FTC Announces Antitrust Scrutiny of Big Tech

On today's episode of Industry Focus: Tech, host Dylan Lewis and Nick Sciple look into the details of the Sprint (S)/T-Mobile (TMUS 0.39%) merger ruling. We also take a closer look at SoftBank (SFTBF 1.41%) and its various holdings and what its activist-investors are suggesting. Finally, the FTC moves to look into the transactions of some major tech giants for anticompetitive practices. Find out what the guys at Industry Focus think.

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This video was recorded on Feb. 14, 2020.

Dylan Lewis: It's Friday, February 14, Valentine's Day, and we're talking about how some big decisions from regulators are impacting the tech space. I'm your host, Dylan Lewis, and I'm joined by fellow IF host Nick Sciple. Nick, what's going on, man?

Nick Sciple: Just doing all right, man. It's fun to be in the guest chair. You know, I get to maybe be a little -- man! I didn't answer that well. [laughs]

Lewis: That's perfect. No, there's a stress I think to hosting that goes unrealized when you don't have to do it, where you're kind of managing the flow of the conversation, you're making sure that we seamlessly transition from one topic to the next. You don't have to worry about that.

Sciple: Yeah, over here, my job is to get the people going, Dylan. So, maybe we can get the people going a little bit today.

Lewis: So, you're the hype man for today's show, as we're talking about SoftBank, the FTC and the Sprint/T-Mobile merger. Before that though, it's Friday, the 14th in February. What's the Valentine's Day plan for you?

Sciple: Yeah, so me and my fiancée -- we got engaged back in December, for folks who haven't heard that -- we're going to dinner this afternoon and then we're going to Mortified, the live podcast, it's going to be in D.C., I don't know if you've seen their stuff on Netflix. Basically, it's this live show thing where people read their old journals from middle school and the letters they wrote to their crush and all that sort of thing. Lacy is really big into it and I watch their show on Netflix, it's pretty funny. So I think it should be fun.

Lewis: Gosh! I think I have some eighth and ninth grade poetry that probably did not age very well. Hopefully, that doesn't see the light of day, big props to people that can go read that stuff on stage.

Sciple: Yeah, I will be observing, not reading any of my embarrassing middle school thoughts. So, that's nice.

Lewis: That's awesome. Jess and I are going to be cooking dinner tonight and hanging out low key. That's kind of the MO, but we got a lot of friend stuff going on this weekend, so we're trying to just take it easy and relax. Speaking of love affairs, Sprint/T-Mobile, this merger that will it happen/won't it happen? We finally have some word from the FTC on their decision and what it looks like will happen with this deal.

Sciple: Yes. So, this is a deal that those companies have been flirting back and forth for the past several years since this merger was announced. And so we heard from judge Victor Marrero of the U.S. District Court for the Southern District of New York on Tuesday. He ruled in favor of allowing T-Mobile and Sprint to merge. I think there were three big takeaways from this case. First was, Sprint's business is just really in rough shape. Just to read a quote from the court, "[The Court is thus] substantially persuaded that Sprint does not have a sustainable long-term competitive strategy and will in fact cease to be a truly national" wireless carrier. Said, "Sprint has struggled to retain the customers [it] initially attracted with [its] aggressive offers, due in large part to its underlying poor network quality." And this is the money quote, I think, that, "[Sprint's] offers deserve some consideration for their pro-consumer posture. But in retrospect, they reflect a desperate and ultimately unsuccessful effort to stay relevant."

So the takeaway from the court here is that Sprint is dead in the water, and if this merger doesn't happen, they're in trouble.

Lewis: You know, we tend to think about a lot of this stuff as, is this going to create problems for consumers? And I think it's particularly scathing that one of the first points in this decision is Sprint cannot last on its own. And I'm living proof of this, as someone that was formerly a Sprint customer. I was someone who's a Verizon customer for a while and [Sprint] had this online deal where it was just like, "You can get a free year of our unlimited data plan and you just pay tax and fees." It was $4 a month. And their whole point there was, we are going to do customer acquisition, we're going to steal all these customers, come in really low and get a bunch of people from Verizon. Well, they did. And then once I had to pay standard fare a year later, I went to one of the MVNOs and just switched and am now with a far cheaper option.

