In this podcast, Motley Fool analyst Tim Beyers and host Dylan Lewis discuss:
- The DOJ's case against Alphabet's Google.
- Google's exclusive deals with Apple and how lucrative those deals were for Apple.
- The similarities between this case and the government's antitrust case against Microsoft in the 1990s.
Motley Fool host Mary Long caught up with Motley Fool analyst Sanmeet Deo for a chat about airport security stock Clear Secure and the race to the front of the line.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on Oct. 11, 2023.
Dylan Lewis: PSA. If you're looking for something you don't have to Google it, you can also use Bing, Yahoo and Duck Duck Go. Motley Fool Money starts now. I'm Dylan Lewis and I'm joined over the airwaves by Motley Fool analyst Tim Byers. Tim, scale is zero to 10. What are we looking at in terms of caffination right now?
Tim Beyers: We're going to 11 Dylan. Let's not get around.
Dylan Lewis: I'm about a half cut behind you but I will get there, I promise. Today, we are looking at the DOJ's case against Alphabet's Google, and one spot where AI may be affecting hiring. Let's start with the antitrust talk, Tim. So many of our antitrust conversations recently have been about potential deals and whether or not they will go through. In the case of the DOJ and Google, though, this is the government looking at past action by a company and saying it led to a monopoly or reinforced monopoly.
Tim Beyers: This is the deal between Google and Apple for over many years, in which Google became the default search engine across all Apple devices. But I think the one that's primarily at issue here is the iPhone, where if you were looking on the iPhone, using Safari on the iPhone, and searching on the iPhone, your default search engine was Google and this has proven to be incredibly lucrative for Apple over time, and theoretically incredibly lucrative for Google. But they're being very cagy about it, Dylan. But I think I know we're going to get to it in a second. Some of the things that current CEO, Sundar Pichai, said about this back in the day. He's being more cagy about it right now, but he wasn't so cagy in the past, which I think is very interesting. But before we get to those comments, let me just quickly frame up here to give folks a sense of how lucrative this could really be. Apple is a massive company today, with about $119 billion in operating income. That's in 2022, fiscal 2022 over the trailing 12 months, about $111 billion in operating income. Reportedly, this deal is worth about $10 billion to Apple on an annual basis. What you're talking about is close to 10 percent of operating income for Apple from one deal that has a very long history, Dylan. This is significant.
Dylan Lewis: Yeah. The arrangement for Apple would be incredibly high margin. What we're talking about here is essentially setting something as the default search engine and forgetting it and just leaving it there. There's been some talk about whether or not this is material to Apple. I think that perspective right there is pretty perfect, Tim. I think we can all agree that's material and something that is definitely benefiting the company and both companies. You mentioned the Sundar Pichai comments earlier, back in 2007 when he was in charge of Google's Chrome browser, not the CEO of the company, he had written a letter to Larry Page and Sergey Brin saying at one point I don't think it's a good user experience and I don't think the optics are great for us to be the only provider in the browser. Even suggesting there should be other options as a dropdown. Those are coming up because he is now in charge and is having to answer for this arrangement that we have in place.
Tim Beyers: To put it even more context around it, at that time, he said there should be wait for it, Yahoo as an option. That is significant at the time, because Yahoo, we haven't thought about Yahoo as a legitimate search engine for decades, let alone years. This is very significant and the fact that he brought this up at the time, I think is very damaging to Google's case because it makes it seem like what Google really paid for is not just space on the iPhone, it paid for exclusivity. Now, whether or not Google is willing to admit that it paid for exclusivity is an entirely different matter and I'm not a lawyer, so I'm not going to make a legal judgment here. But that sounds very suspicious, it sounds very damaging and according to the report that we're seeing, is that over time as this deal was renegotiated, it was renegotiated to allow Apple to have other providers in different parts of the world. To this day, Apple does have, if you use an Apple device in different parts of the world, your default search engine may not be Google, but in most of the world it still is. Of course, there are ways that you can choose to have a different search engine on your iPhone. But Dylan, I'm a reasonably smart tech guy. I've never even tried to make a different default search engine on my iPhone. I am certain that it's possible, but I don't know how to do it. I know I'd have to go research it, and I think that's part of the government's case. It's not instantly intuitive, which is what we want.
