Motley Fool Money - Google, DOJ, and Default Inertia

Episode Date: October 11, 2023

The DOJ’s anti-trust suit against Google is far from over, but details are emerging that show even the search giant knew the optics of their search default deal with Apple weren’t great.  (00:21) Tim Beyers and Dylan Lewis discuss: - How the DOJ is charging Google cemented itself as the search leader with exclusive deals with Apple. - Just how lucrative those deals were for Apple. - The similarities with this case and the government’s anti-trust case against Microsoft in the 1990s.  (14:46) Mary Long caught up with Motley Fool analyst Sanmeet Deo for a chat about airport security stock Clear and the race to the front of the line. Companies discussed: AAPL, GOOG, GOOGL, YOU Host: Dylan Lewis Guests: Tim Beyers, Mary Long, Sanmeet Deo Engineers: Dan Boyd  Learn more about your ad choices. Visit megaphone.fm/adchoices

This episode is brought to you by Indeed. Stop waiting around for the perfect candidate. Instead, use Indeed sponsored jobs to find the right people with the right skills fast. It's a simple way to make sure your listing is the first candidate C. According to Indeed data, sponsor jobs have four times more applicants than non-sponsored jobs. So go build your dream team today with Indeed. Get a $75 sponsor job credit at Indeed.com slash podcast. Terms and conditions apply.

PSA, if you're looking for something, you don't have to Google it. You can also use Bing, Yahoo, and Duck, Duck, Go. Motleyful money starts now. I'm Dylan Lewis, and I'm joined over the airwaves by Motleyful analyst, Tim Byers. Tim, scale of zero to ten. What are we looking at in terms of caffeination right now? We're going to 11, Dylan. Woo!

Let's not get around. I'm about a half cup behind you, but I will get there, I promise. Today, we are looking at the DOJ's case against Alphabet's Google, and one spot where AI may be affecting hiring. Let's start with the antitrust talk, Tim. So many of our antitrust conversations recently have been about potential deals and whether or not they will go through. In the case of the DOJ and Google, though, this is the government looking at past action

by a company and saying it led to a monopoly or reinforced monopoly. Right. And this is the deal between Google and Apple for over many years in which Google became the default search engine. across all sorts of Apple devices. But I think the one that's primarily at issue here is the iPhone, where if you were looking on the iPhone, using Safari on the iPhone, and searching on the iPhone, your default search engine was Google.

And this has proven to be incredibly lucrative for Apple over time, and theoretically, incredibly lucrative for Google, but they're being very cagey about it, Dylan. But I think I know we're going to get to it in a second, and some of the things that, you know, current CEO Sundar Pichai said about this back in the day. He's being more cagey about it right now, but he wasn't so cagey in the past, which I think is very, very interesting. But before we get to those comments, let me just quickly frame up here to kind of give folks a sense of how lucrative this could really be. So, Apple is a massive company today with about $119 billion.

in operating income. That's in 2022, fiscal 2022, over the trailing 12 months, about $111 billion in operating income. Reportedly this deal is worth about $10 billion to Apple on an annual basis. So what you're talking about is close to 10% of operating income for Apple from one deal that has a very long history, Dylan. This is significant. Yeah, and the arrangement for Apple would be incredibly high margin, right? What we're talking about here is essentially setting something as the default search engine and forgetting it and just leaving it there. There's been some to talk about whether or not this is material to Apple. I think that perspective right there is pretty perfect, Tim. I think we can all agree.

That's material and something that is definitely benefiting the company and both companies. You mentioned the Sundar-Pichai comments earlier back in 2007, when he was in charge of Google's Chrome browser, not the CEO of the company. He had written a letter to Larry Page and Sergey Bryn saying, at one point, I don't think it's a good user experience, and I don't think the optics are great for us to be the only provider in the browser, even suggesting there should be other options as a drop-down. Those are coming up because he is now in charge and is having to answer for this arrangement that we have in place. Right. And to put an even more context around it, at that time, he said there should be, wait