So, yeah, I think there are probably a lot of people like me that did that. A lot of these customer acquisition things, they don't really work out long-term.

Sciple: Absolutely. And if you look at the numbers, in the couple of years since this deal was agreed upon, Sprint's subscribers have fallen about half a million, while T-Mobile's subscribers have increased by 12 million. So, Sprint as a business, it's really kind of in secular decline. And so the court determined that this company wasn't necessarily going to be able to exist on its own. Now, that "on its own" wasn't enough to get this case over the hurdle, there are still some concerns, if we allow this merger to take place and we consolidate this industry down to three players -- AT&T, T-Mobile and Verizon -- that's going to be anticompetitive, could potentially allow T-Mobile to raise rates.

The court was kind of convinced that that's not going to take place. And the key word here is mavericks. So the word "maverick" was used 16 times in the decision and was used to describe both Dish and T-Mobile. Well, we mentioned consolidating the industry down to three players from four. Dish allowed the court to determine that maybe that's not quite going to take place. So the conditions of the merger involve this complicated scheme where Dish is supposed to emerge as the fourth wireless player. You mentioned MVNOs. They're going to have a relationship with the new T-Mobile where they will get some preferential treatment on using their spectrum, and that sort of thing.

There's some skepticism on the plaintiff's side in this case of whether Dish is truly incentivized to build out this network. They've actually been accumulating wireless spectrum going back to 2012, so for eight years, and have not come out with a network. The plaintiffs argued and suggested that Dish's network would be something that lawyers can use, but not something that customers can use. A lot of that growth and buildout of their infrastructure has been the FCC saying, "If you don't use this spectrum, we're going to take it away from you." The court, however, thinks Dish is going to be a "disruptive maverick" and come into this market and allow competition to remain. So that's an important part of this deal is, Dish coming into the market and finally using that spectrum that they've been sitting on for so many years.

Lewis: I have to say, that's a little bit of a bold assumption, because if you were just to have looked at Dish over that eight-year period that you were talking, it seems an awful lot like they were squatting on all these things that they had rights to, with the hope that they might be able to sell those to someone else down the line.

Sciple: Yes, that's the allegation the plaintiffs in this case had, is basically saying that they're going to do whatever the regulators make them do to hold on this spectrum, but over the long term their argument is that Dish maybe doesn't have the intent to build this out. We shall see. Dish is using a strategy, they want to use this all-digital network that nobody has done before, which Dish chairman Charlie Ergen has noted has some risk that may not work out. So we'll see. But clearly the court was convinced that Dish is incentivized to pursue this strategy and that's part of what they're going to do.

On the other side, the other maverick in this case is T-Mobile. Obviously, when you look at this combined company, they have 126 million customers, still No. 3 behind AT&T and Verizon. However, the big thing is after this deal is closed, the new T-Mobile is going to have more wireless frequencies than any other U.S. carrier, which gives it some advantages as it transitions to 5G. And so there were concerns from the plaintiffs in this case that this may result in T-Mobile being incentivized to increase rates anticompetitively.

However, once again, the court was convinced that T-Mobile is going to be a maverick in this case. It said that T-Mobile has redefined itself over the past decade as a maverick that is spurring the two largest players in its industry to make numerous pro-consumer changes. And it thinks the new T-Mobile would likely make use of that advantage by cutting prices to take market share from its biggest competitors.

And the court cites that the way they determined this was by looking at the credibility of the witnesses on the stand, they saw John Legere testify, and was just convinced based on his testimony that that was the strategy they're going to take. We'll just have to see how things play out. Obviously, [it] puts this new T-Mobile in a strong position to roll out 5G. They'll have the most robust spectrum holdings of any other wireless competitor, so AT&T and Verizon really have a real competitor on their hands now.

Lewis: So, yeah, I think when you think maverick, you tend to think John Legere. I think that's a pretty fair association and I can understand that. Now, is John Legere going to be the one actually calling the shots here? No, that's not the way that this company is going to be set up. And I think the concerns about the cost coming down are legitimate. For the most part, what we see with a lot of these huge acquisitions, these big mergers, is, "Okay, we're going to realize all these efficiencies by having two different businesses under one hood. We'll be able to serve all these customers. We have to reduce some of our major overhead costs, we'll pass those savings along."

