Some Universities Are About to Be “Walking Dead”

CHRISTIANE AMANPOUR: Now, if you’re on a waiting list for an elite top-tier university, you might be getting a call this year. That is the prediction from NYU Professor Scott Galloway. He’s the host of the new show on VICE. It’s called “No Mercy, No Malice.” And it pulls back the curtain on the decisions and players driving the economy in America. He also co-hosts the podcast “Pivot” with tech reporter Kara Swisher. And here is telling our Hari Sreenivasan why this might be a good time for students to take a gap year.

(BEGIN VIDEOTAPE)

HARI SREENIVASAN: Christiane, thanks so much. Scott Galloway, when you talk about higher education, a lot of people hear you on podcasts, and they see you on TV. They don’t know that part of one of your many gigs is as a professor. So I want to kind of look at higher education, maybe break that down into different groups and how they’re going to be affected. First, let’s talk about how our students that are going to higher education now, through the time of COVID, what’s life like if we get to a post or in this new reality?

SCOTT GALLOWAY, NYU STERN SCHOOL OF BUSINESS: Well, three-quarters say that their experience has already been severely diminished. There’s — the X-factor here, just let me put at the outset, is if and when we get a vaccine, because you could see things hopefully return somewhat to normal soon or just not go back there. The students, I think, across America, along with their families listening on the Zoom classes, are all beginning to wonder, what kind of value, or lack thereof, they’re getting for their tuition dollars? So, I think there’s, one, been a personal disappointment that a lot of kids didn’t get to go through commencement. They didn’t get to finish their college year in a in a manner that they had become accustomed to, and say there’s generally a recognition or a disappointment across America. And I would argue that it’s not that they’re disappointed in the Zoom classes. It’s more the recognition that Zoom has uncovered how disappointing college education is. I think there’s a lot of households saying, this is what we’re paying for? So it’s affecting different stakeholders in a different way across America.

SREENIVASAN: So, what happens to institutions? I mean, you study business. You talk about it. What happens when some of these students decide, you know what, this doesn’t really make sense for me to pay this much, I think I’m going to drop out? And let’s say they decrease revenues, or they’re decreasing revenues from the dorm fees that they’re not getting, or the sports teams that might not be having nice lucrative contracts?

GALLOWAY: Yes, or even, going further than that, that kind of one of the secrets of higher education is our cash cow is foreign students. And you can see that maybe foreign students decide, because they pay full tuition, they might not decide to show up. So, but there’s nuanced argument. The elite, truly high-end universities are going to be fine, because they could — Harvard — the head of Harvard admissions has stated publicly that he could double the size of his freshman class and not sacrifice any quality. So it’s a great time to be on the waiting list of a top-tier university right now, because you’re probably going to get a call. So, a lot of people — one in four kids are saying they’re going to take a gap year, which means that the top universities will reach into their waiting lists, which will reduce the number of people or the yields to the second-tier universities. They will reach into their waiting lists. And then you go to the tier-three universities, but there’s no waiting list to reach into. So, there’s going to be a waterfall. There’s going to be demand destruction, because more people are going to take gap years. More kids are going to take gap years, and you’re going to see increased pressure to lower costs. So just as equity analysts are looking at which companies have cash on the balance sheet and can survive this shock, you’re going to see an incredible destruction among companies that have the following factors, a tier-two brand, expensive tuition, and low endowments. There are 4,500 universities in the U.S. You could see 1,000 to 2,000 go out of business in the next five to 10 years. What department stores were to retail, tier-two, high-tuition universities are about to become to education, and that is, they’re soon going to become the walking dead.

SREENIVASAN: So, you’re saying basically that the Harvards are going to be left up there, the community college that might provide me some local value will be around, but the middle just gets eaten up.

GALLOWAY: So, again, the analogy is retail. Louis Vuitton and Hermes are going to be just fine. Wealthy people are living their best lives in this pandemic. And we don’t want to believe that, but the majority of wealthy people are doing just fine through this pandemic. Those universities are luxury brands. They are no longer public servants. There are very few — when you get into Yale, it’s a $350,000 commitment at 90-plus points of gross margin. There is no other product in the world that gets six figures-plus and 90-plus points of margin. Ferrari gets 30 points. Apple gets 25 points. Hermes gets 60. Nothing gets 90 points of gross margin. And this is essentially because these are the world’s strongest luxury brands tapping into the global wealthy. We like to think that there’s some remarkable kids from middle-income and low-income neighborhoods that get in, and that’s true. But, for the most part, it’s really the finishing school for the wealthy. They are just fine. They are going to perhaps even expand their enrollments. And if they wanted to be really aggressive, if 50 percent of your classes go online, you effectively double the size of your campus overnight. But the waterfall down, just as every other industry we’re finding, there’s going to be a culling of the herd. hand the weaker are going to get cleared out. But once the culling is done, the strong, the top universities are going to come back even stronger.