for it. Yahoo! As an option. I mean, that is significant at the time because Yahoo, we haven't thought about Yahoo as a legitimate search engine for decades, let alone years. So, yeah, this is very significant. And the fact that he brought this up at the time, I think is very damaging to Google's case, because it makes it seem like what Google really paid for is not just, space on the iPhone. It paid for exclusivity. Now, whether or not Google is willing to admit that it paid for exclusivity is an entirely different matter. And I'm not a lawyer, so I'm not going to make a legal judgment here. But that sounds very suspicious. It sounds very damaging. And according to the report that we're seeing, is that over time, as this deal was renegotiated, it was

renegotiated to allow Apple to have other providers in different parts of the world. And to this day, Apple does have, if you use an Apple device in different parts of the world, your default search engine may not be Google, but in most of the world, it still is. And of course, there are ways that you can choose to have a different search engine on your iPhone. But I mean, Dylan, I'm a reasonably smart tech guy. I've never even tried to make a different default search engine on my iPhone. I am certain that it's possible, but I don't know how to do it. I know I'd have to go research it. And I think that's kind of part of the government's case. It's not like instantly intuitive, which is kind of what we want, right? Yeah, there is an inertia to things being defaults. And you just, the average

person is not going to go out of their way to make those changes. And when you solidify yourself there, up in a spot where you are the 90% search market share leader in the most valuable search market in the world. Google very smartly positioned themselves this way, but it seems like maybe they are finally having to pay for it. One of the things I see coming up with this case a lot, and I wanted to ask you about Tim, is there are a lot of comparisons to what is happening here and the government's antitrust case against Microsoft in the 1990s with a very similar notion of pre-installed defaults,

kind of gatekeeping what is and isn't there for consumers when they open a device. Do you feel like that's a fair comparison? I don't know that it's a fair comparison legally, but from the perspective of the narrative, boy, the echoes here are just far too loud. Because at the time, for those who weren't there and didn't see this, the argument with Microsoft is that as part of their deals with different PC makers, they would ship, you know, as part of your Windows license, you were shipping Internet Explorer as the default browser inside Windows.

And so that really crowded out, which was the alternative at the time, which was Netscape Navigator. And it really crushed Netscapes, you know, market share over time because it was very easy. Like you just pointed out, Dylan, if it's the default and it's easy to set up and it's right there for you and you don't have to go down there. load it, well, then that's largely what you're going to use. And part of the issue at the time, which people may not remember, is Bill Gates wrote an internal memo that became public later about, and it was in some ways kind of a roadmap

for Microsoft, and it was entirely about the Internet and how important that Gates thought the Internet would be to Microsoft. And, of course, the Department of Justice absolutely. use that as a sledgehammer against Microsoft at the time. It said, this was intentional. This is what Microsoft wanted to do. They made it the default because they had to grab market share because they knew this was the most strategic market for them because the internet made the PC so relevant at the time, which is a legitimate argument.

Now, again, let's separate the legality from the narrative, but I think that narrative was so strong, and it echoes so much with what Sundarpa Chai was saying, saying, like, look, this is something we don't want to get caught in because we are essentially saying, if we're the default, we own this, and so we get all the advertising revenue, and we're going to pay Apple to play a little bit along with us here. It feels very familiar, Dylan, and that's not a good look at all. Interestingly enough, that decision, that antitrust movement against Microsoft, kind of opened the window for Google and for Chrome and for all of this other second wave innovation that we saw.

Irony never disappoints, Dylan. Irony never disappoints. So one of the things that's interesting about this is we don't exactly know what a remedy would look like if we wind up in a spot where the DOJ is successful here. There's discussion of, would there be a fine? Would there be proposed breakups for Google's search properties and its Internet properties? Tim, what do you make of all of that as a risk to the business? It's something you factor in at all, or you just say, like, this is kind of the reality of

owning shares of a business that is this big? I think it's part of the reality. I have not – I recognize this is something that could happen, and there are multiple scenarios here. I think the more likely – if history is the guide, the more likely out of the way – outcome is a fine, maybe a very substantial fine. But let's remember that Google has a massive balance sheet. They have a lot of cash. They generate a lot of cash. If it's a fine, they are going to be more than happy to pay it, and they can make this go away. If it is a breakup, and I think that's

the unlikely scenario, but let's say it is. That is fine with me. I am an owner of Google shares. I will happily take the breakup. Give me my position in YouTube. Give me my position in Google Cloud, give me my position in the Alphabet core business, and separate it all out. I will take that because I think that ultimately creates value for me as a shareholder. So I see that less as a risk, Dylan, as more as something that is a potential outcome that I would be happy to see if that's the route the government goes down. I think it's more likely. We'll see a fine. That's a short-term hit. that I think Alphabet could easily absorb.

