Good bettors belly up to the table with an idea of the odds and the risk involved. Investors in Google parent Alphabet (GOOGL.O) may want to do likewise. Competition cops at the U.S. Department of Justice are the latest to take aim at the $2 trillion tech giant, proposing a grab bag of remedies - including a potential breakup - as punishment for anticompetitive behavior. Search revenue, Google’s cash cow, is vulnerable, and other salvos add to the damage. In the worst case, more than a quarter of the company’s enterprise value is left to chance.
The DOJ’s Tuesday court filing runs through ways to address concerns relating to search, advertising and Google’s accumulation of data. It comes after an August ruling deemed the company a monopolist. The outlines, for now, are broad, suggesting everything from prohibiting agreements that make Google the default search engine on devices like Apple’s (AAPL.O) iPhone to potentially divesting units like mobile operating system Android.
Google is the top dog in digital queries. Selling advertising against them accounts for more than half of its top line, for an expected $219 billion next year, according to Bernstein. But a lot of that comes from the Apple partnership, whereby Google hands over revenue to secure pride of place on the iPhone. Barclays analysts figure that over a third of search revenue comes from such defaults on iOS, whether through the standard toolbar or Google-owned browser Chrome. Back out money handed to Apple, and that represents $53 billion of next year’s net revenue. At the company’s 40% operating margin for advertising and services, that’s $21 billion of operating income. Apply Google’s current enterprise multiple of 18 times next 12 months’ EBIT, and it implies $380 billion of value is at stake.
Even if a judge nixes these agreements, Google’s sheer dominance means the blow will be softened, at least at first - in Europe, where users must select their search engine, the company maintains overwhelming share through force of habit.
But it's not just Washington watchdogs that Google has to fear. Fortnite owner Epic Games won an injunction against the company led by Sundar Pichai on Monday that could force changes to its app store. Epic claims Google generated $12 billion in operating profit from this source in 2021, according to the Financial Times. Put that on the same multiple and it’s worth more than $200 billion. Intervening growth means the number may be higher now.
All together, nearly $600 billion in enterprise value is on the line. True, the immediate loss is unlikely to be total. But there are yet others circling the antitrust roulette wheel.
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CONTEXT NEWS
The U.S. Department of Justice on Oct. 8 said it may ask a court to force Alphabet, the parent of Google, to divest parts of its businesses. In a court filing, the government pointed to specific units like the Chrome browser and Play app store. A judge found in August that Google had built an illegal monopoly in search.
Google said in a blog post, “The government seems to be pursuing a sweeping agenda that will impact numerous industries and products, with significant unintended consequences for consumers, businesses, and American competitiveness.”
Separately, a California judge on Oct. 7 issued an injunction forcing Google to make several changes to its app store policies. Under the ruling, which results from a jury trial won by videogame platform Epic Games in December, Google for three years must refrain from various revenue sharing and restrictive partnership agreements preventing the distribution of third-party app stores.
