Can Google bounce back in the new 'anti-monopoly' lawsuit?

On Wednesday, September 4th, the second trading day after the U.S. Labor Day, the U.S. stock market failed to rebound. The 'Big Seven' in technology saw more declines than gains, with Google Class A stock falling by 0.58%.

Although Google has risen by over 15% this year, investors remain cautious - in September, Google will face a new round of anti-monopoly lawsuits in court.

Daiwa Securities Group predicts that the U.S. Department of Justice will take a series of measures to break Google's monopoly in the search and advertising fields. These measures include canceling exclusivity clauses in the RSAs, allowing users to make screen choices, and limiting Google's payment ability in distribution agreements. Google may also choose to further monetize Android devices, invest in and promote the installation of more Chrome/Google applications, and reduce losses.

New round of anti-monopoly lawsuits, new round of stock price headwinds

Google's first round of anti-monopoly lawsuits started in 2020, jointly filed by the U.S. Department of Justice and attorneys general from 52 states and jurisdictions.

On August 5th of this year, a US federal court ruled that Google dominated the internet search field through unfair business strategies, violating antitrust laws. Specifically, Google's parent company, Alphabet, pays Apple 20 billion dollars annually to make Google the default search engine on iPhones.

In the second stage of the trial, the federal court will decide what punishment to impose on Google. Google may appeal.

Yelp, a well-known American business review website, took advantage of this opportunity to accuse Google of using its monopoly power in the internet search engine market to control the internet local search and internet local search advertising markets.

Google's second antitrust lawsuit is looming.

The second antitrust lawsuit is scheduled to begin on September 9th. Some analysts refer to it as the 'DoubleClick trial'. In 2008, Google acquired the leading digital advertising company, DoubleClick, for 3.1 billion dollars.

The US Department of Justice claims that Google's dominant position in the digital advertising market harms advertisers and content creators.

This antitrust case will take place in the Eastern District of Virginia Federal Court, presided over by Judge Leonie Brinkema. The media predicts that a verdict in this case will not be made until late 2024 at the earliest.

BMO Capital Markets analyst Brian Pitz believes that during this period, Google's stock may face short-term headwinds. Therefore, it is speculated in the market that Google will take a series of remedial measures. TD Cowen analyst John Blackledge pointed out in a report: 'Ongoing legal action requires Alphabet to take long-term remedial measures, and Google may spin off one or more businesses.'

On July 10th, Google's stock price reached a new high of $191.75, but then fell back with most technology stocks. According to recent trading data, Alphabet's stock may be consolidating. Some analysts pointed out that the trading multiple of GOOGL stock has declined.

JPMorgan Chase believes there may be four possible outcomes of Google's monopoly.

JPMorgan Chase believes that in the face of Google's monopoly in internet search and advertising, the US Department of Justice is mainly concerned with addressing three issues: competition intensity, data scale advantage, and anti-competitive pricing. Based on this, Google has listed four possible outcomes of this case, and the Department of Justice may take a series of measures to break Google's monopoly.

These measures require Google to make several necessary adjustments, including canceling the exclusivity clause in the RSA, allowing users to make screen choices, allowing access to Google's 'click/query/user' data, controlling advertising bidding pricing, and most importantly, limiting Google's payment ability in distribution agreements.

Outcome 1 (least likely): Allow users to make screen choices and cancel exclusive agreements.

Consumers will choose search engines based on product experiences and brands. Data from Europe shows that despite the implementation of the screen choice measure at the end of 2020, Google still maintains over 97% market share on mobile devices.

Therefore, this measure has a minimal impact on Google's business. JPMorgan Chase estimates that it will have an impact on pre-tax profits from -2% to +15% for 2028. The reduced revenue caused by this measure may be offset by lower traffic acquisition costs (TAC).

However, the judge hopes that the situation of Google's monopoly in the internet search field can be changed, so Goldman Sachs believes that the possibility of the US Department of Justice taking this action is the lowest.

Result 2&3 (high possibility): further correcting Google's data advantage and anti-competitive pricing, encouraging competitors to invest in the internet search field.

Goldman Sachs believes that taking a series of measures, including canceling exclusive clauses in the RSA, allowing users to make screen choices, allowing access to Google's "click/query/user" data, and controlling advertising bid pricing, would be more conducive to establishing a fair search competition environment and stimulating continuous investment from competitors.

Under these measures, competitors in the search field such as Bing and GPT will continue to invest, drive differentiation of search engines, attract users, and have a significant impact on Google's pre-tax profit.

These measures may put pressure on Google's profitability in the short term, which will accelerate Google's investment and innovation speed in search products.

Increased investment by multiple companies in the search field may also bring a better user experience, which is positive for society.

Result 4 (the worst-case scenario for Google): restricting Google's payment ability in distribution agreements.

Goldman Sachs stated that in the most serious case, in addition to the above measures, the Department of Justice may also propose limiting Google's ability to make payments to third parties while allowing other competitors to bid freely.

This measure has the greatest negative impact on Google, as it will make Microsoft and others more competitive in bidding for Apple's display positions and even possible exclusivity. According to Cowen, Microsoft has tried to win Apple's search contract, but Apple has repeatedly chosen to cooperate with Google because of its superiority in conversion rates, economic benefits, and user experience.

Cowen: Three measures Google can take to save itself

Measure 1: Continue to innovate and enhance search potential and differentiation through Large Language Models (LLM).

Cowen believes that LLM-driven search in the future may become more visual, interactive, and video-oriented. Over time, these products may provide differentiation for users and distribution partners (including Apple), allowing them to work with Google through licensing agreements.

Measure 2: Further monetize Android devices.

Currently, approximately 78 million Android devices (phones and tablets) are sold in the United States each year. Cowen states that Google can adjust its policies to charge users in the U.S. market for using the Google Mobile Services suite, including the Play Store. In 2019, Google started a similar practice in Europe, charging fees ranging from $2.50 to $40.00 per device.

Measure 3: Invest in and promote the installation of more Chrome/Google applications.

Cowen expects that under the Department of Justice measures, Google may lose the default search engine setting and a portion of its traffic, resulting in lower traffic acquisition costs. In this case, Google may increase its investment in application installation and paid marketing to encourage users to use its applications.

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