So either way, I'm okay with this. But I do think there's a likelihood of consequences. I just don't know what the consequences would be. Gotcha. All right. Over to our second tech story today. And that's that in a job market that is relatively strong, we are seeing some weakness in one zone, and that's IT.

Tim, the unemployment rate for information technology jobs was higher than the overall jobless rate last month. And the immediate take that I'm seeing online is some AI automation may be impacting entry-level IT jobs. Does that hold water for you? Well, yes and no. And maybe no and yes. Maybe let's put those in order. The reason it's a no is because I think we've all seen the number of layoffs in the IT sector, and it's been absolutely staggering. And you can expect that a large number of those layoffs were more junior people. Although I'm assuming, too, there are some other senior people in there because we have seen some startups with some founders that are closer to my age and I'm in my 50s. And that's actually a good cohort for venture

capitalists to put some money behind because you've got seasoned entrepreneurs who know how to do this. So there's probably layoffs across the spectrum. So there's that. But also, there is a lot of talk about AI as an automation mechanism. And I do expect there is automation happening. So I think it's more like, Dylan, we've seen a huge number of layoffs, and you have some IT firms that are unwilling as business picks up to hire back at the same pace, because they may be automating some of those jobs that previously were held by a person. So for folks that aren't as dialed in on tech trends and the role that AI plays in businesses,

what would AI automation replacing entry-level jobs look like at some of these places, Tim? Probably customer service jobs maybe automated, like instead of a customer service agent who is sending out emails and responding to customer requests, that is probably something that's automated through maybe some bots. It could be having to route calls, maybe thinning out your customer service department so that more of the requests are automated and handled via automation. And so you have a much smaller customer service department. I could easily see some elements of marketing and marketing automation handled by different types of AI workflows that are just doing things like, maybe writing base copy, doing basic copy for, or updating website copy and things like that.

So something that a marketing intern might do that now an AI might be doing. And really, it's not much of an AI. It's more like an algorithm, a machine learning system that has a bunch of copy in it and is doing automatically generated pages. It's not really doing anything intelligent. It's just automating things. So I do think there is a bit of an emphasis on automation, and we're categorizing that as AI. And you know what? There is something that's fair, but also unfair about that. But I do think automation is hitting a lot of these tech companies.

So where the jobs are in IT are probably a bit more senior and the junior-level jobs are going to be a little bit tougher to get. So that's a trend I expect to hold up for a little while. Well, Tim, no risk of us automating you away from being one of our Motleyful money guests. Oh, I hope not. I hope not. Always love going to you for Tech Intelligence. Thanks so much for joining me today.

Thanks, Dylan. Coming up, if you've been to an airport recently, you might know clear. It's a company that lets travelers cut through the security line, but you might not know that it's a publicly traded company. Mary Long cut up with Motley Fool's senior analyst, San Mate Deo, for a chat about the business and the competitors in the race to the front of the line. The old adage goes, it isn't what you say, it's how you say it, because to truly make an impact, you need to set an example and take the lead. You have to adapt to whatever comes your way. When you're that driven, you drive an equally determined vehicle, the Range Rover Sport. The Range Rover Sport blends power, poise, and performance. Its design is distinctly British and free from unnecessary details, allowing its raw agility to shine through. It combines a dynamic sporting personality with elegance to deliver a truly instinctive drive.

Inside, you'll find true modern luxury with the latest innovations in comfort. Use the cabin air purification system alongside active noise cancellation for all new levels of quality and quiet. Whether you prefer a choice of powerful engines or the plug-in hybrid with an estimated range of 53 miles, there's an option for you. With seven terrain modes to choose from, terrain response two fine-tuned your vehicle for the roads ahead. The Range Rover event is on now. Explore enhance offers atrangerover.com. Clear's mission is, quote, to enable frictionless and safe journeys using your identity. End quote. What does that mean?

