Motley Fool Money - Big Tech Gets the Regulatory Shakedown

Starting point is 00:00:01 regulators have big tech on their toes. Motley Fool Hidden Gems Investing starts now. Welcome to Motley Full Hidden Gems Investing. I'm Travis Hoym, 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 from their suppliers over advertising shenanigans. all of this is kind of a black box, Lou,

Starting point is 00:00:37 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 to deal with for a while right now. Yeah, 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,

Starting point is 00:01:01 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. And, you know, again, collectively these could end up being a big deal. But a separate case filed in 23, 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 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,

Starting point is 00:01:44 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 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,

Starting point is 00:02:25 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's 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 like, you know, advertise their e-books. 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.

Starting point is 00:03:33 It was negative cash conversion cycle, meaning customers 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 ecological. system rather than giving the best customer experience. And it seems like this is just along those

Starting point is 00:04:05 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 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.

Starting point is 00:04:43 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. 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.

Starting point is 00:05:21 And again, does Amazon need to be a retail business? Is there a world one day where this just is? and 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. 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.

Starting point is 00:06:03 Welcome back to Motley Fool Hingeems investing. Late last week, META reached a settlement with U.S. Attorney's 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,

Starting point is 00:06:24 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 it's, we're so jaded by all these massive numbers 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, which is-

Starting point is 00:06:47 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 number. Some states, specifically Florida, they're being really tough on, 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 doing enough to change its platform to protect kids.

Starting point is 00:07:08 Like right now, 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.

Starting point is 00:07:44 If we go back to 1998 was when the government sued big tobacco, Philip Morris was 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. If 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 all, 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.

Starting point is 00:08:27 not as well known. Some of the side effects were not as well known. Maybe, you know, spending a little bit too much time on social media. My kids are young. They are not using any of this stuff anytime soon. So Philip Morris in 2000 generated $22 billion in revenue in the U.S. alone. And last year 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 26, people were spending hours a day on Instagram, and we just

Starting point is 00:09:03 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

Starting point is 00:09:20 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 they'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 be really limit exposure

Starting point is 00:09:50 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 sentiment was signed, on a total return basis, those shares are up 2,000%. Well, let's put a little bit of context down 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. But also, the total return matters here because it has lost to the S&P 500.

Starting point is 00:10:24 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 Altry 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? Well, here's why I like your Philibald 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

Starting point is 00:11:03 Carolinas where smoking sections and restaurants were a thing until 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 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.

Starting point is 00:11:32 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.

Starting point is 00:11:51 because 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 of child safety. Now, if Meda's 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.

Starting point is 00:12:12 If Mehta 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 Evan forbid do something that's not social media 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 some. smoking declining in coolness, I would say in the U.S. That has not happened throughout the world. It was fascinating going to France last year and seeing how much people still smoke. That's just not something that we see, especially in the northern parts of the U.S., where I'm not in tobacco country.

Starting point is 00:13:03 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 you from you at podcast at pool.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 Turnus. More on that in a moment. Welcome back. Big day in Cooper Tino because John Ternis is officially CEO today.

Starting point is 00:13:38 Yesterday, Mark, 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. As we look forward to John Ternis's time running Apple, what does he need to do? do over, 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. 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

Starting point is 00:14:23 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. 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 a foldable phone, just the Siri reboot. So I do think there is massive price increases. Yeah, hey, that works. But like, longer term, and I think the market should understand this, the pipeline will be a focus and all this talk about 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. The supply chain has

Starting point is 00:15:08 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 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 lose point, I would love for him to roll out the next iPhone.

Starting point is 00:15:52 Portedly, 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, whichever one's doing the robots? But, you know, I'm not counting on that. He really needs to show that what you're referring to, the asset light AI strategy can work. So Apple has extremely light CAPEX.

Starting point is 00:16:11 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 Claude or any of those. If they can show that

Starting point is 00:16:37 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 Cappex race and a spending race 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 earnest is going to have to start putting his mark on the company pretty quickly. As always, people in the program may have interest in the stocks they talk about in the Motley Fool may have four more recommendations for or against, so don't buy

Starting point is 00:17:16 sell stocks based solely on what you're here. All personal findings content follows the Monty Fools editorial standards. It is not approved by 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 William. Thanks for listening. We'll see you here tomorrow.

Motley Fool Money - Big Tech Gets the Regulatory Shakedown

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