Can the Federal Trade Commission Break Up Google?

The U.S. Department of Justice (DOJ) is weighing on the monumental decision to dismantle Google or Alphabet (GOOGL). The prospect of breaking up Google, the undisputed dominant online search engine, has investors of all stripes and techies wondering where this will lead if the giant is ordered to split up.

Here’s what’s going on: The DOJ’s landmark court ruling found Google guilty of engaging in monopolistic practices. This could lead to the requirement to divest one or more divisions. If the DOJ moves forward with a breakup, the implications for Alphabet Inc., Google’s parent company, could be significant for stockholders and certainly be considered a historic event.

Justice Department’s Breakup Consideration

The Justice Department’s ruling against Google marks a significant moment in antitrust legal enforcement history. Judge Amit Mehta, a district judge in Washington DC, ruled on August 5, confirming Google had illegally monopolized the markets for online search and search text ads. This ruling paves the way for the U.S. Government to propose remedies that could include breaking up the tech giant. If the breakup path is taken, it would be the first new attempt to break up a mega-tech company since Microsoft Corp. (MSFT) breakup two decades ago. The attempt to shrink Microsoft’s tentacles eventually failed.

While a breakup is on the table, less severe options are also considered. These include forcing Google to share more data with competitors or imposing restrictions to prevent it from gaining an unfair advantage in artificial intelligence (AI) products.

The government may also push for a ban on exclusive contracts, which limit competition and are key ingredients in Google’s overall dominance. If a breakup is pursued, the likely targets for divestment include the Android operating system, Google’s Chrome browser, and possibly even Google Ads, the platform responsible for selling text advertising.

Impact on Alphabet Shares

The news of a potential court-ordered breakup has already impacted Alphabet’s stock. Following the court ruling, Alphabet shares dropped as much as 2.5% in after-hours trading on Tuesday. A forced breakup of Google would be the largest U.S. company since the dismantling of AT&T (T) in the 1980s. This could become the most significant tech story this decade, sending shockwaves that could impact other large tech companies and small tech competitors.

Up to this point, Google and the Justice Department have remained tight-lipped. Google has announced plans to appeal the decision while the Justice Department is preparing for the next phase of the case. This will involve proposing remedies to restore competition, with a breakup being a distinct possibility.

Investors closely watch these developments, as the outcome could significantly alter Google’s business model and revenue streams. This also raises concerns about Google’s dominance in AI, a sector that has been expected to drive future growth. The government may seek to prevent Google from leveraging its search database to gain an edge in AI, which could limit the company’s ability to innovate in this critical area.

Potential Remedies and Data Access

One of the most discussed remedies is the divestment of the Android operating system. Android, which powers about 2.5 billion devices globally, is a cornerstone of Google’s ecosystem. Judge Mehta’s ruling highlighted Google’s practice of requiring device manufacturers to pre-install Google apps, like Gmail and the Play Store, along with the Chrome browser and search widget. These agreements effectively stifle competition by making it difficult for rival search engines to gain a foothold.

Another potential remedy involves Google Ads. The platform, which generates most of Google’s revenue, also has features that fit the definition of a monopoly, which could cost the company money. In 2020 alone, Google earned over $100 billion from search ads. If the DOJ doesn’t push for the sale of Google Ads, it might instead seek to impose interoperability requirements. These would ensure that Google Ads works seamlessly across other search engines, leveling the playing field.

Additionally, the government could require Google to license its data to competitors like Microsoft’s Bing or DuckDuckGo. Judge Mehta’s ruling also found that Google’s contracts ensured it received the lion’s share of user data, giving it a significant advantage over rivals. This data advantage bolstered Google’s search engine and hindered competitors from improving their services.

Investor Takeaway

As the Justice Department continues its deliberations, the future of one of the world’s most powerful tech companies hangs in the balance.

For investors, the possibility of a Google breakup presents risks and opportunities. On one hand, a breakup could disrupt Google’s operations, potentially leading to short-term volatility in Alphabet’s stock. The sale or divestment of key assets like Android or Google Ads could also impact revenue streams and profit margins.

On the other hand, breaking up Google could unlock value by creating separate, more focused companies. Each entity could attract new investors, particularly those interested in specific areas like AI or digital advertising. Additionally, a breakup might reduce regulatory scrutiny, allowing the newly formed companies to operate more flexibly. The FTC’s decision and Judge Mehta’s ruling represent a critical juncture for Google. While the outcome remains uncertain, investors should stay current and aware, as this case could reshape the tech landscape, including redistributing competitive advantages for years to come.