Google now faces an antitrust lawsuit from the US Department of Justice (DOJ) and from 48 different state governments. Wall Street, however, seems not to be too preoccupied with this lawsuit as Google stock gained 1.39% yesterday. This lawsuit is not just about Google but also implies Apple. Apple and other Google competitors faces probes of their own and, whether these probes become lawsuits will determine how the market will do next as these 5 companies, namely Apple, Microsoft, Amazon, Google and Facebook are the five largest in the world and at the same time, they contributed to most of the gains of the S&P 500 and Nasdaq indices this year. These 5 companies account for 22.5% of the S&P 500.
Despite being banned in the world’s largest market, China, Google dominates search engines in the rest of the world, including the United States, with about 90% of market share. Besides, Google owns Google Chrome, the most popular web browser in the world. They also own YouTube and Android. Being a leader in several fields might not be a problem in itself. Berkshire Hathaway is a leader in insurance, Energy and Railroads. The problem with Google is that these different fields are linked and they may be trying to control the free market and consequently, affect consumers. Right now, Google along with Facebook are the uncontested leaders in ad revenues, with about 60% of market share.
And according to the lawsuit, Google might have colluded with Apple by paying them to make Google the default search engine on Safari. The government claims that Apple CEO Tim Cook and Google’s CEO Sundar Pichai met in 2018 to discuss how the companies could work together to drive search-revenue growth. Apparently, after the meeting, an Apple Senior Executive said, “Our vision is that we work as if we are one company.” That’s a big change from Steve Jobs, reportedly saying, “I'll spend every cent Apple has to kill Google.”
Google declined the allegations and Kent Walker, Google’s chief legal officer, called the case “deeply flawed.”
In a blog, he wrote the following:
“Google Search has put the world’s information at the fingertips of over a billion people. Our engineers work to offer the best search engine possible, constantly improving and fine-tuning it. We think that’s why a wide cross-section of Americans value and often love our free products.
Today’s lawsuit by the Department of Justice is deeply flawed. People use Google because they choose to, not because they're forced to, or because they can't find alternatives.
This lawsuit would do nothing to help consumers. To the contrary, it would artificially prop up lower-quality search alternatives, raise phone prices, and make it harder for people to get the search services they want to use.”
The market seems to be pricing in the best case scenario of the event as Google stock went up by 1.39% yesterday. The best case scenario is that Google will be told by the US Government not to pay Apple and other competitors to put Google as the default search engine on their respective browsers. The base case would also include a major fine, like the $2.7 billion fine Google had to pay to the EU a few years back or the FTC $5 billion fine on Facebook last year. These companies have a lot of cash and need not worry about paying billions in fines. The bear case, however, is that the Government breaks up Google, like it did with Standard Oil in 1911 and AT&T in 1984.
The market seems to think that Google won’t be broken up and will survive the antitrust lawsuit just like Microsoft did in 1998, but this had substantial effects on the stock price of Microsoft, and was one of the main catalysts to cause the burst of the Dotcom bubble.
More than Just Google
This lawsuit is more than just Google. This is just the beginning. The Government will go after each of these big tech companies. With Google, it is easier as it is obvious that they hold a monopoly. Besides, it seems that both parties are eager to regulate the big tech. Even if they are not broken up, more regulations are to be expected. The State of California might be interested in taxing data just like Alaska taxes oil and most of these tech companies are incorporated in California.
We cannot say for sure if this is what will cause the Nasdaq Bubble to burst but looking at the valuations on the big tech companies with PE ratios ranging from 32 to 123, I’ll prefer to stay away. There are a lot of uncertainties ahead for these companies.
21st of October 2020
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