One of the giant bubbles of the last decades has been real estate, and for this week's episode we’re looking forward, not backward, with Dror Poleg, an economic historian and an inspirational thinker who is figuring out how we work, where we work and what work we’ll be working on in this post-pandemic world.
One of the giant bubbles of the last decades has been real estate, and for this week's episode we’re looking forward, not backward, with Dror Poleg, an economic historian and an inspirational thinker who is figuring out how we work, where we work and what work we’ll be working on in this post-pandemic world.
Richard Kramer: [00:00:00]Welcome to Bubble Trouble Conversations between the independent analyst Richard Kramer, that's me and the economist and author Will Page, where we lay out some inconvenient truths about how financial markets really work. One of the giant bubbles of the last decades has clearly been in many regions of the world, real estate. And for this week's episode, we're looking forward, not backward with Dror Poleg, an economic historian and inspirational thinker who's figuring out how we work, where we work and what work we might be doing in this post pandemic world. More in a moment.
Will Page:Dror, it is great to get you on the show. Richard is gonna make much fun of my Scottish accent trying to pronounce your surname. But before we go into accents, let's go into yourself. You wanna just grab the microphone and tell our audience who you are, a little brief background but really important how we can follow your fantastic work.
Dror Poleg:So I'm, as Richard mentioned, I'm an economic historian by training and actually media theorist as well by[00:01:00]training. But I spent the past 20 years doing real estate development, building offices and apartments and shopping malls, mostly in China and before that and after that, being in the online media world and tech world. So I actually arrived to China as a partner in a digital advertising agency and I tried to escape from China, escape from China to the US as the founder of a social media app, of allocation based social media app. But the app didn't work well and the only people who were interested in it were people who owned buildings and wanted to create local based communities. So a community in a co-working space or a community in a residential compound. And that led me to think about that combination of t- those, those two worlds that I was inhabiting, so the tech world and the built world and kind of financial assets more broadly.
And I started to see seven or eight years ago that there's some tidal wave of innovation that is about to reshape everything we understand about real estate. So not just apps for like entering a building or sensors to optimize energy use, but really changes that, that[00:02:00]undermine our basic assumptions about the meaning of location, the meaning of visibility, the meaning of accessibility that ultimately also impact the nature of the cash flow that we get out of our real estate. So if we always assume that land is something that doesn't depreciate and that buildings are inherently valuable, suddenly I saw this thing coming that would enable people to work from anywhere and to access all sorts of premium services without necessarily being at the center of London, and of course shop I- in all sorts of new ways.
And I saw these things not necessarily being better than the alternative, but being good enough in order to like start to mixing up in a meaningful way. Uh, and a meaningful way in the built world means, you know, if you take 10 or 15% of the demand away, that's already very painful and causes significant shocks. So I started writing about it and advising large investors about it.
Richard Kramer:What's interesting to me is you wrote this book about the world that we now call the post pandemic world, about a world where we wouldn't all be spending time migrating into these city center large office[00:03:00]blocks. But you published that book in 2019. Now how much was that informed by your experience in China where I remember going back and sin- I've been going there since the '90s and seeing these enormous office blocks going up and wondering who the heck is gonna go in all these office blocks?
Dror Poleg:I think if China informed my work, it was mostly in the sense of seeing how much change is possible, how quickly. I think in the west-
Dror Poleg:... especially, since I've been alive, like since 1980 or so, the world has been like relatively peaceful, relatively kind of similar to what it has been. And in China you can really see how different, like social dynamics can change so quickly and people themselves to see them, people who worked for me even to see them in one year and then two years later dressed differently, behaving differently, having different values, having different aspirations. And you see how almost that Carl Marxian thing, how that kind of economic substructure impacts the kind of cultural superstructure and people's beliefs and aspirations. So that's China's main contribution. And the second contribution was just that[00:04:00]developing real estate in China, particularly developing shopping malls in China, that idea that, that the digital world is tightly integrated with the physical world was like obvious to us already in 2008 or 2009.
The fact that like everything will be a location based service and social media is tied into anything that you sell offline. And generally even being in r- retail was at the cutting edge of real estate because technology was always integral to it. Like you had sensors, you look at foot traffic, you look at the point of sale data by the second. And you also think about real estate differently because you're not just trying to lease it and come back 10 years later and lease it again. But you're actually interested in every person that walks into your building and what they're interested in and where they're gonna go and how can you drive them into that part and not this part. And so you're thinking about real estate in a way that, in the same way that now everyone else has to think about it. So now office-
Dror Poleg:... landlords also have to think not just about signing the lease, but about like the individual person, "How do I make him come to the office today? Like what is he into? Does he need childcare? Is he hungry?[00:05:00]Does he exercise? Does he care about the environment? Like how do we kind of build a consumer brand that attracts people and doesn't assume that they're like captives and they're boss tells 'em to come, then they'll come, but we actually now have to attract them directly?" So, these are the-
Richard Kramer:[inaudible 00:05:13] and be before I hand it over to Will, I mean, what's fascinating what I observed in China and what's fascinating there is you didn't have these well-established patterns of-
Richard Kramer:... the European city center that grew up since the middle of the 19th century where we had a very defined idea of what the city should be and what the cityscape should look like and, and gradually built it up. But we, we knew where the center of Glasgow or Edinburgh or London was going to be and what monumental buildings were placed there. And then everything evolved around that. And in China, I guess you had to some degree I rem- uh, a blank canvas to recreate that on. I remember going to China in the '90s and there were 12 lane highways for bicycles and if you went back 20 years later, the bicycle path was a tiny little[00:06:00]bit on the side of the road and there were instead a 12 lane highway for cars. So you really had the chance to completely remake everything. And that must have been a fascinating experience.
