1 00:00:00,040 --> 00:00:01,920 Welcome back everyone. We have an exciting episode to 2 00:00:01,920 --> 00:00:04,040 get into. If you know me, you know I like 3 00:00:04,040 --> 00:00:07,600 investing in monopolies. I call them monopolistic 4 00:00:07,600 --> 00:00:11,360 companies or oligopolies, which is basically a word to mean a 5 00:00:11,360 --> 00:00:14,800 shared monopoly. Now, when I studied great 6 00:00:14,800 --> 00:00:18,320 investors, what I've noticed is that most of them like investing 7 00:00:18,320 --> 00:00:20,360 in monopolies. And investing in monopolies 8 00:00:20,360 --> 00:00:23,000 typically does well over a long period of time. 9 00:00:23,400 --> 00:00:27,000 In fact, the greatest investor of all time, Warren Buffett, has 10 00:00:27,000 --> 00:00:31,130 repeatedly invested in monopolies, companies like Visa 11 00:00:31,130 --> 00:00:34,690 and MasterCard, Moody's companies like Apple that own 12 00:00:34,690 --> 00:00:38,290 the Apple App Store, a very monopolistic position. 13 00:00:38,690 --> 00:00:41,410 Now Warren Buffett doesn't call them monopolies. 14 00:00:41,690 --> 00:00:45,250 He uses the euphemism called mote, which is basically having 15 00:00:45,250 --> 00:00:47,130 a very good competitive advantage. 16 00:00:47,690 --> 00:00:50,450 But that is a euphemism. That's a friendly way of saying 17 00:00:50,650 --> 00:00:52,570 this company is very monopolistic. 18 00:00:52,570 --> 00:00:54,530 It's very difficult to compete with. 19 00:00:55,090 --> 00:00:59,960 So it's a different term for the same meaning, but overall I try 20 00:00:59,960 --> 00:01:01,880 to invest in monopolies, companies that have an 21 00:01:01,880 --> 00:01:05,120 incredibly wide Moat, an incredible competitive advantage 22 00:01:05,440 --> 00:01:07,960 and I have a portfolio full of these type of companies. 23 00:01:08,040 --> 00:01:11,120 Now one side effect if you will, one potential problem with 24 00:01:11,120 --> 00:01:14,160 investing in monopolistic companies is they're often the 25 00:01:14,160 --> 00:01:17,200 target from governments. They're the target from U.S. 26 00:01:17,200 --> 00:01:19,000 government and from European government. 27 00:01:19,240 --> 00:01:21,440 We've seen the European government frequently target 28 00:01:21,440 --> 00:01:24,720 companies like Google, Amazon and Apple for being monopoly or 29 00:01:24,720 --> 00:01:28,040 using anti competitive measures. They find them for billions of 30 00:01:28,040 --> 00:01:31,140 dollars, which in most cases is like a speeding ticket. 31 00:01:31,500 --> 00:01:34,260 The companies continue compounding in the future, but 32 00:01:34,260 --> 00:01:37,500 we also have cases where the US government targets monopolies. 33 00:01:37,780 --> 00:01:42,220 We have right now the FTC with Lena Khan going after Amazon. 34 00:01:42,700 --> 00:01:45,580 Now, I don't necessarily think that Amazon is a monopoly as 35 00:01:45,580 --> 00:01:49,700 much as FTC says they are, but we have this going on all the 36 00:01:49,700 --> 00:01:51,580 time. The case that I want to talk 37 00:01:51,580 --> 00:01:54,940 about today is one that started a week ago, which is the 38 00:01:54,940 --> 00:01:57,540 Department of Justice targeting Google. 39 00:01:57,860 --> 00:02:00,930 In this case, the DOJ is targeting Google for being an 40 00:02:00,930 --> 00:02:03,970 illegal monopoly specific to their search engine. 41 00:02:04,370 --> 00:02:08,370 They're alleging that Google has used relationships with default 42 00:02:08,370 --> 00:02:13,730 positions on browsers like Apple Safari to box out all other 43 00:02:13,730 --> 00:02:16,730 competition. So basically the relationship is 44 00:02:17,090 --> 00:02:20,970 Google pays Apple 10s of billions of dollars per year to 45 00:02:20,970 --> 00:02:23,250 be the default position on every Apple device. 46 00:02:23,530 --> 00:02:27,290 So when you buy a new iPhone and you open up the Safari browser, 47 00:02:27,800 --> 00:02:29,680 the first thing you see is google.com. 48 00:02:29,760 --> 00:02:32,560 The Google search. That default position is very 49 00:02:32,560 --> 00:02:35,120 valuable. Google's been paying Apple 10s 50 00:02:35,120 --> 00:02:37,960 of billions of dollars per year for that position, and the 51 00:02:37,960 --> 00:02:40,360 Department of Justice is saying that that's unfair. 