Today on the Joseph Carlson show, Visa is being sued by the
Department of Justice. Merrick Garland is at it again,
targeting the big bad monopolies and Visa is the next one.
Insight. They're being sued over being an
illegal monopoly, specifically with their debit card use.
The Department of Justice laid out their argument of why they
believe Visa is an illegal monopoly.
We're going to take a look at their statement, see if it has
any merit, and see if Visa investors should be concerned.
After all, Visa stock is down 1.36% on the day.
That's after dropping 5% over the past week and year to date,
Visa's only up 4%. This company is struggling to
keep up with the market and we'll be taking a look going
over everything with Visa and MasterCard and seeing of
investors should be concerned about this news.
Now of course we have some other news to get to.
John Donahoe, the former CEO of Nike was fired.
He was canned and replaced with the new CEO Elliott Hill.
He's a long time insider of the company.
We'll be going over why this is good news for Nike.
And then finally, we have here from CNBC's that Gen.
Z and millennials are increasingly doom spending.
That's a direct quote. They're doom spending.
We'll be looking at what doom spending is and apparently why
Gen. Z and millennials are doing it.
So as always, we have a lot to get into.
Let's go ahead and start off with the headline news.
Visas under suit by the Department of Justice for being
an illegal monopoly. The Department of Justice is
headed by the attorney General, Merrick Garland.
And I think it'd be beneficial to first, before even jumping
into this, listening to their case.
Merrick Garland is the one over this, and he basically laid out
the reasons that he's suing Visa.
I'll go through and I'll highlight some of what I think
are the most important points that he brings up.
He starts off with a brief summary here.
We allege Visa is a monopolist in the debit transaction markets
that is violating federal antitrust law and inflicting
often hidden but significant harm on American consumers and
businesses. Visa operates the largest debit
network in the United States. A debit network facilitates the
electronic transfer of funds directly from a consumers bank
account to the merchants bank account in a retail transaction.
Millions of Americans prefer to use debit transactions, which
are often the primary option for lower income consumers without a
credit card. In the United States, over $4
trillion of debit card transactions take place every
year. Over 60% of those transactions
and over 70% of all online debit transactions are routed through
Visa's electronic payment network.
He's laying the groundwork that Visa's a very large company, and
that's part of being a monopoly. It's harder to be a monopoly
when you're a very small company than a big one.
So making the point that Visa's really big is accurate.
And in fact, I think most people realize that Visa's a big
company, but most may not fully understand how big their debit
card business is. A lot of people look at Visa as
a credit card business, but they are massive in debit cards.
If we look at Visa and bring up the fundamentals here on
Qualtrim, I'll point out just one key performance indicator.
These are things that I track on different companies that I hold.
Even though I'm not directly invested in Visa, I do keep
track of this metric and it shows the breakdown of total
Visa cards between the debit cards and the credit card.
What you'll notice is that the orange hair is Visa Debit.
The lighter orange hair is Visa Credit.
Visa Credit is a much smaller portion of the cards issued.
The majority of their business is through debits.
That's around 60 to 70% of their business is through debit cards,
and the amount of debit cards they have is just astounding.
As of the most recent quarter, it's 3.2 billion debit cards
with AB. If we compare that to their
credit cards, the credit cards are only 1.3 billion, still a
lot of them. 1.3 billion is not a little amount, but it's not
anywhere close to the Visa debit card.
So Visa overall right now is more of a debit card business
than a credit card business. So he starts off by laying out
how big Visa is, trying to paint them as monopolist.
The one thing I'd point out that he misses here that he does not
lay out is how big Visa's competitors are.
We have MasterCard here. It is true that MasterCard is
currently smaller than Visa in both market cap and cards
issued, but not by a lot. MasterCard still has billions of
cards issued. Now we just have the total card
number here, but it's 3.05 billion, and I would estimate
that MasterCard has a majority of theirs is debit as well.
So MasterCard is a massive competitor.
They're not something that just be ignored.
But that's what Merrick Garland does, because he's trying to
make the case that Visa's a monopoly.
It's difficult to make the case that something's a monopoly when
you have a massive competitor competing against you.
