In this episode of MarketFoolery, two Fools chat about a few of the juiciest market news drops of the day. Spotify (NYSE: SPOT) is suing Apple (NASDAQ: AAPL) over some rough App Store policies. They're doing it in the EU, of course, because they're based there, and also probably because it'll go farther there than it would here. That might not be such a bad thing for businesses not named Apple. On the subject of big government vs. big business, Capitol Hill certainly has opinions on big tech these days, and some of those make more sense than others. Plus, the guys dip into the Fool mailbag to offer up some advice on investing in e-sports and the future of video games.
A full transcript follows the video.
More From The Motley Fool
This video was recorded on March 13, 2019.
Chris Hill: It's Wednesday, March 13th. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio today, Aaron Bush in the house. Thanks for being here!
Aaron Bush: Thanks for having me, Chris!
Hill: We're going to dip into the Fool mailbag. We will get to Spotify's battle with Apple. I want to start really quick, though, with Aurora Cannabis (NYSE: ACB). Shares of Aurora Cannabis up 10% this morning because the company has named Nelson Peltz to be a strategic advisor. For those unfamiliar, Peltz, longtime activist investor, a lot of experience in the consumer goods space. He's on the board of directors at Procter & Gamble, Mondelez, Wendy's.
I'm less interested in what you think about Aurora Cannabis, although feel free to weigh in on that. I'm more interested in how you view activist investors. I saw this story this morning and I immediately applied a positive reaction to this situation. Because of Peltz's experience in consumer goods, I thought, "You know what? That's a good move by Aurora Cannabis."
Bush: I think for Aurora, it's better for them to have Nelson Peltz than not have him, but I'm not sure how big of a deal it is for them. They're a medical cannabis seller. They have lots of different partners. Even though they don't have that much sales, they already have the makings of what a large conglomerate would look like. It makes sense why he's coming in. But I do feel like people are overplaying this. It's really just the mix of cannabis and Peltz that's causing noise. I mean, just coming on as a strategic advisor isn't that big of a deal. I think he has some options. But if he really believed in the upside for the stock right now -- it's a $10 billion valuation turning at about 100 times sales -- I think he would just be buying the stock instead of just options. I think that says something about Aurora.
But yeah, on the activist front, that's an interesting question. I definitely do think that activists play a role in helping more legacy companies improve their efficiency. You see that a lot with conglomerates. Interestingly enough, I don't actually pay that much attention to activists or care all that much because I spend most of my time looking at internet businesses, and those tend to lend themselves less to what would make an activist get involved. Something like eBay is the obvious counterexample because they turned into a conglomerate of all sorts of different things. So in some ways, it really wasn't that different from a large consumer-facing conglomerate of goods. But I think, when it comes to software, when it comes to marketplaces, there isn't that much that an activist can do. I don't think activists will play as much of a role in internet companies as they have in the physical-world-based companies.
Hill: So you haven't been in a situation where you're looking at the companies in your portfolio, and a news item pops up that activist investor Joe Smith or Jane Smith has suddenly taken an 8% stake, you haven't been in that situation yet?
Bush: I think it has happened. When it happens to one of the companies that I own, I am definitely interested. [laughs] If Carl Icahn comes storming and trying to stir some noise, of course it's worth looking at. You mentioned this before taping, but John Malone, he's not really an activist by a traditional sense, he's just an epic dealmaker whenever he makes moves. He's covered a lot of the entertainment spectrum over the years. Yeah, it's worth paying attention to what he's doing and watching because it probably points toward where the future of entertainment is going. I do think it's worth looking at, but I don't really think about it until it pops up in my portfolio.
Hill: Let's move on to Spotify. The company filed a complaint against Apple with the European Commission's antitrust regulators, claiming that Apple Music has an unfair advantage over rivals. CEO Daniel Ek published a blog post today saying that Apple's control of its App Store deprives consumers of choices and puts unfair restrictions and fees on competitors. Before we get to your thoughts, I'll just say that I'm surprised by this story. I'm surprised that Daniel Ek feels the way he does. [laughs] I haven't seen a response from Apple yet, but I'm sure their lawyers are working on one.
Bush: I think he's right for the most part. I do think that Apple should be able to have its own music app, and in some ways, just because it owns the entire ecosystem, that app is at an advantage. And in some ways, that is OK because it's like any other like private-labeled good. It's a private-labeled app. But when it comes to restricting what other apps can do and really prioritizing your own app over others -- and part of the antitrust issue with Apple, and this applies not just to Apple, but we could go through all of these different tech companies and talk about their antitrust issues. But for Apple in particular, yeah, I do think that we will see antitrust issues emerge with the App Store because they take a 30% cut of every single transaction. I don't think they probably should take a cut of every single thing that happens. But furthermore, when they start imposing rules that stop companies from linking to outside websites, where they can then do payments there, once Apple starts imposing rules that limit what those companies are doing outside of its ecosystem, that is like the purest sign of a monopoly, and that is something where I think regulators should get involved. And I do think that that affects Spotify to some degree, but it's not just them.