52 00:02:40,880 --> 00:02:43,080 Now, this trial's been going on for a while, so we're getting 53 00:02:43,080 --> 00:02:46,320 more information on it, but the most recent thing that has 54 00:02:46,320 --> 00:02:49,920 happened is a new person has been called to the stand. 55 00:02:49,920 --> 00:02:53,760 Satya Nadella, who is the CEO of Microsoft, was pulled into the 56 00:02:53,760 --> 00:02:57,810 courtroom as part of this trial to give his perspective on 57 00:02:57,810 --> 00:03:01,650 dealing with Apple and Google and with being trying to compete 58 00:03:01,650 --> 00:03:05,010 with Google, as well as trying to negotiate deals with Apple to 59 00:03:05,010 --> 00:03:08,610 be the default search position. Now while he's giving testimony, 60 00:03:09,210 --> 00:03:12,650 he didn't hold back. He went hard against Google, 61 00:03:12,890 --> 00:03:15,850 really hard against him. I mean, he did not hold back at 62 00:03:15,850 --> 00:03:18,090 all. So this wasn't a situation where 63 00:03:18,090 --> 00:03:21,250 these CEO's of big tech companies are all buddy buddy, 64 00:03:21,450 --> 00:03:23,570 nudging each other's shoulders and being friendly with each 65 00:03:23,570 --> 00:03:25,490 other. He wasn't friendly at all with 66 00:03:25,490 --> 00:03:28,970 Google, and I thought his testimony was fascinating. 67 00:03:29,210 --> 00:03:31,810 So we're going to be going through what Satya Nadella, the 68 00:03:31,810 --> 00:03:35,970 CEO of Microsoft, had a say about Google's deal with Apple. 69 00:03:35,970 --> 00:03:38,770 So Nadella takes the stand in a dark blue suit. 70 00:03:38,810 --> 00:03:41,690 That's how this starts to be questioned by the lawyer from 71 00:03:41,690 --> 00:03:45,210 the Department of Justice. At first, the Doj's lawyer 72 00:03:45,210 --> 00:03:49,130 simply asked Nadella to explain why he even wanted to try to 73 00:03:49,130 --> 00:03:52,330 compete with Google. So that's the framing of this. 74 00:03:52,700 --> 00:03:54,540 First of all, why do you even want to compete with Google in 75 00:03:54,540 --> 00:03:55,980 the 1st place? You already have a pretty good 76 00:03:55,980 --> 00:03:59,340 business at Microsoft. Here is Nadella's answer, which 77 00:03:59,340 --> 00:04:01,180 I also think is just enlightening. 78 00:04:01,620 --> 00:04:05,220 Money, he says. Quote, I see search as the 79 00:04:05,220 --> 00:04:08,860 largest software category out there by far, he continues 80 00:04:08,860 --> 00:04:11,060 saying. I used to think of Windows and 81 00:04:11,060 --> 00:04:16,779 Office as attractive businesses until I saw search again. 82 00:04:16,779 --> 00:04:19,940 He's painting out Search to be so much more, so much more than 83 00:04:19,940 --> 00:04:22,660 what he already is in control of with Windows and Office. 84 00:04:23,940 --> 00:04:27,700 He explained that Bing didn't have to win the market to be a 85 00:04:27,700 --> 00:04:30,180 big business, and that Bing already turns a profit for 86 00:04:30,180 --> 00:04:33,260 Microsoft. Google's lead counsel later 87 00:04:33,260 --> 00:04:35,860 joked that he wished his law firm could count, quote, 88 00:04:36,060 --> 00:04:40,180 marginally profitable in the billions of dollars, as Indella 89 00:04:40,180 --> 00:04:42,690 did with Bing. Quote, you could you should get 90 00:04:42,690 --> 00:04:45,650 out there and start a search business, Nadella replied. 91 00:04:46,570 --> 00:04:50,930 So to Nadella, having a marginally profitable search 92 00:04:50,930 --> 00:04:54,290 business means billions and billions of dollars of free cash 93 00:04:54,290 --> 00:04:55,650 flow. That's just marginal 94 00:04:55,650 --> 00:04:58,450 profitability. And it's true when we look at 95 00:04:58,450 --> 00:05:00,050 Google search. I can bring it up here on 96 00:05:00,050 --> 00:05:02,490 Qualtrim. And this isn't just Google 97 00:05:02,490 --> 00:05:04,690 Search. We we can't break that away in 98 00:05:04,690 --> 00:05:06,810 and of itself. But Google Search makes up the 99 00:05:06,810 --> 00:05:09,810 majority of their profits. If you look at Google, the 100 00:05:09,810 --> 00:05:13,120 company is astronomically profitable. 