In this episode of Industry Focus: Tech, Dylan Lewis and Fool.com contributor Brian Feroldi talk about the latest market news. There is an exciting announcement in the e-commerce space for small businesses. They discuss ad revenues, online marketplaces, antitrust lawsuits, and much more.
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This video was recorded on May 22, 2020.
Dylan Lewis: It's Friday, May 22nd, and we're talking about the hidden winner of Facebook's (FB 3.77%) new Shop product, and Alphabet's (GOOG 0.56%) (GOOGL 0.42%) antitrust troubles. I'm your host Dylan Lewis, and I'm joined by Fool.com's just OK Brian Feroldi.
Brian, you know, we do this collaborative outline every single week, and I think I had in there "absolutely spectacular" as the description for you, and you have changed it to "just OK."
Brian Feroldi: You've got to lower that bar, Dylan. [laughs] You have got to set expectations upfront that can be beat.
Lewis: Well, yeah, I guess that's true. If you say you're just OK, and the show is excellent, then people are pleasantly surprised. If I bill you as absolutely spectacular and then it's a mediocre show, you know, what does that --
Feroldi: I'm a fan of public CEOs that under-promise and overdeliver, so the key part there is under-promise. [laughs]
Lewis: Oh, that's fantastic. It's Memorial Day weekend. I know we're kind of in like a time-warp period, Brian, but like, this is technically a holiday weekend coming up and a long one, if folks are working. Do you have any plans?
Feroldi: No. We have no plans. I mean, we'll probably head to the beaches, if it's nice out, if we can get on to them, walk around with a mask on. My kids are itching to get outside and do whatever, but I anticipate a whole lot of what it looks like every day for the last two months depending on the weather. How about you, Dylan?
Lewis: So, I have plans, and I'm going to see how this works, but listeners might know that I recently moved. So, I went from the house that I lived in to the house next door, that was my neighbor's house that I bought, and I lost a back deck but I gained a front patio with this move. And so, my plan is to do a drive-thru barbecue out front for my friends on Memorial Day. So, I'm going to make burgers on the grill, set up a little table next to the sidewalk and people can stop by, scoop up a burger and continue their walk through the city. So, we're going to see how that works out. I'm going to try to make sure that everything stays safe and if it winds up being something we can't execute well, but I want to have the spirit of Memorial Day a little bit, but you know, obviously, maintain social distancing.
Feroldi: Sounds great. Good luck with that.
Lewis: Yeah, we'll see. Austin, anything fun going on for you, because you're also a big grill and barbecue guy.
Austin Morgan: I am headed out to Lusby, Maryland. My parents have a house out there, and they have a smoker out there. So, I'll be hanging out by the water and smoking some meat.
Lewis: That's awesome. Yeah, we got some smoker recipes a little while ago from a listener, and if I can find the cut of meat, I'm going to do it. It's a lamb with, like, an oyster sauce combo. So, I'm pretty thrilled about that.
You know, you can write into the show with all these different things. They can be questions. [laughs] They can be ideas for shows or they can be recipes. We're kind of down for everything, but what we're really here to talk about is not meat and Memorial Day plans, Brian, it is tech.
And there have been some big stories this week and this is going to be kind of a more news-oriented show. But one of the ones that stuck out most to me was that earlier this week Facebook announced users will be able to buy and browse products from brands without leaving Facebook with a new product called Facebook Shops.
Feroldi: Yeah this is an exciting product announcement, I thought. I mean, Facebook has a history of, kind of, rolling out new products and trying new things, but when I saw this one, I will tell you, my initial thought was, sounds great. They really seem to make a big effort to make it as easy as possible for small business owners to do business on their platform and with their, what, 2.5 billion or so monthly average users, obviously, they have the resources to get this done.
When they made this announcement, Mark Zuckerberg actually did a video update with Facebook Small Businesses and he threw out a couple of stats that I found interesting. First off, he said, they did a survey of small business owners and they found that 31% of them have stopped operating altogether, just flat out stopped operating. And on Facebook's platform, they have about 160 million businesses that are listed across its property, so some staggering numbers.
Lewis: Yeah. And I think that this is something that they are making very much about the times right now. Where they're saying like, you know, we want to make it easier for people to be able to stand up digital storefronts. There are a lot of folks that are operating small businesses that simply aren't capable of doing what they normally would.