Well, that works as long as you have a pretty vibrant marketplace with a lot of providers. It goes away if there's a stranglehold that only a couple people have access to. And you could see the case where prices start to rise down the road.

Sciple: Yeah, I think one surprising thing -- you mentioned consolidation from this merger. The day after, or the day that the merger was announced, John Legere came out and said, "We're actually going to increase hiring as a result of this merger." They expect to add 11,000 jobs by 2024, which, from my perspective, when you see a merger like this bringing together these really large organizations with lots of backend infrastructure, you would think that they would hire fewer numbers of people. But based on what Legere said, and clearly convinced the court of, during the case, is that they're going to continue to invest in building out 5G, continue to push down prices to compete with AT&T and Verizon. We'll see how things play out.

The case isn't even necessarily over yet. There are 13 states in D.C. that were the plaintiffs in this case who have suggested they may still appeal to the New York attorney general -- New York is one of the lead states in this case. Letitia James said, "From the start, this merger has been about massive corporate profits over all else. And despite the company's false claims, this deal will endanger wireless subscribers where it hurts the most, their wallet." So when I read that quote, I hear that maybe they still want to appeal.

And another thing to think about here is Deutsche Telekom, which is the majority owner of T-Mobile, is also seeking to renegotiate the terms of these deals. The original merger agreement expired back at the beginning of November. And when that merger agreement was first put in place, the all-stock deal gave Sprint an equity value of $27 billion. However, in the interim T-Mobile stock has appreciated over time, Sprint's stock has depreciated. So now the market currently values Sprint at $20 billion, while the value of the deal today in T-Mobile stock is $36 billion. So there is some suggestion that there could be some continued negotiation between the parties now that that merger agreement has expired, but there are no more regulatory barriers to move the case along.

Lewis: That's always one of the risks you're going to run into the longer it takes for a deal to actually close, especially if there is any stock involved in the deal. But if you have these companies, basically sitting on the sidelines waiting for several years, market caps are going to change -- it's only natural for those things to happen.

We can't really talk about this deal, though -- specifically the Sprint side of this deal -- without also touching on SoftBank, because SoftBank is probably the business that has the most exposure to Sprint's outcomes.

Sciple: Yeah. So SoftBank owns about 84% of Sprint worth about $29 billion. So, when we talk about who's going to be negotiating with Deutsche Telecom on the changes in this deal? It's going to be SoftBank; a majority owner of that business. Under the current terms of the deal, SoftBank after this transaction will own 27% of the new T-Mobile. The big takeaway here from SoftBank is that it will move -- as a majority owner of Sprint, it had to carry all of Sprint's debt on its balance sheet, but after this transaction is completed, it will only own 27% of the stock, that means they get to take over $40 billion in Sprint debt that is currently listed on SoftBank's balance sheet, get to take it off their balance sheet. Which, for a company like SoftBank which holds a lot of debt, has some questions around the company when it comes to that. Also, we mentioned that Sprint was kind of sinking, SoftBank gets to get those concerns off their plate, gets to make their balance sheet look a little bit better getting $40 billion of debt off, which is very helpful for the company.

When you look at the balance sheet of this company, this is particularly relevant to how Masa Son [Masayoshi Son], the founder and CEO of this company, wants you to analyze the business. He cited "the rabbit-duck illusion" -- I don't know if you've seen this, Dylan, where depending on which way you look at it, it either looks like a rabbit or a duck -- to describe how he wants investors to view the company. He wants the conglomerate to be viewed as an investment company, not an operating one. So, pay less attention to the operating business underneath and pay more attention to the assets it holds.

When you hear that, what do you think about that, Dylan?

Lewis: Well, I think that it's worth taking a step back for a second and saying, for listeners that didn't know that SoftBank operated in the telecom space, that's really what they do. That is what this company is known for. They've been in the news so much over the last six months because the nonoperating element of their business -- if you will, the investing side of their business, which is a very small part of the overall company -- has made some pretty bad investments. And they have this venture cap arm to them. And I think, increasingly, Masa Son wants people to focus on that. That's a lot more exciting than a telecom business, which tends to be a little bit more staid, a little bit more stodgy.

