Motley Fool Hidden Gems Investing - Big Tech Gets the Regulatory Shakedown

Starting point is 00:00:00 Regulators have big tech on their toes. Motley Fool Hidden Gems Investing starts now. Welcome to Motley Fool Hidden Gems Investing. I'm Travis Hoy. I'm joined today by Lou Whiteman and Matt Frankel. Guys, let's start in the Northwest with Amazon, the latest to have the government regulators go after them the ftc is accusing the company of basically taking 20 billion dollars from their suppliers over advertising shenanigans all this is kind of a black box lou but it does seem like the government is starting to take some of these things more seriously we'll talk about meta in a moment and amazon stock did react a little bit down a couple percent yesterday but it seems like this is one of those headaches that they're just going to have

Starting point is 00:00:49 to deal with for a while right now. Yeah. And the headache is only getting bigger. And I think that's the interesting thing. I don't know what to make of this lawsuit. Amazon was very, very feisty in their defense saying that obviously the FTC doesn't understand how advertising works. So they're ready to defend this. The one that I'm watching is another lawsuit that, and you know, again, collectively these could end up being a big deal, but a separate case filed in 2023 3 alleges Amazon effectively disallowed its sellers from offering lower prices on competing platforms. That's pretty straightforward antitrust, if so. And it feels like that's the sort of thing you can have a paper trail on. Trial for that starts next March. I think that's the one with

Starting point is 00:01:32 teeth and this is sort of the sideshow. But look, all of these, none of this is an Amazon killer, but if the government can effectively fence off how this company does business, how it does retail it's already the low margin part of the business if it makes retail even less attractive that could change what amazon looks like yeah matt the interesting quote from bloomberg was the investigation was aided by amazon employees culture of writing everything down with internal emails and chats showing widespread discussion about the impact of this alleged scheme end quote it is crazy that amazon is known for this writing culture this is something jeff bezos talked a lot about. We like that as foolish investors, but it does tend to come back and bite you if you're

Starting point is 00:02:17 doing something you shouldn't be. The employees did write a lot down and it's what they wrote down that's really going to maybe get Amazon on the hook to pay some money here. I mean, internal documents are showing that surcharges let Amazon get their ad prices beyond what a competitive ad market would have generated. So for a decade now, Amazon has been repeating the same line over and over and over. The winners of its ad auctions pay roughly a penny more than the next highest bidder. That's turning out not to be true. The FTC said that that stopped being true in reality as early as 2018 for sponsored brands, very soon after that for sponsored products. And this isn't just big advertisers that are supposedly getting hit by these higher surcharges.

Starting point is 00:02:57 It's people who advertise their eBooks through Amazon. It's little guys. I've been there personally. Maybe Amazon owes me some money. I don't know. But I mean, $20 billion is even if they had to give all that back is kind of a speeding ticket. That's not the real big deal here. Matt, one of the questions I've always had about Amazon's advertising business, and I know as Jeff Bezos was kind of on his way out, this was one of the areas where he said, hey, there's a huge opportunity here. This is what we've really got to grow. And if you look at their profitability on the retail side, it has been driven by the ad business. I mean, the old school Amazon.com business was essentially break even. It was negative cash conversion cycle, meaning customers

Starting point is 00:03:36 pay before they have to actually pay suppliers. So that brings in free cash flow when you're growing. But the profitability was always really predicated on doing essentially what Google did was, hey, I want to search for a product. Amazon's going to show you a whole bunch of ads before you actually get to the organic result, which just seems a little like they're extracting from the ecosystem rather than giving the best customer experience. And it seems like this is just along those same lines that they're now extracting as much as they can and they have pressure to grow this ad business and maybe it just went too far. Here's what Amazon will say to that. Not that I necessarily believe it. The company started prioritizing ad relevance over the bid price

Starting point is 00:04:21 they were getting on ads and they started doing this in about 2019. So what this means is when you search, like you say, it takes a while to get to your organic results. They put the most relevant ads there instead of the highest bid ads. And what that does is it makes the whole page look like what you searched for instead of making it look like a bunch of ads followed by what you searched for. So that's a good thing or a bad thing. Amazon will say that it's because of this, its average winning bid fell about 50% since 2019 for sponsored products, ads, sponsored products, things like eBooks, things like, you know, things that individual merchants are selling. And they say that that saved $8 billion for advertisers. But if even with that savings, if advertisers paid $20 billion more than they would have in a truly free bidding market, then the FTC might have a case here.

