Welcome back everyone. We have an exciting episode to
get into. If you know me, you know I like
investing in monopolies. I call them monopolistic
companies or oligopolies, which is basically a word to mean a
shared monopoly. Now, when I studied great
investors, what I've noticed is that most of them like investing
in monopolies. And investing in monopolies
typically does well over a long period of time.
In fact, the greatest investor of all time, Warren Buffett, has
repeatedly invested in monopolies, companies like Visa
and MasterCard, Moody's companies like Apple that own
the Apple App Store, a very monopolistic position.
Now Warren Buffett doesn't call them monopolies.
He uses the euphemism called mote, which is basically having
a very good competitive advantage.
But that is a euphemism. That's a friendly way of saying
this company is very monopolistic.
It's very difficult to compete with.
So it's a different term for the same meaning, but overall I try
to invest in monopolies, companies that have an
incredibly wide Moat, an incredible competitive advantage
and I have a portfolio full of these type of companies.
Now one side effect if you will, one potential problem with
investing in monopolistic companies is they're often the
target from governments. They're the target from U.S.
government and from European government.
We've seen the European government frequently target
companies like Google, Amazon and Apple for being monopoly or
using anti competitive measures. They find them for billions of
dollars, which in most cases is like a speeding ticket.
The companies continue compounding in the future, but
we also have cases where the US government targets monopolies.
We have right now the FTC with Lena Khan going after Amazon.
Now, I don't necessarily think that Amazon is a monopoly as
much as FTC says they are, but we have this going on all the
time. The case that I want to talk
about today is one that started a week ago, which is the
Department of Justice targeting Google.
In this case, the DOJ is targeting Google for being an
illegal monopoly specific to their search engine.
They're alleging that Google has used relationships with default
positions on browsers like Apple Safari to box out all other
competition. So basically the relationship is
Google pays Apple 10s of billions of dollars per year to
be the default position on every Apple device.
So when you buy a new iPhone and you open up the Safari browser,
the first thing you see is google.com.
The Google search. That default position is very
valuable. Google's been paying Apple 10s
of billions of dollars per year for that position, and the
Department of Justice is saying that that's unfair.
Now, this trial's been going on for a while, so we're getting
more information on it, but the most recent thing that has
happened is a new person has been called to the stand.
Satya Nadella, who is the CEO of Microsoft, was pulled into the
courtroom as part of this trial to give his perspective on
dealing with Apple and Google and with being trying to compete
with Google, as well as trying to negotiate deals with Apple to
be the default search position. Now while he's giving testimony,
he didn't hold back. He went hard against Google,
really hard against him. I mean, he did not hold back at
all. So this wasn't a situation where
these CEO's of big tech companies are all buddy buddy,
nudging each other's shoulders and being friendly with each
other. He wasn't friendly at all with
Google, and I thought his testimony was fascinating.
So we're going to be going through what Satya Nadella, the
CEO of Microsoft, had a say about Google's deal with Apple.
So Nadella takes the stand in a dark blue suit.
That's how this starts to be questioned by the lawyer from
the Department of Justice. At first, the Doj's lawyer
simply asked Nadella to explain why he even wanted to try to
compete with Google. So that's the framing of this.
First of all, why do you even want to compete with Google in
the 1st place? You already have a pretty good
business at Microsoft. Here is Nadella's answer, which
I also think is just enlightening.
Money, he says. Quote, I see search as the
largest software category out there by far, he continues
saying. I used to think of Windows and
Office as attractive businesses until I saw search again.
He's painting out Search to be so much more, so much more than
what he already is in control of with Windows and Office.
He explained that Bing didn't have to win the market to be a
big business, and that Bing already turns a profit for
Microsoft. Google's lead counsel later
joked that he wished his law firm could count, quote,
marginally profitable in the billions of dollars, as Indella
did with Bing. Quote, you could you should get
out there and start a search business, Nadella replied.