If you want a company or if you want the market to focus on your company and look at it in an investing perspective and not an operating perspective, the investing results better be darn good.

Sciple: Yeah. Well, and it depends how you want to look at it. So the most important asset for SoftBank -- when you talk about looking at the assets they hold -- is Alibaba. Very early in the 2000s, Masa Son made an investment in Alibaba at a super-low valuation, today SoftBank owns about a quarter of Alibaba, worth $146 billion. You compare that worth versus the market cap of SoftBank -- when I looked it up the other day -- it's about $100 billion. So obviously there's some debt involved. But that Alibaba stake is worth more than the entire market cap of SoftBank.

So Masa Son argues that that Alibaba stake isn't sufficiently valued. They also own 75% of ARM Holdings, which is a very important chip company for smartphones and the like. You mentioned the telecom part of the business they own. Two-thirds of SoftBank Group, which is a Japanese telecom business. When you put all those together, Masa Son argues, the equity value of the holdings of the company minus its debt -- that Alibaba stake, that sort of thing -- is worth $228 billion today versus that $100 billion market cap.

When you do the sum-of-the-parts valuation, he has a strong point. However, there have been some questions of whether the Sprint/T-Mobile deal would go through. The performance of the Vision Fund has raised some questions. So that's led the stock to be underpriced, which is part of the other news we heard about SoftBank this week, which is the stake that Elliott Management took in the business.

Lewis: Yeah. And I think that this is very normal for a conglomerate-style business. When you have a position that large, it's not like you can log into your TD Ameritrade account and say, "OK, I'd like to sell that," and liquidate this and realize the true value of it. This is a substantial portion of Alibaba's overall market cap, and any selling on SoftBank's part is going to meaningfully change the market for those shares. And so it's something that you can't unwind very easily, it's not "liquid" in the conventional sense. So even the publicly traded holdings that they -- it would take quite some time to wind that down.

Then you have these private holdings that they also have. And it isn't really clear whether those valuations are rock solid. And we've seen that over the last six months with WeWork. So you have all those normal things that kind of go into pricing. And then, yeah, generally when you are a holding company style, there's going to be a slight discount, especially when you have holdings that are tied to deals that haven't closed yet. There has to be some risk pricing to that stuff.

Sciple: Yeah, absolutely. I mentioned Elliot Management has announced a stake this past week, $2.5 billion stake worth 3% of the market value. And their thesis is exactly what Masa Son has called out, of when they look at the equity stakes that SoftBank holds in Alibaba and these other businesses, relative to where the stock is trading, think they're trading at a substantial discount. So that's why Elliot Management wants SoftBank to do some significant share buybacks, advocating share buybacks in the $10 billion to $20 billion range, want some changes in corporate governance as well to get some more accountability on Masa Son, who has basically been running the show without a lot of pushback elsewhere in the business.

I think this is exciting for a couple of reasons. It shows that it's not historically typical for Japanese businesses to be responsive to activist shareholders. In this case they've been very responsive, have agreed to buy back shares.

The one question we have here is, you mentioned the Alibaba stake and unwinding that. Given that SoftBank's stock today is undervalued relative to the value of that Alibaba stake, there's a case to be made for selling the Alibaba stake and then rolling that into buying shares of SoftBank at a discount. However, Masa Son has said that he intends to hold that Alibaba stake going forward. But I think if we start to see him sell down that stake to buy back SoftBank's shares, that'll be a signal that Elliot Management has really had some influence on this company.

I think when you look at the Vision Fund, they're moving more into private-equity-, venture-capital-type investment. It would seem to me that there has to be a higher return they can generate from that Alibaba stake, investing in those venture-type deals, than the upside in Alabama today. Does that make sense?

