Technology, Real Estate and the Pursuit of Becoming Unique

Technology, Real Estate and the Pursuit of Becoming Unique

First, you should be skeptical of a real estate guy talking about technology. After you apply the appropriate level of doubt and cynicism while you read this, I hope you gain something from this and think about how it applies to your own life.

Like many of my fellow Generation X’ers, I grew up when Silicon Valley was finding its legs. This was the era when the cool kid on the block had a Commodore 64 to play games on. And when IBM clones or word processors became something that could be bought at Office Depot; and yes, we got one. In reflection, it seems like every computer that I have ever purchased cost $2,000.00. If we were to do a quick comparison between then and now, today’s computers are dirt cheap. In the early to mid-1980’s all you could do on these processors was your English class essay and play solitaire. Now you can create a billion-dollar business from your dorm room. Wow, what a difference two decades can make. As Bill Gates said, “Most people overestimate what they can do in one year and underestimate what they can do in ten years.”

In today’s world you can start a global enterprise that networks with an infinite number of customers and partners. You don’t even have to be in the same time zone or living on the same continent for successful business to happen. As Robert Metcalfe’s law states, “The effect of a telecommunications network is proportional to the square of the number of connected users of the system (n2).” Using Facebook to illustrate what this means; the more of your friends that are actively on Facebook is the more valuable it is to you. Metcalfe’s law along with Moore’s law, which simply states “the observation that the number of transistors in a dense integrated circuit doubles about every two years.” These two laws, which arguably could be called, only observations, really have changed the world. This new world with these new laws in play, gave Steve Jobs the creative space to bring forth the iPhone; the epoch of the current age.

I recently read a couple of technology books, “The Four, The Hidden DNA of Amazon, Apple, Facebook and Google,” by Scott Galloway and “Life After Google, The Fall of Big Data and the Rise of the Blockchain Economy,” by George Gilder. In my next blog we’ll take a look at Gider, but today I want to focus on a few of quotes from “The Four, The Hidden DNA of Amazon, Apple, Facebook and Google,” Read these books!

The first quote that caught my attention was, “I hope the reader gains the insight and a competitive edge in an economy where it’s never been easier to become a billionaire, but it’s never been harder to be a millionaire.”

My takeaway from that quote was whatever you choose to do in life, in business, don’t be average. And as Peter Thiel would say, “be a non-consensus thinker.”

The second quote was, “Walmart was the great leveler. But most consumers don’t want to be equal; they want to be special.”

This is true of people across the board. They want to be special and treated that way. And this creates a retail conundrum. People want inexpensive and uniqueness, but low priced and special doesn’t exist. Special in the retail world is usually synonymous with exclusive and expensive. If you can deliver value, cheaply, you have scale. Scale creates profit. See the first quote.

My third quote states, “The truth is that the death of physical stores has been vastly overstated. In fact, it’s not the stores that are dying, but the middle class-and, in turn, the businesses that serve the once-great cohort and its neighborhoods.”

This statement floored me. And it’s one of the most interesting paragraphs in his book. As a former retail real estate person, I think he’s right on with this. We will always have physical retail stores. However, we will just need less of them. An integrated internet and physical location strategy seems to be re-energizing the sector, but it is not a broad-based resurgence. Only the best locations, providing the best mix of tenants who are technologically savvy and synched with the times will be viable. Everything else will approach zero. Zero in technological terminology is asymptote, which basically means it will come very close to being zero but will never actually be zero. Many “in the trenches” real estate people are holding on to the belief that “We’ll always need shopping centers.” This statement is true. However, we may not need, your shopping center.

Any percentage reduction of shopping centers will equal billions of dollars in lost real estate value. Perhaps not this year, and maybe not for a few decades, but this is coming. Anything that is commoditized will have an option of being delivered to your front door. All you need to do is check the exponential growth of Amazon Basics. Galloway does offer a counter balance statement, “It wasn’t the iPhone, but the Apple Store, that defined Apple’s success.”

Quote #4: “As J. Crew chairman Mickey Drexler points out, “It’s impossible to compete with a big company that doesn’t want to make money.”

Obviously these companies want to make money, but the enormous amount of investor capital that continues to flow into their bank accounts gives them the ability to constantly invest in their business models, regardless of profit, until they attain enough paying customers to scale their way to cash flow positive. The book has a long discussion on the virtually zero cost of borrowing money that Amazon, Google, Apple and Facebook take advantage of. Simply, their sky-high valuation of their earnings gives them a blank check to wage war on the marketplace. When $1 of earnings equals $350 of market capitalization, then the money is basically free. This won’t be technically right, but directionally, Amazon is the most dominant monopolist the world has ever known. We, the consumer just don’t care, because we like our stuff cheap and delivered to our door. Really, they (mostly) deserve the money because money flows to where it can be best used. If a monopoly means you are the best at what you do, you have earned your place at the top.

However, the extraordinarily difficult process and cost of being a public company, which gives you access to cheap capital, is the real culprit for the lack of innovation and differentiation from new entrepreneurs in the marketplace, plus the insane patent laws. Blame government regulations and restrictive securities laws for this. Further, let’s call the regulations and barriers to being a public company for what it is, a tax on creativity and business creation. These costs protect the monopolists and not the consumer or the investor. Yes, people lose money in many business ventures, especially highly speculative ventures, but it is their money to lose. We should be free to make money and to lose money.

In summary:

Bezos wrote in Amazon’s first annual letter in 1997, “Given a 10 percent chance of a hundred times payout, you should take that bet every time.”

“Unlike every other Fortune 500 CEO, Steve Jobs punished careful thinking and history recorded the results.”

Stop playing it safe in life. That leads to the middle and the middle is being marginalized, because the middle doesn’t add value. You can build a model on being the cheapest and and you can build a model by being the best, the most expensive, the coolest and the sexiest company on the planet. The middle is dead. Choose not to be average.

I tell my kids, and everyone else who will listen, that greatness has a cost and average has a cost. Everything in life has a cost so, pay to be great.