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In August, federal judge Amit P. Mehta for the District of Columbia determined that Alphabet’s (Nasdaq: GOOG) Google abused its “default distribution” status. The fact that Google comes preloaded on nearly all devices as a default search engine enabled the company to leverage the number of users and their data into ad revenue.

The 286-page ruling found that Google employed monopolistic, exclusionary practices to maintain that status in general search, concluding that “Google is a monopolist, and it has acted as one to maintain its monopoly,”. As such, Google violated Section 2 of the Sherman Antritrust Act brought into law in 1890 to enforce free competition.

On Monday, Justice Department lawyers concluded their arguments in a separate claim that Google rigged its ad brokering platform to illegally maintain monopoly over the online ad market. Before the federal Judge Leonie Brinkema for the Eastern District of Virginia, the case opened in January 2023 and should be concluded by the end of the year.

Year-to-date, GOOGL stock tracked 22% returns, having flatlined over the last 30 days at 0.9% gains. Currently priced at $168.49 against the 52-week average of $159.28 per share, this suggests that the market already absorbed the potential downfall.

But what should investors expect broadly if Google’s ad and search dominance ends?
 

Revisiting Microsoft Antitrust Lawsuit

In a similar antitrust case, federal Judge Thomas Penfield Jackson ruled in April 2000 that Microsoft should be broken up into two businesses based on the November 1999 findings that Microsoft is a “predatory monopoly.” This was related to Microsoft’s coupling of the omnipresent Windows operating system with its Internet Explorer browser.

Just like with Google, this pre-bundling integration prevented free competition. Additionally, Microsoft signed exclusive agreements with OEMs not to install competing operating systems, locking out competitors.

However, the potential Microsoft breakup was overturned a year later. The DoJ opted for an antitrust settlement in 2002 by U.S. District Judge Colleen Kollar-Kotelly. In the end, after opening up its application programming interface (API) to third parties and decoupling Internet Explorer, Microsoft became one of the most valued companies in the world, currently at a $3.16 trillion market cap.

Internet Explorer had already achieved dominance over Netscape Navigator, while Mozilla Firefox and Google Chrome gained substantial market shares years later. Even before AI, Microsoft focused on cloud-computing with Azure infrastructure. As of Q3 2024, Microsoft Cloud is the company’s fastest growing division, having increased its revenue 22% YoY to $38.9 billion, out of total $65.6 billion revenue for the quarter.

Following the AI hype, Microsoft ended up being the first major company to integrate AI into its services holistically, having invested $1 billion in OpenAi in 2019, ramping up to $13 billion by the end of 2023.
 

Is the Antitrust Case Against Google Weaker than Microsoft’s?

For any substantial repercussions for Alphabet to happen, the DoJ has yet to define markets that Google supposedly constrained. Although Judge Mehta resorted to Brown Shoe precedent for the definition of general search engine (GSE) market, he also recognized that it is not quite applicable. 

“Of course, not every Brown Shoe factor is applicable because general search is a free product, so the court does not consider factors related to pricing.”

Furthermore, the ruling states that alternative and social media sites are “not adequate substitutes” for general search services, without proving that to be the case. Google search is likely to become rapidly redundant and inferior to AI-powered platforms like Perplexity, with or without monopoly enforcement on Google, which the judge seems to admit.

“The integration of generative AI is perhaps the clearest example of competition advancing search quality. Google accelerated and launched its public piloting of Bard one day before Microsoft announced BingChat, the integration of ChatGPT’s generative AI technology into Bing to deliver answers to queries.”

Yet, the ruling posits that AI, using natural language queries, is not likely to supplant traditional general search “anytime soon”. This doesn’t seem to be relevant to restraining market competition.

Judge Mehta’s ruling also invokes specialized vertical providers (SVP) that compete with Google in niche sectors like travel or Home Depot catalogues. By referring to SVPs as “walled gardens”, alongside social media sites, the judge inferred that this constitutes a sufficient distinction. In turn, this makes for a barrier to entry (for general search) that benefits Google.

However, for an antitrust law to be enforced, it has to be proven that Google harmed consumers rather than operate by default to keep up with competition. In other words, antitrust claims against Alphabet/Google appear to be weaker this time around on multiple grounds.
 

Is Ad Market Monopoly Case Stronger?

In the case of Doubleclick For Publishers (DFP) and Google’s AdX exchange before Judge Brinkema, it appears there is a stronger case for Google’s harm against customers. This case revolved around Google’s ~90% dominance over the publisher ad server market, which the company then leverages to limit options for both publishers and advertisers.

In turn, it could be argued that this harms consumers. In particular, DoJ lawyer Aaron Teitelbaum argued there is plenty of evidence of Google leveraging Unified Pricing Rules (UPR) to prevent publishers from setting higher prices. The inability to independently set pricing, due to monopolistic influence, Google not only acts to reduce competition but this could constitute consumer harm as publishers earn less revenue.

In the end, it seems unlikely that Google will face severe repercussions or a business breakup. Rather, a more likely scenario is another settlement with a multi-year monitoring for monopolistic influence. 
 

The Bottom Line for GOOGL Stock

The current GOOGL stock price of $169.49 (at the time of writing on November 26th), against the bottom outlook of $170 per share, suggests that antitrust news has exerted negative pressure to its maximum extent. Moving forward, the average GOOGL price target is $207.9 per share. The high estimate is $240 per share, according to 40 analyst inputs aggregated by Nasdaq.

Ultimately, investors should ask themselves a simple question. In the age of private-public partnerships, centralization, and fusion of political and corporate governance, would it make sense to harm such a useful geostrategic tool as Alphabet?

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