SREENIVASAN: So, when you say points and margins, you’re just talking about profit?

GALLOWAY: On Monday nights, I teach 170 kids, brand strategy at NYU. We charge each kid $7,000. So, if you do the math, that’s $1.2 million in tuition just for my class 12 nights. That’s $100,000 per night intuition. My agent takes a 95 or 97 percent commission, so you’re looking at gross margins of 90-plus points. This is — there is no luxury brand like higher education. There is no higher-margin product than education. And to be blunt, a lot of universities, by this cartel where second-tier or tier-two universities have been able to charge the same price, as we have this kind of dictum in the U.S. that you’re failing as a parent unless you get your kids to college at any price, the result is, we have stuck our chins out. The tuition has skyrocketed 1,400 percent in the last 40 years. It has — we talk about health care, Hari. Prices — we have raised prices faster in education that we have in health care. If you go into an emergency room now vs. 1980, things are much different. If you go into a class at a university, it does — looks, smells and feels very similar to 1980. This all spells disruption. And that is, we are — it couldn’t happen to a more deserving group of people. We have stuck our chins out, and this fist of stone called COVID-19 is going to meet that chin.

SREENIVASAN: So, places like the University of Michigan estimate they might be up to a billion dollars short by the end of the year. Is this the role of government to try to provide a backstop? How does the market sort this out?

GALLOWAY: I would argue that we have entered a situation where, unfortunately, America has become a caste system. And the primary arbiter of that casting isn’t like the old caste system in Europe, where it’s your name. It’s where you get your college degree. Our government, our culture, our economy is run by people with business degrees and college degrees, despite the fact only a third of America has college degrees. So, as public servants, we have taken advantage of that. We have starched out all the surplus margin and embraced tuition so fast. The University of Michigan survived. Now, whether or not there should be some pressure, some of the same pressure businesses and other organizations are feeling to cut costs, I would argue that universities, us feeling some of that pressure is probably a good thing over the long term. I’m not sure a bailout is — I worry it creates the same moral hazard that has led to faculties that and departments around things like leadership and ethics and tenure, which, quite frankly, I see as nothing but debt on young people. So, I get why state universities should get more funding. I’m here because of the generosity and vision of California taxpayers and the regions in the University of California getting near free degrees from UCLA and Berkeley. I think government funding of public land grant institutions that dramatically expand their freshman seats is warranted. But unless you are growing your freshman seats faster than the population, you aren’t a public servant, you are a luxury brand. And we should begin taxing endowments. And, quite frankly, some of these universities just deserve to go out of business.

SREENIVASAN: When you talk about tenure as a form of debt on students, explain that.

GALLOWAY: Well, look, the basic notion of tenure to provide academic freedom and protection from people who are saying controversial things, such that Galileo could make provocative statements and not be burnt at the stake. The initial notion and tension of tenure makes a lot of sense. And I would argue there are still departments in the humanities, maybe in the law field, that require a certain level of protection from a current administration or tides of the culture that would not respect the free thought that you love and value on campus. I would argue, for example, at business schools, we haven’t said anything that controversial, and tenure is nothing but one of the most expensive guilds. We have social services for the undereducated called welfare and food stamps. And I believe we have social service for the overeducated called tenure. And that is, about the time an academic is about to enter his or her most unproductive years, we decide to give them job security that costs $3 million or $4 million over the next 30 or 40 years. And it creates an environment of a lack of productivity. It creates an environment of a lack of accountability. And it results — it’s not hard to connect the dot — it results in young people having more student debt than there is credit card debt, which inhibits household formation. It inhibits people getting married. It inhibits people taking the risk to start companies, which hurts the economy. So I think tenure, at the end of the day, should rightfully get serious examination at some of the schools, including mine, where it has just become a form of kind of collegial compensation that directly results in student debt.

SREENIVASAN: And there’s also lawsuits now from parents who are saying, hey, this COVID education is not what I paid for. I want my money back. Are schools in any position to be able to do that?

GALLOWAY: So, there’s 25 pending cases of students in their final year or at universities who have said, this isn’t what we signed up for, we want our money back. And I — just in the last two weeks have talked to administrators and leadership at six different universities, and they have a ton of ideas and a lot of platitudes, we’re in this together. And one idea you never hear is that they need to reduce their costs. And that is coming. And it just seems natural that, when state government funding is being cut, when everyone, from the Department of Justice to state employees in parks and national services are being cut, that universities should have some of the same pressure to offer a better product at a lower price. And that’s all this comes down to. There’s the credentialing you get from a university, which, quite frankly, is the primary value here, the certification. There’s the education part. And then there’s the experience. If the experience part is dramatically reduced, and the education part is somewhat reduced because of remote learning, should we still be charging $58,000 or $68,000 or waiting for state or student bailouts? No, we should be subject to the same pressures as the rest of America. And we also — there’s an opportunity here. We need to dramatically increase enrollment size, and we need to dramatically decrease costs. We can no longer have a society where it says that children of rich people are 77 more times likely to get into an elite college and then some freakishly remarkable kids from middle- and lower-income schools are the ones that get to split all the spoils in our society. This has become a caste system, and we are the arbiters of it, and it comes down to cost that is just prohibitive for too many households. So, some of that disruption, some of that pain some of that challenge, I think it’s long overdue, Hari.

