SIMON BROWN: I’m chatting now with Henry Biddlecombe. He is of course a fund manager at Anchor Capital. Henry, good morning. I appreciate your time. (A) story that’s been bubbling around for a while (is) the Australian parliament wanting to pass legislation to force Facebook and Google essentially to pay for linking to news sites, and there are some nuances in terms of Google and the snippets that they use. In the last week Google started negotiating, starting to pay some money. They’d initially threatened to withdraw from Australia. That wasn’t going to happen. We also see Google paying out in France just some $20-odd million dollars. Is this a … big spat in a small teacup? Is it something that, as investors or potential investors, particularly in the case of Google, we should be worried about?
HENRY BIDDLECOMBE: You know what I think it is, it’s just a continuation of the global regulatory crackdown on big-tech companies, where you’ve got global governments and businesses trying to claw back the revenue that they’ve lost to the big-tech companies as they’ve kind of transformed the world. This is just another example of that taking place, and it happens to be the traditional media sector in Australia this time.
SIMON BROWN: And perhaps it’s not a bad way to do it, because Australia threatened rules, but the Australian prime minister last week was saying, you know what, we quite like that bundle of money you’re sending our way. Perhaps we can step aside. This is like two kids in the playground, sorting it out without the teacher having to get involved. It’s perhaps a better space and an easier path out for them.
HENRY BIDDLECOMBE: I don’t think it’s an ideal outcome. I think this is what happens when you don’t understand how your own business works. The fact is, when you look at the news it loses its economic value immediately when it’s disseminated. In the past, when people bought newspapers, they weren’t paying for journalism. If we’re honest, they were paying for the printing of the newspapers and the delivery trucks that would bring the newspapers to them, and the advertisers were paying for access to those readers. So nobody was paying for journalism.
And the truth is these mediums were in trouble a long time before Facebook and Google arrived. The news outlets needed to understand this.
The fact is they failed to adapt, and that’s why this has happened.
SIMON BROWN: Google is paying out, as I said, some $20-odd million in France, a couple of hundred million in Australia. For you and me that’s a big weekend for Google, which does $50 million revenue, or for Alphabet, which does $50 million revenue a quarter. They don’t want to see the money flow out. This doesn’t necessarily threaten their business model, but it might open The Trade Desk, which is a sort of competitor to the Google and Facebook ad business. Does that bring up something in The Trade Desk because they’re smaller and therefore sort of not being scrutinised – or am I getting ahead of it here?
HENRY BIDDLECOMBE: Look, I just think that this isn’t the answer. I mean, if you look at News Corp or some of the other news agencies in Australia that have now signed an agreement with Google, they’re now more dependent on Google than they’ve ever been, and that’s not going to change. If you look at the New York Times in the US, for example, this is a publication that saw the change coming years ago. They knew that they couldn’t compete with the search and the social media giants for ad dollars; instead, they focused on developing really high-quality content that they would ultimately sell via a subscription model. And of course, what happened was ad revenue, as they predicted, has fallen from about $2 billion in 2006 to just over $400 million last year, but they now have 7.5 million monthly subscribers, one-third of whom were added last year. So they’ve transformed their business. So this is a failure to transform it.
You know, even if you do sign an agreement with Google as a media house, your revenue is now coming from the very guys that you’re blaming for your demise.
SIMON BROWN: And we saw Facebook shut down sort of all news traffic, which included weather and other things, because they said it was news. They used an algorithm and it went a bit crazy. But reports are that Australian news sites lost 15% to 20% traffic. It’s just not going to work. I take your point. The Washington Post, New York Times, Wall Street Journal, that’s the way to do it – make the quality and charge accordingly. That’s how you’re going to win this battle.
HENRY BIDDLECOMBE: Well, it’s going to hurt them more than it’s going to hurt Facebook, that’s for sure. Facebook spoke about how they send around five billion clicks a year to Australian publishers, which they value at around A$400 million. And this is now going to go to zero. And Facebook understands that, by kind of kowtowing to the Australian Competition Commission, you’re now setting a dangerous global precedent. Google, which has now done that, I think is going to pay a fairly heavy price. This will impact margins.
Uber business model
SIMON BROWN: Yes, it is going to hurt them. I haven’t chatted to you, I think, this year yet. There are two other pieces of news I wanted to touch on.
Uber lost their appeal last week in the UK around employing workers. They are contractors. So they’re workers, not contractors and not employees – it kind of falls in the middle. It’s early days. There were only 25 people who had taken this to the UK Supreme Court. This is certainly going to be putting pressure on Uber, although they got the proposition in California, which protects them. But I’ve always looked at their business model. I don’t know. I’ve never thought of Uber as a massively attractive proposition. What’s your take on it?
HENRY BIDDLECOMBE: My kind of take on the delivery economy, stock companies like Uber and some of the other food-delivery companies as well, is that the economics are a little precarious because it’s almost based on the exploitation of a vulnerable class of working people. I mean, if you go to the States and you consider the average Uber driver, it’s typically a foreigner who has come to the States to try and create a better life for themselves. And they’ve become an Uber driver because they didn’t really have an alternative. If you look at the living they make, it’s really break-even at best. So in an environment where your employees are regulated and you’re forced to pay them a good living wage with the associated benefits, all of a sudden the business model becomes economically unviable. And that’s why Uber and companies like Uber have been fighting this so hard. So I think it’s just confirmation that these aren’t sound business models. I think that’s what you’re saying as well.
Jeff Bezos’s Amazon exit
SIMON BROWN: I hear you. They are based on the expectation of the lowest of the population – (it’s) not going to work.
Last one – Amazon’s Jeff Bezos’ leaving is a surprise. He’s only 57. He’s off to spend time with his billions of dollars. They’ve got a replacement. He’s an insider and he’s been there almost as long as Jeff has. It’s always a little scary when founders leave. But, from my looking at Amazon, this is perhaps not really an issue. I mean, it’s going to leave a big hole, but he’s got a team around him.
HENRY BIDDLECOMBE: He does. And the replacement, Andy Jassy, has been around for a long time. I think with a company as big and as complex as Amazon, succession isn’t something that you want to leave until the last minute. That’s something that you want to plan well in advance. And of course, we know that a guy like Jeff Bezos will remain heavily involved with the business. So this is probably how you want to see that succession taking place. I think it’s more than just Jeff going off and sailing off into the sunset to spend his billions, although there’s certainly a component. Running a company like Amazon really isn’t a one-man job, it’s a job for 20 people. And this is probably now the Amazon board starting to put that infrastructure into place. So it is what you want to see, really.
SIMON BROWN: He (Bezos) has his ‘S-team’ with I don’t know how many people in it, but those are the folks essentially running it. He’s going to be stepping up as executive chairman. So he’s still going to be around. But, as you say, a business of that size…. Andrew Jassy got AWS, Amazon Web Services, off the ground, and AWS is now the biggest part of the business.
We’ll leave that there. Henry Biddlecombe is a fund manager at Anchor Capital. Henry, I really appreciate your time this morning.