Google – The Long Game

Things might look very different in 3-4 years. 

• However the legal games play out, Google is not going to be broken up any time soon and with market share loss in digital advertising and dislocation in the search market, Google is going to have a strong case for an appeal.
• Google is under assault on all fronts with its search business, digital advertising business and Android App Store all under serious threat of antitrust remedies.
• Following the most recent loss, the US Justice Department has made a series of recommendations for remedies following Google’s recent loss, which include breaking Google up as well as forcing it to provide access to its proprietary data that it uses for advertising to its competitors.
• The catch here is time as the judge will make his final recommendation in August of 2025 which Google will appeal meaning that there are at least another 3 to 4 years to go before anything could realistically be enforced.
• This is where things become interesting because both the online search and the digital advertising markets are at a point of dislocation, and Google is at risk of losing its dominance.
• While this is bad news for Google generally, it strengthens its case when it comes to appeal because a loss of dominance would arguably obviate the need to take any remedial action.
  • First, digital advertising: where Google still dominates the market but where its share has been falling since 2018.
  • This is not because Google is losing traffic share but because Amazon is more effectively monetising the traffic that it already has (see here).
  • The decline in share looks very similar to the loss of share that Internet Explorer suffered to Chrome over a long period of time and if the DOJ has its way, this will continue.
  • In 3 to 4 years’ time when this case finally rolls around to a resolution, Google’s share could be well below 50% especially if its search business gets disrupted by generative AI (see below).
  • This would provide considerable support for an appeal of the 2024 ruling.
  • Second, generative AI: which threatens to change search from a list of blue links into a single answer which will alter the traditional monetisation method of sponsored search results.
  • I don’t think that it will result in as massive a change as many seem to think as sponsored links can be incorporated into the answer or listed below.
  • However, it does represent a dislocation giving competitors their best shot at Google for many years.
  • Google has had the lead in AI for many years, but the generative AI revolution has levelled the landscape considerably and now Google is not longer easily the best but a contender fighting tooth and nail with a series of equally good competitors.
  • This raises the possibility for a levelling of the playing field in search which, while terrible news for Alphabet’s share price, it would have the silver lining of strengthening its case to overturn the rulings made in 2024.
• The net result is that this case is really only just getting started which means that this is going to be hanging over Google’s head for many quarters to come.
• However, my suspicion is that the market may just take care of this issue by making the most of the dislocation points being offered by the potential change in how users search for things online.
• The big question mark is the user base where Google has billions of users of its digital life services worldwide on both smartphones and PCs.
• This gives it a unique opportunity to distribute its generative AI services to its users and have them adopt them without really noticing that there may be other options available.
• Whether that is an anticompetitive action will be up to regulators and courts to decide, but I can see it being another problem.
• Given the recent fuss around Google’s alleged anticompetitive practices, I suspect that this issue will come under the spotlight and there are some signs that this is already beginning.
• The net result is that there are some real long-term question marks around Google’s long-term position, but for the next 3 or 4 years, things look pretty good.
• Hence, I don’t see this materially affecting the valuation of the company for some time although it is likely to trigger a wobble from time to time.
• Given the uncertainty, the recent rally and Google’s new-found ability to shoot itself in the foot I remain not very inclined to want to own the shares as there are much better options available.