Starting point is 00:05:10 Lou, final word. Is this a big deal or no big deal? Again, this in and of itself, I think is manageable, but I do wonder about just the knock-on effects of all of these things. And again, does Amazon need to be a retail business? Is there a world one day where this just isn't worth it? Because it does feel like, back to what I said at the top, if the least profitable part of this business ends up even less profitable because of regulation, does it just become more of a headache than it's worth? We'll see. That's kind of the interesting thing for me, but that's a long-term question.

Starting point is 00:05:45 Yeah, especially if artificial intelligence does have that trillion-dollar opportunity that Jesse talked about recently in one of their conference calls. When we come back, we're going to get to Meta Platform's latest legal battles. You've got to try breakfast at A&W. You gotta try breakfast at A&W And what better way than with a delicious Pret Organic Coffee, starting at just $1 all day, every day, now until December 31st. You gotta try breakfast at A&W

Starting point is 00:06:27 At participating A&W locations in Ontario. New from Nespresso. Blend wellness into your coffee routine with the Coffee Plus range, infused with functional benefits. Choose the coffee you love with added B vitamins, like Coffee Plus B12 to help support immune function and Coffee Plus B6 to keep your day moving. Or go with the flow and choose Ginseng Delight, our new double espresso with ginseng extract. Whatever lies ahead, don't change your morning. Let your morning change you. Discover Coffee Plus on Nespresso.com.

Starting point is 00:07:01 Welcome back to Motley Fool and Jim's investing. Late last week, Meta reached a settlement with U.S. attorneys generals all over the country to pay $17 billion in fines. Also put some curves on usage of social media for children. Matt, is this going to be something that's a big deal for Meta? It's a big number. $17 billion is a lot of money, but in the grand scheme of things for a trillion dollar company, whatever the market cap is today, it does seem a little bit like a drop in the bucket. I was going to say, is it a big number? Is it? Because we're so jaded by all these massive numbers of tech at this point. It's spread out over 10 years, first of all. About 30% of it is contingent on YouTube and TikTok doing essentially the same things that Meta just agreed to do. That was brilliant, by the way, I think. Which is not a given at all. The fine itself is essentially nothing. And it's not just the numbers. Some states, specifically Florida, they're being really tough on meta declined to join this and not just because the financial penalties being offered weren't strict enough that's only one side of it they said meta isn't

Starting point is 00:08:05 doing enough to change its platform to protect kids like right now that teenagers can no longer be on meta between midnight and 6 a.m does that really stop you know any bad behavior from happening that bad behavior will just happen at 11 p.m in my opinion florida has a point both on the financial side because they need more than a speeding ticket and the real root cause of this is they need to change child safety practices online so that could be the bigger deal financially which we can get into in a little bit lou i wanted to bring in a little bit of an analogy here as i think about what's going on with meta platforms and the potential changes in usage kind of spurred on by this if we go back to 1998 was when the government sued big tobacco philip morris was

Starting point is 00:08:50 the big name there. But that settlement happened in 1998. It took a while for smoking to become something that was very common. There was smoking sections in restaurants when I was growing up. You're under 30, you probably have no idea what I'm talking about. But today, it's just a very, very different business because culturally, smoking itself changed. And I'm wondering if we're maybe at a moment where social media itself is going to change for this next generation coming up. We're a little bit older when smartphones came out. Maybe we're addicted. I think the kids who came out when some of these curbs were not as well known, some of the side effects were not as well known. Maybe spending a little bit too much time on social media. My kids are young. They are

