Google's moat being questioned, and cloud pyramid schemes

1 October 2023 | Issue #9 - Mentions $GOOG, $AAPL, $AMZN, $MSFT, $META, $SE, TikTok

Oct 01, 2023

Welcome to the ninth edition of Tech takes from the cheap seats. This will be my public journal, where I aim to write weekly on tech and consumer news and trends that I thought were interesting.

Let’s dig in.

Search engine wars

Lots of interesting news coming out of the DoJ’s antitrust case against Google, some of which are challenging my prior assumptions about the company’s foothold in search.

From Bloomberg

“Two years after Apple Inc. (AAPL) dropped Google Maps as its default service on iPhones in favor of its own app, Google had regained only 40% of the mobile traffic it used to have on its mapping service, a Google executive testified in the antitrust trial against the Alphabet Inc. (GOOGL) company.
Michael Roszak, Google’s vice president for finance, said Tuesday that the company used the Apple Maps switch as “a data point” when modeling what might happen if the iPhone maker replaced Google’s search engine as the default on Apple’s Safari browser.”

I’ve previously thought that if Google was ever to be prevented from paying Apple to be the default search engine on Safari, it would be net positive to the bottom line for the company as most users would switch their default search back to Google, saving the company billions in expenses, while keeping most of the revenue. This is because Google Search is a superior product due to its algorithm and indexing and has much greater brand recognition. Losing 60% of mobile searches would be devastating for the company, especially considering that desktop searches continue to cede share to mobile every year, while iPhones are gaining share within mobile.

Source: The Webmaster

Maps may not be the best comparison though. There seems to be a lower ceiling as to how good navigation software can be versus search, which can constantly get better with more content and users on the web. Apple Maps is getting close to Google Maps in functionality according to online reviews. Search might be a completely different ballgame. Apple seems to agree.

Microsoft Corp. discussed selling its Bing search engine to Apple Inc. around 2020, a deal that would have replaced Google as the default option on the iPhone maker’s devices, according to people with knowledge of the matter.
Executives from Microsoft met with Apple’s services chief, Eddy Cue, who brokered the current search engine relationship with Alphabet Inc.’s Google, to discuss the possibility of acquiring Bing, said the people, who asked not to be identified because the situation

This would’ve been an easy way for Apple to enter the search engine market, so perhaps the fact that the talks never reached an advanced stage means the economics just weren’t attractive enough for consideration. Of course, this would change if the DoJ wins the case and Google is no longer allowed to bid for its default status. Apple is currently bringing in ~$20bn1 of pure profit, in part, by using Bing as a bargaining chip. It would be a risky and costly endeavour disrupting the status quo, while giving consumers a worse experience. As far as Eddy Cue’s testimony goes, Apple had never really considered not having a deal with Google an option. From the Verge

Meagan Bellshaw, a Justice Department lawyer, asked Cue if he would have walked away from the deal if the two sides couldn’t agree on a revenue-share figure. Cue said he’d never really considered that an option: “I always felt like it was in Google’s best interest, and our best interest, to get a deal done.” Cue also argued that the deal was about more than economics and that Apple never seriously considered switching to another provider or building its own search product. “Certainly there wasn’t a valid alternative to Google at the time,” Cue said. He said there still isn’t one.

Now Eddy Cue could just be saying this because of the deal, but it’s certainly reassuring for Google investors to hear, and also helps with deal negotiations down the line with regards to the revenue share agreement. It’s going to be interesting following along nonetheless.

Cloud giants buying revenue

From WSJ

Amazon.com said it has agreed to invest up to $4 billion in artificial-intelligence company Anthropic, the latest big startup investment by tech giants jockeying for an edge in the AI arms race.
Amazon said that, Amazon said that, as part of the deal, Anthropic would be using its custom chips to build and deploy its AI software. Amazon also agreed to incorporate Anthropic’s technology into products across its business.
People familiar with the deal said Amazon has committed to an initial $1.25 billion investment in two-year-old Anthropic, a number that could grow to $4 billion over time depending on certain conditions. As part of the agreement, Anthropic has agreed to spend a certain amount of the capital on Amazon’s cloud infrastructure business, Amazon Web Services, one of the people said. The specifics of that arrangement couldn’t be learned.

This announcement comes a few weeks after AWS hosted a media day at its Seattle HQ where the company focused on its plans for GenAI. I’ll put some of Adam Selipsky’s comments from that event here.

Selipsky: It is true that we've been considerably less acquisitive than many large technology companies. And I would say that a lot of those technology companies that have been highly acquisitive — not all, I'm not making a blanket statement — but a lot of those tech companies … acquisitions became the way that they innovate, and they then have lost their ability to consistently innovate internally.
Amazon in general, and AWS certainly as part of that, has always jealously safeguarded our ability to innovate and to innovate rapidly on behalf of our customers. We remain an innovation machine highly capable of building new things ourselves that are interesting. That being said, we're certainly going to continue to acquire things I'm sure over time, and we will remain open to not only acquisitions, but also to investments of different types.

