My words come back to haunt me.
See, on September 20, 2019, I told you that Washington’s war on Big Tech was likely to go nowhere, but the option remained open for the Federal Department of Justice to bring a case.
And that is exactly how events have transpired. The Justice Department, along with seven states, recently opened a case against Alphabet Inc. (GOOGL).
The basic premise is that Google has been using its commanding market position to make Google’s search engine the default on a whole vast selection of devices.
If that sounds eerily familiar to the case against Microsoft Corp. (MSFT) 20 years ago, that’s because it is the same basic idea; a search engine holding its leading market share through deals whose legality is now in question.
Last year, companies like Alphabet Inc. (GOOGL) were under fire from Congressional Democrats led by Jerrold Nadler of California.
What I said at the time is that Congress would have very little to say about the business practices of titans like Alphabet, the parent of the dominant search firm Google.
I went on to cite two previous federal antitrust cases taken against large tech leaders.
But now, with the Justice Department getting involved, I want to help you understand what this all means for tech investors.
I’ll also give you my rating on GOOGL and share a great investment for you to consider…
The Case as It Stands
Now then, the Department of Justice claims Google uses illegal tactics to maintain its monopoly on web searches.
According to the lawsuit, Google does this by striking deals with smartphone makers, web browser companies, and wireless carriers.
Google pays these companies billions, and in return they make Google Search their default search engine. This sends a huge amount of search traffic to Google Search.
And Google is very good at monetizing that traffic through its search advertising, which made up almost all of Google parent Alphabet’s 2019 $34 billion profit.
To be clear, Google freely admits to striking deals to make Google Search the default engine in return for money.
The issue is whether those deals are legal, or whether they are an unlawful use of Google’s size and power to exclude potential competitors.
This is separate from other investigations by the Department of Justice and state attorneys general into whether Google has abused its power over the digital advertising market. Those may turn into antitrust cases later down the line.
For now, however, the case is strictly about web searches.
For example, Google practically requires smartphone makers that use its Android smartphone operating system to make Google Search come as the phone’s default.
Google also pays Apple Inc. (AAPL) money in return for Google Search being the default search engine on all iPhones, iPads, and so on.
Apple’s virtual assistant, Siri, by default also uses Google Search to help answer user questions.
Altogether, the Department of Justice estimates that through this deal, Apple devices account for half of all Google Search traffic.
In return, the lawsuit claims Google pays up to $11 billion a year, or one-third of its profits, to Apple.
Those are numbers that competitors would have a hard time competing with, the Department of Justice claims.
And really, that’s all the Department of Justice has to show in this case: that Google dominates the market for online searches. That’s not really in doubt.
The department also has to show that deals with Apple and others hamper Google’s competition.
Last Time Around
As investors, we’re not flying blind here. In fact, we have solid empirical data on these kinds of antitrust cases.
As I mentioned earlier, Microsoft Corp. (MSFT) faced heavy antitrust scrutiny in the late 1990s.
Back then, Microsoft’s Internet Explorer was quickly becoming the dominant web browser, practically monopolizing how most people interacted with the Internet.
As the Department of Justice successfully showed, Microsoft signed deals and bullied companies into not offering any competing web browsers.
Meanwhile, the firm bundled Internet Explorer for free with the popular Windows operating system, making it the default.
That case took a decade to wind its way through the courts. The end result was Microsoft changing some business practices, but no major changes.
Another example is International Business Machines Corp. (IBM), which came under antitrust scrutiny a generation earlier, in 1968. Back then, IBM practically had a monopoly on big computers and was accused of maintaining it illegally.
After 14 years of wrangling in the courts, all charges were dropped.
In both cases, those companies and the tech industry as a whole lived on. As we’ve seen all through the tech-driven bull market, the sector actually got stronger.
That leaves us with four takeaways for this new antitrust suit against Alphabet:
- The case must have at least some merit or the Feds wouldn’t have sued. Remember, leading Democrats were calling for an investigation just a year ago. So, there is bipartisan support.
- In fairness to Google, it does face competition in search. I almost exclusively use Bing from Microsoft Corp. (MSFT). I use Apple Maps for most of my driving or walking directions.
- The case is likely to drag on for many years with Google putting up a spirited defense. But it will have to battle with at least 10 state attorneys general at the same time, so it’s going to cost millions in legal fees.
- While it’s very unlikely Google will in the end be forced into some kind of breakup, it will almost certainly have to amend some of its business practices to put its legal headaches behind it.
On this last item, it’s impossible for me or anyone else for that matter to calculate the financial impact of the case.
The Sounder Alternative
So, you can see why now – after many years of support – I have the stock listed as a “hold.”
I wouldn’t panic sell Alphabet stock right now, but I also definitely would not start building a position. There’s just too much uncertainty.
In a case like this, it pays to wait and see if you can get the stock at a huge discount.
As for what to buy instead, when we talked in September 2019, I recommended the Fidelity Nasdaq Composite Index Tracking Fund (ONEQ), which is an exchange-traded fund (ETF).
It’s a great way to invest in 1,900 Nasdaq-listed stocks in one fell swoop. Doing so gives you access to a wide range of profitable tech trends in a cost-effective investment.
As you know, I’m a big Apple bull. With Google in the government’s crosshairs, the investment thesis has only gotten better.
Consider that Alphabet’s earnings growth is actually no better than Apple’s. But Apple trades at a substantial discount to Alphabet.
And I still wholeheartedly recommend Apple Inc. (AAPL). This one company gives us a play on mobile, streaming music and videos, unified communications, and tech services.
So yes, the road to wealth is still paved with tech. This Google antitrust case hasn’t changed that.
But to profit over the long haul, it pays to avoid hitting big potholes like the one Google is in now.
Cheers and good investing,
— Michael A. Robinson
Source: Money Morning