Starting point is 00:09:34 not using any of this stuff anytime soon. So Philip Morris in 2000 generated $22 billion in revenue in the US alone. And last year it was 4.9 billion, down over 75% in the Americas. Are we potentially at a point, Lou, where meta platforms just culturally is going to change? And if we look back 10 or 20 years from now, we're going to go, man, back in 2026, people were spending hours a day on Instagram. And we just don't do that anymore because we know it's not generally good for us. I think the novelty value deteriorates over time. So I think it might be that social media is not massive forever. I'm not sure if this settlement will be like the tipping point or if that's just going to happen. Anyway, yeah, it's sort of the same where we're training kids and then there's adults that'll use it, but it's not really because we're still giving the kids hours on it. Most kids, like Matt said, there's ways around it. Most kids have more than one Instagram account and parents, if you don't realize that, check because your kid probably does. So it's not like we are going to, A, try and stop the addiction for those over 18, and B, really limit exposure to kids. So I don't think it's the same thing. The other side of that, though, too, is that, yes, Altria, the former Philip Morris, is a much smaller company now by revenue. But since that settlement was signed, on a total return basis, those shares are up 2,000%. Well, let's put a little bit of context on that. I believe shares were trading for something like two or three times earnings back in 2000 or 2001, and that's when they were buying back shares. Point taken.

Starting point is 00:11:19 But also, the total return matters here because it has lost to the S&P 500 as just a stock. But on a total return basis, it's more than double. The point being that Altria might have a smaller base, but they continue to generate a ton of cash. Meta also generates a lot of cash. They have different uses for it. So I don't think this as an investor, I expect the stock to just turn into a great income play the way Altria is. But it changed the world for Altria, but it certainly didn't neuter the company. Matt, will this be kind of seen as a tipping point that fundamentally changes how we view social media?

Starting point is 00:11:53 Well, here's why I like your Philip Morris comparison, because it wasn't just the legal outcome that you talked about that hurt Philip Morris in the long run. We had smoking bans. I mean, I live in kind of tobacco country in the Carolinas. where smoking sections in restaurants were a thing till 2010. So people under 30 remember them. But it was the marketing restrictions that were placed on cigarette companies. They used to be able to put full page advertisements in the newspaper when I was younger. There is the excise taxes, the wide scale smoking bans that we've seen gradually been put into place, even

Starting point is 00:12:20 on public streets since then. Those are what really helped kill smoking. It wasn't just the legal settlements. And the point is, it's not the legal settlement here that's going to hurt Meta at all in this case but if they're forced to do more to prevent unsafe behavior by children and teenagers on their platform it could be a much bigger deal and if you look at what's been going on with roblox the gaming company it's a great example of this they've been really escalating their child safety controls which i've never applauded a stock going down for the right reasons as much as i have roblox recently because that's i think we'd all agree that it's a noble goal you know they really are giving up a lot of near-term growth and profitability in the interest

Starting point is 00:12:58 of child safety now if meta is forced to do that the teenagers on their platform they're not the advertisers big targets today they're not the most engaged users but just like with the cigarette companies they're the top of the funnel for the next 40 years if meta really has to pull back on them and they go to tiktok or youtube as their primary source of engagement that could be the bigger deal here or heaven forbid do something that's not social right or go outside or on a phone yeah go outside a little bit we'll see if i can get my kids to do that a little bit more A little bit more context on the Philip Morris numbers, because I do think that's a fascinating contrast. Over the past year, in 2025, Philip Morris only generated about 10% of their revenue in the Americas. So the cultural shift that happened, and that was sort of the touchstone, but you're right, Matt, that was a multi-decade process of smoking declining in coolness, I would say, in the US. That has not happened throughout the world. It was fascinating going to France last year and seeing how much people still smoke.