I have to imagine that this was also something that was probably on the roadmap for Facebook at some point, because you look at what they've done over the last couple years. And we've seen them evolve, they were a social media business, were a platform, I guess, they weren't even a business in the early days. They figured out advertising was a really great way to monetize the audience. And over time they've been pushing more and more into e-commerce. We've seen it a little bit with Facebook, we've seen it a little bit with the Instagram properties, but they had this Checkout with Instagram feature launched, I think that was about a year ago, allowing people to buy products within the app. Instagram is a very product-oriented platform, very similar to Pinterest, which we talk about a lot.
And then there's also this Marketplace feature that Facebook has, which is kind of a Craigslist-like competitor. This seems like the natural next step in the evolution of e-commerce for them.
Feroldi: Yeah, totally. I can speak to Marketplace in particular, I have personally seen a huge increase in the use of Facebook Marketplace among my friends and my peer group. My brother is actually in the process of moving, and his wife was able to sell a ton of stuff by using Facebook's Marketplace, they even told me they were able to sell an air conditioner in four minutes after they posted it on there. Dylan, has anybody been using Facebook Marketplace in your neck of the woods?
Lewis: So, DC is a Craigslist town, I think. Like, it's really big for housing, it's really big for selling stuff, just like, you know, furniture, all that kind of stuff, it's Craigslist. But I have seen people using Facebook Marketplace a little bit more. And there are a lot of housing groups on Facebook for people looking for housing in the DC area. And I've seen there, kind of, this blend of posting what would be, kind of, a Craigslist housing post in Marketplace and then linking to that Marketplace post in the community that's more housing-oriented. So, it seems like things are going that way. It'll be interesting to see if they can unseat Craigslist there.
But what we see with this Facebook Shops announcement is this is a far more formal approach to e-commerce and this is them basically saying like, "Hey, we like having all this traffic, all this activity here. We want to keep you on Facebook and we want to make it really easy for businesses to get things setup."
Feroldi: Yeah. It makes complete sense when they roll it out. And one thing I will note is, I think that Marketplace is probably a brilliant launch for them because it got people, at least, semi-comfortable with the idea of doing business on Facebook. So, this is almost like a natural next step in there. And it's going to work across seamlessly once it's launched across all of their properties. So, Facebook, WhatsApp, Messenger and Instagram. So, if you post in one and then move to another, that's going to follow you. They also had something in there about once a business signs up, you can actually see their pages on Instagram and then chat with them through Messenger or through WhatsApp. So, I see big potential for this, I think it's a brilliant move.
Lewis: Yeah. And really, like, I think it's such a natural evolution for them, because Mark Zuckerberg has this framework that he likes to use for monetizing platforms. And it's basically, like, get consumers on there, get businesses on there, get businesses and consumers interacting with each other and then profit. [laughs] You know, basically then they start actually making money and monetizing that activity.
And we've seen a lot of companies already start using Messenger as, kind of, a means of customer service, you know, an extension of all the traditional ways that businesses would interact with people. I mean, we use that here at The Fool. Our social media accounts are open for messaging, and Facebook is open for messaging, so that when people are running into issues with customer service, they can immediately go and our social media manager winds up responding right away and gets them in the right direction. So, a lot of businesses are kind of already working that way. It seems like a natural next step.
Some details on all of this. So, creating a Facebook Shop will be free for small businesses. And there's the natural question of, "Okay, well, how is Facebook going to be making money on this?" And it seems like they'll be taking a small fee on purchases, kind of a commission, if you will, for making these things happen.
But according to Dan Levy, who is the company's VP of Ads, the moneymaker here is advertising. And so, the hope is that as you build out a storefront, the pitch for advertising with Facebook and getting your products out in front of more people becomes even stronger and it's really a boost to ad spending.
Feroldi: Yeah. Which makes complete sense to me. I mean, if this product gets launched and sees traction, it's a natural extension for those small businesses that are having success to throw more fuel on the fire and really take some of their dollars that they're having success with and use that to boost their presence on Facebook. So, I like the strategy, I like that it's going after a free market at first. And I do think long-term that monetizing through advertising is the way to go.
