Welcome back, everyone. Today on the Joseph Carlson
Show. Google is a monopoly.
This is something that we've all understood to some degree over
the past decade. The company's highly
monopolistic with their search engine and with YouTube.
But now it's official. It's in writing.
The Department of Justice won their case.
The judge ruled that Google monopolized search through
illegal deals. This is a very long, detailed,
rigorous ruling from the judge. There's a lot to break down with
this ruling. First of all, now that Google's
labeled as a monopoly, there needs to be a remedy.
What does that remedy mean? How does it impact the company?
How will it impact the revenues and operating profits of Google?
What does it mean for future competition?
We have different search products like Search GPT coming
out from Open AI. Is Google going to have to
compete more fiercely with them? Did the judge take into account
these new competitors? We'll be looking at how this
will impact Google from an investment perspective and how
it impacts their partners. ALE.
This lawsuit from the DOJ wasn't against ALE.
They're not claiming that Apples monopoly here, but ALE has done
business with the monopoly. Google and Apple's profiting
dramatically from this business to the tune of $20 billion per
year. At least.
Apple's a highly profitable company, but the amount of cash
flow they make is around $100 billion per year.
So if you took away 20 billion of that, that's roughly 1/5 of
their total profit. Putting this relationship in
jeopardy not only has big implications for Google, but it
does for Apple as well. We'll be breaking down the math
of how this may impact both Google and Apple.
Now, of course, we have some other news.
Airbnb shares have fallen at 14% after reporting earnings.
The company has warned that there's slowing demand in the US
market. We have news that Disney finally
posted their first ever streaming profit.
So now Disney Plus, Hulu, ESPN Plus, all of that is finally
profitable, even if it's by a tiny amount.
And finally, we have an update on the ongoing fallout of the
Crowdstrike outage. Delta Airlines has sued
Crowdstrike and Microsoft, but Microsoft and Crowdstrike are
both pushing back on Delta saying that it's actually their
fault that they they declined repeated offers for help when
the outage begin. Who's really at fault here?
We'll be finding out. So we're going to be going over
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month of August for free. Now let's go ahead and jump in.
This has been a crazy week with a lot of volatility and a lot of
news. But perhaps the biggest news of
the week is Google finally officially lost their Department
of Justice case that accused them of being a monopoly.
The case concluded that Google illegally monopolized the search
market through exclusive deals, the judge ruled on Monday,
handing the government a win in its first major antitrust case
against a tech giant in more than two decades.
The most recent one before this was Microsoft.
The judge said that Google's paying a combined $26 billion in
payments to make it search engine the default option on
smartphones and web browsers, effectively blocking any other
competitor from succeeding in the market.
Quote Google's distribution agreements foreclose a
substantial portion of the general search service market
and impairs rivals opportunities to compete.
This ruling is massively detailed and rigorous.
It covers every single nuance and concerned it's 286 pages.
So this is a thorough ruling against Google unlikely to be
overturned. By monopolizing distribution on
phones and browsers, Google has been able to consistently raise
prices for online advertising without consequences.
Quote. The trial evidence firmly
established that Google's monopoly power, maintained by
exclusive distribution agreements, has enabled Google
to increase text ad prices without any meaningful
competitive constraint. Now on Bloomberg, they continue
to rehash the same thing, that this is a monumental win for the
American people, for the government, and this is a loss
for Google. But when looking at this case
with this loss for Google, what does it actually mean?
What does Google actually lose? What is the remedy here?
That seems to be the big question that's not yet
answered. The Justice Department hasn't
yet said what changes it will seek.
So the DOJ has said so far, Google, you're a big, bad
monopoly. You have defaulted yourself
everywhere. You have boxed out competition,
and you've unfairly raised prices on businesses wanting to
advertise. But when the question rises, OK,
what are you going to do about it?
We have no answers as of now. We just have speculation.
There's a few things that I think Google could be forced to
do. I think US regulators are likely
to copy European regulators. They've already gone over this
issue with Google, and they forced Google to offer
selections to the user when they're starting up their
device. So if you get a new iPhone, if
you get a new laptop, you have the default selection.
Normally in the US, it's already picked for you.
