Kick ‘Em When They’re Down

Googlers, you’ve been served.

On Oct. 20, the US government sued Google, who was accused of using anti-competitive practices to reduce competition in the search engine market.

This is the most high-profile antitrust action taken by the US government since battling Microsoft in the 90s — Microsoft lost and then came a year of pain for Microsoft’s stock price, which stayed relatively flat between 2001-2013.

(Catchup: Why is the government investigating big tech companies and what are antitrust laws?)

The devil is in the lawsuit details

The attack: The Justice Department will have to show that Google has dominant control over the search market and that Google’s deals made with Apple and other companies limit competition. It was estimated that Google pays Apple $8-12b a year to become iPhone’s default search engine

The defense: In a recent testimony by Google execs, two main points were laid out:

• Google owns ~90% of the search engine (e.g. Bing, Yahoo) — Google argues that the definition of “search engine” does not include searches on other platforms like Amazon, Twitter, Pinterest. If it included, its market share would be much smaller
• The payments that Google makes to phone makers are fully legal and that users can choose to switch between other search engines.

The case could take years to resolve but expect a fight from Google, who’s well funded and is no stranger to lawsuits — Between 2015-2019, Google was fined a total of $9.3b by the European Union (EU) over three lawsuits. Despite changes imposed by the EU on how Google conducts its business, its dominance was minimally changed.

Here are three possible outcomes of the lawsuit:

• Fines will likely come but could have little impact on Google, who casually has over $100b in cash lying around.
• Changes to the way Google conducts its businesses — i.e. limiting its abilities to pay phone companies to set Google as the default search engine.
• Break up of Google’s business could be an option — This would likely be the most harmful outcome to Google.

For Investors… Better luck next year, Google

Despite the lawsuit, Google’s stock was up on the announcement. These charges were already expected and just like the EU lawsuits, the severity of the lawsuits may not have a lasting impact on Google’s profitability.

However, the lawsuit won’t be without consequences… Expect less freedom and more distractions:

• Less acquisitions… Google, who built their business on acquiring over 243 different companies could expect their future acquisitions, which requires regulatory approval, to be rejected.
• Distractions… Lawsuits take time and effort from management that distracts from company growth.

Google’s stock is up ~14% in 2020, the worst performer out of the big tech companies – Microsoft, Apple, Facebook, Amazon. Part of the underperformance has been due to a big drop in advertising spend during COVID. However, even Facebook, who generates the majority of its sales from ads, is performing better than Google.

(See also: Google’s unlucky year)