In this episode of MarchéFoolery, two fools are discussing some of the juiciest market declines of the day. Spotify (NYSE: SPOT) sues Apple (NASDAQ: AAPL) about some rough rules of the App Store. They do it in the EU, of course, because they are based in this country and probably because it will go further than it would be here. It may not be such a bad thing for companies that do not call Apple. Capitol Hill certainly has opinions on big tech today, and some of them make more sense than others. In addition, the guys immerse themselves in Fool's mailbag to offer tips on investing in eSports and the future of video games.
A full transcript follows the video.
This video was recorded on March 13, 2019.
Chris Hill: It's Wednesday, March 13th. welcome to MarchéFoolery! I am Chris Hill. Join me in the studio today, Aaron Bush at home. Thank you for being here!
Aaron Bush: Thank you for inviting me, Chris!
Hill: We will dive into the Fool mail bag. We will get to the battle of Spotify with Apple. I want to start very quickly, however, with Aurora Cannabis (NYSE: ACB). Aurora Cannabis shares rose 10% this morning as the company named Nelson Peltz strategic advisor. For the unknown, Peltz, a long-time activist investor, has extensive experience in the consumer goods sector. He is on the board of directors at Procter & Gamble, Mondelēz, Wendy.
I am less interested in what you think about Aurora Cannabis, although do not hesitate to make your contribution. I am more interested in your vision of activist investors. I saw this story this morning and I immediately applied a positive reaction to this situation. Because of Peltz's experience in the consumer goods sector, I thought to myself, "You know what? It's a good initiative from Aurora Cannabis."
Bush: I think for Aurora, it's better for them to have Nelson Peltz than not to have it, but I'm not sure of the scale of the deal for them. They sell medical cannabis. They have a lot of different partners. Even though they do not realize a lot of sales, they already have everything it takes for a big conglomerate. The reason it happens is logical. But I feel that people exaggerate that. It's really just the mixture of cannabis and Peltz that causes noise. I mean, just becoming a strategic advisor is not such a big problem. I think he has some options. But if he really believed in the advantage of the title at the moment (it's a valuation of 10 billion dollars that turns about 100 times the sales), I think he would simply buy the title instead of options. I think that says a lot about Aurora.
But yes, on the front of the activists, it is an interesting question. I really think activists are helping more old companies improve their efficiency. You often see it with conglomerates. It's interesting to note that I do not really pay much attention to activists, because I spend most of my time looking at Internet companies, and these tend to lend themselves less to what would entice an activist to get involved. Something like eBay is the obvious counter-example, because they have turned into a conglomerate of all sorts of different things. So, in some ways, it was really not so different from a big conglomerate of goods turned to the consumer. But I think that in terms of software, markets, there is not much an activist can do. I do not think activists will play as important a role in Internet companies as in the societies of the physical world.
Hill: So you did not find yourself in a situation where you were looking at the companies in your portfolio, and a news article appears that the activist investor, Joe Smith or Jane Smith, suddenly took an 8% stake. situation still?
Bush: I think it happened. When this happens at one of the companies I own, I am definitely interested. [laughs] If Carl Icahn arrives and tries to make noise, it's worth watching. You mentioned this before the recording, but John Malone, he's not really an activist in the traditional sense of the word, he's just an epic negotiator every time he intervenes. He has covered much of the entertainment spectrum over the years. Yeah, it's worth paying attention to what he's doing and watching because that probably indicates the future of entertainment. I think it is worth considering, but I do not really think about it until it shows up in my wallet.
Hill: Let's move on to Spotify. The company has filed a lawsuit against Apple with antitrust regulators from the European Commission, claiming that Apple Music had an unfair advantage over its competitors. Chief Executive Officer Daniel Ek today posted an article in a blog explaining that Apple's control over its App Store deprives consumers of choice and imposes unfair restrictions and fees on competitors. Before moving on to your thoughts, I will simply say that this story surprises me. I'm surprised that Daniel Ek feels like him. [laughs] I have not yet seen an answer from Apple, but I'm sure their lawyers are working on it.
Bush: I think he's right for the most part. I think indeed that Apple should be able to have its own music application and, in some ways, the fact that it owns the entire ecosystem confers it an advantage. And in some ways, it's OK because it's like any other as well labeled private. This is an application with a private label. But when it comes to restricting what other applications can do and prioritizing your own application over others – that's part of the antitrust problem with Apple, and that's not important. not just apply to Apple, but we could go through all these different technology companies and talk about their antitrust issues. But for Apple in particular, yes, I think we will see antitrust issues arise with the App Store because they take 30% off each transaction. I do not think that they should probably take a part of every thing that happens. But in addition, when they start imposing rules that prevent companies from creating links to external sites, they can then make payments there, once Apple imposes rules that limit what they do outside. of its ecosystem, this is the purest sign of a monopoly, and this is an area in which regulators should be involved. And I think it affects Spotify to a certain extent, but it's not just them.