Lewis: Yeah. And I think one of the other things that probably worth touching on with this is, you don't have to look far to find another example of this holding structure creating issues for a company, in fact we have one with Alibaba and Yahoo! They had this stake in this company and it ballooned in value in a pretty short period of time. And as they were trying to figure out what to do with all of their assets, they wound up in this position where they were trying to allow shareholders to access that value but do it in a tax-efficient way. And when you have, in this case, over $100 billion tied to your stake in one business, any sale that you do is going to create a tax liability, it's unavoidable. And so I'm sure part of this, too, is thinking about, "OK, well, how can we set this up in a way that's most tax efficient for shareholders, so that we're not unnecessarily paying taxes and we're able to maximize the rates of return for them?"

What I'm seeing so far from Elliot Management is pretty standard for an activist investor. If you really believe that the assets that a company has are being totally underappreciated, you're totally going to push them to buy back shares. That's one of the easiest things that they can point people to do.

Sciple: Yeah. Absolutely. I think the big question marks around SoftBank today. If you look at their assets, they really are kind of undervalued. You can make a strong case for that. The question mark really is just the way the company has been run, particularly over the past year when you look at raising this $100 billion Vision Fund and then just investing that money very quickly in a way that a lot of folks would view as rash. That's [raised] some criticism and has drawn attention to the company that's probably more negative than when, if you look at actual assets they hold, you should view them.

Lewis: Yeah, I think there are a lot of people that have that exact association of SoftBank and WeWork, and Masa Son and WeWork. And that isn't the calling card that you want if you're trying to pitch yourself as an investing business.

Sciple: Absolutely. So, we'll see what happens going forward, they've announced their second Vision Fund has had some issues raising capital relative to the first one, which would make sense given the performance so far. But they are looking at some creative ways to raise cash to fund that, whether that's the Alibaba stake, whether that's taking loans against their ARM Holdings stake. We'll have to see what happens, but when you look at the assets this company holds, as it sits today, there is a strong argument to be made that it's trading below what the sum-of-its-parts value would get on the open market.

Lewis: Yeah. So, I think we'll probably see some very interesting capital allocation decisions from this company over the next couple of months/years. I think you'll also see, probably, a change in how a lot of the decisions are made. To your point, if there's pretty decent oversight coming from an activist investor with a decent amount of skin in the game, they're probably going to have to move a little bit away from the freewheeling-deal nature that Masa Son has gotten so used to.

There's going to be more oversight. There are going to be a lot more questions being asked about where they're putting their money and why.

Sciple: When we talk about questions being asked about where people are putting their money and why, I think that ties into what we're going to talk about in the second half of the show.

Lewis: You teed me up so well, Nick. We're going to be talking about some more stuff involving some big tech companies and some regulars as well. [laughs] We got news that the FTC is taking a special interest in some capital allocation decisions made by some big tech companies.

Sciple: Exactly. On Tuesday the FTC announced that it's going to be looking into transactions over the past 10 years from all the FANG stocks except Netflix, we're looking at Facebook, Amazon, Apple, Microsoft and Alphabet. And what's significant about this, is that they're going to look at all transactions over the past 10 years that fell below the dollar amount necessary to trigger antitrust scrutiny. So if you look at this year, that's going to be $94 million, but that adjusts relative to inflation. So we're going to look at hundreds of -- the FTC is going to seek information on hundreds of transactions that these big tech companies have made over the past decade that fell under that threshold. Which just opens up a whole new can of worms for these companies.

Lewis: It does. And I guess the original logic with this threshold is, if it's below a certain amount, it probably isn't too meaningful, especially to businesses of a certain size. If you look at a company that's, let's say, $200 billion and they're buying something for $50 million, it probably isn't going to be a market-swaying acquisition in the way that if they went out there and bought someone that's worth $50 billion might be.

Sciple: Exactly. So when you look at antitrust, one of the major concerns is market concentration. And if you look at the size of a firm, that can be a good proxy for whether it's going to have some impact on the concentration of the market. Obviously, when you look at a trillion-dollar company, like Apple, it stands to reason that if they're buying a $20 million company, that's unlikely to affect concentration, competition in the market. However, if you look at statements from FTC chairman Joe Simons, basically, their concerns are that it's possible that as business has evolved over time -- particularly in these tech businesses that can just grow so quickly, so fast -- that some of these small acquisitions may have been used by big tech to kind of kill these potential competitors in the cradle. And this is different than when you talk about Instagram, this billion-dollar company, but when we're gathering up a lot of these small, independent start-ups, there's an argument to be made that they're gobbling up AI companies that can potentially compete with them. And it's anticompetitive for that reason.

