USA vs Google: Old Wine In A New Bottle

A landmark antitrust ruling that is expected to fizz out with a whimper.

«The 2-minute version»

Almost four years after the case was originally filed and three months after both sides presented their closing arguments, the Department of Justice (DoJ) succeeded in making its case that Google illegally exploited its monopoly in search to eliminate competitors and smother innovation.

But first, let’s understand the “big” picture: In case you don’t know, Google commands a 90% market share in Search and in order to maintain its position of dominance, it has manipulated the rules of ad auction, thus charging advertisers higher than they would in a competitive market.

On top of that: Google is notorious for making large payments to Apple, Mozilla, and other companies to be the default search engine, presenting an unfair restriction on competition.

Looking ahead: Let’s make something clear. It is highly unlikely that the DoJ will succeed in breaking Google up, given that its highly intricate product empire has become vital to millions of consumers and businesses. If you are thinking it could force it to stop making its $20B+ payments to Apple, how will that even work out given that Apply was not even a party to the case? The most likely path ahead will be that Google will be let off with a big fat fine while being asked to follow a set of actions that the law deems competitively fit.

From a stakeholder perspective: Did you know that Google sets aside cash to pay for fines in the event it loses in global courts over the following twelve months as part of its Accrued Expenses? The important thing to note is that it actually ends up paying far lower than it has allocated for, with its G&A expenses trending far lower than its Accrued Expenses, as it has been winning or settling on common grounds in most cases, resulting in higher operating income and margins.

For now: It is business as usual, at least until users find better alternatives to shake up Google’s Search dominance.

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🎥Let’s set the stage…

1998 was one of the busiest years in the pre-Y2K era.

I was still a kid at the time but old enough to remember that everyone had a crush on either Britney Spears or one of them, the Backstreet Boys, Viagra was approved by the FDA, Celine Dion’s My Heart Will Go On was incessantly played in every household and record store, and Monica & Chandler finally hooked up in the season finale of Friends, the One with Ross's Wedding. Then there was also a certain scandal in the White House that eventually got former President Clinton impeached as the curtains to 1998 came to a close.

But also in that year, one of the most monumental antitrust cases of the decade, possibly even of the century, was being contested between the U.S.A. and Microsoft MSFT 0.00%↑ with the U.S. government accusing Microsoft of illegally monopolizing the web browser market with its Windows OS.

Almost three decades later, America is waging an antitrust battle with another tech titan. This time, Google GOOG 0.00%↑, the largest online search company in the world, has gotten itself in DoJ’s crosshairs.

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Entangling the legal complexity of Google’s ad businesses

When Google’s antitrust trial began last week, DoJ’s attorneys set the tone via their opening statement that Google had been dominating the ad sector through acquisitions to the point where it manipulated the rules of ad auctions to its own benefit, leaving ad publishers “understandably furious.” This was expected after the DoJ recently won their previous trial against Google.

Google, on the other hand, released their own opening statement last week, which focused on consumer choices in plentiful and harboring competition.

But what Google has in its marginal favor is the immense complexity of its web of products and services, which the internet giant has used in the past to argue against breaking up the company. As of last week, the EU is now unlikely to order Google to be broken up into separate entities after threatening Google last year.

The intricate involvement of Google’s product empire that has become vital to millions of users on both the consumer side as well as the business side means that the DoJ will still have to walk a careful line when advocating for a breaking up of Google so that the livelihood of millions of its users can continue as usual.

Unlike traditional businesses, which are focused on expanding their reach to singular customer cohorts, Google’s platform of products appeals to a wide variety of user cohorts. On one side, there are retail users such as you and me who either use Google to search for something online, check our emails, browse through the internet, view videos, or for almost anything.

Meanwhile, businesses and companies sit on the other end, figuring out which of us retail users would benefit the most if they advertised their products to us. Of course, Google’s platform makes this all possible by allowing these companies to advertise to us, which makes Google’s web of products and technologies this complex to unravel.

One of the ways Google scales the endless possibilities of giving advertisers more ad space is by growing its distribution network—its vast web of user-facing products such as Youtube, Google Search, Gmail, Maps, Shopping, etc. Google also reportedly pays Apple AAPL 0.00%↑ >$20 billion a year to ensure Google Search is the default search engine in all of Apple’s user devices, drawing resentment from its competitors such as Microsoft's Bing and the ire of the DoJ.