101 00:05:13,360 --> 00:05:15,680 Look at the free cash flow of this company. 102 00:05:16,080 --> 00:05:17,960 This is mostly due to Google search. 103 00:05:18,320 --> 00:05:20,240 Now, YouTube does make some profits for them. 104 00:05:20,520 --> 00:05:23,400 Google Cloud is finally barely profitable. 105 00:05:23,800 --> 00:05:26,200 But those businesses are little side quests. 106 00:05:26,200 --> 00:05:29,400 They're little side things off to the main dish. 107 00:05:29,480 --> 00:05:33,000 Google search is what's generating 60, seven, $60 108 00:05:33,000 --> 00:05:36,080 billion per year. These are enormously high 109 00:05:36,080 --> 00:05:39,200 amounts of free cash flow, all generated by the same company. 110 00:05:39,600 --> 00:05:43,010 Now to even add on to this, you might factor in dilution through 111 00:05:43,010 --> 00:05:45,650 stock based comp because Google has to hire a lot of employees. 112 00:05:46,010 --> 00:05:49,290 These lots of employees are mostly for the cloud business. 113 00:05:49,570 --> 00:05:52,730 So most of the expense associated with Google isn't 114 00:05:52,770 --> 00:05:54,850 even with their core search business. 115 00:05:55,170 --> 00:05:58,610 Their core search business is highly efficient with extremely 116 00:05:58,610 --> 00:06:02,050 high margins. So Satya Nadella is correct in 117 00:06:02,050 --> 00:06:05,930 describing this business as more attractive than Microsoft 118 00:06:05,930 --> 00:06:07,770 Office. Microsoft Windows. 119 00:06:08,050 --> 00:06:09,370 It's a Better Business than both of them. 120 00:06:09,490 --> 00:06:12,330 Now, after the Department of Justice has established, with 121 00:06:12,330 --> 00:06:15,210 Nadella saying that Google's the best business that he's ever 122 00:06:15,210 --> 00:06:18,450 seen, that the search business is wildly profitable and way 123 00:06:18,450 --> 00:06:20,930 better than Microsoft's business, he moves on to this 124 00:06:20,930 --> 00:06:24,650 relationship between Google and Apple, where they're paying them 125 00:06:24,650 --> 00:06:28,090 exclusively billions of dollars to be the exclusive search 126 00:06:28,090 --> 00:06:31,570 engine on Apple Safari. This is the relationship that's 127 00:06:31,570 --> 00:06:36,440 at the center of this case? He asks Nadella what would it 128 00:06:36,440 --> 00:06:40,520 mean if Microsoft were to have this deal instead of Google, and 129 00:06:40,520 --> 00:06:42,760 he says, quote, it would be a game changer. 130 00:06:43,120 --> 00:06:47,000 He said that Microsoft was prepared to give Apple all the 131 00:06:47,040 --> 00:06:50,600 economic upside of the deal if Apple were to switch to Bing. 132 00:06:51,480 --> 00:06:53,760 That right there is just amazing. 133 00:06:54,240 --> 00:06:58,720 Nadella's coming to Apple saying please make us the default, we 134 00:06:58,720 --> 00:07:01,880 will pay you just as much money and we'll give you all the 135 00:07:01,880 --> 00:07:04,730 potential upside. Nadella wants to make this deal 136 00:07:04,730 --> 00:07:07,770 so bad to grow, being searched, he has to get the default 137 00:07:07,770 --> 00:07:09,330 position. He's willing to basically do 138 00:07:09,330 --> 00:07:11,490 anything for it. He said he was also prepared to 139 00:07:11,490 --> 00:07:14,610 lose up to 15 billion a year in the process. 140 00:07:15,250 --> 00:07:18,650 Now Microsoft makes a lot of money, but that's no small 141 00:07:18,650 --> 00:07:20,410 amount. Even for Microsoft. 142 00:07:20,730 --> 00:07:23,650 We look at how much 15 billion a year is compared to their cash 143 00:07:23,650 --> 00:07:26,730 flows. Microsoft last year made 65 144 00:07:26,730 --> 00:07:30,050 billion. So you're chunking away 2025% of 145 00:07:30,050 --> 00:07:32,090 their cash flows. That's a lot. 146 00:07:32,330 --> 00:07:35,670 That's how much Nadella is willing to give up to be the 147 00:07:35,670 --> 00:07:38,990 default search engine on Apple devices. 