Alphabet – Competition conundrum

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Google’s growth depends on how well it defends itself to the EU. 

• Google has a very serious problem with the EU as the remedy that it is likely to impose, should it decide that Google has abused its dominant position, could end Google’s control of Android.
• The long running EU complaint against Google is beginning to come to a head as Google now has until September 7^th to respond to the statement of objections that the EU has put forward regarding its conduct on Android mobile devices.
• There are currently two complaints active against Google.
• One of these is to do with its dominant position in search where most of its revenues come from PCs and the other to do with whether Google has unfairly used its position in Android to stifle the services of its competitors.
• I have long been of the opinion that the Android case has the most scope to damage Google’s outlook as RFM research indicates that without revenue growth coming from Android devices, Google’s growth will be very pedestrian indeed.
• This has substantial implications for Google’s valuation as I think that the shares are already pricing in a continuation of its dominance of all Android devices outside of China.
• The problem for Google is not the fine, which is likely to be around three month’s cash flow, but the remedy.
• Here, I suspect the EU could force Google to stop requiring handset makers, who wish to use the Google Play app store, to put its core services front and centre on their.
• These requirements are laid out in the Mobile Application Distribution Agreement (MADA) that each handset maker has to sign in order to get access to Google Play.
• It is well known that it is almost impossible to sell an Android device in developed markets that does not have Google Play on it.
• Google’s position is that it is “entirely voluntary” for handset makers to sign the MADA which I believe is a very misleading statement.
• This is because if handset makers do not sign the MADA, they are unlikely to be able to sell material numbers of devices in developed markets.
• This is why I believe that the MADA is entirely voluntary technically, it is effectively mandatory because there will be no meaningful handset sales without it.
• I don’t think for one moment that the EU will be fooled by the “entirely voluntary” defence which is why Google needs to come up with a far more robust defence for its conduct in Android.
• The one thing that Google has in its favour is time, as these proceedings can take years to be resolved.
• The longer it takes, the more time that Google will have to become entrenched with users before it is forced to unbundle Google Play from its other services.
• By that time, if Android users are already hooked on Google’s services, the need to have the MADA will be diminished as users will simply download the services to which they have become accustomed from the app store.
• Hence, the longer the process takes, the less teeth the remedy will have.
• The caveat to this is the power of default and the example set by Apple Maps and Internet Explorer.
• Apple Maps is an inferior service compared to both Google Maps and HERE but it has managed to gain traction in iOS by being set as default with no option for the user to change it.
• Internet Explorer’s market share has been gradually eroded over a period of many years since Microsoft was forced to unbundle it from Windows.
• Consequently, I think that there is still a possibility that Google loses its entrenched position with users if the EU forces it to relax the MADA requirement, but it could take a long time.
• Hence, I do not see an immediate collapse in Google’s revenues from Android should it lose to the EU but I would become much more concerned with its long term outlook.
• I see this as all downside as I think that Google’s valuation is already discounting indefinite dominance of Android which is something that is increasingly looking to be under threat.
• This is just another reason to reduce a position in Google.
• I would look to Baidu, Microsoft, Samsung for the immediate term and Apple, Facebook and Tencent for the long term.