Lewis: Yeah. And I think that this really gets at one of the main issues that regulators have probably run into over the last five years, which is that when you're considering how you regulate these platforms, they don't really fall into the rules and the buckets that businesses have in the past. If you look at -- Standard Oil is kind of like the go-to example for antitrust-related things, and it was pretty obvious what Standard Oil was doing while they were doing it. They were buying up horizontally and they were vertically integrating. And it was pretty clear that businesses that would plug well into that and what they were able to do when they had them. We're instead looking at all these platform companies and a lot of technology, like AI and machine learning that kind of plugs in behind the scenes and isn't nearly as visible to the end product that people are consuming.

Sciple: Right. So, you look at -- if Google buys up an online photo sharing company, is that anticompetitive because that company will no longer compete with Google Photos? It's hard to define that market, you compare that to Standard Oil or the railroad companies, there's physical infrastructure to see that, you know, when AT&T consolidated the entire industry, they owned all the physical phone infrastructure, which is -- it's just clear how that could create anticompetitive issues.

Now, the critics of these acquisitions would say that these companies are -- it's catch and kill, they're killing competitors in the cradle before they get big enough. If you look at the big tech companies, what they would argue is that a lot of these acquisitions aren't buying Instagram to kill your competitor before it can grow, these are acqui-hires. There's a particularly narrow skill set of people who can offer these services, and sometimes there's not enough people on the open market to be able to just go out and hire those folks.

One industry where we see that a lot, particularly in the past year, is autonomy, self-driving. Apple, small acquisition, earlier this year they bought Drive.ai, it is an acqui-hire to augment their self-driving business. When you look at robotics, this is an industry that's only developed over the past decade or so. A lot of folks are coming from diverse backgrounds, like oceanographic mapping, that sort of thing. There's just not a lot of talent in this space and, in particular, in a lot of these emerging spaces; it's not just self-driving cars, machine vision, all those sorts of things. These are very narrow skill sets. And so sometimes the only way to get this talent is to acquire it.

Lewis: Yeah. And it would be a major wrinkle in how so many of these businesses have operated for a long time. I think that people that have followed along with a lot of the antitrust conversations that are happening in the U.S. with big tech would say, "Yeah, sure, I understand that Facebook and Alphabet via Google and Amazon are probably going to be a part of these conversations." People are probably a little surprised to hear that Apple's name is coming up.

Sciple: Yeah. I think Apple has been an interesting one in all these antitrust discussions for me. Because when you look back at -- everybody talks about Google buying YouTube or, I mentioned, Facebook buying Instagram [sic], over and over again. There's really not an example like that for Apple. So Apple's biggest transaction ever was they bought Beats for $3 billion. They have one other transaction in the history of the company over $1 billion is when they bought Intel's smartphone modem business in the past year; other than that, all of their other transactions have been under $1 billion, a significant number of them very, very small. A quote from Tim Cook said, "In the past year Apple was buying a company on average every two to three weeks." So when you talk about opening up the antitrust folder, the companies that we're going to investigate the acquisitions of -- into these small acquisitions -- Apple is a company that finally it makes sense to me why they're in this discussion from an antitrust perspective.

Lewis: Yeah. It's just funny, because they've flown under the radar for such a long time, because of their whole MO. And I think this is Tim Cook's MO, really, is we're going to be smart with our capital allocation, a lot of really big acquisitions don't tend to work out. You mentioned YouTube and you mentioned Instagram, those are like the poster children for things working out really well. And I think a lot of people would argue that those maybe only succeeded the way they did because they had the parent company backing them, they had the integrations coming from Google, they had the boost -- in Instagram's case -- of the mixed functionality of Facebook and Instagram.

I'm sure there are people that will look at a lot of the stuff and be skeptical of this antitrust stuff being lobbed at these companies. And say, "Well, yeah, I mean, I don't think they would've organically grown to be that big."