148 00:07:39,110 --> 00:07:42,190 That one exclusive agreement isn't that incredible. 149 00:07:42,190 --> 00:07:45,350 The position that Apple's in, these companies will do 150 00:07:45,350 --> 00:07:48,510 anything. They will beg Tim Cook to be the 151 00:07:48,510 --> 00:07:50,110 default. Beg him. 152 00:07:50,510 --> 00:07:53,790 Nadella even said that he was willing to hide the Bing brand 153 00:07:54,070 --> 00:07:57,390 in Apple user search engine and respect any of the company's 154 00:07:57,390 --> 00:08:00,310 privacy wishes. So urgent was his need to get 155 00:08:00,310 --> 00:08:04,050 more data at any cost. Quote defaults are the only 156 00:08:04,050 --> 00:08:07,090 thing that matters, The only thing that matters, he says. 157 00:08:07,330 --> 00:08:09,730 In terms of changing user behavior. 158 00:08:10,010 --> 00:08:11,970 He called the idea that it's easy to switch. 159 00:08:12,050 --> 00:08:16,570 Quote bogus Again, he's going hard against Google. 160 00:08:16,850 --> 00:08:19,770 Google's trying at the same time to paint the picture. 161 00:08:19,770 --> 00:08:22,210 The defaults are just a little part of doing business. 162 00:08:22,210 --> 00:08:25,490 They're not all that matters. And here we have the CEO of 163 00:08:25,490 --> 00:08:29,130 Microsoft showing that he was willing to do anything to get a 164 00:08:29,130 --> 00:08:32,690 deal with Apple, And he calls defaults the only thing that 165 00:08:32,690 --> 00:08:34,490 matters in changing user behavior. 166 00:08:34,850 --> 00:08:38,289 And he basically calls the entire Google argument, their 167 00:08:38,289 --> 00:08:43,250 lawyers in their case, bogus. So if you think these CEO's are 168 00:08:43,250 --> 00:08:46,170 friendly with each other in terms of business, they're not. 169 00:08:46,250 --> 00:08:48,490 They are fiercely competitive with each other. 170 00:08:48,650 --> 00:08:51,690 We move on to the part where Microsoft basically says that 171 00:08:51,690 --> 00:08:54,290 they're being boxed out of this relationship by both Apple and 172 00:08:54,290 --> 00:08:56,410 Google. Has Microsoft tried to become 173 00:08:56,410 --> 00:08:59,690 Apple's default search engine? Yes, Nadella said. 174 00:09:00,060 --> 00:09:03,020 How'd it go? Not well, Nadella deadpan. 175 00:09:03,540 --> 00:09:06,620 Not only are the economics of the Google deal hugely favorable 176 00:09:06,620 --> 00:09:10,660 for Apple, he said, but Apple may also be afraid of what 177 00:09:10,660 --> 00:09:13,220 Google could do if it lost default status. 178 00:09:13,820 --> 00:09:17,780 So this is the scenario that if Apple decided to say, hey, 179 00:09:17,780 --> 00:09:20,780 Google, we're not going to take your money anymore, we want 180 00:09:20,780 --> 00:09:22,780 Microsoft's money. They're the highest bidder. 181 00:09:22,780 --> 00:09:26,460 Now they're paying us more. Apple is afraid of how Google 182 00:09:26,460 --> 00:09:28,920 will retaliate, and this is something that I didn't really 183 00:09:28,920 --> 00:09:31,720 think of until this case. Google has a number of hugely 184 00:09:31,720 --> 00:09:33,680 popular services like Gmail and YouTube. 185 00:09:34,000 --> 00:09:37,360 What if Google used those apps to relentlessly promote 186 00:09:37,400 --> 00:09:40,760 downloading Chrome, thus teaching people to circumvent 187 00:09:40,760 --> 00:09:45,240 the Safari browser entirely? That fair, Nadella claims, keeps 188 00:09:45,240 --> 00:09:47,480 Apple and Google together as much as anything. 189 00:09:48,120 --> 00:09:50,680 So Nadella is saying that the reason that Apple continues to 190 00:09:50,680 --> 00:09:53,960 do this deal with Google exclusively is because if Apple 191 00:09:53,960 --> 00:09:58,430 doesn't Google, we'll make it so that Safari browser is 192 00:09:58,430 --> 00:10:01,150 circumvented. Google will put on YouTube at 193 00:10:01,150 --> 00:10:05,230 the very top, before every video that YouTube works better with 194 00:10:05,230 --> 00:10:08,470 Google Chrome download right here with a huge button, and 195 00:10:08,470 --> 00:10:11,270 they'll keep doing that relentlessly, repeatedly. 