Can Google bounce back in the new "antitrust" lawsuit?
On Wednesday, September 4th, the second trading day after the U.S. Labor Day, the U.S. stock market failed to rebound, with the "Tech Seven Sisters" experiencing more losses than gains, and Google A closing down by 0.58%.
Although Google has seen a cumulative increase of over 15% this year, investors remain cautious as September approaches, with Google facing the opening of a new round of antitrust lawsuits.
Morgan Stanley estimates that the U.S. Department of Justice will take a series of measures to break Google's monopoly in search and advertising, including eliminating exclusive clauses in RSA, allowing users to make screen selections (Choice Screens), and restricting Google's payment capabilities in distribution agreements. Google may also choose to further monetize Android devices, invest in, and promote the installation of more Chrome/Google applications to mitigate losses.
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A new round of antitrust lawsuits, a new round of headwinds for stock prices.
Google's first round of antitrust lawsuits began in 2020, with the U.S. Department of Justice joining forces with attorneys general from 52 states and jurisdictions to file a joint lawsuit.
On August 5th of this year, the U.S. Federal Court ruled that Google had dominated the internet search field through unfair business strategies, violating antitrust laws. Specifically, Google's parent company, Alphabet, pays Apple $20 billion annually to make Google the default search engine on iPhones.
In the second phase of the trial, the Federal Court will decide what penalties to impose on Google. Google may appeal.
The famous U.S. merchant review website Yelp seized this opportunity to accuse Google of leveraging its monopoly position in internet search engines to control the internet local search and internet local search advertising markets.
Google's second antitrust lawsuit is imminent.The second antitrust lawsuit is scheduled to begin on September 9, with some analysts referring to it as the "DoubleClick trial." In 2008, Google acquired DoubleClick, the leading digital advertising company, for $3.1 billion.
The U.S. Department of Justice alleges that Google's dominant position in the digital advertising market harms advertisers and content creators.
This antitrust case will be held in the U.S. District Court for the Eastern District of Virginia, presided over by Judge Leonie Brinkema. The media anticipates that a verdict in this lawsuit could be handed down as early as the end of 2024.
BMO Capital Markets analyst Brian Pitz believes that during this period, Google's stock may face short-term headwinds, hence the market speculates that Google will take a series of remedial measures. TD Cowen analyst John Blackledge pointed out in a report: "Ongoing legal actions necessitate long-term remedial measures for Alphabet, and Google may spin off one or more businesses."
On July 10, Google's stock price hit a new high of $191.75, but then fell along with most tech stocks. According to recent trading data, Alphabet's stock may be consolidating. Some analysts have noted a decrease in the trading multiple of GOOGL stocks.
Morgan Stanley: There may be four outcomes to Google's monopoly
Morgan Stanley believes that in the face of Google's monopoly in internet search and advertising, the U.S. Department of Justice is primarily focused on addressing three issues: competitive intensity, data scale advantages, and anti-competitive pricing. Based on this, Google has listed four possible outcomes for this case, with the Department of Justice potentially taking a series of measures to break Google's monopoly.
These measures would require Google to make several necessary adjustments, including eliminating exclusive clauses in the RSA, allowing users to choose their screens, permitting access to Google's "click/query/user" data, controlling advertising bidding pricing, and most importantly, restricting Google's payment capabilities in distribution agreements.
Outcome 1 (the least likely): Allowing users to choose their screens and eliminating exclusive agreements.
Consumers will choose search engines based on product experience and brand, and data from Europe indicates that despite the implementation of the screen choice initiative at the end of 2020, Google still maintains a market share of over 97% on mobile devices.Therefore, this move is expected to have a minimal impact on Google's business, with Morgan Stanley estimating the impact on EBIT (earnings before interest and taxes) for the year 2028 to range from -2% to +15%. The slight decrease in revenue that Google may experience due to this measure could be offset by lower traffic acquisition costs (TAC).
However, the judge hopes to see a change in the monopolistic situation of Google in the internet search field, hence Morgan Stanley believes that the likelihood of the U.S. Department of Justice taking this action is the lowest.
Outcomes 2 & 3 (more likely): Further rectify Google's data advantage and anti-competitive pricing to encourage competitors to invest in the internet search field.
Morgan Stanley believes that a series of measures, including eliminating exclusive clauses in RSAs (Revenue Sharing Agreements), allowing users to make screen selections, permitting access to Google's "click/query/user" data, and controlling ad bidding pricing, would be more conducive to establishing a fair search competition environment and encouraging competitors to continue investing.
Under these measures, competitors in the search field such as Bing and GPT will continue to invest, promoting the differentiation of search engines, attracting users, and having a significant impact on Google's EBIT.
These measures may also put pressure on Google's profitability in the short term, thereby accelerating Google's investment and innovation pace in search products.
Increased investment by multiple companies in the search field may also lead to a better user experience, which is positive for society.
Outcome 4 (the worst-case scenario for Google): Limit Google's payment capabilities in distribution agreements.
Morgan Stanley stated that, in the most severe case, in addition to the above measures, the Department of Justice may also propose to restrict Google's ability to pay third parties, while allowing other competitors to freely bid.
This measure would have the greatest negative impact on Google because it would make Microsoft and others more competitive in bidding for Apple's display positions, and possibly even exclusive rights. Morgan Stanley noted that Microsoft has tried to win Apple's search contract, but Apple has repeatedly chosen to cooperate with Google due to its superior conversion rates, economic benefits, and user experience.Morgan Stanley: 3 Self-Help Measures Google Could Take
Measure 1: Continue to innovate through Large Language Models (LLMs) to enhance search potential and differentiation.
Morgan Stanley believes that future LLM-driven searches may become more visual, interactive, and video-oriented. Over time, these products could provide differentiation for users and distribution partners (including Apple), leading to cooperation with Google through licensing agreements.
Measure 2: Further monetize Android devices.
Currently, approximately 78 million Android devices (smartphones and tablets) are sold annually in the United States. Morgan Stanley suggests that Google could adjust its policies to charge users in the U.S. market for access to Google Mobile Services, including the Play Store. In 2019, Google initiated a similar practice in Europe, currently charging a fee ranging from $2.50 to $40.00 per device.
Measure 3: Invest in and promote more Chrome/Google app installations.
Morgan Stanley anticipates that under the Department of Justice's actions, Google may lose its default search engine status, resulting in a loss of some traffic and a decrease in traffic acquisition costs. In this scenario, Google might increase investment in app installations and paid marketing to guide users towards its applications.
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