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  1. Home
  2. / Investing
  3. / Technology

Google and the Reported DOJ Antitrust Investigation: 7 Potential Implications

The selling pressure that Google has experienced on reports of a planned antitrust probe feels excessive. However, there is likely to be some fallout.
By ERIC JHONSA
Jun 03, 2019 | 02:17 PM EDT
Stocks quotes in this article: AAPL, TTD, GOOGL

As many readers are likely aware, Alphabet's (GOOGL) shares are tumbling -- they're currently down over 6% -- following multiple reports stating that the DOJ is set to launch an antitrust probe of the company. Amazon.com and Facebook, each of which have been reported to now be under the FTC's oversight, are also down sharply.

For now, details are limited about how the DOJ is proceeding with its probe. However, the Wall Street Journal does say that DOJ officials "have expressed interest in Google's dominance in a broad range of markets," including its ad sales on third-party websites and apps. Officials are reportedly "interested in the lack of transparency" for Google's ad business, and how Google "uses its powerful position to extract a premium cut of online ad dealings."

Overall, Alphabet's Monday selloff feels a little excessive, given that its shares were already about 15% below their 52-week highs as of Friday's close and trading at moderate forward EPS multiples in light of the company's possession of several valuable businesses that for now either produce small profits or are losing money. In spite of the scant details provided so far about the DOJ's probe, investors dreading uncertainty haven't wasted time pricing in a lot of regulatory risk.

With the qualifier that the DOJ itself might not know right now what charges it plans to file against Google (assuming it ultimately does so), here are some thoughts on the reported probe and its potential implications for Google and other tech giants.

1. This Could Impact M&A Activity Among Tech Giants

With major tech companies getting greater scrutiny about how they leverage dominant positions in one or more markets to put complementary businesses on better footing relative to rivals, firms are likely to think twice about making acquisitions comparable to Facebook's purchases of Instagram and WhatsApp, or Google's purchase of mapping rival Waze, given the risk of inviting broader regulatory blowback.

2. Expect More Preemptive Measures

In recent months, Amazon has made several moves that seem aimed at heading off political and regulatory scrutiny. These include giving U.S. marketplace sellers the right to sell goods at lower prices on other platforms, and paring back efforts to promote Amazon's own private-label goods on its site and apps.

And as the DOJ reportedly probes Google's third-party ad business, what used to be known as Google's DoubleClick business has -- perhaps with an eye towards both appeasing regulators and fending off upstarts such as Amazon -- revamped its offerings to address industry complaints about limited transparency and an unfair playing field for real-time bids on ad inventory.

3. An Android Probe Could Cause Headaches

Last July, the EU issued a ruling (now being appealed) that ordered Google to stop requiring Android OEMs to pre-install its Chrome browser and Search app to get access to the Play Store and Google apps such as Gmail, Maps and YouTube. Google responded by overhauling its Android licensing policies in the EU -- it's now charging a licensing fee for access to the Play Store and other Google apps, with OEMs able to include Chrome and Search in the bundle for free if they wish -- and by showing a pair of screens presenting search app and browser options the first time a user opens Google Play following an update to the Play app.

Though Google might be able to offset some of the damage via licensing fees, the EU's actions raise the risk of Android OEMs obtaining a greater search ad revenue-sharing cut from Google in Europe, since they now have the freedom not to pre-install Chrome and Search. If the DOJ demands similar changes to Google's Android licensing policies, the same could end up holding in the U.S., which remains by far the world's biggest ad market.

Google's revenue-sharing deal with Apple (AAPL) , through which Apple is believed to obtain many billions in annual revenue in return for making Google the default search engine on iOS outside of China, is a notable precedent here.

4. Third-Party Ad Changes Are a Fairly Small Risk

After backing out revenue-sharing payments to OEMs, publishers and other ad partners, over 90% of Google's ad revenue now comes from its own sites and apps. In the event that Google's third-party ad sales are stung by policy changes stemming from a DOJ antitrust suit, the impact on Google's bottom line probably won't be huge.

On the flip side, such changes could be a boon for independent ad tech players such as The Trade Desk (TTD) .

5. Don't Expect Google Search and YouTube's Dominance to Be Seriously Threatened

Search and YouTube are believed to collectively account for the lion's share of Google's revenue. And between their network effects, brand power, user data, infrastructure scale and various other competitive strengths, it's pretty unlikely that an antitrust suit will seriously affect the leadership position of either business.

Rather, much as the DOJ's suit against Microsoft 20 years ago didn't undo Windows' dominant position in the PC operating system market but distracted Microsoft at a time when fields such as search and e-commerce were in their infancy, the bigger risk of heightened antitrust scrutiny for Google is how it impacts the company's focus and competitiveness in growing markets where it isn't currently dominant.

6. The 2020 Elections Are a Wild Card

Between the time needed for a probe, a trial and any potential appeals, it's quite likely that any antitrust case filed by the DOJ against Google won't be finished by the time the 2020 elections happen, at least unless a settlement is inked first. This raises the possibility that (in the event President Trump isn't re-elected) a new DOJ leadership will adopt a different stance towards Google than the position that the DOJ's leadership currently has.

7. Google Has Had Time to Prep

As others have pointed out, Google's battles to date with the EU and the FTC have given it plenty of experience when it comes to defending itself against antitrust arguments, as well as for refining its lobbying and PR efforts.

Possibly working in Google's favor in this fight: Though criticism and concerns about the power wielded by tech giants has grown over the last couple of years, public attitudes towards Google and its services (many of which, of course, are provided for free) are still fairly positive.

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TAGS: Investing | Technology |

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