Sciple: Yeah, I know. I think that's a good question of how much path dependence happens with these companies. If Instagram existed on its own, would it have got anywhere near as big as Facebook, especially when you take into account a lot of Facebook's success has been their ad platform, which is so much more robust than anyone else in the industry, and they've been able to integrate that into Instagram as it's grown. You could say the same thing for YouTube, just the infrastructure you need to develop YouTube, you listen to some of their conference calls, they've had trouble -- you know, this giant company with all kinds of capital has had trouble turning this into a consistently profitable business. So those are real questions. We'll just have to see. If the court decides that those are anticompetitive, then these strategies will have to adapt.

We've already seen some reporting from inside Facebook that Mark Zuckerberg has started forming a team in the company to develop new apps out of an expressed concern that they will not be able to acquire as many businesses over time.

I think one other thing to talk about -- and we talked about this before the show a little bit, Dylan -- is that we look at this a lot from the perspective of big tech. But I think we should also look at this from the perspective of start-ups. So for a lot of these small AI start-ups, self-driving start-ups -- their end goal, their exit plan is to be acquired by big tech. If we see antitrust concerns really tighten that up, how does that change behavior? Do we see fewer folks leaving Apple to go start their own start-up, do they stay inside the business, do we see different contractual arrangements between Apple and their suppliers versus acquiring these companies? I don't know, but I think there's definitely going to be some trickle-down effects on this behavior, assuming that this early FTC investigation into the implications of these small acquisitions bears fruit and grows over time into more robust enforcement action.

Lewis: Yeah, I think that it will probably have an impact on what the start-up world looks like, because if you are bootstrapping something in your garage and you're using your own money. You can do whatever you want, you have a lot of freedom there. But when you start taking money from other people, an exit plan has to emerge. And it's either "This gets big enough that we have subsequent rounds and then ultimately maybe we go public as a business," or "We find some bigger investor that's interested in taking the whole thing." Sometimes that's someone in private equity, sometimes that's an acquisition from one of these big companies. But people want to see an exit strategy, they want to see somewhere that they're going to be able to get their money back in five to ten years within the private space. And if these are all out as buyers, that can dramatically affect the funding that goes to some of these companies, the willingness to fund some of these companies and also just the general trajectory of several of them valuationwise, too.

Sciple: Yeah. Maybe. If we want to look on the bright side of this, maybe us as public investors will get more opportunities to buy these companies as they grow. I mean, I would have loved to be able to buy Instagram as a stand-alone company right now. I would be way more excited than buying core Facebook. The other thing that we should just take into account with these businesses -- whether or not this grows into a more robust antitrust inquiry -- is just, for all these big tech companies, how important government relations is becoming for them? It is just massive. We saw in the past week, obviously, the Microsoft-Amazon JEDI contract negotiations back and forth trying to challenge that contract award. And you see Amazon's government relations presence, how significant it is. One of their head communications folks is Jay Carney, former White House press secretary under President Obama. These are really important issues as these companies get bigger and bigger.

I mean, look at Apple, over the past year the way they've been able to navigate the tariff situation has really been beneficial to that company. As these companies grow, as the antitrust scrutiny grows, their ability to have robust government relations is going to be very, very important.

Lewis: And this news is so important, because we haven't really seen anything like this before. I think we meant to hit that earlier and just kind of explaining the importance of this, but we haven't really seen the FTC dig into these smaller acquisitions in the past. It hasn't been something they've concerned themselves with.

Sciple: Right. And it's atypical to investigate acquisitions that are smaller than the threshold, for all the reasons we listed out above. But even more, I guess, probative to what we're looking at here is, who are the companies that are being targeted? I don't think it's any coincidence that it's all the big tech companies, you know, all the FANG companies, plus Microsoft minus Netflix. It's no coincidence these are the companies that are being targeted.

I don't think people are super-concerned about AT&T going out and doing a small acquisition. So it just shows the focus of where the scrutiny is among our regulators. It shows that our regulators, to some extent, are questioning whether the frameworks that are currently in place in the antitrust regime are working. The fact that we have this longstanding policy of not investigating transactions of a certain size, that at least for these companies, our regulators have a real question in their minds of whether that was the correct approach.