Dror Poleg:Yeah, I remember in China you walk on the sidewalk, some cars driving behind you on the sidewalk and they were like honking like, "What the hell are you... Like, get out of my way pedestrian [laughs]." I'm like, "Oh, my God [laughs]." But yeah, I think that that kind of first principles thinking that you can get in a place like that where you're kind of build stuff on such a large scale. And also again the pace means that you can see a lot of other people building stuff and you can see what works, what doesn't work, what seems to make sense. And so it's like real estate I- in taking to the extreme with all its ugliness. So you can kind of see all the stupidities of traditional real estate but like in fast forward and like in sharp relief and you can kind of learn a lot from that about the industry as a whole, I would say.
Will Page:My, my favorite China stat is China built 13 Heathrow airports in the time it took Heathrow to build Terminal 5. And when we opened Terminal 5 it didn't work [laughs].
Will Page:It's an interesting way of framing it. I thought... should[00:07:00]move us into this, the, the conversation here. Let's go back to how we met-
Will Page:... because it's an interesting intersection of our disciplines here, which is the, the real estate giant CBRE both invited us to speak at there, their annual conference. And a big shout-out to everyone at CBRE, Chris Gardner, Caroline Mills who all made that possible. But it's interesting that we are both on that stage with two very different backgrounds talking about a subject that's relevance to real estate market. Talk to us about what you were talking about on stage, 'cause you did actually include one of my slides. You talked about long tail three, but just give a quick synopsis of how you addressed that audience, 'cause I think our audience will find it fascinating.
Dror Poleg:So first I was really excited that Will was there because I was like a, a Will Page fan. And as I was working on some of my work on the future of work, I was looking for some statistics about the evolution of the music industry and the distribution of listens or of rewards within the music industry in the post iPod or-
Dror Poleg:... a- and then the post kind of streaming and post Spotify world.[00:08:00]And my friend John Seabrook sent me, told me about Will's-
Will Page:Oh, John, Philadelphia [inaudible 00:08:04].
Dror Poleg:... Will's book about, Tarzan Economics. Yeah. So then, yeah, we'll have to give a shout-out to John Seabrook. But what, the point that I was talking about then is that I was making a comparison between the world o- of music and of artistic work and all other kind of white collar work. So historically we've been thinking about some professions as kind of stable, predictable, solid, you go be an accountant, go be a doctor. And there was these other professions that are like for crazy people try to be a, a football star or try to be a musician. And our parents would always tell us to choose the first one rather than the last one because those entertainment professions were scalable, which meant that the one winner takes most of the rewards. But your success is incredibly dependent on luck and, and like all sorts of complex dynamics that, that has to do with virality and the average performer in those fields doesn't make a living at all, right?
The average singer or the average aspiring actor doesn't make a living at all. Now until recently we had a choice. We could choose that risky path or we could choose that like, "Okay,[00:09:00]let's go be an accountant or a doctor or a programmer and even if we don't do amazingly in our profession, we're gonna make a decent living." Now what technology is doing and I think what a, remote work is exacerbating, it's creating this huge market for talent for almost any profession. And in that huge market for talent, I think what we're going to see and what we're starting to see is that the biggest winners are starting to be similar to those superstars that we saw in other industries. So the best programmer or the best expert in something in the world can now serve a much bigger market, not always to the same extent that a singer can. Yeah, it's not completely re- replicable, but to a significant extent.
Those at the bottom are like that long tail of either specialists or kind of low income [inaudible 00:09:45] from all sorts of other countries can suddenly compete and become relevant. And most of those in the middle are now either competing against the best person in the world in their field who can kind of broadcast themselves into their market or they're competing with all of these kind of lower income[00:10:00]people who can do more or less what they're doing but for a quarter of the price. And what that creates is like a parallel distribution of income.
Dror Poleg:So if historically we think of knowledge work as like kind of normally distributed, maybe a little skewed here or there, now it's going to become much more parallel distributed and with much less of a middle. So again, you're either becoming successful or you're kind of competing with the rest of the world in your commodity.
Will Page:It guts middle class.
Will Page:Yeah. That's fascinating. And then we speak in a world of music now and since I last met you, the number of songs being onboarded onto streaming services a day has just reached 100,000-
Dror Poleg:Yeah. Amazing.
Will Page:... all competing for the attention. And what I said when I first looked at the long tail theory in 2008 with data was that when you offer more choice, people want more hits. And that's what's-
Will Page:... been reflected in your world. It's a very strange phenomena, it's not just a music data phenomena or a video streaming data phenomena, it's everywhere when we expand choice, hits matter more.
Dror Poleg:Yeah. And something...[00:11:00]I, I'm a bigger Chris Anderson fan I think than you are speaking of the long tail. And I think the theory was, or at least the way people read it was to mean that like the internet is going to democratize opportunity and more-
Dror Poleg:... people could benefit. And it's actually true to that extent. More people make money from music today or from writing online or from posting videos online today than they did. But in terms of the shape of the distribution itself, yes, the biggest stars are bigger than ever. I think as you wrote in your book, I think like the two or 3% of the songs generate about 90% of the streams. Which is if you think that 80, 20 was intense, uh, 10, 15 years ago, now it's much more intense. But at the same time, again, there's hundreds of thousands of songs that are uploaded every day and there's more people that make money, but fewer as a percentage out of the total market competition. I think the same thing will happen in a lot of other knowledge-based professions.
