Breaking up is hard to do and, in the case of Google, it could be very expensive.
Federal regulators fired a broadside at the search engine giant’s parent company Alphabet (GOOGL) on Oct. 8.
Related: Google breakup is on the table — What happens next in DoJ’s case
The U.S. Department of Justice said in a court filing that it may ask the courts to separate Google’s core search business from other Google products — such as the Android mobile operating system, the Chrome web browser, and the Google Play app store — because they combine to form a Google monopoly.
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The remedy, according to the DOJ, “would prevent Google from using products such as Chrome, Play, and Android to advantage Google search and Google search-related products and features — including emerging search access points and features, such as artificial intelligence — over rivals or new entrants.”
“Google’s anticompetitive conduct resulted in interlocking and pernicious harms,” the DOJ said in its filing, according to NPR.
The markets Google controls “are indispensable to the lives of all Americans, whether as individuals or as business owners, and the importance of effectively unfettering these markets and restoring competition cannot be overstated.”
Lee-Anne Mulholland, Google’s vice president of global affairs, wrote in a blog post that “this is the start of a long process and we will respond in detail to the DOJ’s ultimate proposals as we make our case in court next year.”
Sundar Pichai, chief executive officer of Google parent company Alphabet
Google executive warns of ‘unintended consequences’
“However, we are concerned the DOJ is already signaling requests that go far beyond the specific legal issues in this case,” she said.
Mulholland said the case is about a set of search distribution contracts.
Related: Analysts rework Google parent price target on search, antitrust concerns
“Rather than focus on that, the government seems to be pursuing a sweeping agenda that will impact numerous industries and products, with significant unintended consequences for consumers, businesses, and American competitiveness,” she said.
The filing follows a ruling in August by U.S. District Judge Amit Mehta that found Alphabet had violated U.S. antitrust law with its search business.
“After having carefully considered and weighed the witness testimony and evidence, the court reaches the following conclusion: Google is a monopolist, and it has acted as one to maintain its monopoly,” Mehta wrote in his opinion.
Alphabet shares were down nearly 2% at last check. The stock is up 15.3% year-to-date and 17% higher than a year ago.
Analysts at JPMorgan said they believe the Department of Justice’s remedies framework in the Google search commercial agreements trial is mostly in-line with expectations, according to The Fly.
However, the DOJ’s final proposed remedies are not due until November 20, and as a result the initial framework is somewhat broad and unspecific in terms of exact remedies, the firm said in a research note.
JPMorgan says that while there are not any major surprises, the preliminary framework carries headline risk and suggests structural changes or separation proposals are possible for Alphabet.
However, the firm does not believe the high-level framework changes much for the shares in the near-term.
Wall Street focus will shift to earnings over the next few weeks and then to final proposed DOJ remedies on November 20, according to JPMorgan, which is keeping an overweight rating on the shares with a $208 price target.
DOJ antitrust action against Google seems ‘overreach’
This has been a tough week for the search engine giant.
On Oct. 7, U.S. District Judge James Donato in San Francisco ordered Alphabet’s Google to overhaul its mobile app business to give Android users more options to download apps and to pay for transactions within them, following a jury verdict last year for “Fortnite” maker Epic Games, Reuters reported.
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Donato’s order said that for three years Google cannot prohibit the use of in-app payment methods and must allow users to download competing third-party Android app platforms or stores.
Google in a statement said it will appeal the verdict that led to the injunction to the San Francisco-based 9th U.S. Circuit Court of Appeals, and will ask the U.S. courts to pause Donato’s order pending appeal.
TheStreet Pro’s Chris Versace discussed the DOJ ruling in his Oct. 9 column, saying “Google will likely appeal, and that effort could potentially drag the process out for years.”
“Near term, there is headline risk, but from an operational perspective at Google, there should be little to no impact,” he said, adding that the government’s proposed actions seem “like more than a bit of overreach.”
Versace noted the DOJ’s suggestion to limit or prohibit default agreements and “other revenue-sharing arrangements related to search and search-related products.”
“That would include Google’s search position agreements with Apple’s (AAPL) iPhone and Samsung devices,” Versace said. “Should that come to pass, it could mean Apple would lose billions in ‘other revenue.'”
In 2022, Google paid Apple $18 billion to $20 billion each year over the last several years to remain the default search engine for its Safari browser.
“That’s a hefty chunk of Apple’s annual R&D spending, and if that spending offset is removed, it could result in Wall Street having to trim future EPS expectations,” Versace said. “But here, too, it isn’t likely to be something that unfolds in the next year or two.”
He reminded readers that the antitrust case against Microsoft (MSFT) spanned the better part of a decade before a settlement was reached.
Versace said that he had some room to add to his Google position in TheStreet Pro Portfolio, “but with the September CPI and PPI reports set to come later this week, we’re inclined to see if GOOGL shares hold current support levels between $159 to $162 before making any move.”
“Should the inflation reports not show as much progress as the market expects or otherwise add to the thinking the Fed may deliver fewer rate cuts in the coming months than expected,” he said, “the market reaction may mean we can pick up some GOOGL shares at an even better price.”
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