Hill: Spotify has filed in the EU because that is where the company is based. This is also the same place where last year was it a $ 5 billion fine against Alphabet?
Bush: Yes. If you want to do it anywhere, it's probably a good starting point.
Hill: It is. It also helps in case that's where Spotify resides. They are covered from this point of view. Let's review a few others. Our proximity to Fool's World Headquarters in Capitol Hill is such that, perhaps more than in other parts of the country, we are aware of the noise of Capitol Hill and the recent noise of advanced two sides of the aisle. they say the technology is too big.
Bush: Yeah. I do not want to do politics. I do not even think it has to become political. I think I applaud the fact that some politicians are willing to tackle the issue and have difficult discussions, what does a modern Internet-based monopoly look like? Because it is very different from the old monopolies. But I think that they miss the point in several ways. I can talk about a few other companies. One of the ways to miss the point is generalized technology. Technology is not an industry. All these big companies compete with each other, but basically they are very different companies. Amazon is a retailer. Apple sells phones and tablets. Alphabet is the search, Facebook is social media. These companies are all different and should not be considered exactly the same.
Second, yes, today's monopolies are different from those of the past. Standard Oil was a monopoly of the supply. They had all the offer and consumers had no choice but to accompany them. This is bad for consumers. Today, the reason Google, Amazon, Facebook, are so popular is because they use technology to create the best solution for consumers, which consumers have chosen. People can always go to Bing. People can always go to Walmart and deal with e-commerce. Nobody stops them. I think it's less to consider the market share that they hold in society, but rather look at the actions they take and decide whether it suits consumers or not.
I think these are the big main things. But they are right about some things. Limits should probably be imposed on acquisitions. We need to look at the details, as we have just discussed 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 on companies to separate their advertising activities from their research activities. Essentially it's about removing DoubleClick, acquired long ago, which makes no sense, because the commercial model of research is advertising.
Hill: I was going to say, this seems to be the case, maybe only kill the exaggerated, but it would seriously hurt the company.
Bush: What would be the research activities if you were to strip them of advertising? Would it just come down to the same banners from 20 years ago? This business model is what is best for consumers. I think, though, that you can dig deeper and look at things like when Google places its own results on its own site, on top of the others. In some ways, it could be said that it is actually better for the consumer because he knows exactly what to give him and he has what he can give him. But is it anti-competitive? I think the answer is yes. The EU decided that it was like that. But I think there are a lot of individual cases that need to be solved.
We talked about Apple. Amazon, I was surprised to find that the proposal was not intended to split AWS, but to separate Marketplace activities from the retail business. Marketplace activity is that of third-party sellers as opposed to first-sale sellers. Again, that makes no sense. Half of what Amazon sells is made up of first-party products. They buy it wholesale from suppliers and sell to consumers. The only reason third-party vendors are present is because Amazon has done such a good job in bringing all these consumers here. I do not think it should be divided.
But the problem – they have actually just changed, but I think there are probably other things to change too – that is, that Amazon has forced its suppliers who sold on Amazon to not allow them to sell their products on other websites. at lower prices. As soon as you start enforcing what people working on your site can do elsewhere, it's a problem.
I do not think the solution to all of this is big spinoffs or anything like that. It's really a matter of looking at the nuance and determining, at the level of the conclusion of the contracts, the contracts and the rules, what they authorize or enforce, which should not be allowed.
Hill: Putting aside what we discussed with Apple and Spotify – because, in your opinion, I really think Spotify has very good arguments – putting that aside, another element that separates two of the companies we talked about is the question of privacy. In the case of Facebook, in the case of Google and Android phones, and the follow-up that follows, I think these two companies must literally go to Capitol Hill and answer difficult questions without these issues are really Nor do they ask them to need to be interviewed on Amazon or Apple because they do not really have social media.
Bush: Yeah. I think that privacy will become more and more of a thorny topic. We see with GDPR in Europe how it helps consumers in some ways, but it also keeps the strength of the companies in place and makes competition more difficult, which is exactly the opposite of what we are talking about now, what politicians try to do. after. I think we'll have to get close to it. On the other hand, do governments really want to enforce privacy at the end of the day? It also robs them of access to information. Technology is going to be agnostic with privacy. This is probably not going to give priority to some groups over others, as we have seen in China. I do not think that's how it's going to be played here.
I think it will become thorny and much more political and annoying. But I think that privacy is the end of the game. Companies like Facebook will not impose confidentiality on their advertising activities, but with regard to messaging, etc., this will become more and more the norm.