SREENIVASAN: If you’re someone graduating high school right now, should you be thinking about a gap year, while different systems sort themselves out, prices start to change over the next year? I mean, what you said earlier, schools almost brag about how many kids they reject. Exclusivity is part of what they’re selling.

GALLOWAY: Yes, Hari, we have become drunk on exclusivity. I think — and I’m guilty of this. We have lost the script. We’re not public servants. We’re luxury brands. Every — deans of the best school stand up every year and brag that we rejected not 84, not 86 percent of our applicants, but 90 percent of our applicants, which is tantamount to the head of a homeless shelter bragging that he or she turned away 90 percent of the people that showed up last night. I don’t know where you went to school. I just wouldn’t have got into UCLA today. And people say, and they feel proud of it. But what that means is, that means your son or your daughter isn’t getting it. So we need to massively increase the number of seats. I would argue that you’re going to have a lot of gap years. I think, if you have the luxury of taking a gap year, this is a good year to figure it out, as we at universities try and figure out — and we will figure this out — how to offer some sort of hybrid education or to vaccinate, if you will, the campus environment. So, it’s a great year, if you have the luxury to take a gap.

SREENIVASAN: Yes.

GALLOWAY: It’s also a great time to be on the waiting list for a world- class university. There’s never been a better time to be on the waiting list of a world-class university. So it’s all situational. And if you are going to a tier university and somehow decided to swallow that jagged little pill of extraordinary tuition, I would also rethink it, and call them back and ask for more financial assistance, and really decide, is it worth the money? The pricing here, we have priced ourselves out of anything resembling a social good. We have priced ourselves out of the affordability of middle- class homes. So, the disruption is coming. And to be blunt, we deserve it.

SREENIVASAN: This also seems like, beyond education, that if you’re already big now, Amazon, for example, that you come out of this even bigger, that, essentially, you wiped out, you know, a lot of small mom-and- pop businesses on Main Street, on my Main Street, I don’t think are going to come back after this. They didn’t have an extra two months’ worth of cushion where they didn’t have any customers and they were still responsible for costs.

GALLOWAY: Yes, you’re exactly right, times 10. So, if you owned $100 with Amazon, Apple, Facebook and Google stock on January 1, after a pandemic, after what is arguably the largest crisis or the greatest crisis of our generation, even with a great deal of uncertainty around our ability to get out of this crisis, yesterday, more infections reported than today’s, you would have $111. Those stocks are up 11 percent as we sit here today. And I think what the market is saying is that this culling of the corporate herd only means Google and Facebook will go from owning 60 cents on the dollar of every digital marketing dollar to 70. It only means that Amazon is going to become more powerful as they vaccinate the supply chain and e-commerce and grocery goes from 2 percent of all grocery to 15 percent, which is a transition of $100 billion in grocery spending from terrestrial to online, which will benefit Walmart and Amazon. It’s as if this pandemic, and to a certain extent our government action around stimulus, has been kind of the Amazon, Apple, Facebook, and Google shareholder act. So these companies consolidate the marketplace. They pick up great companies on the cheap. And they have absolutely no problem surviving it. Google has enough cash on hand to buy Boeing and Airbus just with the cash they have right now. So you’re already seeing it, Facebook buying Giphy, making investments in geomarket. As every company, 98 percent of the corporate world, is playing defense and furloughing and laying off employees, big tech is on — off of their heels and onto their toes, and making acquisitions investments and soaking up the best human capital. This is dangerous. These companies were too powerful to begin with. They stifle innovation. They avoid taxes. They are not held accountable if their platforms are weaponized, even if it threatens democracy. So, it’s great to be a shareholder of Amazon, Apple, or Facebook, or Google. I would argue it’s bad for citizens and bad for the economy long run. But just no getting around it, these companies come out of this stronger. When the rains return after the culling of the herd, there’s more foliage for fewer elephants. And that’s what we’re going to see here.

SREENIVASAN: All right, the show’s called “No Mercy, No Malice.” It’s on VICE TV. Scott Galloway, thanks so much for joining us.

GALLOWAY: Thanks, Ari. Thanks for having me.