and restaurants all seek to entice customers back, they’re turning to the brands that are most trusted to kill the virus to help.

In a recent Axios/Harris poll of corporate reputation, the Clorox Company emerged as the single most trusted corporation in America. Which probably makes sense when you’re using its products every day (when you can find them) to clean, sanitize and protect your loved one’s from a deadly disease.

What’s particularly interesting about the partnerships that are being announced, like United Airlines with Clorox, and Delta with Lysol, is that they aren’t just about plastering stickers everywhere stating the use of the products. Instead, airlines, hotels, rental car services and others are borrowing the equity of the cleaning expertise of these companies in a consultative fashion. United aren’t just selling you the idea that they use Clorox products, they’re selling you the idea that the Clorox Company has defined the cleaning regimen for United and is to some extent guaranteeing the safety of their aircraft from CV-19.

Aside from being a fascinating example of borrowing brand equity to shore up a critical equity gap these brands now face, this also represents a potentially significant new line of business for the cleaning companies themselves. If Clorox is no longer just about cleaning products, but has instead become an arbiter of all things clean and safe then there’s a lot of economic potential to innovate across the entire value-chain of what it means to be clean.

3. CV-19 is an extinction level event. And like other extinction events it’s forcing rapid evolutionary changes.

Tl;dr: Extinction, rapid evolution and apex predators.

An observed evolutionary phenomenon is that when threatened by outside environmental events, changes that would otherwise take many, many generations accelerate much more rapidly than under periods of stability. This is what happened to mammals, for example, after an asteroid hit the earth and wiped out the dinosaurs.

For businesses, CV-19 is an extinction level event, putting an unprecedented number of businesses out of business, forcing others to rapidly adapt just to survive, and highlighting the power of a few ultra-large tech companies that are now the apex predators of the current economy.

At the bottom of the pile we have the decimation of mom and pop businesses. Estimates are that 60% of the nations restaurant closures are permanent. These are businesses with neither the strength to ride out the storm nor the ability to borrow to survive, and we now know that the most vulnerable businesses were shut out of bailout programs that instead served the wealthy, the corrupt and the Catholic Church. Rapid evolutionary change is almost impossible for these businesses, especially when we consider that small restaurants are now almost solely dependent upon the predatory behavior of massively loss-making delivery services.

However, as with any environment under the force of an external event, there are some green shoots of a new species of mom and pop shop. In this case, the mask-maker. Between now and 2027 mask sales are estimated to grow at 24% to a value of over $30bn and mask sales have largely been the reason for a 140% increase in the value of Etsy, which is the distribution platform of choice for these micro-sellers.

Also facing extinction are those businesses that have been systemically weakened by the private equity industry and their predilection for loading corporations with debt that they then extract as profits via special dividends and management fees. To put this in perspective, even in the good times private equity owned businesses are 10 times more likely to declare bankruptcy than businesses with any other kind of ownership structure. If you look at the bankruptcies of well known brands like J Crew, Hertz, Neiman Marcus or Brooks Brothers, you find the pre-existing condition of massive private equity driven debtloads. Rapid evolutionary change here is largely limited to highly dubious financial engineering of the type highlighted by the frankly bizarre Revlon debt situation, where Citibank accidentally handed over $900m to creditors and then asked for it back (not all of the recipients agreed), which also highlighted the highly dubious practice of shifting intellectual property assets used as collateral in order to leverage it with more than one set of creditors.

It’s in the middle-ground where we’re seeing the most evolutionary dynamism. Businesses like Levi’s that have enough capital to make major changes to survive and hopefully thrive in the future, but not enough that they can simply wait things out are demonstrating a combination of cost-cutting and aggressively focused rapid innovation. In Levi’s case, accelerating their shift to selling direct as traditional retail falls by the wayside. In the casual restaurant business, Brinker just launched a “virtual” delivery only brand called “It’s Just Wings” where the food is prepared in existing Chili’s and sister chain Maggiano’s kitchens and is already estimated to have a value of $150m. And even silicon valley darlings AirBnB have rapidly innovated to refocus on longer-term and closer to home rentals as the shape of travel has changed.

Finally, at the top of the food chain, the apex predators of big-tech have largely avoided major evolutionary change completely, instead leveraging their balance sheet might to extract maximum value by negotiating significantly better terms on long-term real estate deals. Both Amazon and THE FACEBOOK, for example, have committed to major New York City office space (at a hefty discount) that they won’t be moving in to for a year or more. And in the case of Amazon, potentially re-tooling massive mall stores as warehouse distribution centers.

So, what’s to be learned from all of this? Well, I think the most interesting thing is that the big-tech firms we typically see as innovators aren’t leading the innovation charge this time. Instead, they’re acting like the apex predators they are and preying on the weak to extract maximum value. Instead, it’s the mid-cap businesses with threatened business models and enough resources to take innovation risks that would’ve been unimaginable even six months ago that are most interesting. Better to watch them than the really big guys.

4. Beware the bullshit factories of Ad-tech and Mar-tech.

Tl;dr: Behind every modern marketing-ism someone is selling something dangerous, smelly or both.

In 2016, Dan Lyons wrote a book about his experience at Boston startup darling, Hubspot. In it, he didn’t refer to the company as the kind of leader of a marketing revolution that it would have you believe that it is. Instead he labeled it “the bullshit factory.”

And while Hubspot is undoubtedly a huge and stinking pile of bullshit, it is far from alone. Even after the heady funding froth of 2010, the past 5 years, have consistently seen VC’s investing around $2bn per year in AdTech, which in turn has fueled the bullshit of new appendages to the word marketing. Things like digital-marketing, performance-marketing, programmatic-marketing, content-marketing, influencer-marketing, social-media marketing, behavioral-marketing, meme-marketing and blah-blah-blah-marketing.

But what’s the common factor related to every single one of these marketings? That’s right, behind every new flavor of marketing there’s an AdTech vendor selling a solution. It isn’t that marketing has fundamentally changed (because the basic fundamentals of marketing are exactly the same as they’ve always been). Instead, the vomit of tech vendors, hustlers and their enablers has fragmented marketing execution and created abject confusion about the strategic role of marketing in creating value within the organization.

And what’s been the result? Well, despite what the tech vendors would have you believe, all of this so-called innovation and disruption has led to marketing effectiveness that is going down and not up. Brands that are finding themselves in discounting death-spirals. Advertising budgets that have become the biggest single financial supporter of hatred, division and extremism online. Digital advertising fraud that is now believed to come second only to illegal drug trafficking in the global crime stakes, and the AdTech middlemen that are extracting ever larger amounts of the total media spend they are given in order to deliver sophisticated behavioral targeting that adds…absolutely nothing.

It’s high time we got back to basics. Brand-building as a means of expanding your customer base and improving long-term customer acquisition efforts. Marketing execution that isn’t seduced by any single vendor or channel and that pays extra attention to the value-destroying realities of ad-fraud and AdTech middlemen. And marketing as a function that serves as the interface between company and market, and that focuses on innovation and the creation of value rather than the fruitless pursuit of the kind of unbelievable bullshit that’s peddled by the world of AdTech.

Thank you for reading all the way through. If this email was forwarded to you and you like it, you can subscribe here.

If you’d like to talk about anything brand related, or even just to have a chat, that would be awesome. Please reach out. I particularly enjoy helping people solve tricky brand problems.

Cheers for now.

Paul
President, Invencion

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