Alphabet and the antitrust lawsuit

Equities 5 minutes to read

Summary:  On the whole, given the stellar return to growth in earnings in Q3 and the digital spending rebound likely to continue in the post covid world, the antitrust case by DoJ should prove to be a minor hurdle in the accelerating digital business landscape for Alphabet


October was an interesting month for Alphabet. US Department of Justice filed a complaint against  Google for alleged anticompetitive business practices in particular to maintain its monopoly in search services and advertising. The main focus of DoJ is the exclusionary agreements that Google has entered into with companies like Apple and Verizon which preload Google as the default search engine in their products and services. The contention of the case is that Google enjoys 94% market share of search in mobiles and 82% on PC in the US. This was a long pending reality facing not just Google but most big tech companies in US. But the fact that Google was the first in line, and that DoJ chose to focus specifically on search services where the monopoly can be established easily suggests the very conscious choice to follow the  DoJ’s case against Microsoft on similar grounds in the 90s.

Source: Bloomberg

Despite the fact that the long awaited antitrust complaint was officially filed and that more governments around the world are framing policies to tame the monopolistic policies of the big tech companies, market was quite happy to ignore the possible ramifications and the Alphabet share in fact closed higher on the day of the complaint. Since then it has announced stellar earnings for the Q3 with topline and EPS thumping the estimates riding on the broad based rebound in digital ad spending. Search revenues improved on their robust baseline, Youtube revenues crossing 5bn for the first time, and Cloud revenues grew by 45% to $3.4bn. A stirring comeback after the Q2 slowdown was enough to convince the bulls to ride ahead.

While the immediate reaction in the market highlights that the antitrust lawsuit doesn’t weigh on investor’s minds heavily now, given the long drawn battle of Microsoft and the strikingly similar nature of framing the lawsuit, Alphabet and its investors must be prepared for a long drawn, painful process of defending its actions against an increasingly bipartisan support in the government.

Google’s initial response to the complaint is as follows:

  • So many businesses beyond Tech have such exclusionary agreements to promote their products – Cereal brand paying a supermarket for a choice display location
  • Other search engines have the choice to pay as well and in some case they are paying currently to offer their product as the default choice
  • Scope of search business expands beyond text search and should factor in voice search and other evolving modes of internet usage
  • It’s easy to replace the preloaded choice of search engine in all the devices and services
  • That it enables the company to offer Android Operating System and Services for free

If DoJ is shadowing the Microsoft case in its framing, it seems Google is following Microsoft’s playbook in its response. But as tempting as it is to compare the two cases, it’s hard to argue Google’s fortunes will be as much of a roller coaster as Microsoft’s was.

  • With or without distributor payments, Google is the undisputed market leader among search engines
  • Some analysts even argue that if DoJ forces Google stop paying its distributors, it might actually benefit the company as it’ll save substantial expenses for the company without a commensurate impact on revenue
  • The systemic effect of banning the payments given the massive amount of revenue Google contributes to the distributors – For instance, the payments from Google to Apple are estimated to be between $8-12 bn every year. It is quite possibly a bigger concern for Apple than Google.
  • While Google’s initial response is similar to Microsoft, the precedence of the long drawn, exhausting battle of Microsoft will force Google to be more dynamic and flexible in their response as the case evolves

On the whole, given the stellar return to growth in earnings in Q3 and the digital spending rebound likely to continue in the post-covid world, DoJ’s antitrust case should prove to be a minor hurdle in the accelerating digital business landscape for Alphabet. But what Alphabet investors have to contend with is that this is likely to be the starting point of what is likely to be an era of greater regulatory scrutiny for big Tech around the world.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
- Full disclaimer (https://www.home.saxo/en-mena/legal/disclaimer/saxo-disclaimer)

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

Saxo Bank A/S is licensed by the Danish Financial Supervisory Authority and operates in the UAE under a representative office license issued by the Central bank of the UAE.

The content and material made available on this website and the linked sites are provided by Saxo Bank A/S. It is the sole responsibility of the recipient to ascertain the terms of and comply with any local laws or regulation to which they are subject.

The UAE Representative Office of Saxo Bank A/S markets the Saxo Bank A/S trading platform and the products offered by Saxo Bank A/S.