Richard Kramer:To me that seems like it might only apply to professions where the skills are fungible or transferable in the sense of a programmer can only[00:12:00]work for one company at a time. He can only work on one set of programs at a time. An accountant can only review one set of books at a time. So how do you see... a surgeon can only operate-
Richard Kramer:... even if they can operate remotely around the world via indirect surgery or how, I'm trying to think of the right phrase for it.
Dror Poleg:Yeah, yeah.
Richard Kramer:A surge- a, a surgeon can do remote operations around the world if they're brilliant, but they can only-
Richard Kramer:... operate in one patient at a time. So how do you break the link between a lot of these professions and that the work is linked to the individual-
Richard Kramer:... which is different than in the artist's case where a million people can, or m- millions of people can stream the new Taylor Swift album the minute it drops on Spotify?
Dror Poleg:Great question. So let me give you two dynamics and we'll start from like the extreme case. Like let's say the brain surgeon for example. So there's two things that the brain surgeon can do to scale himself or herself. One basic optimization, the fact that people don't have to travel to you. The fact that you see people remotely means that[00:13:00]you can now see, you know, eight people a day instead of four people a day. Which is meaningful, especially if you compound it over time. More importantly is a dynamic that we already know from labor markets for specialized work, which is a dynamic of matching. Why do people in cities make more money? Because they can be matched with jobs that require their very specific skills. So not just, you know, "I'm a great engineer level eight, but I'm a great engineer who speaks like Persian and English and also has experience with social media and with regulation of a cryptocurrencies in the Guatemala or something.
And the person who needs me is going to pay me much more than anyone else because they know that I can do the thing much faster or much better or that I can solve something that nobody else can solve even if they work on it for 20 years or a whole team." Now once you have a global market for talent, your ability to be matched at any given moment with the people who would pay the most for whatever it is that you're selling is phenomenal. And people will, are going to pay more for your time than ever[00:14:00]before. So I, like a simple example, let's say you have headaches. You go to the the doctor, he says, "God forbid you have a brain tumor." If you could speak to the greatest expert in the world for five minutes and you have $10,000, would you pay $10,000 to speak to that person? Yes.
If you know you could speak to the second best person or the fifth best person for free and have the option to speak to the best person still for $10,000, would you pay the $10,000 if you had them? Yes you would. So it creates the dynamic and for a lot of fields, even for programming it less about building and doing the thing all day, it's more about solving that specific problem, getting that expertise from that person at that moment. So these are the two main dynamics. Then there's a bunch of others. We saw that certain professions are actually much more scalable than we thought they were. A Peloton instructor makes about 20 times more than an average gym instructor because they can teach 500[00:15:00]people a day and they can do something that is kind of hybrid. They teach live classes, they have kind of a direct relationship, they give shout outs to individual people, but at the same time the classes are also recorded.
They're being kind of repurposed and recycled. They're being sliced and diced in all sorts of ways. They're being productized, so their expertise is productized in all sorts of ways. So that's another aspect of it. So, and again, taken together these like, this multiplies something by two and then another thing multiplies it by five and then another multiplies it by, it, it ends up being 50X or 100X of the average person. And again, that comes at the expense of someone as well. So that Peloton instructor that is based in New York and is broadcasting to London, took the job away from someone in London. They didn't just [inaudible 00:15:40] person's gain is another's pain.
Dror Poleg:And by the way, especially in those traditional professions, it's more of a zero sum game interestingly. So a doctor that you went to here, you're not gonna go to there, but some video that you listen to, you can listen to five in parallel or like to all of them. So it actually, it's less of a zero sum game for media.
Will Page:You can scale the unscalable.
Dror Poleg: [00:16:00]Yeah.
Will Page:First touring outfit to scale the unscalable was the Chippendales because there was never the same Chippendales on tour. You could have seven sets of Chippendales touring at the same time 'cause the audience was never looking at their faces. Anyway. So I wanna, there's one, I know that Richard desperately wants to dive into your thinking about ponzi schemes-
Will Page:... but before he does, I had one other sort of step back question for you, which I've always wanted to ask you. And it is, in the after-work for the Paperback of My Boot coming out in January. Which is, what fascinates me if I think about the cohort of people leaving university to start work? What your work does for our audiences' benefit, it allows you to rethink work. You're like the David Hume of the working culture. David Hume teaches you how to think, you teach us how to think about work.
And what I keep stressing to people is the brightest and the best when I was at university, went into accountancy, banking and law, that was the three top professions. And I look at the data, I look at the average graduate salaries, they're not the top three anymore. It's product management, UX,[00:17:00]software developer, engineering, that's where the brightest and best are going. This is a big question, but I want you to wrap it up for us, but what does it mean when the brightest and best are now going into tech as opposed into the old guard professions of banking and law? What does that mean for the future?
Dror Poleg:So first I'm honored to be, uh, compared to one of the greatest Scots of all time, I was afraid you're gonna say Neil Ferguson or something like that. So thank you for comparing me-
Will Page:Oh please.