Dylan Lewis: Yeah, there is an inertia to things being defaults and just the average person is not going to go out of their way to make those changes. When you solidify yourself there, you wind up in a spot where you are the 90 percent search market share leader in the most valuable search market in the world. Google very smartly positioned themselves this way, but it seems like maybe they are finally having to pay for it. One of the things I see coming up with this case a lot, and I wanted to ask you about Tim, is there are a lot of comparisons to what is happening here and the government's antitrust case against Microsoft in the 1990s with a very similar notion of pre-installed defaults gate keeping, What is and isn't there for consumers when they open a device. Do you feel like that's a fair comparison?
Tim Beyers: I don't know that it's a fair comparison legally, but from the perspective of the narrative, point, the echoes here are just far too loud. Because at the time, for those who weren't there and didn't see this. The argument with Microsoft is that as part of their deals with different PC makers, they would ship as part of your Windows license, you were shipping Internet Explorer as the default browser inside Windows, and so that really crowded out, which was the alternative at the time, which was Netscape Navigator and it really crushed Netscape's market share over time because it was very easy, you just pointed out, Dylan. If it's the default and it's easy to set up and it's right there for you and you don't have to go download it. Then that's largely what you're going to use. Part of the issue at the time, which people may not remember, is Bill Gates wrote an internal memo that became public later and it was in some ways a roadmap for Microsoft and it was entirely about the Internet, and how important that Gates thought the Internet would be to Microsoft. Of course, the Department of Justice absolutely used that as a sledgehammer against Microsoft at the time. Said this was intentional, this is what Microsoft wanted to do. They made it the default because they had to grab market share because they knew this was the most strategic market for them. Because the Internet made the PC so relevant at the time, which is a legitimate argument. Now, again, let's separate the legality from the narrative. But I think that narrative was so strong and it echoes so much with what Sundar Pichai was saying, saying, look, this is something we don't want to get caught in because we are essentially saying, if we're the default, we own this and so we get all the advertising revenue and we're going to pay Apple to play a little bit along with us here. It feels very familiar, Dylan, and that's not a good look at all.
Dylan Lewis: Interestingly enough, that decision, that antitrust movement against Microsoft opened the window for Google and for Chrome and for all of this other second wave innovation that we saw on.
Tim Beyers: Irony never disappoints, Dylan. Irony never disappoints. [laughs]
Dylan Lewis: One of the things that's interesting about this is we don't exactly know what a remedy would look like if we wind up in a spot where the DOJ is successful here. There's discussion of would there be a fine, would there be proposed break ups for Google's search properties and its Internet properties. Tim, what do you make of all of that as a risk to the business? Is it sing you factor in at all or are you just say this is the reality of owning shares of a business that is this big.
Tim Beyers: I think it's part of the reality. I recognize this is something that could happen and there are multiple scenarios here. I think the more likely, if history is the guide, the more likely outcome is a fine, maybe a very substantial fine. But let's remember that Google has a massive balance sheet. They have a lot of cash, they generate a lot of cash. If it's a fine, they are going to be more than happy to pay it and they can make this go away if it is a break up. I think that's the unlikely scenario. But let's say it is, that is fine with me. I am an owner of Google shares. I will happily take the break up. Give me my position in YouTube, give me my position in Google Cloud, give me my position in the Alphabet core business, and separate it all out. I will take that because I think that ultimately creates value for me as a shareholder. I see that less as a risk, Dylan, as more as something that is a potential outcome that I would be happy to see if that's the route the government goes down, I think it's more likely we'll see a fine that's a short term hit that I think alphabet could easily absorb. Either way, I'm OK with this, but I do think there's a likelihood of consequences. I just don't know what the consequences would be.