196 00:10:11,630 --> 00:10:14,790 When you do that repeatedly, it conditions users over time. 197 00:10:15,230 --> 00:10:18,910 They will at one point in time just click the button to get it 198 00:10:18,910 --> 00:10:21,870 to go away and then boom, they're using Google Chrome 199 00:10:21,870 --> 00:10:25,010 instead of Apple Safari. And then it doesn't matter if 200 00:10:25,010 --> 00:10:27,770 Safari holds the default position because people have 201 00:10:27,770 --> 00:10:29,690 circumvented it using Google Chrome. 202 00:10:30,250 --> 00:10:35,010 If Google did that with Gmail and YouTube relentlessly, they 203 00:10:35,010 --> 00:10:37,770 could convert people away from Safari browser, which of course 204 00:10:37,770 --> 00:10:41,650 Apple doesn't want. So I believe in Adallah in this 205 00:10:41,650 --> 00:10:44,650 claim. I think it also it shows the 206 00:10:44,650 --> 00:10:47,810 power that Google has. Google really does have some 207 00:10:47,810 --> 00:10:51,730 ways to retaliate if they're if they're boxed out of this deal. 208 00:10:51,770 --> 00:10:54,250 Now continuing on, we get into the AI battle. 209 00:10:54,610 --> 00:10:57,690 As we know, Nadella was pretty excited at one point to be in 210 00:10:57,690 --> 00:11:00,210 the lead with the AI battle with Chachi BT. 211 00:11:00,610 --> 00:11:03,370 But now he's walking back those statements a little, saying that 212 00:11:03,370 --> 00:11:07,810 Google still very much in the AI game and they may even be a 213 00:11:07,810 --> 00:11:10,690 bigger AI leader than they were with Google Search. 214 00:11:11,260 --> 00:11:14,460 So he lays out the case for Google insulating their position 215 00:11:14,580 --> 00:11:17,180 with AI. Nadella called search engines 216 00:11:17,340 --> 00:11:20,580 quote the organizing layer of the Internet, but the large 217 00:11:20,580 --> 00:11:23,340 language model powered systems continue to grow. 218 00:11:23,780 --> 00:11:26,620 Publishers and platforms are growing wary of how their data 219 00:11:26,620 --> 00:11:29,540 is ingested and used to train AI systems. 220 00:11:29,780 --> 00:11:33,820 Those publishers, Nadella said, may start to sign exclusive 221 00:11:33,820 --> 00:11:37,700 deals that allow Google, and only Google, to use their data. 222 00:11:38,210 --> 00:11:40,690 That would essentially crush every other search engine on the 223 00:11:40,690 --> 00:11:43,490 market. So here's the scenario right 224 00:11:43,490 --> 00:11:46,370 now. Right now, with search engines, 225 00:11:46,370 --> 00:11:49,090 you can crawl the web and create links based off of that. 226 00:11:49,410 --> 00:11:52,610 So everyone can at least start a very basic search engine. 227 00:11:52,730 --> 00:11:55,450 But with large language models, it's a bit different. 228 00:11:55,770 --> 00:11:59,770 You use all the text on websites to train data, and a lot of 229 00:11:59,770 --> 00:12:02,210 websites are saying you don't have permission to do that 230 00:12:02,490 --> 00:12:05,010 unless you pay us. You have to cough up some cash 231 00:12:05,010 --> 00:12:07,380 to do it. So companies like Google are 232 00:12:07,380 --> 00:12:11,140 striking exclusive deals with different data, with different 233 00:12:11,140 --> 00:12:14,260 websites that have lots of data to make it so that only they can 234 00:12:14,260 --> 00:12:15,900 train the best. A I systems. 235 00:12:16,380 --> 00:12:18,980 And this is the problem that Nadella's highlighting right 236 00:12:18,980 --> 00:12:21,580 here, he says. What is publicly available 237 00:12:21,580 --> 00:12:23,980 today? Will it be publicly available 238 00:12:23,980 --> 00:12:25,860 tomorrow? That is the issue. 239 00:12:26,260 --> 00:12:29,500 He said that he's already hearing from publishers with a 240 00:12:29,500 --> 00:12:33,420 deal in place with Google asking being to match it. 241 00:12:33,970 --> 00:12:37,290 So Google's way ahead of this. So Nadella is relaying the exact 242 00:12:37,290 --> 00:12:39,970 same thing that smaller upstart search engines say. 243 00:12:40,330 --> 00:12:43,450 And we move on to where of course anytime. 