Dror Poleg:... today with you. But so what does it mean? I mean, one those traditional definitions of law, banking, software I think are no longer as relevant. And when you have Citibank or JP Morgan Chase employing 30 or 40,000 software engineers and even more-
Dror Poleg:... product managers and designers, t- this is the business. You know, if you want to go into finance and make the big bucks, we, you are as likely to do-
Dror Poleg:... so as, as a software engineers than as, than as an MBA or just as a guy who comes to hustle as a banker. And I think that's, another thing that's happening to work is[00:18:00]that, like Mark Andreesen said long time ago, "Software is eating the world." So like the business itself is becoming more scalable. It requires fewer employees to generate the same amount of revenue or the same amount of fire power. So those giant companies that we have today, the Facebooks, the Apples, they're far fewer employees compared to the amount of revenue that they generate. I mean Apple gen- what did it like, almost a hundred billion a quarter. Publisher said that it's, it's un- unbelievable scale.
Will Page:That's the [inaudible 00:18:26] of Scotland.
Dror Poleg:Yeah. And I don't remember how many employees they have, but they have far fewer employees that probably GM had at its peak. And I don't think GM was doing a hundred billion a quarter. So people are flowing towards things that seem as scalable as possible and that they're willing to pay them. And what we are seeing in the local, I- in the local part of the whole kind of labor world is that in tech still today you have that kind of bell curve distribution that even the average Facebook employee or Apple employee still earns a lot of money and[00:19:00]has a great salary even if they're not so great at what they're doing. So it's one of those professions where you can kind of coast still. So, so I think that's why people are going there, w- which is what's similar to lower like, or 10 or 15 years ago. Uh-
Will Page:Did you say people coast? Did I hear that correctly?
Dror Poleg:Yeah. Coast. Yeah.
Will Page:You know that classic joke, "How many people work at Google? Uh, about half of them."
Dror Poleg:Yeah, [laughs] exactly. But it's true. And what's interesting here, it's another relevant dynamic is that the companies are not stupid for doing so. [inaudible 00:19:27] when General Motors were trying to build a car, they knew what they're trying to build and they knew what-
Dror Poleg:... challenges were there, what kind of input they had to throw at it in order to get what type of input. Today we, we don't always know what we're even trying to build and we definitely dunno how to build it. So we have to throw all sorts of things or even to throw all sorts of people at the wall and to see what sticks. So you hire a lot of people and if one of them comes up with Gmail as happened inside Google or 12 of them build Instagram and then get acquired, t- that's what you need. So it's worthwhile to employ 500 others if a few of them actually end up being relevant.
And also it could be a[00:20:00]different person every day or every quarter. Like even that winner take all dynamic, just like in the entertainment world, you're a star one day, but then people forget about you and someone else becomes a star. So it's not about becoming great and then staying great. Like you're constantly fighting that battle to stay ahead. Like the fact that you got attention today that you generated revenue or did something creative and useful and was noticed doesn't guarantee you anything. It just means that you can try again tomorrow and maybe you have a bit more of a cushion. But that's the best you can hope for unfortunately in this world of work that we're heading to. [inaudible 00:20:32] very unstable, very dependent on forces that are beyond their control.
Will Page:Beautifully said. Richard?
Richard Kramer:Well, I think k- knowing these tech companies as well as I do, I think what they hire is people with certain capabilities.
Richard Kramer:So they hire engineering talent and in the case of Google, they've hired or they've added nearly 50,000 people to their headcount in the last seven quarters. They're literally stockpiling[00:21:00]an army of technical talent.
Richard Kramer:And then for, then the challenge becomes how do you continually employ these people so that they do come up with the next big ideas. I don't think you've had industrial models ever follow that approach where-
Richard Kramer:... a General Motors or a GE or, or in Germany, a BMW or Volkswagen would say, "Let's hire 20,000 engineers and just-"
Dror Poleg:And see what happens, yeah.
Richard Kramer:"... because we know their engineers [laughs]. Maybe they'll build an airplane and we'll be in the airplane business or maybe they'll build trains and we'll be in the trained bus-" that, give them enough ropes so that they can hang themselves. And, but that also speaks to the nature of skills today that are much more horizontal.
Richard Kramer:Now, how do you, when you're thinking about real estate and thinking about bringing people together to work together, how do you find or create places where you can foster horizontal skills, as opposed to have the work in vertical silos or factories or the[00:22:00]cubicle department of the, uh, in, uh, the, that Will, the cubicle factory that Will worked on the 11th floor of his, his government economics department job?
Dror Poleg:So the first thing is that I don't even try, I think that perception that like how do we get people back to the office? What do we do to make them back here? The assumption that you're, the point of departure is like, people have to be together now let's figure out why, or let's figure out how to explain it to them, reject it. So I think we have to start from zero. And I think a lot of the kind of built world and even cities themselves are kind of still kind of trying to figure out how to bring people back rather than ask themselves, "Okay, why do we even need them back? Or if we need them back, maybe it's not for work, maybe we can, maybe they'll be back but to do something else. Maybe they just like to live next to each other. Maybe they just want to eat all day." And, and you see that to a certain extent already in New York, the restaurants are full, the cafés are full, the parks are full, the offices are not. And you see it also in Tel Aviv-
Dror Poleg:... and in other cities that have even best, better restaurants and better cafes. People are doing work, innovation is being created, but it's not being created inside of offices. And trying to figure out why people should be[00:23:00]in offices is not necessarily the most economically productive activity. Now, to still try to answer it practically, I wrote in my book that the office of the future is not a place, it's a network of locations and services that enables every individual to do their best work at any given moment. And their best work can vary throughout the day. At some point they need access to a podcasting studio, then they need to work alone, then they need to work with a team, then they need to impress a client.
