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Google was the first of the Big Tech stocks to draw fire from increasingly antitrust-minded U.S. regulators, but it won't be the only one.
The U.S. Department of Justice filed a lawsuit against Alphabet Inc. (NASDAQ: GOOGL) on Oct. 20, accusing it of holding illegal monopolies in web search and web search advertising.
Of the so-called "big five" tech stocks, only Microsoft Corp. (NASDAQ: MSFT) has avoided accusations of anticompetitive behavior. Of course, Microsoft had a protracted antitrust battle from the late 1990s through the mid 2000s over its attempts to use its PC market dominance to control the web browser market.
In a divided Washington, antitrust sentiment is bipartisan. The Google case is coming from a Republican DOJ. But breaking up the Big Tech companies is also on the agenda of many Democrats, most notably Sen. Elizabeth Warren (D-MA).
Needless to say, a major antitrust suit is a business risk investors need to watch carefully.
Facebook may be next. The Washington Post recently reported that the Federal Trade Commission (FTC), along with a number of state attorneys general, is expected to file antitrust charges against the social media giant as early as November.
Apple has faced ongoing criticism of its App Store. Developers like Epic Games and Spotify have long complained about the 30% fee Apple charges on all App Store transactions, including subscriptions and in-app purchases. The App Store is the only means Apple customers have to get software for the iPhone and iPad.
Amazon has gotten in trouble for its marketplace too. Although a boon for third party vendors seeking exposure to Amazon's vast customer base, it becomes a double-edged sword when Amazon undercuts those vendors by selling imitation products for less.
The meat of the matter is what sort of impact this wave of antitrust activity could have on the Big Tech stocks.
It may go against logic, but investors in the Big Tech stocks are unlikely to get hurt – and depending on how the cases play out, could actually come out ahead.
Why GOOGL Stock Went Up
One clue we already have to the impact of antitrust on the Big Tech stocks is how Alphabet shares reacted to the news. On the day of the announcement, GOOGL stock rose 1.4%.
One reason for this is that the news took no one by surprise.
"As an investor, as an owner of the stock, this wasn't a blindside hit," Mark Tepper, president of Strategic Wealth Partners, told CNBC. "This has been a headline risk for years, and it really doesn't change my outlook."
Another is that Wall Street knows the DOJ case will be a long and difficult struggle. It took six years to fully settle the Microsoft case, and the repercussions lingered for another seven years. Along the way, a breakup was ordered that never came to pass.
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The Microsoft case offers another lesson: The DOJ lawsuit was little more than a speed bump to the company's long-term success. Today, Microsoft's $1.54 trillion valuation ranks third in the world, trailing only Apple and Amazon.
If the DOJ takes action against any of the other Big Tech companies, the same thinking will hold true.
That said, let's take a look at the different ways the Google case might play out, and the implications for the other Big Tech stocks…
What the DOJ Can Do to Big Tech Stocks
The crux of the DOJ case against Google is that it pays the hardware makers, carriers, and browser companies billions of dollars to ensure that Google is their default search engine.
The lawsuit estimates the annual payments from Apple alone are in the $8 billion to $12 billion range.
An open question is just what sort of remedy the DOJ might seek if it wins the case. The suit is vague on this point.
But the DOJ has only so many options here.
- Fines: The DOJ could opt for fines, but that approach won't have much impact on the hugely profitable Big Tech companies. We know this because the European Union fined Google $4.8 billion for anticompetitive behavior in 2018. A year later, the EU antitrust officials had to revisit the case, saying the fines weren't working. Fines still could be part of an antitrust remedy, just not the only part.
- New Rules: The DOJ could order Google to change its behavior. Specifically, it could stop Google from paying other firms for the default search engine position. Ironically, Google would benefit in some ways from not paying for the default spot. Most of those billions of dollars would drop back into Alphabet's bottom line. At the same time, the loss of those payments would hurt the companies receiving them. The DOJ estimates Apple's share makes up 15% to 20% of Apple's profits. Imagine what that would do to Apple stock. But Google would not escape unscathed – it would lose market share. Studies by rival search engine DuckDuckGo peg the losses at about 11 percentage points.
The DOJ could also order Google to change how it displays ads among its search results. Over the years, Google has made paid ads harder to distinguish from organic results. It has also reduced the space allotted for organic results in favor of more ads. This kind of remedy would force concrete change and hit Google's ad revenue.
- A Breakup: This is the most extreme remedy, and as such has historically been considered a "last resort" option. If the DOJ chose to break up Google, it almost surely would try to split off some part or parts of its ad business. Selling ads is how Google makes most of its money.
For GOOGL investors, this would be a boon – the effective equivalent of a spinoff. Google shareholders would end up with stock in both companies. Most spinoffs are done to unlock value – which means Google shareholders would almost surely end up wealthier as a result.
The last big breakup was AT&T in 1984 – and it turned out very well for investors. When Ma Bell was split into seven "Baby Bells," shareholders got shares in each of the new companies. Twelve years later, those investors were up 600%. Those that reinvested the dividends were up 900%.
But Google would not be nearly as easy to split up as AT&T, which was carved up based on geographic regions. Google's ad and search businesses are not only integrated with each other, but with other parts of Alphabet like YouTube. You'd still end up with parts worth more separately, but getting there would be much more painful.
For investors, the impact risk of fines is fairly low. Alphabet's free cash flow is north of $30 billion a year. Any sort of breakup that spins off a new company is likely to bring net gains.
Even court-ordered changes to how Google does business would likely be offset by reduced customer acquisition costs (assuming Google won't be paying for the default search engine spot anymore).
Antitrust suits against any of the other Big Tech companies would have to choose from the same menu of remedies – with similar consequences for investors.
But the regulators face still another big complication in going after Big Tech…
The Trouble with Taking on Big Tech
Because the Big Tech companies have millions of users (billions in the case of Facebook), antitrust officials need to be careful not to take actions that will degrade the user experience.
Take Google. The search engine service it offers is free (well, if you don't count the user data Google collects). It works well. People aren't clamoring for alternatives.
Any remedy that disrupts the ease with which people "Google" things will get a lot of pushback.
Facebook, Apple, and Amazon all pose similar challenges, depending on which parts of those businesses regulators target.
Regulators need to balance the goal of trying to increase competition with its impact on users – and that works to the advantage of the Big Tech companies.
Given all that, the antitrust backlash against Big Tech stocks is something investors need to keep an eye on – but it's certainly no reason to panic.
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About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.