The Prof G Pod with Scott Galloway - Office Hours: Google vs. Airbnb, SPAC IPOs, Real Estate Investments, and Brick-and-Mortar Stores

Episode Date: July 19, 2021

Scott answers a question about Google’s dominance in the travel space, and how Airbnb manages to hold its own. He also shares his thoughts on how companies that go public via SPAC are perceived, why real estate is a solid investment, and why opening physical stores can be a powerful branding move — even for a tech company like Amazon.  Music: https://www.davidcuttermusic.com / @dcuttermusic Learn more about your ad choices. Visit podcastchoices.com/adchoices

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cards, savings accounts, mortgage rates, and more. NerdWallet, finance smarter. NerdWallet Compare Incorporated. NMLS 1617539. Welcome to the PropGPod's Office Hours. This is the part of the show where we answer your questions about business, big tech, entrepreneurship, and whatever else is on your mind. If you'd like to submit a question, please email a voice recording to officehoursatproptimedia.com. Again, that's officehoursatproptimedia.com. First question. Hey, Scott, this is James from Jasper in the Canadian Rockies. Unsurprisingly, given where I live, I'm in the tourism space. And knowing how well Airbnb has done thus far since going public and knowing that TripAdvisor

apparently is working on a subscription model and knowing how well Expedia's stock has done over the last year up almost 100%, why is it that I still think Google's going to eat everybody's lunch and travel? Thanks. So James from Jasper in the Canadian Rockies. Dude, my sense is you have it figured out. I just get the sense where you live is incredibly beautiful and you're really happy and balanced and hang out with dogs and, I don't know, have a really great relationship. I don't know what living in Jasper would do for your relationship, but I get the sense it's probably helpful. Anyways, good for you. So in the tourism space, hands down, probably the biggest winner has been Google. If you look at the amount of shareholder value that's been added to Google, it's probably greater than the entire travel industry combined. Why? Because every travel company has had to enter into this downward spiral of buying keywords and PLAs. And basically, Google has inserted themselves in between any tourist and the end destination or the source. So at their core, a brand is shorthand for diligence. And that is when I used to go to London on business, I would either stay at the

Four Seasons or the Mandarin Oriental. Why? Because A, first and foremost, someone else was paying. And B, those brands always deliver a seven or an eight out of 10. And I didn't have the time and I didn't have the knowledge and I didn't have the domain insight to understand everything about hotels in London and maybe pick something that was more relevant or appropriate for me. So I had to defer to the shorthand of the brand. And then Google comes along and becomes a weapon of mass diligence, creating a bridge across the ocean of the unknown. And I go in and I type in London hotels, and then it serves up a bunch of articles, or at least it used to. But slowly but surely, slowly but surely, Google has figured out a way to insert not one, not two, but the entire first page is now ads or links to other places they can

further monetize in the travel space. And the biggest marketing byline by far across the major travel companies, I don't care if it's JetBlue or the Six Senses hotel chain, which by the way, it's an incredible hotel chain, is how much money they have to spend on search and keywords. However, however, there is another. The one company that's broken out of this inexorable downward spiral, Airbnb. Airbnb was able to establish such a strong brand and such an incredible core of evangelists, specifically it its half a million strong hosts, that it'sasons, Orlando Marriott, et cetera, all the search queries for every other travel brand don't add up to the number of queries of Orlando Airbnb. Nobody says I got an Expedia in Jasper. They'll say I got an Airbnb in Jasper.

And I'm going to look up James. Where's Jimmy in Jasper? Anyway, you get my point. So there is a disruptor here. And the reason why I went big for me anyways, in terms of Airbnb stock, was they're able to bust out of this. But, but I agree with you that Google is an enormous beneficiary of the travel space. Now, what's going to happen in the travel space? It's going to be a tale of two cities. Specifically, the travel industrial complex that services the business traveler is just going to get kicked in the groin over and over. Why? Because just as we're not going to go back to the offices often, we are not going to engage in as much business travel. Now, where will it be compensated and maybe even not only compensate, but make travel even bigger is that COVID-19

has done a couple of things. One, it's made us pause and think about priorities. Travel is a gift of the modern age. The number of people who could go to Europe from the US just 50 years ago was probably less than a tenth of a percent. Now it's likely, realistically, somewhere between 20 and 50%. Europe is within reach for a holiday. This is a wonderful thing. We are happiest as a species when we're emotion and surrounded by others.