Each one of those activities optimized, requires a different types of space, often in a different type of location. And increasingly also a space that might be able to connect digitally to other people in other spaces. So I think that's the answer. The answer is something that enables that dynamic network because that matching, the powerful matching dynamic that we spoke about earlier. So matching the right person to the right task, it's something that happens at any given moment. It's not like that you assign them to a job and then they do it[00:24:00]for five years.
Dror Poleg:And to do that, there's simply no physical solution to that. The people, the best person is never going to be the one that happens to be in the office with you, even if there's 100 people there or 5,000 or 20,000, there's always gonna be a better person if you look at, at a bigger pool because that's just a statistical fact. So offices that enable that agility and enable that flexibility and matching I think, they are the future. So it might be still the same buildings, but used completely differently and managed by software in order to enable that kind of, uh, higher velocity of change within them. And beyond just controlling the access and who goes where, also in terms of how designed to be more adaptable, easier to change, easier to reconfigure, kind of giving more people, empowering them to kind of shape them in their own way, a bit like Lego blocks.
I have a friend called Casey Climbs who was, was a researcher at Google and is now kind of an independent consultant. And h- he speaks about emergent design or designing for emergence, not trying to find the answer, but giving the people tools to kind of shape the environment based on what they think is[00:25:00]correct. And then maybe if they do something amazing, you can take that and try to replicate it or like at least tell other people about it so that they can use it in the same way but not get too ossified because there's no, the old answer is dead, but there's no new answer. The new answer is that there is no answer. The office, the new office is not something, it's just like a dynamic system.
Will Page:Well if I could share two thoughts before we go to the break and they both relate to the company that brought us together, Dror, which is CBRE, that commercial real estate giant. Firstly during my keynote to the audience, which followed yours, I made the point that in the late '90s, record labels used to sell CDs to the record shops by the weight of pallet. So I say to Dror's record shop, "I got a pallet of CDs." And Dror wouldn't say, "What's on it." He'll say, "How much does it weigh? 40 kilos? Should I [inaudible 00:25:45] stuff like that's on it, but it's 40 kilos of CDs you'd give me this much." It was that easy to make money. And then I learned that in the real estate world, what they often use is tone style data, which is how many times the tone style to enter the office has been used.
Will Page:But like, is that as[00:26:00]far as your big data goes? What if I forget my keys and I have to rush back in and use a turn style twice. "Oh, we count you twice." So one thing which could happen in real estate is to embrace big data a, a bit more of a nuanced way than measuring how many times the gates were an office opened and closed [laughs]. That's just-
Will Page:... that was hilarious. But secondly, and I- I again credit to CBRE, but if you go to their own offices, I mean eat your own dog food time, what do the real estate giants do about real estate? What they've done is they've turned their reception to everyone else's reception. So if you're a client of CBRE and you're in Oxford Street area, that reception is yours. There's bathrooms there, there's a kitchen there, there's beautiful Wi-Fi there, there's breakout meeting rooms there. Come in and use our reception 'cause it's your, your reception. And that makes the culture of having a meeting so much easier. It's a 1:00 meeting, but I'm downstairs anyway. So come down when you're ready.
And credit to William Row and team at Sony. If you go to visit their in Kings Cross is the meeting place for everyone to meet. It's not wait in the reception, spend 30 minutes finding a meeting room, have a[00:27:00]rush, meeting a rush out again. So these little signs of the culture's changing, the data could be changing, I think there's hope. Yeah. Let's come back in part two where we've got ponzi schemes to discuss. We'll be back in more in a moment.
Richard Kramer:Welcome back to part two of Bubble Trouble with Dror Poleg and we're talking about how we're gonna work in the future and what it might look like. Will, do you want to pick up some questions you wanted to ask Dror?
Will Page:Yeah, Dror. Again, thank you so much for joining our podcast. Another burning question I have relates back to an issue where both myself and Richard agreed to disagree on just about everything. And one argument I've been punning forward, which I know has raised heckles with our listeners, is, I do not believe the rate of inflation that's being reported in the UK and the US and Key Western markets is as high as it currently is. Uh, in my book, I talk about what's matters most is often measured least.[00:28:00]There's a bunch of deflationary forces out there, which are not in the CPI basket, which produces the 8.9% inflation that everyone's worried about. Lemme just go through three of them. I think working from home reduces the cost of living. If you don't have to pay for that train ticket to get to work. People from Reading pay 6,000 pounds a year on getting in and out of London. That's hugely deflationary. Not needing central real estate and the ability to outsource. Topics that are close to your heart. Do you see a deflation world that's not being picked up by the government statisticians?
Dror Poleg:I think the, the things that you're talking about, you know, they might have an impact later, but I don't know if they're not being picked up at the moment. I mean, people have been buying more homes and paying more for them, partly because they are spending more time in their houses, at least here in the US, so they need suddenly-
Dror Poleg:... larger houses, they pay more for them. They spend, they seem to spend more money on other things. So even if they don't spend it on commuting, they go golfing[00:29:00]more, for example, during the week, which is an interest statistic.
Will Page:But discretionary spend is not compulsory spend. So if I choose to travel-
Dror Poleg:No, right. So I mean-
Will Page:... to Scotland to see my parents more, but travel to work less, I'm choosing to travel to Scotland to see my parents more. I'm not compulsory-
Will Page:... ordered to pay for that season ticket to the train to get to work in the morning.
