As a follow up to my previous email, pointing out a couple pre-emptive moves Alphabet is taking ahead of a potential lawsuit from the DoJ/State AG’s. The first pre-emptive move is that Google announced a new initiative called “Google News Showcase” which is a partnership with news publishers where GOOG will pay publishers $1B in licensing payments over the next 3 years to “to create and curate high-quality content for a different kind of online news experience.” This seems meant to mitigate one of the issues related to their search dominance – GOOG’s ability to scrape and display snippets of news from publishers w/out the publishers making a profit (no subscription or ad served on their site unless user clicks through). The EU is already addressing this issue w/ their “Copyright Directive” passed in June 2019 (it gives EU Member States until June 2021 to pass legislation that meets the directives requirements). The key provision of the Directive is that content-sharing service providers will have the obligation to identify what is copyrighted by making them liable for copyright infringement. The law is aimed at helping publishers/creators of content (e.g. journalists, musicians etc.) get a bigger piece of ad revenues that go to companies like Google and Facebook. The Google News Showcase announcement marks a big shift in attitude for Google, as their early response to the Copyright directive was more defiant.
The second pre-emptive move is related to GOOG’s pending acquisition of Fitbit. Earlier this summer Google said they wouldn’t use Fitbit data for advertising. They’ve increased their concessions to include “supporting other wearable manufacturers on Android and to continue to allow Fitbit users to connect to third-party services.”
https://www.wsj.com/articles/google-makes-concessions-in-effort-to-buy-fitbit-11601480052
Both of these actions highlight one of the indirect implications of this looming anti-trust action – that the threat of it is already changing management behavior and could continue to over the course of a trial as they may take proactive steps to assuage regulators and generally be more tepid in their competitive behavior…this could also include avoiding M&A that could draw further scrutiny.
To summarize:
· The potential for a Department of Justice antitrust lawsuit against Google is rising. Group of 48 State AG’s may file a suit in conjunction with this or separately.
· The lawsuit is widely expected ahead of the election.
· These types of lawsuits tend to take multiple years, so any formal consequence of this should take time. We expect to keep re-assessing this as we know more.
· This is a bipartisan effort which should not recede based on the outcome of the election.
· In the meantime, this can weigh on the multiple, distract management, and result in more conciliatory competitive behavior.
From: Sarah Kanwal
Sent: Thursday, October 01, 2020 5:18 PM
To: Research <research@crestwoodadvisors.com>; Relationship_Managers <rm@crestwoodadvisors.com>; Portfolio_Managers <pm@crestwoodadvisors.com>
Subject: Alphabet Antitrust Update
Sending an update on Alphabet as the potential for a Department of Justice lawsuit is rising. As a reminder, they are being investigated by federal and state-level regulators (the DoJ and State Attorneys General) which began over the last year. It is widely expected that a lawsuit from the DoJ is imminent, which may or may not include the AG’s as part of that lawsuit (or they may take separate action). At issue is their dominance in search and their dominant position in the ad tech stack. These are separate but interconnected issues. Google’s dominance in search (~90% global share) gives them the best data (“click and query” data) which is the raw material for targeted advertising. Search also allows them to give preference to their own sites (e.g. YouTube) when placing ads. Revenue from Google’s own sites has been a key driver of growth. In ad tech, Google is present at all significant stages of the opaque ad tech stack – they are present on both the ‘buy’ and ‘sell’ sides of the market. They serve ads to Publishers (sell side) and help advertisers place ads (buy side). The concern involves their ability to limit competition via this vertical integration.
There are not many historical templates for US antitrust suits – in the last 50 years, there have been three major antitrust actions against dominant U.S. companies: IBM (1969), AT&T (1974) and Microsoft (1998). One thing we know from those cases is that they take a long time – likely at least 3 years. With IBM the trial took over a decade, w/ AT&T over 7 years and w/ MSFT over 3 yrs. So while a lawsuit may be imminent, it should take time for the implications of this to play out. It’s possible this could be resolved sooner if GOOG and the DoJ can settle w/ GOOG making some concessions. Such initial lawsuits sometimes state potential suggested remedies and sometimes they do not.
There are a wide range of potential remedies that could be sought. Current rumors are that the DoJ lawsuit will focus more on search. One area regulator’s could target is Google’s position as the default search engine on most mobile devices (they pay Apple for this privilege which is ~5% of Apple’s rev). Regulators could also target previous acquisitions (YouTube of DoubleClick) – The Clayton Act allows regulators to unwind previously-approved mergers. Other potential outcomes include changes to search that result in less ad revenue from owned sites, sharing/licensing of click and query data (could meaningfully increase competition but could still provide a fee stream), a forced to break-up (I don’t view that as big downside risk…in fact some argue the sum trades at a discount to the value of the parts).
The US is not the only place GOOG is facing antitrust scrutiny. For GOOG (and AAPL, AMZN & FB) there has been an expanding global footprint of regulatory scrutiny with the EU leading the charge, but w/ no significant consequence at this point. Since 2017 the EU has fined GOOG $9B, which is not meaningful given GOOG’s valuation and cash on their balance sheet (>$100B). The EU has also gone after GOOG’s position as the default search engine on Android phones, but to no real avail at this point. https://www.wsj.com/articles/some-google-search-rivals-lose-footing-on-android-system-11601289860?mod=tech_featst_pos1
Partisan considerations…
Scrutiny has been bipartisan. The outcome of the presidential election is unlikely to reduce antitrust risk for GOOG. With the new Supreme Court justice the implication is not clear cut. The most meaningful change could be Democratic control of Congress which could have implications for potential new antitrust law aimed at regulating big tech (this was the focus of The House Judiciary’s Antitrust Subcommittee hearing in July w/ GOOG, AMZN, FB and AAPL CEOs).
In summary, I view this growing regulatory scrutiny as an evolving risk but do not expect the filing of a lawsuit to catch the market by surprise; it is expected. If there are recommended remedies in the suit, this could have an impact (as investors know which outcome to “probability weight”), but again will take some time to resolve. I expect to keep re-assessing this as we know more.
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
$GOOG.US
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