The things you will remember when you were older, or one of the things you will remember is that time you were with your family walking around MGM Universal, or when you were with your teenage boys walking around Rome. Those types of things or hiking in Jasper

with our cool guide, James. I don't know if that's what you do, James. But anyways, travel is just such an incredibly wonderful thing. It's going to become, I think, more in reach for people. People are going to spend more money on it. COVID has put a ton of money because of a $7 trillion stimulus in people's wallets.

They're going to be saving more money because they're going to be working from home and they're going to spend it on resort travel. So Airbnb is already showing this. Fortune reported in April that Google searches for resorts and hotels were the highest levels in nearly 10 years. So what do we have here? I think Google continues to be a big winner. There are fewer and fewer organizations that have basically created their own internet. You know, there's Google, there's Amazon, and there's Facebook, and then everyone else is fighting over the 30, 20, 19, 18% of traffic online. And they can monetize that attention, and they will continue to do that in travel.

I think Airbnb mostly has been able to bust out of that stranglehold and you're going to see business travel, step change down, structural decline, but we're going to see much more money spent on what is a gift of the modern age and that is your ability to travel with loved ones and be inspired by other great cultures and the wonder of the outside. I'm in Aspen right now. It's a great endorsement. I'm the only person that comes to Aspen and then spends the majority of his time indoors. Anyways, thanks for the question. Jasper. James from Jasper. Next question. Hey, Scott. Dor from Tel Aviv, Israel. I'm a 29-year-old MBA student and your content truly impacts my professional and financial decisions.

My question today, also as a young investor, is about a very hot trend globally and specifically here in Israel of SPAC acquisitions. Recently, we've been seeing a surge in Israeli mid-sized tech companies going public via SPAC. While the benefits of going public via SPAC is still in debate, I would like to ask about the day after the merge, the day after the private company gets listed. So how are these companies treated by the big institutional investors, the ones that really move the needle and create demand in the stock market? Are they treated like the traditional public companies, ones that have been listed through IPOs and direct listings? Or are they treated with suspicion due to the fact that they were listed via SPAC? Thanks, Dora from Tel Aviv. Thanks for the kind words. So SPAC IPOs

are on a tear in 2021. Already, they've surpassed last year's record within just the first half of this year, which, by the way, last year was a record. There's been 362 SPAC IPOs so far in 2021, with proceeds surpassing $111 billion. Oh, my gosh. 2020 saw a total of nearly 250 SPAC IPOs with a total of just more than $83 billion. So think about it. Just so far, halfway through the year, we're at $111 billion. So your question was, what happens kind of post the IPO? Generally speaking, the best IPOs,

the companies that are kind of prepped, washed and ready, and the most desirable kind of unicorns are still going their traditional route. And that is, they go through the traditional IPO industrial complex of JP Morgan and Goldman and B of A. And those organizations tend to attract the bluest

chippest, if you will, or the blue chippest, bluest chip institutional investors that are hold for a long time. And typically they will underprice. The kind of a game is the following. Goldman underprices the IPO to please their institutional clients who are their bread and butter. And the company does endure some additional dilution. And that is it probably only needed to give up 10% of the company, not 12% to raise $100 million or a billion or whatever it is. However, that additional 2% of dilution to have a successful IPO done through Goldman that pops creates a series of brand associations. One, it's Goldman taking you out. And that's sort of like getting into the Tuck School of Business.

It's not how you perform in school. It's the fact that you were selected by Tuck. It's the certification. And the fact that you were selected by Tuck. It's the certification. And the fact that you were selected by J.P. Morgan or Goldman to go public basically says to the whole world, this company is real. This company has vetted or passed through what is the finest filter of who gets into the public markets. It also is going to have likely right out of the gates a better investor base. And that is institutional clients. The investors and IPOs is becoming surprisingly consolidated and inert. And 90% of the S&P 500 companies, there's three players. I mean, it's BlackRock, State Street, and there's one other that are almost always one of the two or three biggest shareholders. And Goldman and

JP Morgan, those guys, those types of IPOs are sort of a green light for them to invest and hold long term. So a company does want to, ideally, if it has the choice, get out through traditional IPO. Now, once it starts trading, it's really about the performance of the company. I think the mechanism that got them public is kind of in its rear view mirror. So Virgin Galactic got out this back. But now I think that people don't really care that much about the mechanism is kind of in its rear view mirror. So Virgin Galactic got out via SPAC, but now I think that people don't really care that much about the mechanism through which it accessed the public markets. And one of the advantages of a SPAC is you can get public sooner.