And I will tell you, Dylan, when this first came out and I just heard the headline, my very first thought was, "Doesn't sound like good news for Shopify (SHOP 2.63%)." [laughs]
Lewis: [laughs] Yeah. And then you started reading the details, right?
Feroldi: Yes, exactly, and I was pleasantly surprised to see that Facebook is partnering with Shopify to get this product off the ground. And, you know, Shopify has been a phenomenal company that has succeeded in getting lots of small businesses up-and-running, with e-commerce anyway. So, I really like to see that Facebook chose Shopify as its partner here to, kind of, handle all the logistics in the background. And it really makes great sense for both.
For Shopify, they are kind of the top-dog at doing what they're doing. They have over a million small business merchants. Facebook, obviously, has unparalleled reach. So, the two companies combining forces makes it almost a no-brainer if you're going to be starting one of these things from scratch.
Lewis: Yeah. And I mean, why would they go out and develop all these e-commerce tools when there's already a best-in-class provider. You know, there's the old folklore story of Amazon (AMZN 0.89%) deciding that they couldn't put out something better and deciding to [laughs] just let Shopify own that part of the market. I think, if Amazon is going to take that approach, it probably makes sense that Facebook would do the same thing.
Feroldi: Yeah, it completely does. And Shopify actually, this month has announced several new products. One of the reasons that the stock has been on fire in 2019, I mean this is a monster winner prior to this, and then in 2020, this stock has more than doubled. Just absurd. [laughs]
Lewis: Yeah. It's been a runaway train. And I mean, this is the kind of stock that makes value investors cry, just because, [laughs] you know, we see all this positive news coming out. And I think we did a show on them, not so long ago, where there were concerns about what was going to be happening with COVID, because a high-growth business with a high-growth valuation?
And as it turns out, this only helped them. You know, more and more people are going online. There is that quote from one of their executives, someone in management there saying that they were seeing traffic that is effectively Black Friday traffic; you know, in the early days of people staying at home. It's hard to say exactly what that number looks like now. But obviously, this has been a boon to them and it's really highlighted the strength of digital offerings and having something beyond just physical storefront; Shopify helps people do that. At 100% year-to-date that's pretty darn the rich, Brian.
Feroldi: Yes, it is. But to your point, they're basically seeing Black Friday levels of traffic on their networks every single day. When you add in this announcement with Facebook as well as a number of other new products that they've recently announced. They recently held their first virtual-only conference, and some of the new products that they are rolling out in response to COVID-19 are Shopify Balance, which is a new business-type of account that's designed specifically for small businesses.
So, one stat they threw out there was 40% of their merchants do business to have their personal account and their business account tied together. So, this is a new tool that will allow them to break those two things apart without having to pay any fees, any minimums and still earn rewards. So, that sounds like a great additional product.
They're launching a new product to allow consumers that are shopping on Shopify's network to buy products now, but pay for them later, to almost do installment payments over time; they can split them up into four separate payments that are interest free in terms of consumer payment flexibility.
They're beefing up their ability to do local delivery. Shopify's merchants will be given the ability to, kind of, set certain geographies and increase their presence there, so they can do local deliveries. And they're also investing more into their fulfillment network. So, when you combine all of that just announced in one month, it's very clear that Shopify is taking COVID-19 extremely seriously and really hitting the gas.
Lewis: Yeah. And this just highlights the strength of having a platform that people like, and then being able to roll more and more functionality into it over time. You know, the hope for them as a business is that they continue to find features and products that end users like and wind up building into their accounts and what they're willing to pay for. And the only way that that works, if you're an e-commerce player, is if you're offering things that wind up facilitating transactions. And you look at all of these and they make sense.
You know, things that are a little bit more in the business account financing realm, things that are a little bit more in the delivery realm, my gosh! That has been like the narrative of the last couple of months; and fulfillment networks. I mean, they're just trying to make all of these elements a lot easier for small businesses, because it's hard to stand that stuff up on your own.
Feroldi: Yeah, totally. And, again, this just shows why Facebook chose to partner with Shopify. It's products like these that are going on in the background as well as Shopify's vast ecosystem that shows that, I think, Facebook was [laughs] pretty smart to say, how about we partner with Shopify as opposed to trying to take them on directly?
