Google vs. DOJ – Scroogled!

Now its Google’s turn.

• Its Google’s turn to be on the end of a lawsuit brought by the US Department of Justice alleging abusive monopolistic practices that harm competitors and could result in the break-up of the company.
• I think that a break-up is a pretty unlikely scenario, but I can see a huge fine (the US treasury badly needs the money) and Google being forced to allow competition for search and on Android.
• Like China, curbing the power of big tech is one of the few issues where there is common ground on both sides of the aisle, meaning that whoever wins the election in 2 weeks, this issue is likely to go forward.
• There are two areas of focus both of which have been covered before:
  • First, search: The DOJ alleges that Google is “a monopoly gatekeeper” for the Internet and has entered into transactions to prevent competition coming to the fore.
  • Google’s riposte to this is that users come to Google freely because it offers the best search experience.
  • This is clearly the case especially when it comes to the long-tail and Google’s ability to interpret vague search terms and still arrive at the answer that the user was looking for.
  • However, this is not what the DOJ is complaining about as it is asserting that Google is preventing 3^rd parties from reaching or surpassing its service quality through use of its market position.
  • This is a more serious allegation that Google has not addressed in its brief riposte but will have to do so in the fullness of time.
  • Second, Android: Here the allegation is that through the market power of Google Play, Google has ensured that its ecosystem is predominant on Android and that competing services do not have a fair chance to compete.
  • To be fair to Google, its digital ecosystem services are the best available in many categories and as a result, users would choose them over competing services.
  • However, Google forces handset makers to put them front and centre on their devices and to set them by default.
  • The DOJ also cites well-known terms in the contract between Google and handset makers that prevents them from making handsets that use alternate versions of Android.
  • Google claims (and has done since 2007) that this prevents fragmentation on the platform, but it also has the handy side effect of limiting the appeal of competing ecosystems on Android.
• The net result is that this is a more complex case than it was for Microsoft, but the precedent of the EU finding against Google in a similar case is a problem.
• Hence, I think that while Google has some good arguments against these allegations, I think that the balance or probability is that it loses.
• I think that the most likely remedy is not a break-up of the company but measures that enforce fairer competition.
• A simple one would be the unbundling of Google Play such that a handset maker can use the Google Play store but also put non-Google services (such as search, mail and maps) front and centre on the device and set them by default.
• This would go some way towards fixing the search complaint, but I suspect further measures would also need to be put in place.
• Either way, this is not good news for Google but it is going to be a long time before any of this is felt in terms of profit or cash flow.
• I remain cautious on Google as I am on all of the large-cap technology stocks where everyone is hiding, but its valuation is not as crazy as some and when a correction comes, it will have more fundamental support.