Yesterday 50 attorneys general from 48 states announced an investigation into anti-competitive practices at Google and Facebook – (includes DC and Puerto Rico, but not California and Alabama). The stock is not really reacting to the news. Among the concerns cited by the AG’s were the company raising costs for advertisers and questioning whether consumers are getting the best information from search results. This announcement comes after the DoJ has announced a broad review of Big Tech and is recently confirmed to be conducting an investigation of Alphabet. The FTC is investigating FB and is rumored to have plans to investigate Amazon. Below is a good excerpt from the WSJ outlining the potential case against Google. It’s not clear what the outcome may be. A required change to their business model would likely be more damaging than fines. Alphabet has been investigated by the FTC previously – in 2013 the commission voted unanimously not to bring any charges and determined that Google’s practices improved search results for the benefit of users and that any negative impact on competitors was “incidental to that purpose.” After lengthy investigations in the EU over the last few years Alphabet was fined over $9B (see below). To put that in perspective, Alphabet has over $100B in net cash on their balance sheet and produces $20-$30B in FCF annually.
Recent EU fines:
1. $1.7B in 2019 for illegal practices in search advertising aimed at cementing its dominant market position.
2. $5.1B in 2018 for abusing the market dominance of its Android operating system to extend the reach of Google’s search engine.
3. $2.7B billion in 2017 for abusing its market share to illegally provide an advantage to its own Shopping service.
The Potential Case Against Google
•That Google has used its dominance in online search to solidify its dominance in internet advertising, creating an unfair advantage over publishers and rival tech firms that sell and place ads online. Google, thanks in part to acquisitions of potential rivals such as DoubleClick, has come to dominate software tools at every layer between online advertisers and websites, including the main tech platform that connects buyers and sellers of display ads, this argument goes. That middleman status has given it great power, especially because no one else has anything like the data Google possesses on publishers, advertisers and what consumers search for. Advertisers are boosting their spending on digital ads, but much of the money goes to Google and Facebook, not publishers, whose ad revenues continue to decline. (News Corp, publisher of The Wall Street Journal, is among those raising objections.)
•That Google won or maintained its huge market share of online ad sales by excluding others that could have competed, including through contractual terms that make it harder for advertisers and publishers to work with other ad businesses that want to compete with Google. Advertisers feel they must use Google’s products, rather than tools from other companies, according to this argument. And in 2016, Google began requiring that advertisers use its tools to buy ads on its YouTube channel, which has by far the biggest audience for online videos.
Google’s Defense
•Google has an enviable place in online advertising, but it doesn’t have monopolistic pricing power. Google competes with other big tech companies including Facebook and Amazon for ad dollars, and weak demand for old advertising models—not its role in the ad-tech machinery—is the reason publishers haven’t reaped more of a windfall from digital ads.
•Google’s actions are geared toward goals like giving users the information they want, as quickly as possible. Sometimes that means directing consumers to Google sites and services, the company says. Supreme Court precedent states that companies such as Google generally have no duty to assist in promoting a rival. In a 2004 ruling, the high court threw out antitrust allegations that Verizon Communications Inc. provided insufficient service to rival telecom companies using its phone lines.
•Many of Google’s services are free to the public, with consumers effectively paying with the personal data they generate. Judges may face challenges assessing the nontraditional products that companies like Google and Facebook offer. “It’s not like having 90% of the market for toothpaste,” said Cleveland State University law professor Christopher Sagers.
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
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