Dror Poleg:So in that sense, I would rephrase the question in order to agree with it. And I would say, is the current way we measure inflation, does it really take into account all the things that, that, t- that matter to people? The answer is no. But we kind of knew that already. But I also think that inflation was understated or offset because of China and because of a lot of things in tech that have been happening over the past 15 years and are not accounted for. So we kind of thought that there was no inflation, but I think that there was a lot of inflation happening even though we were kind of hiding it because there were other forces offsetting it on things that we weren't measuring. So-
Dror Poleg:... when people suddenly look today and say, "Oh, now there's inflation finally," after everything that was done in 2008. I think the reason that we couldn't see the[00:30:00]inflation since 2008 and even since 2000 while we were financing wars and all sorts of other bailouts and kind of NeoCon programs or kind of progressive programs, whatever they were, we couldn't afford either, I think that was buried because of China and mostly because of stuff that is happening in tech and a lot of things that people are doing that are just not accounted for or a lot of things that are people, are getting for free now and that they're just, they're not spending money on so they don't count. But there's still things that they're getting, but we don't know how to measure them yet.
Richard Kramer:I mean, speaking of one of those great unhidden sources of inflation, aside from of course the zero interest rate policy and the fact that we made money free for a decade, which obviously led to an orgy of real estate speculation in places like China. We did have a podcast 30 or so episodes ago about Evergrand and the collapse of the largest real estate company in China.
Richard Kramer:But you have a, you had a recent essay called In Praise of Ponzi Schemes, which are ponzi, and it came out in December, 2021. And I have to say to my, to my eyes, it doesn't age particularly well.[00:31:00]Especially today, Will and I were seeing something on LinkedIn, which where someone was proudly showing off an NFT that they had bought for $100, which was now worth quote unquote $30. And we've obviously seen a rather spectacular collapse in many of the cryptocurrencies out there and lots of hacks and t- the collapse of, of stocks like Coinbase and so forth. So I guess my pushback on In Praise of Ponzi are, I have no problem with the greater fool theory as long as you know, as a fool that you're being taken for a fool.
Richard Kramer:And is, are ponzi schemes actually ethical if you believe that the person you're passing on the, this valueless, this intrinsically valueless NFT token to understands exactly what they're doing? And one of the most listened episodes of Bubble Trouble ever was the one we did on NFTs, where I explained the concept of wash trades and certainly ponzi-
Richard Kramer:... schemes and wash trades are a, a part and parcel of one another. And I guess to round out the, this last critical point and see if you wanna[00:32:00]defend it, but was Bernie Madoff doing the right thing as long as his clients didn't worry that, about all those yachts and fancy holidays he was taking and are, when he was taking in their money and spending it like, like mad? I mean, how can we be praising these ponzi schemes if we are not certain that the people participating in them don't have full knowledge of what they're-
Dror Poleg:So first I'm glad that you're asking this question now after all of the other themes we covered, because they all come into the answer of this question. Now, my article, beyond the provocative headline, is not about, it doesn't say ponzi schemes are great. It says, "Ponzi schemes are going to be the dominant marketing method of the 21st century of the next two decades." And to understand why we combine everything that we just talked about in terms of the future of work and income distribution and digital media. So in the past we spoke about the industrial world, a linear world where input equals output more or less. And where content is a tool to sell actual things. So[00:33:00]PnG financed soap operas in order to sell soap. The fact that you could make soap and that you had access to the raw materials was kind of enough to guarantee that making, that you'll make money from selling soap.
And then if you had a connection to a gatekeeper, the TV channel that was like, there were only two or three at the time, you created the advertising, you moved the goods. Today we live in a world where an increasing amount of the stuff that we spend money on is content itself. It's intangible. So no, it's either content parks like music or videos or it's knowledge or other things that are intangible.
Dror Poleg:And even the sales of things that are physical of real estate, of cars, of food has to go through a digital channel. So it depends on somebody noticing your content, paying attention to it. I- it like, it, it, so it's subject to the same dynamics that content is subject to when content competes. Now, as we discussed in the world of content is a world dominated by parallels because it's a world of abundance. There's tons of stuff competing for very limited attention, which means that certain[00:34:00]things pull ahead because of social dynamics. They pull ahead because some people liked and shared something at the right time. That meant that the algorithm thought that thing might be interesting. So it boosted it and showed it to more people, those people liked and shared it. And that's how things become successful in this world.
Now, based on all of this, what we see is that the critical effort today to make a thing successful is increasingly the efforts of those people that liked and shared the thing at the right time, rather than the efforts of whoever produced it because it, it's cheap to produce, it's abundant or it's a commodity. There's a lot of physical things today that are just so cheap and easy to make. Now, if those efforts of those people that started, that shared and liked it are so critical, why aren't they being paid? There aren't being paid or historically they're not being paid for two reasons. One, because maybe there was not so important historically, Proctor and Gamble didn't think that they cared about who would share or like their product because they could go to the TV station or they just thought[00:35:00]that nobody else can do what they do. But that's no longer true.
And second, because it just wasn't possible to pay every person who liked your product or shared it. It was too expensive if you had to send each one of them a bank wire and figure out who they are and where they are and send them 20 cents every time they like something on Facebook, you couldn't do it. Now what's interesting in the crypto world is that for the first time, you actually have a, almost a transaction cost zero type of system that enables you to pay your customers automatically every time they perform such a silly action like liking something or even playing a game and participating in something in a way that boosts engagement.