So to Nadella, having a marginally profitable search
business means billions and billions of dollars of free cash
flow. That's just marginal
profitability. And it's true when we look at
Google search. I can bring it up here on
Qualtrim. And this isn't just Google
Search. We we can't break that away in
and of itself. But Google Search makes up the
majority of their profits. If you look at Google, the
company is astronomically profitable.
Look at the free cash flow of this company.
This is mostly due to Google search.
Now, YouTube does make some profits for them.
Google Cloud is finally barely profitable.
But those businesses are little side quests.
They're little side things off to the main dish.
Google search is what's generating 60, seven, $60
billion per year. These are enormously high
amounts of free cash flow, all generated by the same company.
Now to even add on to this, you might factor in dilution through
stock based comp because Google has to hire a lot of employees.
These lots of employees are mostly for the cloud business.
So most of the expense associated with Google isn't
even with their core search business.
Their core search business is highly efficient with extremely
high margins. So Satya Nadella is correct in
describing this business as more attractive than Microsoft
Office. Microsoft Windows.
It's a Better Business than both of them.
Now, after the Department of Justice has established, with
Nadella saying that Google's the best business that he's ever
seen, that the search business is wildly profitable and way
better than Microsoft's business, he moves on to this
relationship between Google and Apple, where they're paying them
exclusively billions of dollars to be the exclusive search
engine on Apple Safari. This is the relationship that's
at the center of this case? He asks Nadella what would it
mean if Microsoft were to have this deal instead of Google, and
he says, quote, it would be a game changer.
He said that Microsoft was prepared to give Apple all the
economic upside of the deal if Apple were to switch to Bing.
That right there is just amazing.
Nadella's coming to Apple saying please make us the default, we
will pay you just as much money and we'll give you all the
potential upside. Nadella wants to make this deal
so bad to grow, being searched, he has to get the default
position. He's willing to basically do
anything for it. He said he was also prepared to
lose up to 15 billion a year in the process.
Now Microsoft makes a lot of money, but that's no small
amount. Even for Microsoft.
We look at how much 15 billion a year is compared to their cash
flows. Microsoft last year made 65
billion. So you're chunking away 2025% of
their cash flows. That's a lot.
That's how much Nadella is willing to give up to be the
default search engine on Apple devices.
That one exclusive agreement isn't that incredible.
The position that Apple's in, these companies will do
anything. They will beg Tim Cook to be the
default. Beg him.
Nadella even said that he was willing to hide the Bing brand
in Apple user search engine and respect any of the company's
privacy wishes. So urgent was his need to get
more data at any cost. Quote defaults are the only
thing that matters, The only thing that matters, he says.
In terms of changing user behavior.
He called the idea that it's easy to switch.
Quote bogus Again, he's going hard against Google.
Google's trying at the same time to paint the picture.
The defaults are just a little part of doing business.
They're not all that matters. And here we have the CEO of
Microsoft showing that he was willing to do anything to get a
deal with Apple, And he calls defaults the only thing that
matters in changing user behavior.
And he basically calls the entire Google argument, their
lawyers in their case, bogus. So if you think these CEO's are
friendly with each other in terms of business, they're not.
They are fiercely competitive with each other.
We move on to the part where Microsoft basically says that
they're being boxed out of this relationship by both Apple and
Google. Has Microsoft tried to become
Apple's default search engine? Yes, Nadella said.
How'd it go? Not well, Nadella deadpan.
Not only are the economics of the Google deal hugely favorable
for Apple, he said, but Apple may also be afraid of what
Google could do if it lost default status.
So this is the scenario that if Apple decided to say, hey,
Google, we're not going to take your money anymore, we want
Microsoft's money. They're the highest bidder.
Now they're paying us more. Apple is afraid of how Google
will retaliate, and this is something that I didn't really
think of until this case. Google has a number of hugely
popular services like Gmail and YouTube.
What if Google used those apps to relentlessly promote
downloading Chrome, thus teaching people to circumvent
the Safari browser entirely? That fair, Nadella claims, keeps
Apple and Google together as much as anything.