244 00:12:43,450 --> 00:12:45,690 And if you've watched any type of lawyer show, you'll know 245 00:12:45,690 --> 00:12:48,250 this. You'll see that anytime you 246 00:12:48,250 --> 00:12:51,850 bring someone on the stage to testify on your behalf, they 247 00:12:51,850 --> 00:12:55,410 also have a chance for the opposing counsel to question 248 00:12:55,410 --> 00:12:57,530 them. That's called cross examination. 249 00:12:57,730 --> 00:13:01,260 That's so that you can get kind of both sides of the story, so 250 00:13:01,260 --> 00:13:04,420 that if your testimony or what your questions were were one 251 00:13:04,420 --> 00:13:07,860 sided or they're misleading, they have the other council that 252 00:13:07,860 --> 00:13:11,020 can try to clarify things. So here we have a new lawyer, 253 00:13:11,020 --> 00:13:14,100 this time from Google cross examining Nadella. 254 00:13:14,940 --> 00:13:16,580 Now they had a completely different view. 255 00:13:16,580 --> 00:13:19,260 Of course, Google views this totally different than the 256 00:13:19,260 --> 00:13:23,720 Department of Justice in his you being is not an inferior search 257 00:13:23,720 --> 00:13:26,560 engine because it was deprived of oxygen by Google. 258 00:13:26,600 --> 00:13:30,080 Being is inferior because Microsoft has mismanaged its 259 00:13:30,080 --> 00:13:33,000 search and mobile products for the better part of two decades. 260 00:13:33,600 --> 00:13:38,040 So here we have we have Nadella. He's on the stand talking about 261 00:13:38,040 --> 00:13:41,440 how Google is anti competitive and their big meanies striking 262 00:13:41,440 --> 00:13:44,160 this deal with Apple. And then the Google lawyers come 263 00:13:44,160 --> 00:13:48,040 in and just say the truth is, your products just suck because 264 00:13:48,040 --> 00:13:50,280 you've made bad decisions. That's literally what the 265 00:13:50,280 --> 00:13:52,960 lawyers are saying here. You're just bad at managing 266 00:13:52,960 --> 00:13:55,360 search. And then they go through and 267 00:13:55,360 --> 00:13:58,880 basically prove that Microsoft has been really bad at managing 268 00:13:58,880 --> 00:14:01,400 search. A key part of Google's defense 269 00:14:01,760 --> 00:14:05,200 is that it's not illegal to build the best search engine, 270 00:14:05,680 --> 00:14:09,240 and the Google lawyer argued that that's the only thing. 271 00:14:09,320 --> 00:14:10,880 That's the only thing Google did. 272 00:14:11,720 --> 00:14:15,560 Their lawyers led Nadella through a nearly two hour tour 273 00:14:15,640 --> 00:14:21,380 of Microsoft's failure from MSN search in 1998 through the ugly 274 00:14:21,380 --> 00:14:24,420 end of Internet Explorer, the expensive failure of the Windows 275 00:14:24,420 --> 00:14:27,980 Phone, the endless renaming and rebooting of Microsoft search 276 00:14:27,980 --> 00:14:30,580 products. It's hugely problematic deals to 277 00:14:30,580 --> 00:14:34,900 bundle Bing with a BlackBerry and Nokia phones and much more. 278 00:14:35,580 --> 00:14:39,100 So they're going through example after example after example, 279 00:14:39,100 --> 00:14:44,140 This huge timeline of events, of Microsoft fumbling and bungling 280 00:14:44,140 --> 00:14:48,140 everything along the way, painting the picture that Google 281 00:14:48,140 --> 00:14:50,820 was just doing things right. They had one search engine named 282 00:14:50,820 --> 00:14:54,700 one thing, one nice product growing organically while 283 00:14:54,700 --> 00:14:56,940 Microsoft is over here tripping over their own feet. 284 00:14:57,300 --> 00:15:00,300 That's the picture that Google lawyers are painting now. 285 00:15:00,300 --> 00:15:03,820 Nadella, as he did so often during the cross examination, 286 00:15:04,060 --> 00:15:07,060 nodded and said correct, and that sounds right. 287 00:15:07,540 --> 00:15:11,060 So Nadella's nodding his head agreeing with this, this lashing 288 00:15:11,060 --> 00:15:14,300 of Microsoft's management and mismanagement of this product. 