Hill: Spotify filed in the EU because that's where the company is based. It also happens to be the same place where, was it last year, was it a $5 billion penalty against Alphabet?
Bush: Yep. If you're going to do it anywhere, it's probably a good place to start.
Hill: It is. It also helps in the case that that's where Spotify's based. They're covered from that standpoint. Let's go through a couple of the others. Our proximity here at Fool global headquarters to Capitol Hill is such that, maybe more so than other parts of the country, we're aware of the noise from Capitol Hill, and the noise lately with respect to big tech from both sides of the aisle is they say big tech is too big.
Bush: Yeah. I don't want to get political. I don't even think this has to get political. I think I applaud that there are politicians who are willing to bring this up and have the hard conversations of, What does a modern internet-based monopoly look like? Because it is very different from the monopolies of old. But I do think that they are missing the point in a couple of key ways. I can talk about a couple of the other companies. One way they're missing the point is overgeneralizing tech. Tech is not an industry. All of these different large companies, they compete with each other in some ways, but fundamentally, they're very different businesses. Amazon is a retailer. Apple sells phones and tablets. Alphabet is search, Facebook is social media. These companies are all different and they shouldn't be thought of in the same exact way.
Second, yeah, the monopolies of today are different than they have been in the past. Standard Oil was a supply-side monopoly. They owned all the supply and consumers had no choice but to go with them. That is bad for consumers. Today, the reason why Google, the reason why Amazon, Facebook, they're so popular is because they use technology to create the best solution for consumers, and consumers chose them. People can still go to Bing. People can still go to Walmart and deal with e-commerce. No one is stopping them. I think it has to be less about the fact that they have so much market share, and it has to be more about looking at the particular actions that they take and deciding whether or not it's best for consumers or otherwise.
I think those are the big main things. But they are right about some things. There should probably be limits placed on acquisitions. We need to look at the specifics, like we just talked about with Apple. If you look at the proposals that have been made, we can start with Alphabet and Google. I think Elizabeth Warren recently called for them to separate their ad business from their search business, which essentially means stripping out DoubleClick, which they acquired a long time ago, which frankly makes no sense because the business model for search is advertising.
Hill: I was going to say, that sounds like it would, maybe kill is overstating it, but it would seriously impair the business.
Bush: What would the business of search be if you were to strip the ad business away from it? Would it just be going back to the same banner ads of 20 years ago? This business model is what is best for consumers. I think, however, you can dig into the nuance and look at things like when Google places their own results to their own sites above others. In some ways you could say that's actually better for the consumer because they know exactly what to give them and they own what they can give them. But is that anticompetitive? I think the answer is yes. The EU has determined that it is that way. But I think there are a lot of individual cases that need to be worked through.
We talked about Apple. Amazon, I was surprised, the proposal wasn't to split off AWS, it was to split off the Marketplace business from the core retail business. The Marketplace business is third-party sellers vs. the first-party sellers. Again, that doesn't make sense. Half of what Amazon sells is first-party stuff. They buy it wholesale from the suppliers and sell to consumers. The only reason why the third-party suppliers are there in the first place is because Amazon's done such a good job bringing all of these consumers here. I don't think that should be split up.
But the issue though -- they actually just changed, but I think there are other things that probably need to change too -- is that Amazon essentially forced their suppliers who sold on Amazon, they did not allow them to sell their goods on other websites at lower prices. As soon as you start enforcing what people that work on your site can do elsewhere, that's a problem.
I don't think the solution for all of this is big spinoffs or anything like that. It's really just looking at the nuance and determining, on the deal-making, the contracts and rules level, what are they allowing or enforcing that shouldn't be allowed.
Hill: Setting aside what we discussed with Apple and Spotify -- because, to your point, I do think that Spotify has a pretty good case there -- setting that aside, another thing that separates two of the companies we've talked about from the others is the issue of privacy. In the case of Facebook, in the case of Google and Android phones, and the tracking that goes on, I think that those two companies have to literally go up to Capitol Hill and answer tough questions in a way that those questions aren't really being asked, nor do they necessarily need to be asked of Amazon or Apple because they don't really have the social media stuff.