and from Adam’s FT interview back in July this year

RW: Microsoft has been working with OpenAI for four years. With that amount of experience, and that head start, they have a real advantage in perfecting or optimising the platform for this kind of technology. Are you behind?
AS: No, I think that’s just flat out untrue. I’ve seen numbers recently published that suggested AWS is at least twice as large as [Microsoft’s cloud computing service] Azure. So our experience in running technology and systems at massive scale is unparalleled. We have far more customers across every industry, every use case, every country . . . So I think, just in terms of overall cloud capabilities, it’s really not even close. We have by far the broadest and deepest set of capabilities and of customers.
Then, specifically in machine learning, we released SageMaker in 2017. So we’ve had a machine learning platform since 2017, and have over 100,000 customers using it already.
We’ve even been building our own LLMs. And not all of our large competitors are choosing to build their own models. Some have just outsourced the models that they’re going to use to other companies, which is an interesting choice, but not the choice we’re making.
It’s interesting that somebody who’s not running their own models [like Microsoft, which has outsourced to OpenAI] would argue they’ve got such deep expertise in this area.

This makes the investment in Anthropic even more interesting. It seems like Amazon is hedging their bets as it relates to GenAI (something all the cloud giants are doing, to be fair). The space is still so early - “Day 0.1” as Adam says - so he can be forgiven for not wanting to make binary bets. Amazon had stumbled early on by missing out on OpenAI, Cohere and Anthropic, and the company’s initial attempts at developing an LLM internally - named Bedrock - have been unsuccessful (Bedrock is now the name of its fully managed service that gives customers access to external LLMs). OpenAI is still the leader as far as LLMs go, but partnering with multiple providers will help to commoditize the space, while cashing in the computing costs required for training and inference (and prevents customers from going to other cloud providers to get their AI/ML needs). Amazon seems to be figuring it out (though maybe Adam’s comments are why he didn’t get a photo op)

More consumer chatbots

From the Verge

Meta is officially entering the AI chatbot wars, starting with its own assistant and a slew of AI characters it’s releasing in WhatsApp, Instagram, and Messenger.
For anyone who has used OpenAI’s ChatGPT, or other chatbots like Anthropic’s Claude, Meta’s AI will immediately feel familiar. Meta sees it as a general-purpose assistant for everything from planning a trip with friends in a group chat to answering questions you’d normally ask a search engine. On that latter piece, Meta is announcing a partnership with Microsoft’s Bing to provide real-time web results, which sets Meta AI apart from a lot of the other free AIs out there that don’t have super recent information.
Another big aspect of the Meta AI is its ability to generate images like Midjourney or OpenAI’s DALL-E via the prompt “/imagine.” In my brief demo, it produced compelling high-res photos in a few seconds. Like all of Meta’s AI features being announced this week, this image generation is totally free to use.

The AI characters masking as celebrities is actually genius and makes it much more monetizable. We know from Google SVP Prabhakar Raghavan’s comments from last year that almost 40% of young people are using Instagram or TikTok to look for a place to eat lunch instead of Maps or Search. I can imagine people asking the Kendall Jenner AI for recommendations on clothes or make up products to buy or even for her favorite restaurants. These would have more weight than a general chatbot. This is all very compelling and only the beginning of what’s to come. UBS ran some napkin math and came up with $16bn in incremental revenue for the company based on monetizing 5% of queries and using Google’s mobile CPC (UBS estimates Google’s mobile search queries are monetized at 29%). The company has shared in the past that people are doing more than 2 billion searches a day across its family of apps, looking up people, businesses and other things they care about. Its ads have been all about discovery so far and pushing products you didn’t know you needed. Intent based ads are going to be all incremental, so it’ll be interesting to see Meta combine them both to be a one-stop shop for advertisers. I wonder if Google will present this development in search competition as an argument in the DoJ trial.

Source: UBS

Indonesia ecommerce

From Reuters

“Indonesia has banned e-commerce transactions on social media platforms, the trade minister said on Wednesday, in a blow to short video app TikTok, which is doubling down on Southeast Asia's biggest economy to boost its e-commerce business.
The government said the move, which takes effect immediately, is aimed at protecting offline merchants and marketplaces, adding that predatory pricing on social media platforms is threatening small and medium-sized enterprises.”
…
The new regulation also requires e-commerce platforms in Indonesia to set a minimum price of $100 for certain items that are directly purchased from abroad, according to the regulation document reviewed by Reuters, and that all products offered should meet local standards.
Zulkifli said TikTok had one week to comply with the regulation or face the threat of closure. Indonesia Deputy Trade Minister Jerry Sambuaga earlier this month named TikTok's live streaming features as an example of people selling goods on social media.

This regulation is very positive for incumbents and inhibits TikTok’s ability to leverage its existing SFV userbase to drive ecommerce transactions. It means it’ll have to go back to allowing links to external ecommerce sites and build a separate ecommerce platform, if it still wants to stay in the space. The rule on minimum price of $100 for imported items also prevents Temu and Shein from entering/coming back into the region, as their items are typically $20-30. Shares in Sea are up 22% in a week in response, though in my opinion are still too cheap as growth was set to accelerate even before this ban was announced. This will be incremental to both GMV growth and marketing efficiency.

That’s all for this week. If you’ve made it this far, thanks for reading. If you’ve enjoyed this newsletter, consider subscribing or sharing with a friend

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I welcome any thoughts or feedback, feel free to shoot me an email at portseacapital@gmail.com. None of this is investment advice, do your own due diligence.

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