Lewis: Yeah. And you know, it's something where the Facebook element of this news might wind up being non-news, you know, we don't have to go back far to see an instance of Facebook announcing something that seemed, kind of, earth shattering and wound up being pretty ho-hum. You know, Facebook Dating, [laughs] I remember when they announced that, Match shares cratered, like, 20%. I don't know anyone that uses Facebook Dating.
And so, there are whiffs when it comes to these big tech companies, but so much of the, kind of, influencer element of social media and brand element of social media is highlighting products and really making those products more visible, I have to think that making it easier to buy products that are being featured is only going to bode well for, both, Facebook and for Shopify.
Feroldi: Yeah. My takeaway from Facebook Dating was, don't bet against Tinder.
Lewis: [laughs] Yeah, I mean, people like having certain parts of their life segmented, I think. I think that's maybe a helpful takeaway there too. Match Group is just, my gosh,! A giant in that space.
Alright, Brian, we're going to be talking about our second story from the week that I think is probably worth a pretty decent deep dive here. And we've talked about how there's antitrust stuff going on in big tech; you know, the larger that these types of companies get, Facebook being one of them, the more and more regulators are going to start paying attention to them.
And it seems like this week there is traction gaining with an antitrust case levied at Google's parent, Alphabet. You know, this is something we've long, kind of, speculated about. But I think for one of the first times we've seen a little bit more concrete evidence that something might be coming down the pike.
Feroldi: Yeah. So, the Justice Department and a group of state attorney generals said that they're likely to file an antitrust lawsuit against Google in the near-term and really get into building up a litigation against them. This is nothing new, to your point before, God! We've been hearing about this for how many years. And take a company like Google, how many times has this company paid fines in the billions of dollars throughout its history for its anti-competitive practices, but you flagged a story for me that really kind of shows that regulators in the U.S. might finally be kicking this up to the attention that it deserves to beget, so it's something to keep an eye on.
Lewis: Yeah. And this is something that, you know, both sides of the political aisle are interested in, the big tech platforms are kind of in this rare space where no one seems to like them and yet everyone uses them all the time. And so, you know, no matter which side of the aisle you're on, you are probably not happy with at least one of these companies. And I think what we're seeing for, you know, the group of state attorney generals is, it's almost every single state, you know, this isn't something that is regionalized or too politicized in that sense.
But we don't know exactly when a case might be coming from the Justice Department, there's rumors that it could be happening as soon as this summer, but I think it's worth kind of unpacking exactly what the path to an antitrust case looks like here, because this stuff gets really complicated really quickly. We've done some discussions of it in the past on the show, but I think what this kind of hinges on is the fact that Google is absolutely dominant in search, absolutely dominant.
Feroldi: Yeah, totally. Their market share is North of 90%, and they also dominate with, kind of, the tools behind the scenes. So, on the market for supply side platforms, those are called SSPs, their market share is between 40% and 60%. And then for accepting bids from exchanges on the demand side, their market share is between 50% and 70%, and we don't really see that as consumers, right? That's what makes this so interesting.
We as consumers, the products that we use, they are free. So, in this case, it's almost like they have a monopoly with their core customers which are businesses, businesses that want to advertise. So, this is in so many ways so different than the antitrust that we saw in the past with, like, Standard Oil or like AT&T, where consumers were the ones paying those bills. Consumers aren't paying these bills, [laughs] businesses are. So, I think that's probably one of the reasons why it's taken so long to kind of get to where we are today. So, this will be a fascinating story to watch play out.
Lewis: Yeah and the logic flow here is, you know, the consumer element is such a large part of anything with antitrust, you know, antitrust is going to look generally at are there consumer damages, is it stifling competition, is it stifling innovation? Those are all considered, kind of, bad outcomes of power being too consolidated in a marketplace.
And when you talk about the dominance they have in search and the fact that they have these other products that other people use that basically connect buyers and sellers. Well, publishers tend to use those quite a bit; and Google, for making those transactions happen between ad buyers and sellers, wind up taking a little bit of money as part of that.
And so, the thought is that they have these tools that are available, they also own the search landscape, and people that are vying for internet attention are trying to use these tools. And so, Google is both, kind of, a participant and a provider in this space. And there's a thought that maybe Google prevents its tools from playing nice with competitors. Because they are able to kind of hide behind privacy, there's the thought that they might be able to obfuscate some of the performance metrics when it comes to ad tools. And so, you know, how do we get to the point where this is something where consumers are paying more?