Now once there's a system that enables it, it's inevitable that companies will actually start paying their users in order to recruit other users and let them benefit from whatever economic value they create. Now, this is interesting for two ways. One, again, it's a marketing method, but it also tells you something about the future of work. The future of work, a lot of it is just us doing all sorts of things that seem completely useless and[00:36:00]frivolous and getting paid for them, liking videos, sharing them, playing a game. A bit like when bar owners u- used, used to let ladies in for free and you give them free drinks in order to attract the guys who would come and pay, we're all gonna play the same game.
Richard Kramer:So, so I guess I don't disagree with you. I guess I wouldn't call those ponzi schemes, I would call that pyramid marketing. It's what Herbal Life wa- which was the, so- sort of the subject of a giant tug of war between-
Richard Kramer:... two, an activist investor and a forensic analyst for many years. It's what undid Valiant.
Richard Kramer:It's, that pyramid mar- and by the way, there's a brilliant BBC Sounds podcast on OneCoin and the missing Crypto Queen. And that, that was a pyramid marketing slash ponzi scheme where in the end someone took away the money. Now I've also seen many efforts over the last 25, 30 years to pay people in micropayments.
Richard Kramer:And what was constantly found is that those in- infinitesimally small values of clicking on something or liking something were never enough to[00:37:00]really change the behavior, I would argue-
Richard Kramer:... we already have that world today because number one, Proctor and Gamble pays to put its products on shelf space in supermarkets-
Richard Kramer:... and it pays digital shelf space in Amazon or any of the large social media companies for promotion. And, and indeed you have now a big question about paid promotion. I- indeed Kim Kardashian just settled a lawsuit-
Richard Kramer:... where she was promoting a cryptocurrency instrument without disclosing that she was. So you have that-
Richard Kramer:... paid promotion already that's a very well established system. I just don't know whether it actually means enough to individual, the tiny amounts of money you'd have to pay to get millions and millions of people to like your video or your product. Whether that's worth it for, to, for me to go around clicking all day long because I can earn a penny a click.
Dror Poleg:So one, there's a huge difference between paying one entity then paying millions of people in parallel all the[00:38:00]time-
Dror Poleg:... based on real actions that they take. That's a swarm dynamic rather than, Kim K was still a gatekeeper. She was born on television, that's how she built her audience.
Dror Poleg:But then you have people like Mr. Beast that has a hundred million YouTube followers and one day he decides that he wants to compete with McDonald's. So he calls a bunch of cloud kitchens in 200 cities and say, "Hey, you're now gonna offer Mr. Beast burger and I'm just gonna put it in my channel and now I have a burger chain just because I have a YouTube channel." Now, someone like that to determine who actually becomes the next Mr. Beast, those likes and share matter very much. So if in your industry you still have a gatekeeper that you can call and they can guarantee or like, increase the likelihood that you can sell something, good for you. But increasingly that's not gonna be possible. You're gonna compete in a very noisy environment with all sorts of stuff that pops up and down out of nowhere and eats your lunch.
And you know, even Kylie, like she ended up, she built a brand on Instagram. She started from having the channel and then decided what she wanted to sell and then she sold the whole enterprise to, to a giant cosmetics company. So[00:39:00]that, that's another one of those bets that companies will have to make. You either buy ready-made things and you pay most of the rev- you pay a full price to somebody who already created it. Or if you try to create your own, you have to, you have to get the masses to behave in a certain way. And most importantly, it's enough that some companies will start doing it, then everyone will have to do it. It's an arms race. Yes. I- it, stars emerge organically as well. But once people start paying, creating those incentives, you'll have to compete with them and [inaudible 00:39:27].
Richard Kramer:I would, I would say those, that arms Race started a decade ago with social media and it's, and-
Dror Poleg:Sure. Yeah.
Richard Kramer:... and the, the $300 billion of advertising revenue that Meta and Google are-
Richard Kramer:... directly linked to that alongside all the other smaller platforms. Will, do you wanna s-
Will Page:Yeah, yeah. Just before we get you smoking with Richard, your description of the market backs up a, an adage I use for this, which is, for me, the room's getting increasingly crowded. It's getting harder and harder to be heard at the back. It's just a nice way to visualize the signal-
Will Page:... to noise ratio problem that we're all[00:40:00]facing right now with this explosion in supply.
Dror Poleg:But there's one my, one more subtle point. It's not just... and in complexity science you, we speak about, there's like rugged landscapes that have multiple peaks. So compared to like the kind of single peak landscapes where you, like a GM, you knew exactly what you needed to do to make the car, now there's kinda like all sorts of things you have to try. But here it's also a dancing landscape because the landscape constantly adapts to what you're doing. So you spoke about digital advertising. People said, "Okay, let's spend money on Facebook and that's gonna work." But then there's diminishing returns because all of your competitors figure out all of the best behaviors.
Will Page:Yes, yes.
Dror Poleg:And ultimately it becomes more and more extreme, which is why it gets to the point of like, let's pay every person for like every smile that they make and every share that they give. Because whatever is possible to do will be done because this is a terrible race to the bottom. But, uh, what I'm saying is we're far from the bottom and when I look towards it, those pyramids is what I see and I think we're just gonna see more of them. It doesn't, it doesn't mean I condo it or think it's great. This is just the reality as I see it.
