Join our community of smart investors

Why investors don’t need to worry about an Alphabet break-up

But will the anti-trust lawsuit harm the tech giant's shareholders?
October 21, 2020
  • The US has sued Google for anticompetitive practices 
  • A break-up is on the cards - but not might be fatal for shareholders 

The US Department of Justice (DoJ) has filed a lawsuit against Alphabet (US:GOOGL) subsidiary Google, accusing the company of anticompetitive behaviour in search and search advertising. The case marks the most aggressive antitrust case brought against Big Tech since a hearing against Microsoft (US:MSFT) almost three decades ago.

Google has condemned the case as “deeply flawed", saying that it "would do nothing to help consumers”.  But regulators’ principal issue lies with Google’s alleged smothering of competition.

The lawsuit comes hot on the heels of a 16-month inquiry by the US House of Representatives, investigating alleged anticompetitive practices by the likes of Google, Facebook (US:FB), Amazon (US:AMZN) and Apple (US:AAPL). The concluding report called for the break-up of Big Tech platforms. 

But a break-up at Google would not necessarily spell disaster for shareholders. True, it currently makes the bulk of its revenues from advertising – at $135bn in 2019, or over four-fifths of total sales. But the company has more than 70 subsidiaries – many of which are young, rapidly growing businesses. Take DeepMind, the UK-based artificial intelligence (AI) firm that Google acquired in 2014. Revenues here almost doubled in 2018 to £103m compared to the year prior, according to accounts submitted at Companies House. 

If the lawsuit against Google takes as long as the 10-year case against Microsoft, this could give its subsidiaries enough time to plant a strong foothold in their respective markets before a spin-off. Indeed, Google has its fingers in so many pies that it reports on a collective ‘Other Bets’ category in its income statement. This portfolio includes self-driving car venture Waymo and life sciences company Verily, among others. Google describes its other bets as earlier-stage technologies for which the goal is "to become thriving, successful businesses in the medium to long term".

Time is on its side, as any potential break-up would be some way off: the case brought against Microsoft took more than a decade to finalise. Indeed, the software company's shares still managed to achieve a 26 per cent compound annual growth rate (CAGR) over the decade that it dealt with the DoJ. Microsoft is still massive, with a market value of $1.6 trillion (£1.2 trillion) – and this summer has escaped the scrutiny of regulators on Capitol Hill. 

The lawsuit against Google will not be an easy win, especially as its search product is free and it does face some competition from Microsoft’s Bing platform. It will be made more difficult by the nature of current US competition law, which places greater emphasis on the welfare of the consumer rather than the health of the market. And given the company’s image as the champion of the age of information, the argument that Google has harmed the average American will not be an easy one to make.