We, of course, also have many other credit card companies.
Visa and MasterCard aren't the only ones.
But that goes against the point that Merrick Garland's trying to
make. He's trying to make the point
that Visa's dominant, that it's the leader, that it's a
monopoly, that it has a limitless pricing power, and
that it controls consumers. If you highlight how big the
competitors are, how fierce the competition is in this space, it
discredits his point. The truth is, when you look at
this from an impartial standpoint, it looks like Visa
is actually facing tough competition.
In fact, if we look at Visa's revenue growth, a proxy for
their market dominance and their pricing power, it was 9.7% year
over year. Over the last trailing 12
months, we have just under 10% growth from Visa.
If we compare that level of growth to MasterCard, again,
their primary competitor MasterCard is growing faster at
1187%. So MasterCard is growing around
3% faster than Visa. But Visas being sued for being a
monopoly, MasterCard isn't. If we look at different reports
of market share over time, Visas also losing market share to
MasterCard over time. MasterCard has gained market
share and debits over the past decade with 27% share last year,
up from 21% in 2005. S in the past 10 years,
MasterCard has gained 6% market share of Visas debit card
business. So we see the numbers here that
MasterCard, their primary competitor, is growing faster
than Visa by a good margin. MasterCard is gaining market
share in debit cards, which is what they have a problem with.
We also have other data we can look at.
MasterCard is growing faster internationally.
They're issuing cards at a faster pace.
There's a lot of reasons to believe that Visa does have
competition to face, MasterCard being the primary competitor.
But even as we see that data, Merrick Garland paints the
opposite picture. He paints the picture that
Visa's note is impenetrable. According to Visa's own
calculations, it is insulated from competition for 75 to 80%
of debit transactions initiated with a Visa branded debit card.
We allege that to maintain this monopoly power, Visa deploys a
web of unlawful anti competitive agreements to penalize merchants
and banks for using competing payment networks.
At the same time, it coerces would be market entrance into
unlawful agreements not to compete by threatening high fees
if they do not cooperate and promising big payouts if they
do. The result is a debit market
where Visa has unlawfully amassed the power to extract
fees that far exceed what it could charge in a competitive
market. Merchants and banks pass along
those costs to consumers, either by raising prices or reducing
quality or service. And there we get to the crux of
the complaint. They're alleging that Visa used
a carrot and stick strategy to coerce different merchants into
unlawful agreements. They would punish merchants by
levying higher fees if they routed some transactions to
other card networks. The Justice Department said
consumers are losers from that arrangement.
Now, it is true that Visa does this.
They say, hey, if you use just our service, then we'll give you
a better rate than if you use a lot of people's service.
This is called an exclusivity agreement.
It's a normal thing in the terms of business.
Lots of businesses have exclusivity agreements.
You might have the same thing if you're providing ingredients to
a restaurant. If you're the only one providing
and supplying this product, you might have an exclusivity
agreement that you get better rates than if you have many
people supplying it. This type of thing happens all
throughout businesses worldwide. So in and of itself, giving a
business a better rate when they exclusively do business with you
is not something inherently illegal.
Many businesses are doing this right now, and it's the reason
that Visa has been able to do this this for decades now.
The other part of this where they say consumers are the
losers from this arrangement is entirely subjective.
The argument from the Department of Justice is that retailers
like Walmart and Target pass along the cost of the Visa
transaction on to the consumer. So when Visa charges more, the
consumers pay more and therefore the consumers are the loser in
the situation. But that isn't necessarily
accurate. In fact, a lot of people that
study this stuff and do third party research on it, people
that study debit card and credit card transactions, they've
looked over a lot of data and found that even when you remove
the credit card fee, the retailer does not pass along the
savings to the consumer. They pocket them for themselves.
So if Walmart suddenly could get rid of Visa's transaction fees,
it's not necessarily true that they would just pass along those
savings right to the consumer. A lot of, if not all, of those
savings would fall to Walmart's bottom line.
Retailers are upset at Visa not because they have to charge
customers more, but because they have to pay Visa to do business.
The other thing they leave out when alleging that consumers are
the loser from this arrangement is that not all networks are the
same. Visa has built a trustworthy,
reliable, insured network to process transactions.