In addition, the DoJ also contends that Google has broken several antitrust laws, leading the nation’s leading law enforcement agency to file lawsuits against the company. The DoJ won the first leg of the battle, where a judge ruled in the DoJ's favor last month, finding Google liable, stating that:

"Google is a monopolist, and it has acted as one to maintain its monopoly.”

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What’s Next For Google & Its Users

The ongoing trial being held in Virginia is about finding remedies for the antitrust laws that Google broke. The DoJ has strongly hinted at breaking up Google without specifying how exactly they plan to move ahead.

Breaking up Google will be hard at this point. It’s highly likely that Google will be let off with a big fat fine while being asked to follow a set of actions that the law deems competitively fit. There is enough precedent in the USA vs. Microsoft case from 1998 that shows how Microsoft was at one point during the course of those trials ordered to be split into multiple different entities. Microsoft eventually appealed, successfully overturned the breakup ruling, and settled with the DoJ at the time after conforming to a set of anti-competitive practices over a period of 10 years. 

Ironically, what the Microsoft ruling also did was give birth to a new era of new browsers that Google took advantage of and launched their Chrome browser, which became one of the most popular browsers at launch.

It's most likely that Google’s trial will also follow a similar path that will open up the platter of choices for consumers. One of the most expected remediatory steps will be to stop the $20 billion arrangement between Google and Apple as well as any similar arrangements Google may have with other device makers where Google Search is the default search engine in those devices.

This will give more power back to device users, who will have more freedom in choosing their choice of Search as an example. But with Google dominating the Search market by holding a 90% market share, it remains to be seen how many users consciously follow through with their choices of their preferred Search engine away from Google.

For advertisers, it's really going to be simple. They will follow where the users go. So if more users jump ship away from Google properties such as Search and Gmail away to other products outside of the Googleverse, expect advertisers to divert their ad budgets outside of Google’s ad network.

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Google’s Shareholders & Stakeholders Should Be Unharmed

With large penalties and fines being the foremost possibility in Google’s case, market participants have largely stayed away from the company while choosing to invest in its other larger technology peers.

But what most shareholders miss out on is the leverage Google’s management demonstrates in managing its ad empire despite the wide range of lawsuits that are thrown at the company.

The chart below shows just how efficiently Google manages its business despite these legal headwinds.

According to the Mountain View, CA-based company’s filings, Google sets aside cash to pay for fines in the future after it receives rulings on cases that it loses in global courts. The expectation Google has under its Accrued Expenses is that the company will end up paying these fines within the next twelve months, and per the chart above, it's very noticeable how much more cash Google has been setting aside to pay for potential fines in the future.

But that does not mean the company actually ends up paying all those fines if one looks at the G&A expenses. In fact, if you look closely, Google’s G&A expenses have been consistently trending far lower than its accrued expenses, indicating that Google consistently appeals for cases where it has lost and ends up winning or even settling on common grounds in most cases. 

When observed as a percentage of its sales, it becomes even more clear how Google’s plans for these legal outcomes in advance while still pushing forward with its business plans.

Per the chart below, Google’s operating margins have actually grown over the past few years while operating expenses as a percent of revenue, especially its G&A as a percent of revenue, have shrunk, which is actually beneficial to Google’s shareholders. 

Therefore, even if Google were to pay hefty fines as a resolution of the antitrust laws it broke, the company would still be able to weather the storm while also adhering to anti-competitive remediations that the DoJ sets for the company.

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In Closing…

As is standard fare with most legal cases, the outcome for the USA vs Google trial will take at least another 12 months to proceed to the next stage, if not more. Google will also be expected to file another appeal should it find itself at the receiving end of the law, especially if the court orders for Google to be broken up into separate entities much like Microsoft was ordered to in 1998.

But apart from a few business practices being changed and some hefty fines being paid, expect no significant changes to how Search and Online Ads work. 

The monopoly of Google and its Search empire will only end once users find better alternatives out there. With Google commanding a 90% market share, those changes in user behavior won't come overnight. But maybe AI search tools from the likes of OpenAI and Perplexity might start to move mountains.

Until then, it's business as usual for Google.

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Back to you!!!

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That’s all for today. Please let us know your thoughts, questions and feedback in the comments section below.

Uttam & Amrita 👋🏼👋🏼