The other question is, OK, assume that we see that some of these transactions are anticompetitive, given how small these businesses are, how do you unwind them, what does it look like? I don't know. A lot of question marks here. The thing I do know for sure is that, if any antitrust action comes out of this, lawyers are going to benefit very significantly, both in the government and within these businesses, and that's going to be an implication.

Lewis: That's one of the safe bets. And we talk a lot with regulation about how typically it will lag innovation. It's really hard to keep up with where things are going. And maybe this is an admission that when we were looking at these companies, over the last five, ten years, we didn't have a lot of the monopolistic concerns because they were giving most of their products away for free. And so it was a model that regulators still had to kind of work their head around, and say, "Well, OK, who's being harmed?" And that's one of the big things that comes into play when you're looking at monopolies.

Sciple: Yeah. I think that's a big thing across the board with all this FTC antitrust stuff. Even if you look at the Sprint/T-Mobile case, if that case gets appeal. And I think it's just the fact that, I think in the next five, 10 years, at some point there will be a Supreme Court case in the antitrust arena and at some point there will be some alteration to what the standards are. That's what I believe, given what we're observing. I think that's going to happen. And it's very, very rare for the Supreme Court to take an antitrust case. So, if that ever happens, I'll be watching it very closely, very excited to see what happens.

Lewis: [laughs] Well, we'll definitely do another show together if it does. I was like tapping my chief legal correspondent. [laughs]

Sciple: [laughs] Hey, you know, I got the JD, I've got to come on here and use it every now and again.

Lewis: Exactly. Well, Nick, you know and I'm sure some listeners know that I like to wrap up the show with some shout-outs to folks that have given us some five-star reviews on iTunes. We got a flood of them recently, so I'm not going to be able to go through all of them, but I do want to give some shout-outs to some folks. RAR Dad, Freaky Frogster, Muddy Fox, and RCGVA. Those are some usernames on iTunes. Love them. They were all talking about how they missed the Healthcare show, [I'm] happy to see it in the rotation with Wild Card Wednesday.

We did have one review that I want to give a shout-out to the Longtime Fool. "Thanks for what you do. The only improvement should be always giving the ticker symbols of the stocks you talk about. I'm glad you're working on the sound issues, because I drive a big rig and sometimes it is tough to hear what you guys are saying."

Love that. We try to work some of the stocks into the description of the shows and we're trying to standardize some of that stuff to make it a little bit easier to follow along.

Sciple: Yeah. We can give you the rundown of the tickers, in case we didn't hit them before. So, Sprint is S. T-Mobile U.S. is TMUS. SoftBank is SFTBY. And then, obviously, Facebook is FB. Microsoft, MSFT. Apple, AAPL. Amazon, AMZN. And what, is that it? GOOG.

Lewis: GOOG and [GOOGL]. And what we do try to do is drop those listed at the end of the description of the episode so that anyone's following along ... I do notice that we have a tendency to use "this company" after we've mentioned the company name once or twice, just so we don't get too repetitive, try to be a little bit better about that, too.

But the real reason I loved this review was finding out that Longtime Fool listens to us while driving a big rig truck. I love getting that color on where people are consuming our content and where they are out there in the world, that's awesome.

Sciple: Yeah. Always excited to learn where our listeners are coming to us from. And so happy to hear you all are enjoying the show.

Lewis: Yeah, sometimes it feels like we're kind of throwing the episodes out into the void a little bit, right?! It's nice to know people are out there listening to them. And it's fun to visualize Longtime Fool sitting in his truck -- maybe hopping into a truck stop, getting something to eat, and listening to us. It's always awesome, the romance of the open road, Nick.

That's going to do it for this episode of Industry Focus. Folks, if you have any questions or you want to reach out and say hey, shoot us an email over at [email protected] or you can tweet us @MFIndustryFocus. If you want more stuff, subscribe on iTunes or wherever you catch your podcasts.

As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear.

Thanks to Austin Morgan for all his work behind the glass today. For Nick Sciple, I'm Dylan Lewis, thanks for listening and Fool on!