Dylan Lewis: Over to our second tech story today. That in a job market that is relatively strong, we are seeing some weakness in one zone. That's IT. Tim. The unemployment rate for information technology jobs was higher than the overall jobless rate last month. The immediate take that I'm seeing online is some AI automation may be impacting entry level IT jobs. Does that hold water for you?
Tim Beyers: Well, yes and no and maybe no and yes, maybe let's put those in order. The reason it's a no is because I think we've all seen the number of layoffs in the IT sector. It's been absolutely staggering. You can expect that a large number of those layoffs were more junior people, although I'm assuming too, there are some other senior people in there because we have seen some start ups with some founders that are closer to my age. I'm in my '50s and that's actually a good cohort for venture capitalists to put some money behind because you've got seasoned entrepreneurs who know how to do this. There's probably layoffs across the spectrum. There's that, but also there is a lot of talk about AI as an automation mechanism. I do expect there is automation happening. I think it's more like Dylan, we've seen a huge number of layoffs and you have some IT firms that are unwilling as business picks up to hire back at the same pace because they may be automating some of those jobs that previously were held by a person.
Dylan Lewis: For folks that aren't as dialed in on tech trends and the role that AI plays in businesses, what would AI automation replacing entry level jobs look like at some of these places Tim?
Tim Beyers: Probably customer service jobs may be automated. Like instead of a customer service agent who is sending out e mails and responding to customer requests, that is probably something that's automated through maybe some bots. It could be having to, maybe route calls, maybe thinning out your customer service department so that more of the requests are automated and handled via automation. You have a much smaller customer service department. I could easily see some elements of marketing and marketing automation handled by different types of AI workflows that are just doing things like maybe writing base copy. Doing basic copy or updating website copy and things like that. Something that a marketing in turn might do that now an AI might be doing. Really it's not much of an AI, it's more like an algorithm, a machine learning system that has a bunch of copy in it and is doing automatically generated pages. It's not really doing anything intelligent, it's just automating things. I do think there is a bit of an emphasis on automation, and we're categorizing that as AI. You know what, there is something that's fair but also unfair about that. But I do think automation is hitting a lot of these tech companies. Where the jobs are in IT are probably a bit more senior, and the junior level jobs are going to be a little bit tougher to get. That's a trend I expect to hold up for a little while.
Dylan Lewis: Tim, no risk of us automating you away from being one of our Motley Fool Money.
Tim Beyers: I hope not.
Dylan Lewis: Always love going to you for tech intelligence. Thanks so much for joining me today.
Tim Beyers: Thanks, Dylan.
Dylan Lewis: Coming up. If you've been to an airport recently, you might know Clear. It's the company that lets travelers cut through the security line but you might not know that it's a publicly traded company. Mary Long cut up with Motley Fool senior analyst Samneet Deo, for a chat about the business and the competitors in the race to the front of a line.
Mary Long: Clear's mission is quote, to enable friction-less and safe journeys using your identity and quote, what does that mean and what does it look like as an actual business model?
Sanmeet Deo: Clear Secure ticker Y-O-U. Their business models basically is simply, we describe as like an identity management platform. They use biometric technology to verify a person's identity by looking at faces, fingerprints, you know, et cetera. It's not just an airport company though. A majority of the revenue still comes from there. But it's expanding to use cases such as stadium security, online identity verification by linkedin, financial security like know your customer, type use cases and et cetera.
Mary Long: Let's focus first on that airport security piece because that's probably one that listeners are most familiar with. Clear Plus is the company's flagship offering, and that grants expedited entry to over 50 airports in the US. It comes out to about $189 a year. How many paying members does Clear actually have today?