There was a paper put out that kind of walked through that logic flow and effectively it was, well, if we're not seeing true rates or if Google is able to take a cut and, kind of, obfuscate a little bit, it's possible that publishers aren't getting paid as much as they maybe should be getting paid or that Google is getting paid more for some of the services that they're providing, because performance metrics might not be as clear as they should be. And in turn, that means that publishers have to charge more to customers or that products have to wind up being charged slightly more higher prices in the marketplace to account for this higher ad spends that are going to be coming in.
That is a several degree argument though, Brian, and it falls apart quickly. I think what I kind of struggle with this is like, well, you could very easily argue that the advertisers are the customers here, you know, we think of consumers as the customers for antitrust, but it would be very easy to look at these businesses and say, well, these are the real customers of these companies.
Feroldi: Yeah. The point here is that me and you are not lawyers, this is an extremely confusing issue, I see both sides of the case. I think that Google could easily say, well, look at all the competition we have in search. It's just a click away to go to a DuckDuckGo or, I personally use Ecosia as my search engine. So, Google has some points there.
And are consumers being hurt directly? The government might have a really hard time, kind of, proving that thing out. And then there's also the, well, what are the potential ramifications could this be? Is it just that Google is going to have to start paying bigger fines because of this, is there going to be calls for the company to get truly broken up? I mean, we don't know. But I think the thing that we wanted to highlight here is that this issue, first off, isn't going away, and second off, could really start to heat up. It's worth pointing out, it's an election year too, Dylan.
Lewis: Yeah. And so, this is something that could be a big win for people that are looking to score political points. The reason that I think this is interesting, and [laughs] you're like, you threw Amazon, that's in there. This is where I'm going with that part of the conversation, Brian, is -- so, I talked before about how Google has a product that they, kind of, operate in and a market that they operate in, but then also a platform that monetizes behavior within that market. And we're seeing more and more companies, especially big tech companies do things like that. You know, we have companies that have a ton of resources, they've been able to build out these ecosystems far beyond what they were originally scaled to do.
And just as another example, and this one might be a little bit more tangible for people to follow. So, Amazon, at core, they're an online marketplace, that's what people know them as, right, the everything store. But they also participate in that marketplace with private label goods. And so, they are in a position where they connect buyers and sellers with the marketplace, they are a buyer and seller, or they're certainly a seller, and they also collect ad revenue from sellers looking to reach buyers.
So, it's a very complicated situation. But when you start acting that many ways in one market, it puts you in a position where you are probably going to have a conflict of interest at some point. And in Amazon's case, we've seen reports of Amazon employees allegedly accessing private seller data in order to make determinations about what private label goods the company will decide to sell.
That is probably a more concrete way of illustrating some of the problems that Google might have when antitrust folks come along, because Google is not the only one that has that dynamic of, we operate the space and play in it.
Feroldi: Yeah, I think that's right. I remember seeing a CNBC interview, when they did a deep dive on Amazon, and I believe they did an interview with an Amazon seller that sold supplies for paintball equipment. And they said, "Yeah, everything was rocking and rolling and then Amazon saw how well we were doing and then they started to compete against us." And it's kind of hard to compete against a company like Amazon when they can see your cards and their cards at the same time. So, yeah, there's something there for sure.
Lewis: Yeah, imagine going to a blackjack table [laughs] in Vegas and then having the dealer know what you had in your hands, you know, that's effectively what you're doing in that situation; if those allegations are true. And that's just inherently anticompetitive.
So, I think that this is the, kind of, again, natural next step. I mean, that's kind of the keyword I use with Facebook before, with this evolution of e-commerce, but this is the natural next step in what we're going to be seeing with antitrust regulation where these businesses have gotten very big very quickly and probably gone beyond the scope of what regulators expected them to be able to do. And we know that these regulations are always going to, kind of, follow behavior, that's kind of the evolution of rules, period. It's the same for sports and it's certainly true for business. And it seems like regulators are intent on catching up at this point.