The third party networks, the cheaper ones that Walmart and
Target would happily send customers to, may not be as
trustworthy. They may not be as reliable.
We had the same type of discussion a year ago when there
was a new Durban amendment proposed.
This would allow retailers like Walmart to choose what network
your transactions are processed on and the results would be the
same. Exactly because I'm the one
paying for that purchase, I should choose where my purchase
gets run. Why should the retailer decide
now? Let's run it on a cheap network
that doesn't have fraud protection.
That's what this bill will allow.
This will absolutely harm consumers.
So it may not necessarily be in the best interest of the
consumer to make Walmart more money by transacting through
lower quality payment processors, but that's what
could happen if this type of thing is successful.
Now, we've addressed this stick part where Visa apparently
punishes companies by using exclusive agreements.
There's also the carrot part. The Justice Department said that
Visa has a practice of offering volume discount to merchants
that is illegal under antitrust law.
Now, again, this is something that every business is doing all
the time. Offering bulk discounts for high
volume customers is standard practice in virtually every
industry, especially in software and payment processing.
They loop this back again to the penalizing factor.
Federal law requires that merchants have the ability to
choose from at least two unaffiliated debit card networks
to process transactions. But Visa would penalize
merchants who pick another payment network by charging
higher fees on all transactions processed.
So even when they're talking about bulk discounting, they're
really talking about once again, penalizing merchants for using
other payment networks. Visa likes to have the
exclusivity agreement where companies like Costco use only
Visa and they give them a much lower rate for being exclusive
with them. And that is the primary concern
that the DOJ has. Now, the DOJ hasn't laid out
specifically what they want in terms of relief.
So we don't know really what they're asking of Visa.
They're just alleging they're a monopoly at this point.
But if I was to guess, it would be that Visa and other credit
card issuers are forced to have multiple options for transaction
processing at merchants. And most likely the merchant
would be able to pick where your transaction is processed.
If it's processed through Visa's network or a third party
alternative. That would be a lack of choice
from the customer and it would benefit the merchants.
Now, in terms of the argument and the strength of these
arguments, I think it's rather weak from the DOJ.
I've looked at different arguments from the Department of
Justice on many lawsuits they've had with other companies, and
this one is one of the weaker ones.
They're basically just alleging that Visa gives group discounts
with exclusive agreements. That has some validity to it,
but that is normal standard business practice.
Offering discounts for bulk and volume customers is also
something that's standard practice.
Outside of that, Visa hasn't been boxing out competition.
They haven't been buying up companies.
Visa's transaction with Plaid was blocked by the DOJ.
They've mostly been growing organically over time.
So I think this is going to be an uphill battle from the
Department of Justice, and Visa thinks so as well.
They said, quote, we are proud of the payment networks we have
built, the innovation we advance, and the economic
opportunity we enable. This lawsuit is meritless and we
will defend ourselves vigorously.
So Visa is ready to fight this and take on the DOJ.
Now looking at this from an investment standpoint, when I
look at My Portfolio, I announced frequently that I
invest in monopoly, monopolistic companies that have a large
dominant concentration in very important, usually global
markets. So we look at S&P Global, it is
a duopoly with Moody's. MasterCard is a somewhat duopoly
or oligopoly with Visa. In this case, I actually think
that MasterCard is growing faster taking market share.
That's why I have a preference of MasterCard over Visa.
Intuit has a very dominant position in so many different
markets, and that leads to lots of advantages.
These companies are more stable, they grow organically, they have
huge network effects of people naturally gravitating to their
products. There's lots of things that go
well with these type of dominant companies.
But one thing you're always going to face when you have a
portfolio like this, when you're investing in lots of dominant
monopolistic companies, is government interference.
Government is constantly going to be targeting these type of
companies. And I've seen this pattern over
the past five years. We see an example of it time and
time again. Just recently, the Justice
Department sees Google for monopolizing digital advertising
technologies. They're suing Google twice for
being a monopoly in two different categories.
The Justice Department sues Apple for monopolizing
smartphone markets. That happened in March of 2021.
