‘OK, Google, Call The Lawyers’

Months in the making, the Justice Department’s antitrust case against Google is set to go forward Tuesday, marking the opening salvo in what’s expected to be a multi-front legal battle involving both the federal government and several state attorneys general.

The DoJ is taking aim at Google’s search dominance, while attacks on the company’s ad monopoly are imminent. Lawmakers on Capitol Hill have accused Facebook, Google, Amazon, and Apple, of various abuses vis-à-vis their clout in all things digital.

At issue on the search side for Google is its position as the default engine for both desktop and mobile users on Safari, Firefox, iOS, and, naturally, Chrome. Some attorneys suggested last month that William Barr rushed the investigation in order to score political points for Donald Trump ahead of the election. Both Barr and Trump could be gone by the time the case goes to trial — if it goes to trial. To say Google has the resources to put up a fight would be to laughably understate the case.

Read more: Bill Barr Comes For Google

“The department will allege that Google is maintaining its status as gatekeeper to the internet through an unlawful web of exclusionary and interlocking business agreements that shut out competitors,” The Wall Street Journal said Tuesday, previewing the suit. “The government will allege that Google uses billions of dollars collected from advertisements on its platform to pay mobile-phone manufacturers, carriers and browsers, like Apple’s Safari, to maintain Google as their preset, default search engine.”

The Journal adds that “the lawsuit will also take aim at arrangements in which Google’s search application is preloaded, and can’t be deleted, on mobile phones running its popular Android operating system.” These revenue-sharing agreements prevent competitors from having their search apps preloaded, the government will say.

I suppose I’d ask why you would ever want a search engine other than Google, but because this is an antitrust suit, that begs the question.

While every college freshman who completes Business 101 learns that monopolies stifle innovation, there’s been no shortage of innovation from any of these companies. And when they see an innovator they like, they just buy it.

While this is surely detrimental on any number of fronts, it’s by no means clear that the average person (i.e., your everyday netizen) is worse off under these alleged monopolies. I have no use for Facebook or any of its offerings personally, so I don’t have much to say there, but when it comes to Google, Apple, and Amazon, I struggle with the notion that our digital experiences would be improved were they forcibly broken up or otherwise compelled by government decree to do something they don’t want to do.

That is not to say that abusing their “gatekeeper” powers isn’t broadly detrimental to rivals, nor is it to suggest that they shouldn’t be broken up or otherwise reined in. Rather, I’m speaking purely from the perspective of a disinterested netizen who wakes up in the morning and wants to, for example, check his/her e-mail, Google the best place to get a tire rotation, and then listen to an Apple playlist on the way to the tire shop, guided by directions on his/her cellphone.

In any case, from a market perspective, regulatory risk for big tech has been on the radar for years, and it hasn’t stopped the top five names from becoming almost synonymous with corporate America itself.

While both Republicans and Democrats support a crackdown on America’s tech giants (albeit for different reasons), the risk to near-term market performance of undermining them and otherwise injecting uncertainty into their medium-term prospects is considerable.

“Excluding Info Tech, S&P 500 EPS fell by 41% in Q2”, Goldman wrote last month, in a summary of the worst quarter for corporate America in recent memory.

“The five largest stocks in the S&P 500 (FB, AMZN, AAPL, MSFT, and GOOGL, or ‘FAAMG’) account for 16% of S&P 500 EPS, and each of those companies beat consensus sales and EPS estimates by more than one standard deviation in the quarter”, the bank’s David Kostin went on to say, adding that “in aggregate, FAAMG EPS grew by 2% YoY in Q2 compared with an aggregate decline of -38% for the other 495 S&P 500 companies”.

As the charts below (from Gerard Minack) show, the outperformance of the S&P 500 versus the rest of the world is almost entirely down to Facebook, Apple, Amazon, Alphabet, Netflix and Microsoft. Indeed, the S&P 494 (if you will) is essentially no different performance wise than global equities more broadly.

Another set of charts (also from Minack, as featured by SocGen’s Albert Edwards back in May), illustrate the extent to which FAAANM is almost solely responsible for sales and profits outperformance in US stocks.

The figures (below) show that when you strip those companies out, corporate America hasn’t done much better than “corporate world”, if you will.

Clearly, this leaves the US equity market vulnerable to a scenario where those stocks take a significant hit due to executive action that opens some of them up to ambulance-chasing lawyers  (i.e., messing around with social media’s 230 protections) or antitrust proceedings both at the state and federal levels.

The visuals below are from a lengthy 2019 Goldman note. The pie chart illustrates Google’s share of global search. Everyone knows these numbers, but the visuals always comes across as particularly poignant. On the right is a bar chart which shows Google, Facebook, and Amazon were set to account for a combined 68% of US net digital ad revenue last year.

These companies have undoubtedly improved the lives of hundreds of millions of people across the globe, but that kind of footprint invariably entails collateral damage.

Big tech’s list of enemies multiplies commensurate with the increase in that collateral damage.

Have a look at mobile OS concentration (left) and market share of US online retail sales (right).

Again, the visuals paint a striking picture.

As Bloomberg put it on Tuesday while documenting the case against Google, “the search engine decides the fates of thousands of businesses online and has funded expansion into email, online video, smartphone software, maps, cloud computing, autonomous vehicles and display advertising.”

You can pen similar tales of expansionary conquest for Facebook, Apple, and Amazon. The question is whether humanity will actually be better off, on net, from government intervention. The pandemic underscored how indispensable these companies really are. The utilitarian calculation for knee-capping them is far from clear-cut. That said, the effect of their domination on wealth concentration and inequality is as clear as day.

These issues are all but impossible to disentangle, let alone weigh separately in order to determine what the “proper” amount of regulation should be.

While there are probably people capable of answering the myriad questions raised by everything mentioned above, the irony is that those people likely work for Google, Facebook, Apple, and Amazon.

One thing we know for sure is that the odds of elderly lawmakers on Capitol Hill getting this right are on par with your odds of launching a search engine that competes successfully with Google.

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