Google’s Getting Knocked Down, But It’s Not Out Yet

Shah Gilani|October 28, 2020

Alphabet Inc. (NasdaqGS:GOOG)’s Google division has a heavyweight fight on its hands, defending itself against Justice Department (DOJ) claims that the search giant is a “monopoly gatekeeper for the internet” and uses “anticompetitive tactics” to maintain and extend its monopolies in search and search ads.

The lawsuit’s prosecutors, alleging Google stifles competition and innovation from smaller upstarts and harms consumers by reducing the quality and variety of search options, will undoubtedly draw on Google’s losing battles with European Union competition regulators and on the outcome of the monopoly case the DOJ waged against Microsoft Corp. (NasdaqGS:MSFT) twenty years ago.

Unfortunately for Google, it’s not likely to prevail. But neither is the Justice Department.

Here’s how the DOJ will lean on previous outcomes to make its case, how Google will defend itself, and how the lawsuit will impact Google’s stock and other tech giants’ share prices…

The FTC Takes a Swing

The FTC took Google to the mat back in 2011, but Google, applying some jujutsu moves, flipped the case on its head. Both sides walked away in January 2013.

The claim that Google tweaked its algorithms to show self-serving sites and services above competitors couldn’t be proven. Google counterclaimed its functions benefited users, and the FTC sheepishly concluded Google’s actions “weren’t necessarily anticompetitive.”

However, the FTC prevailed in less impactful claims that Google used patents it acquired when it bought Motorola Mobility in an unfair way, and that Google was “scraping” data and other sites’ results to convene its own services (specifically copying what Yelp was doing).

Here’s what came out of the FTC’s 19-month pursuit of Google:

The Details of the Case

• On search bias: The FTC didn’t find enough evidence that Google manipulated search results to favor its own products to pursue a lawsuit.
• On scraping: Google agreed to refrain from misappropriating, or scraping, content from rivals’ websites, such as restaurant reviews.
• On opt-outs: Google would allow websites to opt out of Google’s vertical services, such as shopping or travel, without affecting their rankings in Google’s core search engine.
• On AdWords: Google would give online advertisers more flexibility to run ad campaigns on AdWords and rival ad platforms.
• And, on patents: Google agreed to allow competitors reasonable access to Motorola patents based on wireless industry standards.

Next into the ring with Google came the European Union Commission on Competition.

The first EU Commission hit to Google came in 2017 after a lengthy investigation determined Google unfairly directed visitors to its own shopping service, Google Shopping, harming rivals (sound familiar?).

The Commission fined the company 2.42 billion euros ($2.87 billion) and demanded Google change the way it provides search results in Europe. (You can view the details on the European Commission’s website here.)

The Commission Decision requires Google to stop its illegal conduct within 90 days of the Decision and refrain from any measure that has the same or an equivalent object or effect. In particular, the Decision orders Google to comply with the simple principle of giving equal treatment to rival comparison shopping services and its own service:

Google has to apply the same processes and methods to position and display rival comparison shopping services in Google’s search results pages as it gives to its own comparison shopping service.

If Google fails to comply with the Commission’s Decision, it would be liable for non-compliance payments of up to 5% of the average daily worldwide turnover of Alphabet, Google’s parent company. The Commission would have to determine such non-compliance in a separate decision, with any payment backdated to when the non-compliance started.

A year later, the EU Commission fined Google 4.34 billion euros ($5.15 billion) for forcing smartphone makers that use its Android operating system to install Google search and browser apps and blocking rivals (a central claim in the DOJ lawsuit). View the details on the European Commission’s website here.

And, in 2019, European regulators fined Google 1.49 billion euros ($1.77 billion) for “freezing out” rivals in the online advertising business. Even before the investigation was completed, Google made enough changes so regulators didn’t require any remedies to restore competition. (View the details on here.)

Google ceased the illegal practices a few months after the Commission issued in July 2016a Statement of Objections concerning this case.

Looking Back at the DOJ’s Case Against Microsoft

In 1998, the DOJ accused Microsoft of forcing PC makers, reliant on its Windows operating system, to also feature Microsoft’s Explorer web browser, just as the internet was taking off. That bundling effort essentially crushed the most-popular browser at the time, Netscape.