Hill: Our email address is email@example.com. Question from Ellis Laura. Ellis writes, "I wanted to get your opinion on e-sports and possible investment ideas." Similar to film, video games are a successful business and I do not feel confident enough to invest only in a few video game publishers, you recommend buying an index such as ESPO or GAMR or creating a basket of shares for players? Thank you for all these good advice. "ESPO and GAMR, they are ETFs built around video game companies. A look at Google Finance and the launch of ESPO last fall. Basically flat. The GAMR ETF was launched almost exactly three years ago today. This ETF, up about 67% over the past three years.
I am curious to know what you think. My feeling is that you are optimistic about e-sports in general.
Bush: Yeah. I have a few things to say about it. First, you talk about video games as a successful business. I think that's true, but it's less and less true. Many companies are finding ways to keep their major franchises generating recurring revenue for longer periods. You look at something like Call of Dutyit's been 15 years that it lasts. You look at things like sports franchises, like NBA2K or FIFA, those who come out every year. So there are counterexamples to make it a successful business.
Hill: Expect. Maybe we're splitting hairs, but I think, yes, Call of Duty was a blow and they go back well in the same way that Disney came out with Iron Man and it worked, and they're like, "Hey, maybe we can start doing these Avengers movies."
Bush: OK yeah Maybe it was a hit at one point, but I guess I thought it was more like those unique hits that happen from time to time –
Hill: Oh, like candy Crush. Like, King Digital is coming out with candy Crush, and that is basically the reason to buy this business.
Bush: Yes or Take two now with Red Dead Redemption 2. He made $ 700 million during his first weekend. But what was he doing during the previous three years? Nothing. It was a blow and it drove this business. I do not necessarily think it's bad. The shots are great. Whatever the case may be, I think we are moving away a bit more from a successful business, to more and more recurring revenue. Some franchises have been around for a long time, some games continue to do things every year. The mobile is even a different beast.
I think you can do very well with a clue or ETF. I looked at those you threw. ESPO is perhaps the slightly more interesting. It has a large number of publishers around the world. It's not just a problem centered on the United States. It's global. It also has non-editors like Nvidia and AMD, on which I have mixed opinions. The other thing to consider is the cost, but it does not look terrible for this one. I think it's okay. You can invest in this ETF and all is well, you will have exposure to the sector, which I think will be good.
Perhaps unsurprisingly, I also think that you can do better by choosing individual stocks because you do not have to own any obviously bad companies that are also being floated into ETFs. I do not know, if people are interested, maybe I could work on a basket …
Bush: – or partner with J-Mo on something since he is the king of the basket here. I can work on that. I am going to launch this basket today with a number of things that I would like to put right now, namely the Take-Two, which I just mentioned with Red Dead Redemption, and Tencent, which is the largest video game company in the world. These are the two stocks with which I would sow the basket. Maybe I'll have to work on the rest.
Hill: Part of your choice of these two the fact that they've been beaten over the last year? They are certainly cheaper than they were.
Bush: They certainly are, but I think it's about pretty much every video game company right now. [laughs] Take-two to me stands out above Activision and EA especially at this moment because they are breaking records, they are laying a clear foundation for growth and are working with little drama. You can not really say the same thing for Activision or EA at the moment.
Hill: I was just going to say that the stories I've read about Activision Blizzard and leaders who have left this company and are going to start their own business … say what you want from the performance from Take-Two Interactive over the past year, they do not seem to have a talent problem.
Bush: No, they do everything right, in my opinion. I think other video game companies will also bounce back. But Take-Two is not as hard to overcome, even though they were beaten the same way. Tencent, they are the largest video game company in the world. They are the largest video game company in China. I think it's powerful. In addition, if you look at what is happening in China with video games over the past year, the government has frozen the approval of new games. This is obviously something that will disappear with time. They are about to be the # 1 beneficiary when that happens. In addition, if any of these companies wish to import their games in China, they will probably associate with Tencent to do so. Tencent is very well placed in video games, and they have a ton of other things to do, like WeChat and all the other investments that they have made.
I feel very good about these two. These are two very different businesses, but that's what I would like to sow my basket.
Hill: Tencent has not turned their music into a separate IPO? I thought they had done it last year.
Bush: They did it with music, and they did it with Chinese literature, which is an e-book service.
Hill: Do you think they would do that with their video game division?
Bush: No. One of the things that people do not realize is that one of the biggest synergies they have between the gambling industry and their social media business is that they can advertise their games on the Internet. social media. In addition, I do not think that they are seeking to raise as much money because it is a good company, unlike some of those companies whose split has occurred to collect segregated funds from the Tencent basic balance sheet. So, I doubt that this will happen. It's too fundamental for them.
Hill: Aaron Bush, thanks for being here, dude!
Bush: Thanks for having me, as always!
Hill: As always, program participants may have an interest in the actions they are talking about and the Motley Fool may have formal recommendations for or against, so do not buy or sell any stock on the sole basis of what you heard. That will do it for this edition of MarchéFoolery! The show is mixed by Dan Boyd. I am Chris Hill. Thank you for listening! Well, see you tomorrow!