You don't select anything. You can go into your device and
change it if you want, but Google's already the
predetermined preselected default option.
But in Europe, they forced Google and Apple to offer
options to the user. So the user's presented with a
list of search engines and then the user selects which one they
want, therefore making it one more obstacle for the user to
select Google. They will force Google on their
Chrome browser to offer users different default searches.
And that solution, if implemented now, comes at a
pivotal time. On this note, we have Cantor
from the Department of Justice arguing that this may be why
Google's forced now to open up the selection of possible search
engines. There's no competitor to search,
so therefore you have to do this.
Could you not be overridden by the event of July 25th 2024
Search GPT prototype? These are factual questions.
The court addressed the number of these questions and it's
lengthy opinion that was extremely rigorous, detail
oriented, relied on expert testimony as well as documents
and data. The fact of the matter is
competition often matters most when they're new inflection
points that emerge in the market and monopolies have the greatest
incentive during those inflection points to sifle
competition before it has the opportunity to take hold.
So at right now is perhaps the most critical inflection point
we've seen in the search market in 15 years.
And making sure that it has the opportunity that competitors
have the opportunity to compete on the merits, benefit of their
own innovations and and win or lose based on the merits of
their products is the most important thing right now.
We are at an inflection point of the most important time in the
search market in over a decade, and this inflection point is
precisely when the Department of Justice is opening up the
floodgates of competition. The answer to how we remedy this
problem of Google being a monopoly is by offering
competition. Competition meaning other search
engines. Allowing users to select from a
list seems like a good idea because it solves the problem of
claiming that only people use Google because Google's the
default search engine. The issue with this remedy is
that even when you have a big list of search engines, even
when you have Perplexity DuckDuckGo, you have search GT,
and you present that list to users and you allow them to pick
guess what search engine they pick the majority of the time,
they still pick Google. Not only the majority, but the
huge majority of the time when you allow users to select from a
list, they still pick Google. And that's still a problem for
Google being the dominant monopolistic market share
leader. This is where this case runs
into an issue. The judge is saying that
Google's a monopoly because of the default position.
But even if you undefault Google, even if you allow users
to select from a list what search engine they want to use,
most users still use Google. So there can be other search
engines like Bing or Chachi PT that went over some of the
market, but not a meaningful amount.
So the judge may want to go even further.
The problem is, if the judge goes too far, it may cause more
issues than it solves. European regulators have already
ran into this issue when they require Google to offer users a
choice of search engine. It LED few to switch, so they
might go further and have more aggressive, invasive solutions.
The agency could demand a separation of Alphabet search
business from other products like Android and Chrome, which,
if ordered by the judge, would mark the biggest force breakup
of U.S. companies since AT&T was dismantled in 1984.
Is the judge ready to break up one of EU s s best companies in
the world? One that offers products that
hundreds of millions of consumers love, that they use
every single day. This is far bigger of a deal
than even AT&T. AT&T was looked at as more of a
utility, something like your water or heating.
Google offers services that are updated routinely that benefit
users in more personalized ways. Breaking up the company may
damage the services that they offer to users.
If the judge decides to break up Google, the risks are much
higher. The option of breaking up Google
is the most unlikely option. It may happen, maybe the judge
will go down that route, but it's unlikely.
More than likely, Google's going to be forced to not be able to
have the same default relationship on different
devices, especially Apple. So how does this impact Apple?
We know that Google's paying $26 billion to different companies
to be defaulted, and out of that $26 billion, Apple alone takes
over $20 billion of it. So they're taking the lion's
share of Google's nice payment that they make to be defaulted.
Well, there's a couple different options here.
First of all, it's unlikely that the DOJ can completely end this
relationship. That's a really difficult thing
to do. More than likely they'll change
the deal a little bit and allow Google to still pay Apple around
10 to $15 billion per year. And they can do different
licensing agreements so that so that if users use Google search
on Apple devices, Apple gets a cut of the Corey flow in the
advertising around 10 to 30%. So Apple can still make a
fortune from Google even if the DOJ makes certain rules
regarding the relationship. Even if the Department of
Justice was able to say that Google can make no deal with
Apple whatsoever, Apple would probably still turn out just
fine because the default position that Apple has is an
incredibly valuable position. It's an incredible asset for
Apple, and Google's not the only one willing to pay money to be
defaulted. Microsoft has already said that
they're willing to pay Apple any amount of money they want to be
defaulted. It's worth so much money to be
defaulted on Apple devices that Microsoft will cough up the cash
and they'll make whatever economic agreement that Apple
wants. They can even brand being under
Apple. All Microsoft wants is that
quarry flow to improve Bing. So if the Google deal was
scrapped then Apple could move to an alternative like
Microsoft. Or they can make a deal with
open AI and ChatGPT. They're already in agreement
with different aspects of these companies anyway.