And what does it look like as an actual business model? Yeah, so Clear, ticker YOU, their business models basically is simply we describe as like an identity management platform. So they use biometric technology to verify a person's identity by looking at faces, fingerprints, you know, etc. It's not just an airport company, though majority of the revenue still comes from there. But it's expanding use cases such as Stadium Security, Online, identity verification by LinkedIn, financial security, like know-your-own-your-customer-type use cases and et cetera.

So let's focus first on that airport security piece because that's probably one that listeners are most familiar with. Clear Plus is the company's flagship offering, and that grants expedited entry to over 50 airports in the U.S. It comes out to about $189 a year. How many paying members does Clear actually have today? So, Clear has, as of the second quarter of 2023, they have over 6 million active Clear Plus members. So those are paying members.

This is up from around 3.8 million as of the end of quarter 1, 2021. So, you know, Claire is a pretty sticky product with their net member retention above 90%. And their annual, they have a key performance indicator that they use that the report is called the annual plus member usage. that's been steadily increasing over the past eight quarters, and that kind of indicates how much utilization of their product, of their pass is being utilized. So, you know, the amount of verifications done over how many actual use members there are. Interesting.

Within the airport space and others, because you mentioned that Clear is kind of expanding into different sectors as well, are there any competitors that clears up against, or is this kind of the only game in town. So, one of the first competitors that you would think of when you think of Clear and the airport, if you've ever seen in the airport, is TSA Precheck. So, TSA Precheck is solely focused on airport security, enrolling members through an online application and in-person appointments. And they rely on traditional documents like boarding passes, government IDs. It costs about $85 for a five-year membership, offers no family plans or discounts. In contrast, Clear, primary serves airports, but has expanded to use cases,

their use cases, stadiums, other venues. They enroll members through in-person kiosk using biometric identification, fingerprints, eye scans, and they have an app, which you can also enroll on. It costs about 189 per year and offers family plans, free membership for kids under 18, and various discounts. So, you know, a key differentiator for Clear versus T's. TSA pre-check is that it lets you skips lines at boarding gates and passport control desks in addition to the security checks. Now, an interesting thing is in 2020, TSA actually awarded Clear what they call the TSA Biometric Precheck Expansion Services and Veting Program. That's a mouthful. They have to have an acronym for that at some point, I guess. But as part of this program,

Clear is going to leverage their network and resources to handle the TSA pre-check subscription renewal processing and new enrollments for TSA pre-check. So while it seems like they would be competitors, they're actually more of complementary products. And in addition to this, Clear is going to be offering a bundled Clear Plus membership and TSA pre-check subscription for new members. So you can have both with a bundled offering that kind of enhances your ability to kind of get through lines and use their products.

So TSA pre-check, while you would think right? off the bat, the that's a competitor. It's a little bit more of a complementary service, especially with some of the partnerships and collaboration that they've been doing. There are some other smaller competitors like Verify and others that do some of this airport security type identification, but many of them don't have airport presence like Clear does. And that's been a huge staple of Clear's businesses, having those kiosks, having that presence in the airport where you passengers kind of get an idea of what their business. is all about, what their offerings are all about, and they have ambassadors, which some people

might get annoyed by because they try to sell them the pass at the airport. They do also help them with getting enrolled, using the service, what it could actually do for them. So you have someone to speak to at the airports to kind of get a better understanding for that product. That's something that other competitors don't have. In terms of their biometric technology, you know, some of the competition, I would say, is typically from big tech, you know, Alphabet, Google, Apple, Microsoft, meta, some of those big tech companies, if they start offering more identity verification system, software to help with that, that could be a competitor. Of course, having privacy and all that information with big tech is probably going to be concerned for many

people, given that they already have so much of our information, do you want to really be giving them a lot more? So that's kind of the competitive landscape that Clear is facing. When talking about the competitive landscape, you mentioned, like, I'll say the threat of big tech and, like, their handling of biometric data and how that could be a potential obstacle for Clear. But if we focus on Clear alone, what do they actually do with our data? Should we be wary of them? So, yeah, you know, here they have, like, look, you give them your driver's license, your passport, all this information that, you know, wow, like, they have it all. But privacy is actually heavily embedded in the DNA of the company. They're committed to never selling member data. They may use the data to improve their own marketing, but they're never going to sell your data to other outside parties.

