U.S. plan to break Google’s search dominance risks profits

Analysts say the U.S. Department of Justice’s plan to reduce Google’s search dominance could hurt its primary source of profits and slow its progress in artificial intelligence despite the final decision taking years.

On Tuesday, the DOJ announced it might urge a judge to require Google to sell off parts of its business, like the Chrome browser and Android operating system, which it claims are used to uphold an illegal monopoly in online search.

This is just one of several possible solutions prosecutors are exploring.

Other proposals include preventing Google from gathering sensitive user data, requiring it to share search results and indexes with competitors, allowing websites to opt out of having their content used for AI training, and making Google report to a ‘court-appointed technical committee’ which would oversee and regulate its operations.

Alphabet investors, facing multiple antitrust actions this year, including a Monday ruling requiring Google to open its app store, saw shares drop 1.5% to $161.86 by the close on Wednesday following the DOJ news.

The proposed remedies target the core of Google’s internet empire, which has made the company synonymous with search. It could decrease its revenue and provide competitors with more growth opportunities.

Gil Luria, managing director and senior software analyst at D.A. Davidson, stated that the DOJ has analyzed Google’s success strategy and is determined to dismantle it.

“The proposed privacy and data accumulation remedies would give Google the choice to either share all the data it collects or stop gathering the data in the first place. As it will likely choose the former, that could strengthen its competitors and possibly create new competition,” Luria said.

Analysts have raised concerns that the proposed AI-related measures could significantly affect Google’s business operations. This comes at a time when Google is already under considerable pressure from emerging startups in the AI field, such as OpenAI, known for developing ChatGPT, and Perplexity, which operates an AI-driven search engine. As competition intensifies, these new players are challenging Google’s market position and pushing the company to innovate and adapt quickly. Regulatory scrutiny and competition from these innovative startups create a challenging landscape for Google, raising questions about its future growth and profitability in the rapidly evolving tech sector.

Research firm eMarketer predicts that Google’s share of the U.S. search advertising market will drop below 50% by 2025 for the first time in over a decade.

“The last thing Google needs right now in the broader AI battle is having to fight with one hand tied behind their backs by regulators,” said Bernstein analyst Mark Shmulik.

Other companies that are expected to benefit from the proposed remedies include search engines like DuckDuckGo and Microsoft Bing, as well as AI competitors such as Meta Platforms and Amazon. These companies could see increased market share and revenue as a result of the potential changes in Google’s operations.

“The framework understands that no single remedy can undo Google’s illegal monopoly; it will require a range of behavioral and structural remedies to free the market,” stated Kamyl Bazbaz, senior vice president of public affairs at DuckDuckGo.

‘REMEDY SPAGHETTI’

However, some industry experts and analysts were surprised to learn whether the remedies, which represent the largest antitrust effort in the U.S. since the case against Microsoft in 1999, would be successfully implemented.

“The DOJ is throwing remedy spaghetti at the wall,” noted Adam Kovacevich, CEO and founder of Chamber of Progress, a trade organization representing tech companies.

“It might score some headlines, but it’s a legal non-starter. The DOJ is throwing out remedies that go far beyond the judge’s ruling, and history tells us that broad remedies won’t survive the appeals process,” Kovacevich said.

Nonetheless, Russ Mould, investment director at AJ Bell, emphasized that this risk has been acknowledged for quite some time now. He pointed out that industry experts and market analysts have long been aware of this situation’s potential challenges and uncertainties. As the landscape evolves, investors and stakeholders must remain vigilant about these ongoing developments. Mold’s comments highlight the importance of proactive measures and strategic planning in navigating these risks effectively.

“Investors don’t appear to believe a forced break-up will happen,” he said.

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