The Justice Department already blocked Visa's proposed
acquisition of Plaid. This is going to be a great
acquisition for Visa. This is a a phenomenal digital
property for Visa to buy, but Visa ended up buying a smaller
alternative to Plaid because they couldn't get this deal to
go through. And there's many more examples
than this. There's lots of governments even
outside of the US that are also targeting big tech companies,
namely the EU. So if you have a portfolio full
of companies that are top tier, dominant, world class companies,
they're going to run into regulatory issues over time.
That is the natural consequence of being a dominant winner,
whether justified or not. And I can say the same thing
about the story fund. The companies in this portfolio
are every bit as dominant as in the passive income portfolio so
far. Some of them have avoided a lot
of legal action, but some haven't.
Amazon has been under threat of lawsuit and sued so many times
for being a monopoly and it's never going to end for this
company as long as they're dominant as they are.
But the company will continue winning anyways.
Netflix is one that I think has avoided most lawsuits.
It hasn't been one that's been targeted, but I think with the
continued dominance of Netflix, and when investors, the market,
and government officials from large economies realize that
Netflix is in fact a dominant company that has huge
concentrated market share, they're going to be targeted as
a monopoly as well. I think it's only a matter of
time. I can't perfectly predict the
future with any of these companies, but if we use history
as a guide, in most cases having these companies targeted as a
monopoly ends up with these companies becoming stronger over
time. Visa itself is an example of
this. The first Durban amendment was
passed in 2011. If we look back close to that
time period, Visa was trading for below $50 per share.
The stock price is up 400% while it's paid dividends the entire
time up to 270 dollars, and this was after a groundbreaking
antitrust lawsuit was successfully launched against
Visa. The stock has still crushed the
market over that time period. So I consider events like this
with scary things happening to an otherwise great company as
typically buying opportunities. And I think most Visa investors
will do really well overtime given its current valuation and
price point. I'm not going to be buying into
Visa because I already own a lot of MasterCard, but I'm going to
continue holding my MasterCard. Now moving on, we have some good
news for Nike. Nike fired their old CEO John
Donahue, and they replaced him with someone named Elliott Hill.
Now, Elliott Hill is not a known entity.
He's someone that has worked at Nike for a long period of time.
We'll learn about him in just a minute.
But I want to highlight just again, which I covered this in a
previous episode, but I think it would be good to summarize
really quick the problems that John Donahue caused with Nike.
Basically what he did was he consolidated a lot of Nike's
products off of different retail shelf space and off of different
online outlets like Amazon and Zappos and different third party
sellers of Nike products. He put all of it on the Nike
app. He bet everything on the Nike
app. So you could only get Nike
products on select retailers, only a handful of them and the
Nike app. And of course the consequence of
that was having other top competitors like New Balance and
Adidas quickly fill in that shelf space.
Adidas New Balance found that they had a lot more
distribution, which caused them to gain market share.
Then Nike also decided to make their business more efficient,
higher margins by lowering the amount of investment into new
shoes and new designs. Instead of just creating new
designs for runners, they created a lot of new colors for
existing product lines and this allowed a host of all new
different shoe companies to start spawning.
Ones like Hoka, on brand ones like Brooks.
All these different brands started popping up out of
nowhere and they got popular. People found out about these
shoes, they've fallen in love with these shoes, and now Nike
has a host of competitors that didn't exist just four years
ago. So in many ways, we can directly
attribute the increasing competition to Nike as a
consequence for them concentrating everything on the
app. And that's why it was overall,
looking back in hindsight, not a great decision to put everything
on the app. And here we have Nike.
Now investors realize the mistake they've made, the
executive team has as well, and they need a change of leadership
so they can John Donahue and they get a brand new Nike CEO.
Now. I didn't know anything about
this guy Elliott Hill, and most people didn't as well because
he's not a known name. He's not some hotshot CEO moving
from company to company. He's not someone that came from
a firm like Mackenzie that was plugged into the company.
Elliott Hill started working at the sneaker giant in 1988 as an
intern. Right When I read this first
sentence, I already like him better.
He's already a better CEO in my opinion than the existing or
previous Nike CEO. The fact that he started working
at the company in 1988 as an intern, I was born in 1989, just
to give you an idea of how long ago that was.