Sanmeet Deo: Clear as of the second quarter of 2023, they have over 6 million active Clear Plus members, so those are paying members. This is up from around 3.8 million as of the end of quarter one 2021. Clear is a pretty sticky product with their net member retention above 90%. They have a key performance indicator that that their report is called the annual plus member usage. That's been steadily increasing over the past eight quarters. That indicates how much utilization of their product, of their pass is being utilized. The amount of verification is done over how many actual members there are.
Mary Long: Interesting. Within the airport space and others because you mentioned that Clear is expanding into different sectors as well. Are there any competitors that clears up against or is this the only game in town?
Sanmeet Deo: One of the first competitors that you would think of when you think of Clear in the airport, if you've ever seen in the airport, is TSA pre-check. TSA pre-check is solely focused on airport security and royal members through an online application and in person appointments. They rely on traditional documents like boarding passes, and government ID's. It costs about $85 for a five year membership, offers no family plans or discounts. In contrast, Clear primary serves airports, but has expanded to use cases. They use stadiums, other venues, they enroll members through in personal kiosk using biometric identification, fingerprints, high scans, and they have an app which you can also enroll on. It costs about 189 per year and offers family plans, free membership for kids under 18 and various discounts. Key differentiator for Clear versus TSA pre check is that it lets you skip lines at boarding gates and passport control desks in addition to the security checks. Now an interesting thing is in 2020, TSA actually awarded Clear what they call the TSA biometric pre-check expansion services and vetting programs. That's a mouthful.
They have to have an acronym for that at some point I guess. But as part of this program, Clear is going to leverage their network and resources to handle the TSA pre check, subscription renewal processing, and new enrollments for TSA pre check. While it seems like they would be competitors, they are actually more of complimentary products. In addition to this, Clear is going to be offering a bundled Clear Plus membership and TSA pre check subscription for new members. You can have both with a bundled offering that enhances your ability to get through lines and use their products. TSA pre check while you would think right off the bat that that's a competitor, it's a little bit more of a complimentary service, especially with some of their partnerships and collaboration that they've been doing. There are some other smaller competitors like Verify and others that do some of this airport security type identification, but many of them don't have airport presence like Clear does. That's been a huge staple of Clear's businesses, having those kiosks, having that presence in the airport where passengers get an idea of what their business is all about, what their offerings are all about. And they have ambassadors, which some people might get annoyed by because they try to sell them the pass at the airport. They do also help them with kind of getting enrolled, using the service, what it could actually do for them, so you have someone to speak to at the airports to get a better understanding for that product. That's something that other competitors don't have. In terms of their biometric technology, some of the competition I would say is typically from big tech Alphabet, Google, Apple, Microsoft, Meta. Some of those big tech companies, if they start offering more identity verification system software to help with that, that could be a competitor. Of course, having privacy and all of that information with Big Tech is probably going to be a concern for many people given that they already have so much of our information. Do you want to really be giving them a lot more? So that's kind of the competitive landscape that Clear is facing.
Mary Long: When talking about the competitive landscape, you mentioned like I'll say, the threat of big tech and like their handling of biometric data and how that could be a potential obstacle for Clear. But if we focus on Clear alone, what do they actually do with our data? Should we be wary of them?
Sanmeet Deo: Look, you give them your driver's license, your passport, all this information that like, wow, they have it all. But privacy is actually heavily embedded in the DNA of the company. They're committed to never selling member data. They may use the data to improve their own marketing, but they're never going to sell your data to other outside parties. They've built a comprehensive information security and cybersecurity program. Their platform is certified at the highest level of security by government regulators and it is constantly being monitored and evaluated. The Department of Homeland Security has certified Clears security program with a FISMA high rating, which is the highest designated designation according to the Federal Information and Security Modernization Act. They do have some backing by government regulators, Department of Homeland Security. They're under the microscope, if they're not careful, they're not protecting that data, those government organizations have a much, much more in rows into really clamping down on them.
Mary Long: Clear might be a bit of an older company than people might expect and you've talked to me before about its founding story. How did Clear come to be?