So Nadella is saying that the reason that Apple continues to
do this deal with Google exclusively is because if Apple
doesn't Google, we'll make it so that Safari browser is
circumvented. Google will put on YouTube at
the very top, before every video that YouTube works better with
Google Chrome download right here with a huge button, and
they'll keep doing that relentlessly, repeatedly.
When you do that repeatedly, it conditions users over time.
They will at one point in time just click the button to get it
to go away and then boom, they're using Google Chrome
instead of Apple Safari. And then it doesn't matter if
Safari holds the default position because people have
circumvented it using Google Chrome.
If Google did that with Gmail and YouTube relentlessly, they
could convert people away from Safari browser, which of course
Apple doesn't want. So I believe in Adallah in this
claim. I think it also it shows the
power that Google has. Google really does have some
ways to retaliate if they're if they're boxed out of this deal.
Now continuing on, we get into the AI battle.
As we know, Nadella was pretty excited at one point to be in
the lead with the AI battle with Chachi BT.
But now he's walking back those statements a little, saying that
Google still very much in the AI game and they may even be a
bigger AI leader than they were with Google Search.
So he lays out the case for Google insulating their position
with AI. Nadella called search engines
quote the organizing layer of the Internet, but the large
language model powered systems continue to grow.
Publishers and platforms are growing wary of how their data
is ingested and used to train AI systems.
Those publishers, Nadella said, may start to sign exclusive
deals that allow Google, and only Google, to use their data.
That would essentially crush every other search engine on the
market. So here's the scenario right
now. Right now, with search engines,
you can crawl the web and create links based off of that.
So everyone can at least start a very basic search engine.
But with large language models, it's a bit different.
You use all the text on websites to train data, and a lot of
websites are saying you don't have permission to do that
unless you pay us. You have to cough up some cash
to do it. So companies like Google are
striking exclusive deals with different data, with different
websites that have lots of data to make it so that only they can
train the best. A I systems.
And this is the problem that Nadella's highlighting right
here, he says. What is publicly available
today? Will it be publicly available
tomorrow? That is the issue.
He said that he's already hearing from publishers with a
deal in place with Google asking being to match it.
So Google's way ahead of this. So Nadella is relaying the exact
same thing that smaller upstart search engines say.
And we move on to where of course anytime.
And if you've watched any type of lawyer show, you'll know
this. You'll see that anytime you
bring someone on the stage to testify on your behalf, they
also have a chance for the opposing counsel to question
them. That's called cross examination.
That's so that you can get kind of both sides of the story, so
that if your testimony or what your questions were were one
sided or they're misleading, they have the other council that
can try to clarify things. So here we have a new lawyer,
this time from Google cross examining Nadella.
Now they had a completely different view.
Of course, Google views this totally different than the
Department of Justice in his you being is not an inferior search
engine because it was deprived of oxygen by Google.
Being is inferior because Microsoft has mismanaged its
search and mobile products for the better part of two decades.
So here we have we have Nadella. He's on the stand talking about
how Google is anti competitive and their big meanies striking
this deal with Apple. And then the Google lawyers come
in and just say the truth is, your products just suck because
you've made bad decisions. That's literally what the
lawyers are saying here. You're just bad at managing
search. And then they go through and
basically prove that Microsoft has been really bad at managing
search. A key part of Google's defense
is that it's not illegal to build the best search engine,
and the Google lawyer argued that that's the only thing.
That's the only thing Google did.
Their lawyers led Nadella through a nearly two hour tour
of Microsoft's failure from MSN search in 1998 through the ugly
end of Internet Explorer, the expensive failure of the Windows
Phone, the endless renaming and rebooting of Microsoft search
products. It's hugely problematic deals to
bundle Bing with a BlackBerry and Nokia phones and much more.
So they're going through example after example after example,
This huge timeline of events, of Microsoft fumbling and bungling
everything along the way, painting the picture that Google
was just doing things right. They had one search engine named
one thing, one nice product growing organically while
Microsoft is over here tripping over their own feet.
That's the picture that Google lawyers are painting now.
Nadella, as he did so often during the cross examination,
nodded and said correct, and that sounds right.
So Nadella's nodding his head agreeing with this, this lashing
of Microsoft's management and mismanagement of this product.