A lot of people would say the company doesn't need to incur the dilution because it's a more accurate pricing mechanism. The filter for SPACs is in the investment bank's operating committee to decide whether they want to take it on as an IPO. And one of the things that a SPAC offers is speed to market because they do all the SEC registration for you and get public, which increases or decreases the time to market. But the screen, if you will, the filter for SPACs now is the pipe market because typically a SPAC or a blank check company will raise $200 to $300 million in equity. And if their target is bigger than that, which it always is, it needs

some sort of debt financing. And it's the debt markets, specifically the pipe market, which is a public investment in a private equity, that is the adult in the room and says, well, no, we're not going to lend money against a company doing scant revenues and huge losses that says it's worth a billion and a half dollars. Maybe you think it's worth a billion and a half dollars. Maybe even equity investors will support that, but we're not going to provide the debt for it. So they've been the screen in this market. So what I believe is that you're going to see and you already have continued correction in the SPAC market. And that is, generally speaking, and there'll be a lot of winners that were SPACs, but generally speaking, companies that go public via SPAC aren't of the same institutional quality, which isn't to say they won't outperform others. underperformed. In the last couple of years, they've overperformed because the thirst or the

hunger for shares in these quote-unquote disruptive companies seems to be unquenchable. But I would suggest that the downward trend in SPACs is going to continue. What do we have? Over 50% of SPACs are down by at least 50% from their all-time highs. The market seems to be rationalizing a bit around SPACs. Anyways, at the end of the day, you got to look at the company, you got to look at the numbers, you got to look at the fundamentals, the sector,

and make your own decision. Because once the company, the mechanism through which it accessed the public markets doesn't have a lot of impact post three or six months of the offering on the company's futures prospects. But again, I do think you're dealing with a series of companies that didn't get through the same filter as traditional IPOs. Oh my God, I'm verbose today. What does that mean? It means I'm in Aspen where there's

dispensaries everywhere. Connect the dots. We have two more questions right after the break. Support for this show comes from Constant Contact. You know what's not easy? Marketing. And when you're starting your small business, while you're so focused on the day-to-day, the personnel, and the finances, marketing is the last thing on your mind. But if customers don't know about you, the rest of it doesn't really matter. Luckily, there's Constant Contact. Constant Contact's award-winning marketing platform can help your businesses stand out, stay top of mind, and see big results.

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ConstantContact.ca The Capital Ideas Podcast now features a series hosted by Capital Group CEO, Mike Gitlin. Through the words and experiences of investment professionals, you'll discover what differentiates their investment approach, what learnings have shifted their career trajectories, and how do they find their next great idea? Invest 30 minutes in an episode today. Subscribe wherever you get your podcasts. Published by Capital Client Group, Inc. Welcome back. Next question.

Hi, Professor G. Thank you for taking the time to answer my question. I'm Mia, an incoming junior at NYU Gallatin concentrating in fintech. I wanted to ask about real estate and specifically how much diversification do you think it can really provide to one's portfolio? And if you believe it's a true inflation hedge and long-term investment or just more of a pain to upkeep, especially physical, tangible real estate. And as a 20-year-old, I've been fortunate enough to learn from my immigrant parents who taught me financial literacy early on, and I've been able to max out my Roth IRA and savings since I was a kid. And at the opportune time in the market last March, I was able to snag a great deal on a studio with a decent mortgage near school.

But this property wasn't for myself, rather just to lease out to generate passive income. And now I'm considering more options in real estate and wanted to get your take on crowdfunding such as Fundrise or REITs, although they mimic stocks. And I'm looking for that return in utility, just not having to deal with tenants anymore. Do you also think there's a possible housing bubble on the horizon? Thank you. Oh my gosh, Mia, we're going to need a bigger boat. We could spend a couple of days trying to track down or break down real estate as an investment. And there's obviously a lot of nuance in to track down or break down real estate as an investment. And there's obviously a lot of nuance in there. By the way, you sound incredibly impressive for someone at the age of 20.