Sanmeet Deo: Yeah, it's an interesting story. It was founded in 2003 and it was originally named Verified Identity Pass. It was founded by Stephen Brill who's a law writer and entrepreneur. It was in response to the intensive security checks and long wait times after the 911 attacks. And probably thought, how can we improve this? By 2008, they had 250,000 paying customers. They've been using 18 airports across the country. But then due to unsuccessful negotiations with their largest creditor, they had to file for bankruptcy and they ceased operations in 2009. Incomes, the two co founders now co founders Caryn Seidman Becker and Ken Cornick came in and bought out the assets out of bankruptcy for $6 million including hardware, access to the members,250,000 members, the Clear brand name and licenses with the Department of Homeland Security and other organizations. Seidman Becker and Cornick had come from the financial industry, running hedge funds and decided they wanted to buy this out of bankruptcy and run the company. Clear relaunched in 2010, it was a smart card company before launching pods and kiosk at airports, which many of you may have seen already. And then a partnership and investment by Delta in 2016 kind of helped accelerate their growth. Then they got 135 million in six investment rounds from various institutional investors and United Airlines bought a stake in 2019. All of that really started building their funding, building their platform. It took almost seven years for them to reach 1 million members. But it's added each subsequent million in less than a year. So it's been growing very fast and so ending in 2019, they had more than 5 million members. It's been around for a decent amount of time in a different entity. But it's really lately that it's definitely taken off. And it's well funded and has a strong balance sheet which I like as well.
Mary Long: So the company went public in June 2021, and since then, despite everything that we've talked about, the increasing enrollments, etc, the stock is down over 55% and it's now trading at about $17.50 a share. Again, that's in spite of increasing enrollments, the company's grown quarterly revenue since its Public Offering. In its most recent earnings, which were the second quarter of 2023, it posted positive net income for the first time as a public company. If we could say all that, why has the stock slumped so much?
Sanmeet Deo: One of the things that intrigued me about this investment is that it's trading it almost like a 10% free cash flow yield which is a 10 multiple on its free cash flow. So it's trading very reasonably cheaply actually in so it's like what's going on here? One, it's a very tightly held company. The co-founders own about 17% of the whole company themselves and they have pretty much, I think it's 80% of the voting control of the company. Then the rest of the holders of the stock, there's some institutional shareholders in there, Bill Miller and some T Row and some other institutional investors. The actual float that's out there is not as much as you might think. Given that it's a very tightly held company, the stock is going to be very volatile. So that definitely accounts for that. It does have an 18% short interest in the company. So that has probably been a result of some of the declines in the stock. As well a couple other points, you know, since it's heavily into the aviation airport industry as that industry news flow and things are discussed about that industry, the stock will trade on those data points, so that causes some volatility in the stock. But I have no reason to believe that they can't continue to maintain the profitability, continuing to grow, you know, memberships while, it could slow.
They have stated that the travel industry is still very strong and that's been confirmed by some other companies that you are widely followed like booking and Airbnb and others where the revenge travel as they've called it post-pandemic is still going and that could slow for sure. I think another reason that the stock may be trading down a little bit is because, it does have a huge concentration in the aviation industry. All these use cases that I was discussing briefly before are, they're working on, but there's no guarantee that that's going to be successful or even take off. That it will be a big platform that everyone's using and it's very ubiquitous. So there's probably a lot of skepticism around that.
Mary Long: Yeah, lots of potential for it to expand into industries beyond aviation, but still early days for a lot of that it seems. Sanmeet, thanks for clarifying Clear for us. It's been great talking to you today.
Sanmeet Deo: Yeah, thank you, Mary.
Dylan Lewis: As always, people on the program may own stocks mentioned and the Motley Fool may have formal recommendations for or against. So don't fire-sell anything based solely on what you hear. I'm Dylan Lewis. Thanks for listening. We'll be back tomorrow.