They've kind of built a comprehensive information security and cybersecurity program. Their platform is certified at the highest level of security by government regulators and is constantly being monitored and evaluated. And the Department of Homeland Security is certified Clears Security program, with FISMA high rating, which is the highest designated designation according to the Federal Information Security Modernization Act. So they do have some backing by government regulators, Department of Homeland Security, and they're under the microscope. If they're not careful, they're not protecting that data, those government organizations have a much, you know, much, much more inroads into really clamping down on them.

Clear might be a bit of an older company than people might expect. And you've talked to me before about its founding story. How did Clear come to be? Yeah, you know, it's an interesting story. So it was founded in 2003, and it was originally named Verified Identity Pass. And it was founded by Stephen Brill, who was a law writer and entrepreneur. And it was kind of in response to the intensive security checks and long wait times after the 9-11 attacks. You know, and probably thought, how can we improve this?

So, by 2008, they had 250,000 paying customers. They were being used in 18 airports across the country. But due to unsuccessful negotiations with their largest creditor, they had to file for bankruptcy and they ceased operations in 2009. In comes the two co-founders, now co-founders, Carolyn, Karen, excuse me, Seedman Becker, and Ken Kornick came in, bought out the assets out of bankruptcy for $6 million, including hardware, access to the members. 250,000 members, the Clear brand name and licenses with the Department of Homeland Security

and other organizations. Steve and Beckerman Becker and Kornick had come from the financial industry running hedge funds and decided they wanted to buy this out of Bankers, and run the company. So Clear relaunched in 2010. It was a smart car company before launching pods and kiosk at airports, which many of you may have seen already. And then a partnership and investment by Delta 2016 can help accelerate their growth. And then they got $135 million in six investment rounds for various institutional investors. And United Airlines bought a stake in 2019. So all that really started building their funding, building their platform. And it took almost seven years for them to reach one million members. But it's added each subsequent million in less than a year. So it's been

growing very fast. And so ending in 2019, they had more than five million members. So it's, It's been around for a decent amount of time in a different entity, but it's really lately that it's definitely taken off. And it's well-funded and has a strong balance sheet, which I like as well. So the company went public in June 2021. And since then, despite everything that we've talked about, the increasing enrollments, et cetera, the stock is down over 55 percent, and it's now trading at about $17.50 a share. And again, that's in spite of increasing enrollments.

The company's grown quarterly revenue since its public offering. And in its most recent earnings, which were the second quarter of 2023, it posted positive net income for the first time as a public company. So if we could say all that, why has the stock slumped so much? Yeah, you know, one of the things that intrigue me about this investment is that it's trading it almost like a 10% free cash flow yield, which is a 10 multiple on its free cash flow. So, it's trading very reasonably, cheaply, actually. So it's like, what's going on here? One, it's a very tightly held company. The co-founders own about 17% of the whole company themselves,

and they have pretty much, I think it's 80% of the voting control of the company. And then the rest of the holders of the stock, there's some institutional shareholders in there, Bill Miller, and some T-Roe and some other institutional investors. So the actual float that's out there is not as much as you might think. So given that it's a very tightly held company, the stock's going to be very volatile. So that definitely accounts for that. And it does have an 18% short interest in the company.

So that has probably been a result of some of the declines in the stock. And as well, a couple of the points is, you know, since it's heavily into the aviation airport industry, as that industry, news flow and things are discussed about that industry, the stock will trade on kind of those data points. So that causes some volatility in the stock. But I have no reason to believe that they can't continue to maintain the profitability, continuing to grow memberships. While it could slow, they have stated the travel industry is still very strong. That's been confirmed by some other companies that widely follow, like booking and Airbnb and others, where, you know, the revenge travel, as they've called it, post-pandemic, is still going.

And that could slow, for sure. I think another reason that the stock may be trading down a little bit is because, you know, it does have a huge concentration in the aviation industry and all these use cases that I was discussing briefly before are, you know, they're working on. but there's no guarantee that that's going to be successful or even take off, and that it will be a big platform that everyone's using and it's very ubiquitous. So there's probably a lot of skepticism around that. Yeah, lots of potential, but to expand into industries beyond aviation, but still early days

for a lot of that, it seems. Sam, Meet, thanks for clarifying clear for us. It's been great talking to you today. Yeah, thank you, Mary. As always, people on the program may own stocks mentioned, and The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Dylan Lewis. Thanks for listening. We'll be back tomorrow.