Feroldi: Well, let me ask you, Dylan; now that we kind of know this. I know that you're a shareholder of many of these businesses. Does any of this scare you? Make you think differently or are you going to change anything you do based on what we learned today?
Lewis: Well, I mean, it's interesting, because I think fines have just been part of standard operating procedure for a lot of these companies for a while. And Europe has, kind of, put these businesses in their sights a little bit sooner than the U.S., and maybe that's not surprising, because they're U.S. businesses, but also there are different rules and attitudes about privacy in Europe for sure.
I think that if we are in a position where it's fines, like, we just have to be used to that. You know, if you're going to own shares of these businesses, that's just the way things are going to go. What gets interesting is if any of these lead to businesses being broken up, and this gets talked about all the time with companies like Amazon, it's entirely possible that a broken-up version of Alphabet or Amazon actually looks more valuable than the bundled version of that company we see today.
Feroldi: Yeah, that's the crazy thing, right? You could make the argument, if Instagram was spun out of Facebook, for example, [laughs] that, boy! Would it command a high valuation in the market and some shareholder value could be unlocked there. So, that would be totally ironic [laughs] if antitrust regulation went through and then shareholders made even more money off of it.
So, I can tell you for me, I own almost all the businesses we talked about today and I'm definitely taking note of it and will probably watch it, but I'm not going to take any action so far based on what we know today.
Lewis: Yeah. And the one concern, I think, with splitting some of those businesses up is there are operations that they have that are just inherently costly. You know, YouTube, for example, hosting video content is incredibly expensive. And while it is a media giant and it's the leader in the video space online, it's something where, like, we think we know roughly what that business looks like in terms of advertiser popularity and usage, but we don't really have a good sense of what the bottom-line on a business like that looks like. It's an expensive one to run and it might be being subsidized right now by far more profitable operations from Google.
And so, you know, a lot of these platforms have been able to survive because they've had this wildly profitable parent that's allowed them to operate at a loss. I don't know what a split-out version of it might look like from a financial perspective.
Feroldi: Neither do I, but we would, obviously, get that kind of data before the split happened, then we would have to make judgment calls then. But, yeah, either way, this is going to be a business story that isn't going away. Don't be surprised if you start to see this more and more and more in the news. But also keep in mind that, as we just said, this is an election year, so it's very possible that there could be gnashing of teeth, screaming and turning out to be a big nothing burger by January of next year; we'll see.
Lewis: Yeah. [laughs] And I mean, kind of, on that note, election years tend to be really good for ad-based businesses. So, in addition to this being something that could heat up or dampen the antitrust thing, it's probably something that will ultimately be good for the business results for these companies, because you see ad rates and ad interest skyrocket as campaigns are going on.
Feroldi: Yeah. And they also called out the fact that it might result in these businesses being more regulated. If that was the case, boy! Could that potentially stifle potential competitors down the road. So, that might even increase these companies' moats over time, even beyond what they see today. So, again, at this point it's really too early to know anything with confidence, but you can bet that we'll be watching.
Lewis: Yeah. And you can bet that we will not be lawyers. [laughs] I think that that was one of the things that the conversation highlighted is, this is a very complicated space and neither of us are going to be getting our JDs before any of this wraps up. So, maybe we'll bring on our legal consultant, Nick Sciple, to talk about some of that stuff -- [laughs]
Feroldi: ... I was going to say, that's why we have Nick, right? [laughs]
Lewis: [laughs] Yeah. In-house counsel. Brian, thanks so much for hopping on and talking through all this tech news with me.
Feroldi: Hey, enjoy your drive-thru Memorial Day weekend at your house, Dylan.
Lewis: Yeah, hopefully it goes smoothly. And if I wind up doing that listener recipe, if I can get the lamb, I will post a picture of it and the finished results. And I always love to see whatever Austin Morgan is working on. So, Austin, if you wind up smoking anything good, you know, make sure that you throw it up on Twitter as well.
Listeners that's going to do it for this episode of Industry Focus, if you have any questions or you want to reach out and say, "Hey!" shoot us an email over at [email protected] or @MFIndustryFocus on Twitter. If you want more stuff, subscribe on iTunes or wherever you get your podcasts.
And 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 Brian Feroldi, I'm Dylan Lewis, thanks for listening, and Fool on!