289 00:15:14,380 --> 00:15:17,460 He knows that Microsoft hasn't done the best job historically 290 00:15:17,460 --> 00:15:21,220 with the search product over the past 20 years, so he's being 291 00:15:21,220 --> 00:15:22,820 honest in saying that it hasn't been great. 292 00:15:23,340 --> 00:15:27,620 Now, one of the big defenses from Google is pointing out that 293 00:15:27,620 --> 00:15:29,940 Microsoft does have default power. 294 00:15:30,300 --> 00:15:33,420 This whole case is focused on Google having an agreement with 295 00:15:33,420 --> 00:15:36,260 Apple, but remember that Microsoft has a lot of Windows 296 00:15:36,260 --> 00:15:38,430 devices. On every Windows device that you 297 00:15:38,430 --> 00:15:41,350 install, there's going to be the Edge browser installed by 298 00:15:41,350 --> 00:15:44,590 default, with Microsoft being being the default search engine. 299 00:15:44,950 --> 00:15:48,350 So Google's pointing out, hey look Microsoft, you have the 300 00:15:48,350 --> 00:15:51,790 default position on millions of devices that are sold every 301 00:15:51,790 --> 00:15:54,150 single year. What are you complaining about? 302 00:15:54,550 --> 00:15:58,350 Listen to how Nadallah responds to this point of contention. 303 00:15:58,430 --> 00:16:00,870 The Google lawyer pointed out that even though Microsoft 304 00:16:00,870 --> 00:16:04,540 bundles Edge and Bing, which is the browser and the search 305 00:16:04,540 --> 00:16:08,820 engine of Microsoft, with every Windows PC on the planet, Chrome 306 00:16:08,820 --> 00:16:11,620 and Google Search are both vastly more popular among 307 00:16:11,620 --> 00:16:14,620 Windows users. That, he argued, as he has 308 00:16:14,620 --> 00:16:17,340 throughout the trial, proves that defaults don't actually 309 00:16:17,340 --> 00:16:20,300 matter that much. Nadella and the DOJ said it 310 00:16:20,300 --> 00:16:23,300 proved the opposite. The very fact that Bing has 311 00:16:23,300 --> 00:16:26,540 market share of any kind on Windows, which is somewhere in 312 00:16:26,540 --> 00:16:30,290 the teens, Nadella said, as opposed to the low single digits 313 00:16:30,290 --> 00:16:32,890 on mobile, is proof that defaults do work. 314 00:16:33,210 --> 00:16:36,650 More people used Bing, which helps make being better, which 315 00:16:36,650 --> 00:16:39,730 made fewer people switch. Not everyone would drop Google 316 00:16:39,730 --> 00:16:42,170 immediately, he said, but controlling the defaults has 317 00:16:42,170 --> 00:16:44,730 helped Microsoft begin to make a dent. 318 00:16:44,890 --> 00:16:47,850 I think this is proving very tough for the Google lawyers to 319 00:16:47,850 --> 00:16:51,010 argue, and I think that Nadella is being a big thorn in their 320 00:16:51,010 --> 00:16:53,650 side. This testimony, Having him as a 321 00:16:53,690 --> 00:16:56,810 witness or whatever you call it on the stand, is not doing 322 00:16:56,810 --> 00:16:59,970 Google any favors. Nadella repeatedly said he 323 00:16:59,970 --> 00:17:03,130 believes that defaults matter in a big way, no matter what the 324 00:17:03,130 --> 00:17:04,609 Windows market share numbers say. 325 00:17:04,930 --> 00:17:08,329 When the lawyers asked him to respond to the idea that users 326 00:17:08,329 --> 00:17:11,730 can easily switch search engines, he said that quote. 327 00:17:12,010 --> 00:17:16,290 My only argument against that is that users don't switch, so even 328 00:17:16,290 --> 00:17:18,770 though they can easily do it, they just don't do it. 329 00:17:19,010 --> 00:17:23,109 So defaults matter. His best example, Apple Maps, 330 00:17:23,150 --> 00:17:26,710 which started out disastrously bad, has still grown and gained 331 00:17:26,710 --> 00:17:29,550 market share in the last decade. Because it's preinstalled on 332 00:17:29,550 --> 00:17:32,390 every iPhone. People use it, it's the default, 333 00:17:32,390 --> 00:17:35,150 he said. Now, I would take a little bit 334 00:17:35,150 --> 00:17:39,310 of disagreement in this I've tried using Apple Maps 335 00:17:39,390 --> 00:17:42,150 historically and the product was really bad. 336 00:17:42,230 --> 00:17:45,590 So I installed Google Maps, and I would use Google Maps 337 00:17:45,630 --> 00:17:47,950 routinely. But then over the years, Apple 338 00:17:47,950 --> 00:17:50,950 Maps became better. In fact, it became a lot better. 