The reason you're seeing Apple stock move up today and an
investor is not really too concerned about the economics of
this deal going away, is because Apple's not the company being
sued here and Apple has every right to default different
search engines that have lower market share.
The reason that we see Google moving up today, I also believe
because investors are weighing the pros and cons of these deals
changing. It is true that Google may lose
its position as the default status on every device, but
investors in Google assume the people still use Google search.
That's unlikely to change. And if Google saves some money
by not paying so many billions of dollars to be defaulted, it
may actually benefit their bottom line.
Imagine if Google pays $15 billion a year instead of 26 and
they don't lose much market share.
Well, in that case, they just saved $11 billion in payments.
If you look at Google's free cash flow on a trailing basis,
it's $60 billion. So if Google saved $10 billion
and they had the same outcome with the same market share, they
would add on an incremental 20% in free cash flow.
So with both cases with Google and Apple, it's difficult to see
how these companies are really in trouble.
Google has many opportunities to and win consumers to their
search engine if they're not defaulted.
Apple has enormous opportunity to monetize their massive
install base. And even though Google's now
officially labeled a monopoly, it's still difficult to see how
this company loses. Now moving on, we have news at
Airbnb. One of these previously hyper
growth companies is now seeing a slowdown and this has caused the
stock to drop 14%. It is true that they missed on
their earnings per share slightly that played a role in
this, but the reason that the stock is down so much is because
of their projections because of them warning about a slowdown in
the US and this also brings up speculation of the US entering
into a recession. Airbnb is a company that I
studied that eventually led me to looking at Booking Holdings.
So I was initially interested in Airbnb.
I researched this company and upon looking at the industry and
what they do, I came across Booking Holdings and ended up
investing in that company instead.
But along my research with Airbnb, I did learn some things
about the company. If we look at this report, we
can actually see how things are developing now.
Up until now in Qualtrim, we could view the quarterly view
and the annual view. Of course, quarterly shows all
the metrics quarter by quarter. Annually shows it every single
year. But now we also have quarterly
TTM. When this view is selected, it
shows the most recent quarters number plus the most previous
3/4 combined every single quarter.
And this allows you to see a smoother trend of what's going
on with different financials. Seeing the quarterly trailing 12
months really makes some these metrics easier to view.
For example, if we switch back to quarterly and we take a look
at the free cash flow, we can see some trends here.
We see the free cash flow going U overtime.
That looks good, but it's still a little jagged.
It's kind of difficult to see. If we switch over to quarterly
TTM, it shows it a bit more smoothly.
For example, we go back to that same view and this is what it
looks like the trailing 12 month on a quarterly basis.
In the trailing 12 months, their free cash flow was $4.36
billion. If we look at the bookings of
the company on a trailing 12 month basis, we see a similar
trend. It continues to go up, but it's
slowing down slightly. There is some deceleration, but
Even so, when I look at these charts, I don't see an
indication of a recession. The fact that people are slowing
down on their travel slightly lately is not an indication of a
recession. It's an indication that the post
COVID boom is coming to an end, that travel is now normalizing.
And we've seen the same thing with Booking Holdings.
Booking Holdings is a new position in My Portfolio.
I've been buying into this one, building up the position.
I bought more of it during the dip.
Currently it's a $42,000 position, $4000 in the red.
With a new position. I have to give this one time to
compound. But Booking also shows a similar
trend. If we look at the gross bookings
over time, we can see the gross bookings slowing down a little
bit. They're not stopping, they're
not going down, but they're decelerating.
If we look at room night sold, this is a forward-looking
metric. We can also see a slight
deceleration over the past four quarters.