I think you should go to work in real estate, private equity or get the sense you're going to do incredibly well. So, look, real estate has been a fantastic way to generate wealth or build wealth for people. If you look at the Fortune or the Forbes 400, I think it is. Outside of people who inherit money, which by the way, is the best strategy for getting rich. So if you can do that, do that. But numbers two and three are entrepreneurs and people who own real estate. Real estate is the most tax-advantaged asset in the world. And that is you get to write off the interest on your mortgage. In addition, even more so, you can depreciate. If you own real estate, you can depreciate it up to 3% a year, even though it's increasing in value. You can't do that with stocks.

If you own $100 in Amazon stock, you can't take a $3 write-off every year, despite the fact it goes from $100 to $130 or $140. Commercial real estate is even more tax advantage. You can sell the asset, and as long as you roll it into another like-kind asset within six months, you don't trigger a tax event. You can't do that in any other asset class either. So the real estate lobby is very powerful and has created tremendous tax advantage. By the way, entrepreneurs or entrepreneurship small companies are also very tax advantage. See a trend here? When the government decides this cohort should be rich, they get rich. Now, for you personally, I think that it sounds like you know what you're doing.

Real estate is cyclical. I personally would be very scared to buy real estate in most places right now. We saw real estate prices year on year this quarter go up double digit in a low interest rate environment. We'd never seen that before. So I'm a little bit scared. But one of the reasons, one of my many closet investors is I hate to buy stuff when it feels expensive. However, in terms of a long-term asset, in terms of long-term, if there's a place where you might want to be a little bit, I don't want to say over-concentrated, but if you can do it without a ton of debt, real estate and passive income, rental, that's just a fantastic way to build wealth. And also, building wealth through your own personal residence is a great way to build

wealth. Now, Bob Schiller, or Robert Schiller from Yale, who's a Nobel Prize winner in economics, would claim that, and he has evidence to show this, that when you take into account maintenance and your mortgages and all that, that it's not a better asset class. I would argue that it's a great way to build wealth, your personal residence, and that is one place you want to stretch economically. I find that I also like to rent. I love the idea of slamming my keys down and leaving. But when you talk to people, oftentimes they have built the majority or a lot of their wealth through their primary residence. When my mom got cancer for the second time, we decided, okay, this is it. You need to stop working. And we were able to sell her home, her condo in Westwood and kind of fund a large part of her retirement. And so a few ways to look at this. One, investing in funds will typically not offer the same return you might get if you're willing to

put up with the bullshit. So putting up with tenants, finding a place, fixing it up, yeah, all that shit is hard. And guess what? It's the hard stuff that gets returned. Don't be, you know, there is no free lunch if you want to go into a real estate portfolio. It's an asset class. They can do really well, REITs or other types of real estate funds, but you're not going to get the same return because they're doing the work for you. I think at your age, to start thinking about buying rental income, if you have the cash flow and you can do that, I think it's an outstanding way to build wealth. The bottom line is if you were to say, I'm going to take a disproportionate amount of my money and not lever up, but buy real estate in areas where I thought I got good yields in

terms of rental income, New York never offers good yields. What it offers is good asset value increase. New York real estate is like, especially Manhattan, is like oceanfront. It goes down a little bit every once in a while, but for the most part, it's just a solid bulletproof asset. But the yields, you get a cap rate of 2% or 3%, and that is you don't get very high rents relative to the cost to buy. So it's a different type of return. Anyways, real estate, I think, is a fantastic way to build long-term wealth. It's tax advantaged. Are we probably in a period where real estate prices might be a little bit frothy? Yeah. But if you're in it for the long-term, you know, oh my gosh, you're asking questions I wish I'd asked. I didn't ask you how you're getting cash

flow to buy these things. But anyways, it sounds like you figured it out or you have it. So anyways, real estate, hard to imagine a better asset class historically over the long term that's built more wealth for more people. Just don't get too levered up and be disciplined about the cap rates you're getting. And don't kid yourself. The better returns will be for stuff you manage yourself. Great question. Welcome to NYU. My gosh, you make us seem smart. You almost compensate for that batshit crazy professor. Next question. Hi, Scott. Tim here from Merced, California, gateway to Yosemite and home to the newest UC campus. As I was out shopping the other day, I came across, of all things, an Amazon bookstore. After I got over my shock and horror that the company that almost single-handedly ruined the independent bookstore industry, I noticed its proximity to an Apple store. Tesla was across the street. Cartier was around the corner.

