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When the trial between the US Department of Justice and Google begins next month, it will mark the first examination of a big tech company’s business practices since the Microsoft case 25 years ago. A ruling in favor of the US could have significant implications for Google’s core business and potentially allow competitors to gain a larger market share in mobile search.
Interestingly, despite the ongoing scrutiny, Alphabet (Google’s parent company) has seen a remarkable 47% increase in its share price this year. The broader tech industry has also experienced a noteworthy rally, with big tech leading the overall stock market. Investors, seemingly unfazed by the so-called “techlash” phenomenon, perceive minimal risk pertaining to regulatory actions against tech giants.
Regulators, thus far, have struggled to achieve significant antitrust victories against tech companies, and Congress has been unable to pass any substantial legislation in this regard. Even the fines imposed by Brussels on Google have failed to alter the competitive landscape in the markets it dominates.
However, the EU’s Digital Markets Act could pose a greater risk. In the absence of new laws in the US, regulators are attempting to stretch existing legislation. Nevertheless, the courts remain cautious about restricting business practices that provide immediate benefits to consumers, such as lower prices. Tech companies assert that any interference in their current business models could endanger free internet services and affordable digital goods, which have gained popularity among millions of consumers.
Furthermore, the recent failure of the US Federal Trade Commission in its attempt to block Microsoft’s $75 billion acquisition of Activision Blizzard highlights the courts’ reluctance to intervene without clear harm to consumers, despite complaints from competitors.
The case against Google primarily focuses on the deals the company made with mobile device manufacturers and browser developers, ensuring the default use of its search engine on devices running its Android software.
While some aspects of the complaint were dismissed earlier this month by Judge Amit Mehta, the trial will center on an area where Google may be vulnerable. Section two of the Sherman Act broadly prohibits any “exclusionary conduct” aimed at monopolizing a market. The US successfully utilized a similar complaint against Microsoft, which utilized exclusive contracts to promote its Internet Explorer browser and suppress competitor Netscape.
Even if Google’s search deals are found to exclude competitors, the company can still defend its conduct by demonstrating pro-competitive intent. Google argues that its payments to secure its search engine as the default option for users are akin to cereal makers paying for prominent shelf space in supermarkets. The company also warns that any denial of its promotional deals and interference in its normal business practices could result in a worse consumer experience, potentially leading to higher phone prices.
Interestingly, this legal test coincides with reports that the Federal Trade Commission is close to filing a long-anticipated lawsuit against Amazon’s e-commerce operations. The focus of the investigation is Amazon’s treatment of third-party sellers on its platform. Critics claim that the company pressures these sellers into paying for additional services, like Fulfillment by Amazon, to ensure their products receive better placement within the marketplace.
Similar to Google, this case also challenges a fundamental aspect of Amazon’s core business. Independent sellers account for nearly a quarter of Amazon’s revenue, making this a crucial component of the company’s operations. Despite these allegations, Wall Street appears unconcerned, as Amazon’s shares have surged by 57% this year.
Investors seem to be speculating that even if the companies lose their cases, they may be able to resolve the issues by making adjustments to certain contract terms rather than undergoing fundamental operational changes. For instance, Amazon has already made concessions in the EU and UK concerning its treatment of third-party sellers, with little impact on its business.
As the Google trial sheds light on practices criticized by Big Tech’s opponents for years, Wall Street predicts that it won’t have a significant impact on the companies’ most profitable operations.
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