When you talk to the Booking management, they say that this
is normal. This is just a normal
deceleration after the huge bump post COVID.
Overall, when I look at Airbnb's quarter, I see a highly
profitable company that's still growing quite nicely.
It's making a lot of net income, a lot of free cash flow.
It has a strong balance sheet with $12 billion in cash, and it
has organic growth ahead. I think Airbnb is a good
company. The issue of this company is
that it's far less diversified than a company like Booking.
Airbnb offers nightly rental. That's basically the only thing
this company does. Whereas Booking offers nightly
rentals, hotels, car rentals, and reservations for
restaurants. It is far more fully fledged.
As a travel agency, they are your concierge during your
entire vacation, so Booking Holdings is far more diversified
and less reliant on the nightly rental market.
Airbnb knows this and they're jealous of the market position
that Booking has, and we can see that in their most recent
earnings call. In the opening remarks of this
earnings call, we have Brian Chesky, who is the the CEO of
Airbnb and at the end of his opening remarks, he says
something that's a little bit interesting.
He says we also have new guest services and new host services
that we're launching next year that we're working on.
And then every year starting next year, we're going to launch
new products and services. I look at Apple, I look at
Amazon. Apple at one point was selling
IMAX, Amazon was only selling books.
We've gotten bigger than either of those companies just selling
short term rentals, but we're ready to go beyond short term
rentals. So the new Airbnb will be about
a lot more than short term rentals.
It's going to be about long term stays.
It's going to be our guest services and host services and
many new offerings that you'll begin to see the start of next
year. Brian Chesky makes it very clear
that they're going head to head with Booking Holdings.
They want to become the fully serviced travel agency, just
like Booking Holdings. The problem for Airbnb is that
the the market in Europe for hotel stays is already taken.
It is dominated by Booking Holdings, and I think there's
little chance that they'll be able to uproot Booking Holdings
in Europe. And the US market for hotels is
far less valuable because most of that is dominated by the
hotel chains Marriott and Hilton.
So Airbnb is trying to go down this path of competing with
Booking Holdings, but as far as I'm concerned, I would rather
own the company that's already dominant in this market.
Now moving on, we get to the news that Disney has posted its
first ever streaming profit, but it's warning now about the parks
business. So the tides have turned a bit.
Before streaming was the money losing portion of the business,
the part of the business that was a bit of a drag and the
parks were the good part of Disney's business.
Now with this earnings report, the parks business is struggling
and streaming is the bright spot.
The entertainment giant streaming unit, which includes
Disney Plus, Hulu, ESPN Plus, became profitable 1/4 ahead of
schedule, producing an operating income of 47 million dollars on
$6.3 billion in revenue. Now, $47 million in profit is
tiny, so Disney's barely eking out a profit with their
streaming, especially based off of $7 billion in revenue.
But it is a profit, and next quarter they should generate far
more profits with their streaming.
The CFO went on to CNBC. They said that they've made
great progress. They said they were losing about
a billion dollars a quarter. Not long ago, the streaming
portion of Disney was recently losing 4 to $5 billion per year,
and now it's profitable. That is incredible progress by
the Disney team. Now, ironically, the part of the
business that investors are looking at as being a bit of a
disappointment is the parks. Operating income fell 3.3% to
2.2 billion despite steady park attendance numbers and per
visitor spending. This was largely due to the
increased costs and soft consumer demand towards the end
of the quarter. We know that Disney prices the
parks based off of demand and because they don't have quite as
much demand, prices in the parks are being lowered.
Disney forecasted more challenges for the theme park
business. The company said it expects
operating income in the division to fall by mid single digit
percentage points in the fiscal fourth quarter.
So not only was this quarter a miss for the parks business, but
next quarter is going to be a bit disappointing as well.
If we look at some of the key performance indicators for
Disney, we can see that this most recent quarter isn't that
big of a change in their streaming subscribers.
They only increase the amount of subscribers by 5% overall, not
too much of A change over the past seven or eight quarters.
When we look at revenue per subscriber, Hulu takes the
lion's share. When we look at this without
Hulu, we can see that the total revenue per subscriber is going
up across the board. It ebbs and flows in the
different markets, but it's now creeping up to $16.00 per
subscriber. And then finally looking at the
revenue per segment, Disney in 2023 decided to break this out
into three different categories. That's why you see the change in
color hair. The entertainment business,
which has their movies is doing quite well.
