To The Moon

Google and the U.S. Department of Justice traded opening statements Tuesday, kicking off the largest antitrust trial in more than two decades. The case has major implications for Google and the future of antitrust law.

$Alphabet(GOOG)$ , the dominant search engine in the United States, faced the biggest legal threat since its creation this week. The company allegedly violated the U.S. antitrust laws of the civil lawsuit will enter the trial in Washington.

The lawsuit, filed by the Department of Justice, targets Google Search and whether the company used illegal agreements to crowd out competitors and hurt consumers and advertisers in the process. For example, Google paid billions of dollars to $Apple(AAPL)$ to become the default search engine for the Safari browser.

Google, owned by $Alphabet(GOOGL)$ , grew up in an era of more relaxed antitrust enforcement, an environment that particularly benefited technology companies developing innovative (and often free) ways of exploring and using the Internet. Efforts to regulate Google and other tech giants have failed to make headway in Congress in recent years. In the absence of such regulatory rules, the U.S. government is attempting to use antitrust laws to manage online competition and impose restrictions on the "gatekeepers" of the Internet. Here are some of the highlights of the biggest antitrust trial since the U.S. government challenged Microsoft more than 20 years ago.

Why Google is facing an antitrust lawsuit.

The U.S. Department of Justice and several states sued Google three years ago, accusing the company of using illegal tactics to maintain a monopoly in the market for Internet search and related advertising. According to the U.S. Department of Justice, Google has about 90% market share in the search field and maintains its dominant position through restrictive agreements with Apple, Mozilla, $Samsung Electronics Co., Ltd.(SSNLF)$ , $Verizon(VZ)$ and other partners in the browser and cell phone field. Google became the default search engine on most U.S. cell phones with the help of these agreements, which the U.S. Department of Justice deemed unlawful. Google also has agreements with some Android-based mobile device manufacturers that prevent them from pre-installing or promoting competing search engines if they choose to receive a cut of Google's search revenue. 

How are Google's agreements harmful?

The U.S. Department of Justice argued that Google's exclusivity agreements with Apple and others prevented competitors from effectively competing in the search business or improving their products. According to the DOJ, because Google locked down all of these browsers and had exclusive access to all relevant queries, other companies, such as Microsoft, were unable to conduct enough searches to improve their own products, thus Google gained a scale advantage that hinders competition. The US Department of Justice claimed that Google's agreement also hindered innovation because the company did not have to improve its search engine in order to maintain market share. Finally, the DOJ argued that Google has used its monopoly position to increase the price of ads on its search results pages.

How does Google explain these deals?

Google said the company's deals with Apple and others promote competition because Google gave browser providers what they want - a single default search engine option for customers in those deals. Google said Apple and Mozilla chose Google because it had been ahead of its competitors in search engines rather than being forced to do so by revenue sharing or other inducements. What’s more, the company said that Windows users, whose personal computers (PCs) do not come with any Google products pre-installed, generally choose the Google search engine because it is the best way to explore the Internet.

Google also noted that its agreement does not prevent partners from offering other search engines, as users of Apple's Safari or Mozilla Firefox browsers can change the default search engine option in their settings. Google says that, consumers can switch from the pre-installed search engine to other products on their own on Android phones. What’s more, Google said that the fact that few people do so was not evidence of exclusionary practices, but rather proof that consumers are sticking with a higher-quality product.

What happens if Google loses?

Theoretically, U.S. District Judge Amit Mehta could order Google to be split up. However, legal analysts think it’s unlikely. More likely, they say, would be new restrictions on the way Google conducts its business, such as limiting Google's ability to pay Apple, Samsung and others to be the default search engine on cell phones. Paul Gallant, a technology policy analyst at Cowen Washington Research Group, said, "It seems like the most natural remedy. It seems unlikely that a judge would order Google to be split up for making illegal payments to device makers, relative to the harm caused."

When was the last time the U.S. government challenged a large monopoly in court?

The U.S. government sued $Microsoft(MSFT)$ in 1998, accusing the latter of trying to take control of the Internet browser market on computers with Windows installed. The U.S. Department of Justice won the suit. And according to the DOJ, the victory opened the way for future Microsoft’s competitors like Google and Facebook to do well. The DOJ claimed that Google had followed Microsoft's lead in the 1990s to establish and maintain its own monopoly in Internet search and advertising. Google, for its part, argued that the DOJ's comparison was inappropriate.

How long will the trial in this case last and when will a verdict be issued?

The Department of Justice has one month to present its case, which means that the states and Google will not be questioning witnesses until October. Witness testimony is expected to end in November, and then both the plaintiffs and the defendants will present their briefs to the judge and present their arguments for what judgment the judge should enter. Closing arguments and a final judgment are not expected until next year. If Judge Mehta finds that Google violated the Sherman Antitrust Act, he will schedule a separate hearing to determine what penalties to impose. Mehta's decision will likely be appealed, so it could be several years before the outcome of the lawsuit is finalized.

ETFs with the Largest Exposure to Google Stock  

There are two stock classes of Google stock, $Alphabet(GOOGL)$ and $Alphabet(GOOG)$ . The main difference between the two stock classes is that Class A shares offer voting rights, while Class C shareholders have no voting rights. The ETF with the largest exposure to Google stock is the $iShares Global Comm Services ETF(IXP)$ , which has 12.89% of GOOGL and 11.15% of GOOG for a combined allocation of 24.04%.

As of September 12, 2023, here are the ETFs with the largest Google stock allocations (broken down by stock category):

ETFs with the largest GOOGL equity exposure

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Source: TigerTrade

 ETFs with the largest exposure to GOOG stock

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Source: TigerTrade

The outcome of the Google’s antitrust lawsuit could have a significant impact on Google's stock price, as well as the prices of ETFs holding the stock. If the Department of Justice prevails in the lawsuit, it could force Google to change its business practices while opening up the market to more competition, finally leading to lower prices for consumers and more choices for businesses, which could hurt Google's profits. 

However, it is also possible that the DOJ could lose the lawsuit, or the outcome may not be as severe as the market expects. In that case, Google shares could rise as investors have reason to believe the company will continue to be the dominant player in the search and search advertising market.

Ultimately, the impact of the Google antitrust litigation on Google's stock price, the price of ETFs holding the stock and the broader technology industry will depend on the outcome of the case and the specific remedies imposed on Google. If the outcome is similar to the landmark Microsoft case in 1998, Google could continue to be a dominant player in the technology sector for decades to come.

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