He has been working at this company for longer than I've
been alive. So when you talk about CE OS and
their ability to see the company overall, the culture, the
direction they should go, I think it's always a better idea
to have people that have been there a long time period that
really know the company, that they've lived the company,
they've experienced it. It's basically all they know is
that company from what I see, that is most often the best
people to have running the company.
And I see the same thing with Costco.
The Costco CEO, someone that worked as a forklift operator,
he worked as a starting point in the company and rose through the
rings. And this guy, Elliott Hill, did
the same thing. He took on calls from customers.
He moved boxes in warehouses. Over more than three decades, he
climbed to be one of the top executives.
So in 2020, Nike had to decide who to make their CEO.
They had option one, who was Elliott Hill, who had worked
with the company for 35 years, risen through the rings over
time. Then they had option 2, John
Donahow, who was someone that had experience with cloud.
Architecture, but it was more of a consulting type of person
coming from Bain and company, which is similar to a McKenzie
type of personality. They wanted to make the app big
and so they chose someone that had experienced in app
architecture. But of course this was the wrong
decision. They needed someone that had
experience running Nike, not someone that had experience
running cloud architecture. Nike has a lot of engineers that
they can refer to to figure out the technicalities.
Having someone that has the experience of the culture and
the business was far more important.
So once they realized the error in this decision, they fire John
and they brought back Elliot Hill.
So he is now back to try to revive Nike and get it back on
track. Now they know her accurately
that he faces steep challenges. The industry is increasingly
fragmented. Rivals like Hoka and On are
taking market share from Nike score running category and its
lifestyle offering. Another hurdle will be managing
key franchises like Air Jordan's and Dunk, Which Nike were sold
in recent years. Nike is cutting back on new
releases under those models in an effort to engineer scarcity.
Executives warned in June that the move would likely hurt the
company's sales growth. So this is a great thing to have
him as a CEOI think he's going to do a better job and make
decisions that will help Nike in the long term of the company.
But he now does face a far more uphill battle.
These other brands like ON and Hoka already exist.
People have already fallen in love with them.
And it's true that Nike's facing a far more competitive space.
So even though I think this is a great job from the Nike
executive team to bring back Elliott Hill to the company, I
think he'll do a better job. I still think that Nike is going
to face a lot of challenges. For that reason, I'm not buying
the stock right now, but I wish it well.
Now, moving on, we get to this headline here.
Gen. Z and Millennials are
increasingly doom spending. Here's what it is and how to
stop it. When I read headlines like this,
I just wonder where the term comes from.
Who's pioneering terms like doom spending?
I've never heard of this in my life and I have just a hunch, a
hunch that this is from TikTok. I feel like whenever there's a
new term that's it's out there. It's a little crazy.
It comes from TikTok. But apparently some young people
are splashing out on luxuries like travel and designer
clothing instead of saving and a trend that's being characterized
as doom spending on social media.
Social media. I I think it's I think it's
TikTok in this definition. Doom spending is when a person
mindlessly shops to self soothe because they feel pessimistic
about the economy and their future.
According to Ecology Today, so apparently this is when you feel
so pessimistic about the economy and about the future, you're
just, you're just going out and spending money to soothe
yourself, a mechanism for relieving the stress, making so
you feel a little bit happier in the moment.
According to a senior lecturer in finance at King's Business
School, the practice is both, quote, unhealthy and fatalistic.
Now it may be unhealthy, but the ironic thing here is that that
people doom spending and going on vacation and spending their
money is ironically what's causing us not to go in a
recession. So, so people are are mindlessly
spending money, feeling pessimistic about the economy
because they they might fear an upcoming recession, but then
mindlessly spending money is what's causing us to not go in a
recession. They say that this is also
happening because people are chronically online and feel like
they're constantly receiving bad news.
It makes them feel like Armageddon.
To me, after reading this, it seems like doom spending is just
another way for people to complain.
They have a lot of money. They're spending it going on
vacations and shopping and we're still unhappy about it.
But there you have it. Apparently the global economy
right now is being held up by doom spending.
That's all for this episode. See you in the next one.