Starting point is 00:13:59 That's just not something that we see, especially in the northern parts of the U.S., where I'm not in tobacco country. But we'll see what happens with this. I think this may be something that we look back on with a little bit more consternation about, oh, was this a turning point? If you have thoughts on this, we'd love to hear from you at podcastatpool.com. We'll get you in the discussion over the next couple of weeks. When we come back, we are going to talk about the first days of Apple's new CEO, John

Starting point is 00:14:24 More on that in a moment. At participating A&W locations in Ontario. ahead don't change your morning let your morning change you discover coffee plus on nespresso.com welcome back big day in cupertino because john turnus is officially ceo today yesterday marked the end of tim cook's time running the company one of the most successful runs i think that we've ever had for a ceo particularly who was not a founder of a company but lou as we look forward to John Ternus' time running Apple, what does he need to do over,

Starting point is 00:15:54 let's say the next one to three years to kick this off on the right foot? Big shoes to fill, right? Almost as big as the shoes Tim Cook had to fill, which is saying something. Cook was just remarkable. And it's interesting because Ternus is being hailed as a return of a product guy to the CEO office.

Starting point is 00:16:10 This is an investor base that still kind of pines for that Steve Jobs one more thing, like, oh, amaze us with some new gadget. that hasn't been the case under tim cook i don't think that's tim cook's fault i think just the phone was pretty good and it's hard to replace it but still there is that allure that people are hoping comes back and we have a massive product event coming up just next week september 9th which is kind of hey no pressure guy uh no look presumably tim cook didn't set his replacement up to fail i would assume that apple has some interesting things to talk about whether it's

Starting point is 00:16:44 a foldable phone, just the Siri reboot. So I do think there is massive price increases. Yeah. Hey, that, that works, but look longer term. And I think the market should understand this. The pipeline will be a focus and all this talk for product guy being in charge, who knows what they'll come up with. But my guess is Ternus will be judged on his ability to kind of follow Tim Cook and not Steve jobs. And here's what I mean about that. It's the supply chain has never been more complex we have component costs going crazy because of ai and all of that we have trade wars we have global regulations looking at how we use our phones and the app store and what they can do all of that boring tedious stuff that tim cook mastered i don't think the next 10 years for

Starting point is 00:17:27 apple is going to be about some flashy new one more thing i think it's going to be ken turnus just roll up his sleeves and do some of that hard work that cooked it matt one of the interesting things that Apple has done recently is kind of zig while everyone else is zagging with relation to artificial intelligence. So is that a huge question that he's going to have to answer pretty quickly? To Lou's point, I would love for him to roll out the next iPhone. Reportedly, Apple's developing some smart home products. They're developing robots. Wouldn't it be cool if they got to market before SpaceX or Tesla or whichever one's doing the robots? But I'm not counting on that. He really needs to show that what you're referring to,

Starting point is 00:18:05 the asset-light AI strategy can work. So Apple has extremely light CapEx. Again, we're saying extremely light when we're talking about billions of dollars here. We're kind of standoffish about these numbers here when it comes to hundreds of billions of dollars. But compared with like Meta, Alphabet, Amazon, Microsoft, very, very light spending. Their whole strategy is on-device AI, for one. Their new models of laptops are designed to run AI models right on the device instead of running them through, you know, open AI or, or cloud or any of those, if they can show that their asset light and capital light AI strategy can work, Apple is the most valuable company in the world in five years is my bold prediction. If not, this is a CapEx race and a spending race

Starting point is 00:18:49 that he's going to have to start catching up from behind. So that's really over the next three years. That's going to be what I think is the defining part of his tenure. It will be an interesting start next week. These product announcements have not been incredibly exciting over the past few years, but maybe this will be one to watch because Cernus is going to have to start putting his mark on the company pretty quickly. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal findings content follows The Motley Fool's editorial standards and is not approved by

Starting point is 00:19:22 advertisers. Advertisements are sponsored content and provided for informational purposes only. to see our full advertising disclosure please check out our show notes for lou whiteman matt frankel and christy waterworth behind the glass i'm travis holland thanks for listening we'll see you here tomorrow

Motley Fool Hidden Gems Investing - Big Tech Gets the Regulatory Shakedown

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.