339 00:17:51,030 --> 00:17:53,830 Right now, I think Apple Maps is just about as good as Google 340 00:17:53,830 --> 00:17:55,870 Maps. So I do think it's important to 341 00:17:55,870 --> 00:17:58,230 have defaults, and I certainly think defaults matter. 342 00:17:58,470 --> 00:18:00,430 But the product also has to be good. 343 00:18:00,790 --> 00:18:03,670 The product is way bad or way worse than the alternative. 344 00:18:04,030 --> 00:18:06,230 People will switch. They will make the effort to 345 00:18:06,230 --> 00:18:08,750 switch if the product they're switching to is significantly 346 00:18:08,750 --> 00:18:10,630 better. But if the products are about 347 00:18:10,630 --> 00:18:13,390 the same, which I think Apple Maps and Google Maps are about 348 00:18:13,390 --> 00:18:16,620 the same now, then people tend to choose the default, And that 349 00:18:16,620 --> 00:18:19,260 makes sense. If there's no huge incentive to 350 00:18:19,260 --> 00:18:21,660 shift, then people naturally use the default. 351 00:18:22,100 --> 00:18:26,140 So you have to have both a competing product that's just as 352 00:18:26,140 --> 00:18:28,500 good and be in the default position. 353 00:18:28,700 --> 00:18:30,900 And that's exactly the position that Google's in. 354 00:18:31,100 --> 00:18:34,300 They have the best product in the default position, right 355 00:18:34,300 --> 00:18:36,820 where they want things to be. And that right there wraps up 356 00:18:36,820 --> 00:18:39,820 the day of Sasha Nadella at court as part of this lawsuit. 357 00:18:40,340 --> 00:18:44,380 He did not do Google any favors and in fact I think he swayed 358 00:18:44,380 --> 00:18:48,860 the case further in favor of the Department of Justice, painting 359 00:18:48,860 --> 00:18:52,380 Google to be an anti competitive company that boxes out all 360 00:18:52,380 --> 00:18:55,820 competition that uses retaliatory measures if they 361 00:18:55,820 --> 00:18:58,660 face any competition. And I also believe that Nadella 362 00:18:58,660 --> 00:19:01,540 accurately showed how powerful defaults are. 363 00:19:01,820 --> 00:19:04,340 Another thing that Google's trying to argue against. 364 00:19:04,660 --> 00:19:08,060 Nadella showed that he's willing to do anything for Microsoft's 365 00:19:08,060 --> 00:19:12,660 Bing to be defaulted on Safari. He was willing to give up all 366 00:19:12,660 --> 00:19:17,580 the economic upside to pay 15 billion a year to brand it under 367 00:19:17,580 --> 00:19:20,340 Apple's branding, to not even have his own branding. 368 00:19:20,540 --> 00:19:24,020 So the argument from Google lawyers that default positions 369 00:19:24,020 --> 00:19:27,020 don't matter, I don't see how they're going to accurately 370 00:19:27,020 --> 00:19:30,300 argue that against the judge that's listening to another 371 00:19:30,300 --> 00:19:33,820 executive that's basically willing to do anything to be the 372 00:19:33,820 --> 00:19:35,900 default. I just think it's a very 373 00:19:35,900 --> 00:19:39,890 difficult argument for Google. And when I look at this case, I 374 00:19:39,890 --> 00:19:41,330 think it's a tough one for Google. 375 00:19:41,450 --> 00:19:45,890 I say this as a Google investor. Now, if Google loses this case, 376 00:19:46,010 --> 00:19:47,490 do I think that's the end of Google? 377 00:19:47,730 --> 00:19:50,090 Of course not. Most companies, big tech 378 00:19:50,090 --> 00:19:52,690 companies and monopolistic companies that lose a case here 379 00:19:52,690 --> 00:19:55,650 or there, they typically survive it and become stronger over 380 00:19:55,650 --> 00:19:57,770 time. But there is a chance that 381 00:19:57,770 --> 00:20:00,810 Google's going to have to give up this relationship with Apple 382 00:20:01,050 --> 00:20:02,810 if the case keeps going this way. 383 00:20:03,290 --> 00:20:04,930 So that's what we know as of now. 384 00:20:05,210 --> 00:20:06,810 I'll give more updates in the future. 385 00:20:07,210 --> 00:20:08,050 See you in the next one.