Richard Kramer:Yeah. And the greater fool in this case might be the[00:41:00]marketing person who thinks that they just have to be the last one in to advertise on the popular social media platform-
Richard Kramer:... at the lowest return on ad spend. We need to move into the last section of Bubble Trouble where we do a little smoking, not of the variety Will regularly endorses necessarily, but in our own fashion. We like to ask our guest-
Will Page:I did not inhale. I did not inhale.
Richard Kramer:He did not inhale. And we like to ask our guests, what are the kind of things where you see the smoke signals, where you see the warning signs when someone talks about, and maybe you could take one or two on your field of real estate or work or the nature of work where people say something where it just makes you pause and go, "Uh-uh. Uh-uh, no, that's not gonna end well," or that's an Uh-uh moment where you can smell trouble ahead? And maybe you can help our audience spot some of the bubbles that you were, you might have been seeing form in areas like real estate or prognostications about the future of work. Anything spring to mind?
Dror Poleg:So in real estate, one of the things that's been happening over the past few years was that[00:42:00]everyone was running away from retail to logistics, so to industrial space. And then office started kind of shaking so people moved even further into industrial space. And everyone's thesis is like, "Yeah, but we're gonna need more houses and logistics. So... sorry, more warehouses and logistics, so let's go there." Because that's the last category that still looks like real estate, it's kinda like a big empty box that people sign long leases for. And you kind of don't have to do too much 'cause there's no people inside, so you don't have to like care about what they eat or what kind of exercise regime they're into. So I think their, I think the way it was priced recently was probably in a way that doesn't reflect the actual risk associated with it.
And I think Amazon's 20% drop in share price and their kind of troubling revenue numbers also sends a signal to that effect that kind of says, okay, people thought that e-commerce is gonna j- jump into COVID and then keep going from there. That's not gonna happen. It's gonna go back to trend. Maybe it's even gonna go below trend because of geopolitics and macro issues. So I think there's gonna be a lot of pain there. And that brings me to the second thing that I have to say[00:43:00]I'm most concerned about today that doesn't have to do with real estate or with the future of work, but it is macro. I think the world is perched in a way that I really don't like. And I think since I've been alive, the world has not been as dangerous as it is today.
When I look at America depleting its oil reserves, for example, in order to fight inflation short term, at the same time China kind of cons- already doing a dress rehearsal for a Taiwan invasion, kind of closing itself up for the last two years and kind of trying to prepare for a world where they kind of, they're completely shut out from it and of course Europe kind of completely pinned by Russia. I see a world that, that is very precarious and very scary for people that, you know, that, that are interested in their good civilized free life. So I'm very concerned about macro and I know that a lot of people are now, but I think I, I think they should be even more concerned. And it does, I, I'm not saying terrible things are coming, but I think that the odds of them coming now are uncomfortably high.
Dror Poleg:So I'm very worried about that.
Will Page:Wow. Well on that note, we've gotta bring Bubble[00:44:00]Trouble to a slightly downbeat close. But I, I gotta say two things mean. One, I wish you were my lecturer back at university in the late '90s early [inaudible 00:44:08], I really do. I would've paid attention to those lectures, which I never really did. But it is the way that you open your mind to these bigger issues, you're gifted, you're gifted. And then two, we've talked about a lot of things here, but we've traveled up and down the long tails throughout this conversation. And again, as you inspire me, I just wrote this out, do you know who gets which crater, term crater, gets the most listening hours on Spotify? There's 8.4 million craters on Spotify. Guess [inaudible 00:44:37]? Correct [laughs] because I just wrote it out. Three hours a show-
Will Page:... two to three shows a week, 17 million listeners, far more hours in terms of the long tale of attention than Drake or Taylor Swift combined.
Will Page:That's interesting. The, a podcaster sits on top of the attention tree.
Richard Kramer:But the difference there, and what's fascinating is that you'll listen to that Drake or Taylor Swift song many[00:45:00]times over, but you'll never go back to listen to that podcast twice. So the repeat value of, the persistent value of the content is very different depending on where you sit on that creator economy scale.
Dror Poleg:Yeah. As a financial asset. Like you could sell it in 20 years like the Taylor Swift royalties and-
Dror Poleg:Joe Rogan [inaudible 00:45:21].
Richard Kramer:Correct. Correct. Whereas the Daily from, the New York Times Daily, which is routinely the most listened to podcast on all Pod track is useless, the one from last Thursday.
Will Page:Oh yeah. But just, I mean w- we, not to dig too deep into this, but the one problem you have there is, they double count all the listeners in a month as well, so.
Will Page:Which is a tricky one, but it is interesting just to think about how long tails form in attention as well as [inaudible 00:45:44], as well as content.
Dror Poleg:Yeah, [inaudible 00:45:46].
Will Page:Dror, this has been a very productive conversation in there. I've learned a lot. Rich has picked up an awful lot. And I hope our audience has too. We would love to get you back, but it goes without saying an honor to have you on the show. And thank you[00:46:00]so much for giving up your precious time to Bubble Trouble.
Dror Poleg:Thank you both-
Dror Poleg:... I really appreciate it.
Richard Kramer:If you're new to Bubble Trouble, we hope you'll follow the show wherever you listen to podcasts. Bubble Trouble is produced by Eric Newsom, Jesse Baker and Julia Nat at Magnificent Noise. You can learn more at bubbletroublepodcast.com. Will Page and I will see you next time.
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