He knows that Microsoft hasn't done the best job historically
with the search product over the past 20 years, so he's being
honest in saying that it hasn't been great.
Now, one of the big defenses from Google is pointing out that
Microsoft does have default power.
This whole case is focused on Google having an agreement with
Apple, but remember that Microsoft has a lot of Windows
devices. On every Windows device that you
install, there's going to be the Edge browser installed by
default, with Microsoft being being the default search engine.
So Google's pointing out, hey look Microsoft, you have the
default position on millions of devices that are sold every
single year. What are you complaining about?
Listen to how Nadallah responds to this point of contention.
The Google lawyer pointed out that even though Microsoft
bundles Edge and Bing, which is the browser and the search
engine of Microsoft, with every Windows PC on the planet, Chrome
and Google Search are both vastly more popular among
Windows users. That, he argued, as he has
throughout the trial, proves that defaults don't actually
matter that much. Nadella and the DOJ said it
proved the opposite. The very fact that Bing has
market share of any kind on Windows, which is somewhere in
the teens, Nadella said, as opposed to the low single digits
on mobile, is proof that defaults do work.
More people used Bing, which helps make being better, which
made fewer people switch. Not everyone would drop Google
immediately, he said, but controlling the defaults has
helped Microsoft begin to make a dent.
I think this is proving very tough for the Google lawyers to
argue, and I think that Nadella is being a big thorn in their
side. This testimony, Having him as a
witness or whatever you call it on the stand, is not doing
Google any favors. Nadella repeatedly said he
believes that defaults matter in a big way, no matter what the
Windows market share numbers say.
When the lawyers asked him to respond to the idea that users
can easily switch search engines, he said that quote.
My only argument against that is that users don't switch, so even
though they can easily do it, they just don't do it.
So defaults matter. His best example, Apple Maps,
which started out disastrously bad, has still grown and gained
market share in the last decade. Because it's preinstalled on
every iPhone. People use it, it's the default,
he said. Now, I would take a little bit
of disagreement in this I've tried using Apple Maps
historically and the product was really bad.
So I installed Google Maps, and I would use Google Maps
routinely. But then over the years, Apple
Maps became better. In fact, it became a lot better.
Right now, I think Apple Maps is just about as good as Google
Maps. So I do think it's important to
have defaults, and I certainly think defaults matter.
But the product also has to be good.
The product is way bad or way worse than the alternative.
People will switch. They will make the effort to
switch if the product they're switching to is significantly
better. But if the products are about
the same, which I think Apple Maps and Google Maps are about
the same now, then people tend to choose the default, And that
makes sense. If there's no huge incentive to
shift, then people naturally use the default.
So you have to have both a competing product that's just as
good and be in the default position.
And that's exactly the position that Google's in.
They have the best product in the default position, right
where they want things to be. And that right there wraps up
the day of Sasha Nadella at court as part of this lawsuit.
He did not do Google any favors and in fact I think he swayed
the case further in favor of the Department of Justice, painting
Google to be an anti competitive company that boxes out all
competition that uses retaliatory measures if they
face any competition. And I also believe that Nadella
accurately showed how powerful defaults are.
Another thing that Google's trying to argue against.
Nadella showed that he's willing to do anything for Microsoft's
Bing to be defaulted on Safari. He was willing to give up all
the economic upside to pay 15 billion a year to brand it under
Apple's branding, to not even have his own branding.
So the argument from Google lawyers that default positions
don't matter, I don't see how they're going to accurately
argue that against the judge that's listening to another
executive that's basically willing to do anything to be the
default. I just think it's a very
difficult argument for Google. And when I look at this case, I
think it's a tough one for Google.
I say this as a Google investor. Now, if Google loses this case,
do I think that's the end of Google?
Of course not. Most companies, big tech
companies and monopolistic companies that lose a case here
or there, they typically survive it and become stronger over
time. But there is a chance that
Google's going to have to give up this relationship with Apple
if the case keeps going this way.
So that's what we know as of now.
I'll give more updates in the future.
See you in the next one.