Big Tech is In Trouble, But That Doesn’t Mean Your Money Is
On Tuesday, October 20, 2020, the U.S. Department of Justice filed a 64-page lawsuit against Alphabet Inc. (NasdaqGS:GOOG)’s Google division under Section 2 of the Sherman Antitrust Act.
The Complaint aims to “restrain Google LLC (Google) from unlawfully maintaining monopolies in the markets for general search services, search advertising, and general search text advertising in the United States through anticompetitive and exclusionary practices, and to remedy the effects of this conduct.”
The lawsuit, 15 months in the making, brought by “The United States of America, acting under the direction of the Attorney General of the United States,” was joined by the States of Arkansas, Florida, Georgia, Indiana, Kentucky, Louisiana, Mississippi, Missouri, Montana, South Carolina, and Texas.
Google called the complaint “dubious” and “deeply flawed.”
What’s at stake is Google’s stock market valuation and, to a lesser degree, Apple Inc. (NasdaqGS:AAPL)’s.
Here’s what the Complaint alleges, where the lawsuit might go, and how it could impact big tech…
Monopoly and Monopoly Money
While it’s not illegal to be a monopoly under U.S. law, it is a violation of the law if a dominant company engages in exclusionary conduct to protect or strengthen its market power.
The Justice Department says Google employs a “web of exclusionary and interlocking business agreements” to maintain its monopoly-like dominance in search and advertising.
While Google maintains it competes fairly against strong and well-capitalized rivals and doesn’t have a monopoly in any of its businesses, it’s hard to deny its dominance.
According to StatCounter, 80% of search queries in the U.S. are conducted on Google, and globally 90% of the time.
On mobile devices, Google is used 95% of the time for all search queries, says StatCounter; on desktops, Google handles 81% of all search queries. Microsoft Corp. (NasdaqGS:MSFT)’s Bing search engine is a distant second on desktops with a 13% share of searches.
In the browser wars, Google’s Chrome browser holds a 50% market share in the U.S. and an even bigger 70% share globally, based on StatCounter data.
Tuesday’s Complaint alleges Google’s exclusive agreements with phone makers, including Apple and wireless carriers, including Verizon Communications Inc. (NYSE:VZ), are designed to “deny rivals the scale and distribution they need to compete against Google in search.”
Evidence of that abounds based on market research firm IDC’s calculation that 85% of smartphones, globally, run on Google’s Android operating system, and 56% in the U.S. market. Android phones are mostly preset with Google Search as a default.
The lawsuit alleges, interlocking agreements are used by Google to monetize its dominance in search by selling advertising, which it then uses to pay for expensive and exclusive deals.
Evidence in the case includes Apple receiving billions of dollars from Google annually, and an Apple employee email saying, “Our vision is that we work as if we are one company.”
Analysts estimate Apple is paid between $8 billion to $10 billion annually by Google to preset its phones with Google Search and for other services. Apple itself says Google pays it $8 billion.
The lawsuit maintains Google’s ability to pay exorbitant fees to carriers and smartphone manufacturers stems from its extraordinary Ad revenues derived from Search.
Google’s annual revenue is close to $166 billion. Of that, in 2019, Ad revenue totaled $135 billion. That amounts to one out of every three dollars spent on all digital advertising in 2019.
Google’s Ad revenue, which supports rich payments to front-load Google Search on devices creates a strong disincentive for distributors to switch to another service, according to the complaint.
“Through these exclusionary payoffs, and the other anticompetitive conduct described below, Google has created continuous and self-reinforcing monopolies in multiple markets,” the U.S. said.
Of course, Google disagrees and plans on defending itself vigorously, as it has in many other suits.
“People use Google because they choose to, not because they’re forced to, or because they can’t find alternatives,” Google Chief Legal Officer Kent Walker said in a blog post in response to the complaint.
According to Quartz, “Walker likened Google’s distribution agreements with phone makers and wireless carriers to the way a cereal brand would pay a supermarket to stock its products on a shelf at eye level.”
Other search engines can compete with Google for those deals, he said, and Users can also easily switch to other search engines on desktops and phones.
“This isn’t the dial-up 1990s, when changing services was slow and difficult, and often required you to buy and install software with a CD-ROM,” he said. “Today, you can easily download your choice of apps or change your default settings in a matter of seconds-faster than you can walk to another aisle in the grocery store.”
However, as Bloomberg points out, “At the heart of its defense, though, is an odd paradox: Google thinks its search is so good that people will choose it, but the company still pays billions a year to make sure it’s first in line.”
That might be the biggest question facing Google and a weak defense if it chooses that counterargument.
Been There, Done That
Google’s been here before.
It got an FTC-launched antitrust case in 2012, based on the company’s advertising practices and preferential placement of its own services, dropped in early January 2013.
To appease the FTC, Google agreed to allow websites to remove specific content from Google’s specialized sites, such as its Google+ local business listings and Google News, without dropping out of results from Google’s main search website.
The FTC’s five commissioners voted unanimously to close without action on what Google’s detractors called “search bias,” and promised to “remain vigilant and continue to monitor Google for conduct that may harm competition and consumers.”
At the time, FTC Commissioner J. Thomas Rosch, who didn’t advocate suing Google, said the FTC should require legally binding consent decrees if problems are found. Which they were.
“After promising an elephant more than a year ago, the Commission instead has brought forth a couple of mice,” Mr. Rosch commented when the suit was dropped.
This time around may be different.
Next week, I’ll explain what Google’s been sued for in Europe and Russia, what the outcomes were, and how Google’s had to adapt.
I’ll break down the new Complaint, and address how Google will defend itself based on prior cases.
And, I’ll tell you exactly how to play both Google and Apple, who’s also in the line of fire, and the other big tech stocks currently under investigation by the Justice Department, State attorney’s general, and the FTC – again.
But until then, there is an opportunity here, besides just going for the obvious.
Because the tech giants are taking a beating, I’m seeing more and more tiny tech startup companies using this as a chance to break out.
Think about it, the next nine months will be, without a doubt, the most transformative period for startup investing to date, because a market crisis is fertile ground for “unicorns” – or businesses that makes it to $1 billion in revenue.
The most iconic unicorns in history were all formed during economic crises. Uber and AirBnb, for example were founded in 2008, and Elon Musk merged X.com with Coinfinity to start Paypal during the dot.com crisis.
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I’ll be back with you on Friday.