After a series of flops from Disney, they finally have some
huge hits with Inside Out Two being one of the biggest ones.
The sports business is also growing in revenue.
The experiences business, which includes the parks is the
problem. It's.
It's only up 2.7% which is slower than inflation.
So now Disney's reliant on sports and entertainment to grow
the business. I realized the stock isn't doing
well. It's down 3.5% today.
It's down 2.78% year to date. So I realized Disney
shareholders may be bummed out owning the stock this year, but
I don't think things are so bad for Disney.
If I was a Disney shareholder, I would not be disappointed with
this report. Now finally we get an update on
the story of the crowd strike outage.
We know that out of all the companies that were hit, Delta
was hit the hardest. And Delta is now suing
Crowdstrike and Microsoft to be compensated for the losses of
having their systems shut down for the day.
They say it cost them upwards of $500 million.
And recently, the CEO of Delta went on to CNBC to explain the
problem. Well guys, this cost us a half a
billion dollars. So that's what's going to
happen. You're.
Suing. Well, well, we've we're gone.
We have no choice. Yeah.
Over a period of five days between not just the lost
revenue, but the 10s of millions of dollars per day and
compensation and hotels. And we did everything we could
to take care of our customers over that time frame.
We have no. So if you're going to be having
access, priority access to the Delta ecosystem in terms of
technology, you've got to test the stuff you got to.
You can't come into a mission critical 24/7 operation and tell
us we have a bug. It doesn't work.
What did they offer you? Did they say oh thanks, here's a
meal voucher? Do you really want to know?
Yeah. No, we really want to know.
We're here. I won't, I won't go there.
But no, they haven't offered anything.
He says that they haven't offered him anything, but they
claim otherwise. They say that they offered him
something very important that he refused.
In fact, Crowd Strikes said that they repeatedly reached out to
Delta and offered on site assistance, meaning that they
would send their team over to help assist in the recovery of
this problem. And the fact that Delta refused
that they wouldn't have on site assistance is what led to the
ongoing problem, The ongoing outage costing them half a
billion dollars. So Crowd Strike is arguing that
yes, they are to blame for the original outage, but they're not
to blame for the ongoing damage that that outage caused Delta
because Delta had insufficient IT and they weren't willing to
allow any type of assistance with their IT recovery efforts.
So Delta owns the problems of the recovery effort, which cost
them all this money. Microsoft is now agreeing with
Crowdstrike, saying that Delta is the one to blame because they
declined repeated offers for help.
Microsoft said that their preliminary reviews suggested
that Delta, unlike its competitors, apparently had not
modernized its IT infrastructure, either for the
benefit of its customers or for its pilots or flight attendants.
Delta responded to that claim saying since 2016 Delta has
invested billions of dollars into IT capital expenditures in
addition to billions spent annually and IT operating costs.
Microsoft responded to that saying, quote, we have no reason
to believe that Microsoft failed to comply with contractual
requirements and otherwise acted in grossly negligent, indeed
willful manner in connection with the faulty update.
So Microsoft is washing their hands clean from the Crowdstrike
update, saying that if this is not Delta's fault, it's at least
Crowdstrike's fault. This certainly is not
Microsoft's fault. Microsoft claimed that Delta's
public comments are incomplete, false, misleading, and damaging
to Microsoft and its reputation. So as the situation stands right
now, Microsoft and Crowdstrike are both saying that the reason
Delta was uniquely hit is not because they just use
Crowdstrike more, but because of their poor IT and because of
their efforts, and it's their fault because they would not
accept help from either company. This is likely a case where
there's some truth to each side, and if I had to give an order of
blame, I think the highest blame goes to Crowdstrike for
releasing the poor update. The next in line is Delta for
not accepting offers of help, and then the last in line is
Microsoft. Microsoft never released a
faulty update and they offered to help even though it wasn't
their problem to begin with. I think the judge will rule in
favor of Delta to receive some compensation, but probably not
the half a billion dollars that they're asking for.
That's all for this episode. I'll see you next time.