I realized this outlet was simply there to give Amazon a more luxury feel than they have with just their internet presence. Thoughts? Tim from Merced. Thanks for the thoughtful commentary. UC Merced, the University of California, is one of the greatest public institutions in the world. I'm here speaking to you because of the generosity and vision of California taxpayers and the regents of the University of California. And UC Merced is where Michelle Obama decided to give the commencement address, which I thought was such a smart move. Anyways, I'd like to see another half a dozen UC campuses that serve as a place where you finish the last two years for our incredible Cal State system that educates a half a million people every year versus like the 60,000 in the entire Ivy League. What's more important to America?

Yeah, that's right, Cal State. Anyway, anyway, love you, C. Okay, so what you are highlighting is a key component of brand and brand strategy and the core brand or the offering, there's pre-purchase. So think of traditional advertising or public relations or sampling. And then there is purchase, and that is distribution, where you actually go into the dealership to buy the car, go into the store, go into the gap. And then there's post-purchase, what happens after you've consummated the relationship and purchased the've seen a lot of brands decide they would get greater ROI is if they shifted resources out of pre-purchase advertising into purchase. Probably one of the most accretive business moves in history was Apple's gangster decision in 2002 when everyone was getting out of stores because e-commerce was going to eat the world, supposedly, was Steve Jobs' decision to take $7 billion out of broadcast

advertising and allocate it towards 550 leases, temples to the brand called Apple Stores. And I believe that Apple's core asset is its brand that results in the greatest margins in history. The iPhone is a car that has production volumes of Toyota with margins of Ferrari. We've never seen that before. But it's because it's wrapped around this brand that says you're storyteller, you're smart, that people should consider mating with you because you have an iPhone and iOS is essentially the billion wealthiest people in the world. And what has been the gangster move around the brand? Yeah, it's been elegant products. Yeah, it's been a fantastic spokesperson, both in Steve Jobs and Tim Cook. But I think more than anything, it's been distribution that really enhances the brand.

Think about where you buy your Android phone. It's usually an AT&T or Verizon store from a guy named Jim that's with bad lighting and bad carpeting. And when you go into an Apple store and you think, God, I'd like to hang out here forever. So distribution is hugely important. Luxury was the first one to really go all in on distribution.

LVMH decided to kind of exit Nordstrom, exit Saks, exit Neiman Marcus, and spend billions to open 750 of their own vertical stores. Richemont, another luxury player, said, no, we're not going to distribute our watches to other high-end mom-and-pop jewelry stores. We're going to open Panerai stores. We're going to open Van Cleef and Arpels stores, because the distribution is where there was an underinvestment, an opportunity to go vertical. What is the biggest gangster move of Nike over the last 10 years? Simple. They've gone from about 5% or 10% direct-to-consumer to 30% or 40%.

Because they realize being in a store with a guy dressed up as a referee holding one Adidas shoe and one Nike shoe is not great for the Nike brand. Whereas you go into a Nike store and you think, wow, this is an incredible branded experience. In sum, Tim from Merced, you're talking about brand building pre-purchase and post-purchase. You're talking about distribution. It's been a fantastic form of investment for some of the biggest players. Yes, Tesla does not spend any money on advertising. They do spend money on stores, taking stores into malls where they get foot traffic. It's like a giant 3D billboard. Apple has taught us all that distribution is a key component of driving brand value led by the original invaders, the original gangsters in distribution, and that is luxury. We're going to see more of it. There's going to be fewer stores. There are going to be fewer self-supporting stores, but there'll be more aspirational brands doing revenue, share of revenue deals with the top malls in America.

Interesting viewpoint. Thank you, Tim, from Merced. That's all for this episode. Again, if you'd like to submit a question, please email a voice recording to officehours at profgmedia.com. Our producers are Caroline Chagrin and Drew Burrows. Claire Miller is our assistant producer. If you like what you heard, please follow, download, and subscribe. Thank you for listening to The Prof G Show from the Vox Media Podcast Network. We will catch you on Thursday. Hey, it's Scott Galloway, And on our podcast, Pivot, we are bringing you a special series about the basics of artificial intelligence. We're answering all your questions.

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