Google Will Still Be the Oxygen of the Internet
Adding to the DOJ’s October antitrust lawsuit, Google was served two new complaints from coalitions of states claiming additional antitrust behavior. There are, of course, many unknowns in terms of how they will play out. What’s clear is these lawsuits will take years to reach a definitive decision, which means the company will operate as usual for the foreseeable future. In the meantime, we believe the usage of Google products will continue to grow, given any brand damage from the suits will be minimal compared to the reality that consumers have no alternative to Google Search and YouTube. The company’s role as the oxygen of the internet will prevail.
Google’s antitrust roadmap
Below are the lawsuits’ core complaints, along with our anticipated outcome:
Exclusionary contracts for search engine preference. In plain English, Google pays for search traffic. The signature example is the company’s relationship with Apple, in which Google pays potentially $10B plus per year to be the default search engine in Safari. The strategy of paying for search goes beyond Apple and has been part of Google’s playbook since its inception. Looking at the company’s traffic acquisition costs (TAC) gives an insight into the magnitude of this spending, which was more than $30B over the last four quarters.
Anticipated outcome: We believe Google will win this complaint given the precedent it would create would have a seismic impact on online commerce. The reason is the affiliate marketing model, i.e., a website receiving a commission for promoting another company’s products, is used by small and large companies alike. A surprising twist is if Google loses this complaint, it will likely be advantageous for the company. Why? If Google is prohibited from paying for search engine placement, consumers will eventually opt back into Google because it is a superior product, thereby saving the company billions in TAC.
Monopoly in the online ad marketplace. In plain English, Google owns the buy and sell side of online advertising and has given favorable pricing to certain players. One example in the complaint says Google made adjustments to its ad bidding marketplace to give favorable pricing to Facebook in an effort to coordinate pricing on the companies’ respective ad bidding platforms.
Anticipated outcome: Unclear. Focusing on the Facebook piece, the allegation is serious and the outcome is difficult to predict. If there is a negative outcome, it would most likely take the form of a fine, along with dissolving the Google-Facebook arrangement. We don’t see any significant changes to Google’s online ad marketplace, given the bidding nature of the platform means advertisers will only purchase ads if the ads are profitable for the advertiser. Google’s role is to facilitate the auction, and there are already many tools available from both Google and third parties to help advertisers maximize their ad spending.
Preferential search results rankings. In plain English, Google puts its products at the top of search results. This calls into question the order of Google’s search results and the company’s ability to put its own products ahead of competitors. For example, if you search for a restaurant and Google Maps results appear ahead of Yelp.
Anticipated outcome: This is the same behavior the EU penalized Google for in 2017 which required the company to make adjustments to search results rankings. Those adjustments have had little impact on revenue growth, as evidenced by the most recent Sep-20 quarter results in which the EMEA segment, which is predominately European revenue, was up 11% y/y, compared to the US up 15%. We believe the primary reason European changes had little to no impact on revenue is that in opening up higher-position results, advertisers were motivated to bid higher for placement, thereby offsetting the required changes. The unlikely negative outcome in the US would be a double whammy: a change in placement results and a change in the bidding market place mechanics that diluted Google’s opportunity to revenue per click.
Google will still be the oxygen of the internet
Years ago, Google’s corporate culture used the guiding principle of “don’t be evil.” The company has since moved away from that, but the principle’s legacy remains. Collectively, these antitrust lawsuits may be viewed by some consumers as Google being evil and the company’s reputation will be negatively impacted as a result. This brand impact misses the bigger picture: Google’s products have become an indispensable part of our lives, with no comparable alternatives. The company will remain the oxygen of the internet and consumer usage of its products will rise in the years to come.