In 2001, after a protracted court trial, leveling the ultimate knockout blow, a federal judge ruled Microsoft should be broken up into two companies, one focused on software and the other on its operating system.

Fortunately for Microsoft, it appealed and got the case remanded back to a lower court where the two sides reached a settlement in 2002, that by consent decree, restricted Microsoft from bundling its products to the exclusion of competing products and services.

Leaning on Precedent

Legal analysts believe the Justice Department’s suit against Google similarly revolves on the company bundling products around its dominant position in search, much like Microsoft’s case revolved around its bundling of products in Windows.

Given the DOJ’s initial victory in the Microsoft case and a judge’s order to break up the company, analysts believe lawyers in the Google case may lean on decisions in the Microsoft case and pursue a breakup of the giant.

As far as big fines and game-changing decrees, U.S. officials close to the case say they want to go beyond EU-style headline-grabbing fines, which Google can easily afford, and want the court to consider structural relief to remedy competitive harm. That might mean a fight to break up the company.

Before the Defense Rests

Google’s got the money, legislative muscle, and smarts to fight the DOJ’s complaint. And it’s got history on its side.

In deflecting the FTC’s attack in 2013, Google proved it’s a benefit to users when it comes to its free services, especially search. The fact that the FTC said Google’s “not necessarily anti-competitive” is something to hang its defense on.

While Google’s going to fight, and to its benefit draw out proceedings for years if it can, its back-pocket plan would be to agree to make some changes, maybe based on what the EU won from Google.

In Europe, setting up Android phones, most of which run on Google’s in-house operating system, now triggers a menu allowing users to pick a default browser. The menu exists only because of EU Commission antitrust cases.

In fact, everything the Justice Department is going after Google for has already been proven by the EU and been remedied.

If the DOJ isn’t gunning for a show-trial and the breakup of Google, it could easily and quickly bring Google to heel based on paths already cleared in Europe, slap the company with a record fine, and force it to consent to leveling the competitive landscape in search and advertising.

Google Should Be So Lucky

The genie’s out of the bottle now, and a new administration and or a new Congressional body might want blood, and not just from Google.

Apple Inc. (NasdaqGS:AAPL), for example, plays a major role in the Justice Department’s case against Google. The more than $8 billion Google pays Apple annually to preload Google search on all its phones is incentive enough to quash competing search apps.

Adding insult to injury, a House committee report just released on October 6, 2020 determined that Apple, Google, Amazon.com Inc. (NasdaqGS:AMZN), and Facebook Inc. (NasdaqGS:FB) “enjoy monopoly power.”

With Google under the microscope now and groundwork having been laid to go after other tech giants, the next Congress comes in with a strong hand as they debate how to tackle America’s Mega-Tech Transformers legislatively.

Investors can hold onto their tech darlings for as long as it takes the Justice Department to wage its war against Google, and for as long as it takes the new Congress to throw down its gauntlet, which it may never do.

But, if the tide turns on the Transformers, investors might want to start taking their profits and looking for competitors waiting in the wings.

What to Do Now

Google’s having a bad day, primarily because the market’s being dogged by rising virus spikes, a more than likely contested election, and no stimulus anywhere in sight.

Not to mention, Google’s CEO is answering questions at a Senate hearing about internet companies’ indemnity cloaks and whether they should be stripped bare. Add to that the clear path the DOJ can take, following EU’s successful attack on Google, and the stock could see more downside.

If the stock falls another 4% from here (it’s trading at $1,531 now), it would be around $1,468. That’s a great buy-in spot.

I’d take a position there and hope to add to that if GOOG falls further and slips to $1,400. Google’s not going anywhere. It’s going to get its wrists slapped and have to make some concessions, but it’s still a cash printing machine, and buying it on this dip is a golden opportunity.

Apple is getting hit today, too. But that’s the market’s weight. Apple’s about to sell a lot of new iPhones, tablets, apps, and wearables and is going to keep on making money, spitting out cash by the billions, more than enough to make up for what regulators might cut out of their Google payment flow.

Apple’s a buy on this dip down at $110. And, if you’re lucky enough to add to your position, if it gets to $100, BUY MORE THERE, FOR SURE.

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I’ll be back with you soon.

Sincerely,

Shah