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  1. Home
  2. / Investing
  3. / Technology

Google Search Antitrust Charges Would Matter More Than Others for Alphabet

Search is still by far Google's most profitable business, and antitrust charges aimed at other parts of Alphabet's empire likely wouldn't have a major profit impact.
By ERIC JHONSA
May 20, 2020 | 06:30 AM EDT
Stocks quotes in this article: GOOGL, AMZN, TTD

Should Alphabet/Google (GOOGL) face antitrust charges over both Google Search and its ad tech business, the search charges would probably be much more financially important.

According to the WSJ, both the DOJ and a group of state attorneys general are likely to file antitrust suits against Google, with the states potentially joining the DOJ suit or filing one or more separate complaints. The paper adds that whereas the states are directing much of their attention to Google's ad tech offerings for third-party publishers, the DOJ is focusing on both the ad tech business and (without elaborating) "concerns that Google uses its dominant search business to stifle competition."

Prior reports have indicated that the ad tech probes partly revolve around how Google integrates its ad server for third-party websites and apps (previously known as DoubleClick for Publishers) with its own ad exchange for connecting advertisers and publishers (previously known as AdX). In 2018, Google placed both of these offerings into a broader ad tech platform known as Google Ad Manager.

Without getting too deep into the technical details, publishers have argued that the integration of Google's ad server and exchange, together with the mechanics of the ad server, led the ad exchange to get preferential treatment relative to non-Google exchanges, and that this would result in the publishers collecting less ad revenue than they would have if dealing with a truly level playing field.

Also reportedly being probed: Google's 2016 decision to require advertisers looking to purchase ads on YouTube to use its own ad-buying tools, thereby shutting out ad tech rivals.

Should Google be required to overhaul its ad tech stack so that its ad server couldn't provide any kind of preferential treatment to its ad exchange, it might ding the top line of its Google Network reporting segment, which covers ad sales on non-Google properties and posted 2019 revenue of $21.5 billion, a little bit. And conversely, it could benefit some ad tech rivals, including Amazon.com (AMZN) .

And if YouTube, which generated $15.1 billion worth of ad revenue in 2019, was required to re-open itself to third-party ad-buying platforms, it could impact Google's take rate on YouTube ad sales a little, while benefiting demand-side platform (DSP) owners such as The Trade Desk (TTD) .

However, given the breadth and popularity of the offerings covered by the Google Network segment, as well as Google's efforts in recent years to address publisher complaints, the revenue impact of the first change probably wouldn't be massive for a company generating more than $160 billion in annual revenue.

Likewise, though it's tough to gauge the exact impact it would have, there's a good chance that the second change also wouldn't have a major revenue impact for a company of Google's size, given that YouTube's ad inventory would still belong to Google and that Google's ad-buying tools (backed by the company's data and targeting/measurement abilities) would still probably remain the most popular way to buy YouTube ads.

Just as importantly, it's worth keeping in mind that Google Network and YouTube are both relatively low-margin businesses for Google. Traffic acquisition costs (TAC - ad revenue-sharing payments) consume more than two-thirds of Alphabet's Google Network revenue, and YouTube typically gives content creators a 55% ad revenue cut.

On the other hand, Google's TAC for ad sales on its own properties was a relatively modest 13% in Q3 2019 (the last quarter that it was broken out). And more than 80% of the $113.2 billion in ad revenue generated by Google properties in 2019 is believed to have come from Google's very-high-margin search ad business.

As a result, antitrust rulings that have a major impact on Google's search ad operations -- for example, a ruling restricting how much ad space it can place on search results pages, or ones specifically impacting its lucrative travel and e-commerce ad sales -- would likely do more harm to its bottom line than rulings affecting its ad tech operations or YouTube ad-buying policies.

And for that reason, Alphabet investors should probably pay more attention to any antitrust charges that take aim at Google Search than ones that target other parts of Alphabet's empire.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Action Alerts PLUS, which Jim Cramer co-manages as a charitable trust, was long GOOGL and AMZN

TAGS: Investing | Technology

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