Will tech stocks suffer another blow? Google's "Second Antitrust Case" goes to trial today

Although U.S. officials have been investigating tech giants in recent years, only Alphabet has so far entered the trial process.

On Monday, September 9th, Eastern Time, the "Second Antitrust Case" against Alphabet began, with the U.S. Department of Justice (DOJ) accusing Alphabet of monopolizing the digital advertising market to the detriment of advertisers and content creators. This antitrust trial may impact the future of online advertising.

The trial will take place in Alexandria, Virginia, and is expected to last for several weeks. It is the first technology industry antitrust trial brought by the Biden administration. California, Colorado, Connecticut, New Jersey, New York, Rhode Island, and Tennessee have joined the case.

The DOJ believes that Alphabet unfairly raised the prices for customers to advertise due to its monopoly position, and lowered the income of website creators. Alphabet, on the other hand, argues that both sides of the advertising transaction have many choices, customers often mix different advertising platforms, and the DOJ's demands will slow down innovation, increase advertising costs, and make it difficult for thousands of small businesses and publishers to develop.

If the DOJ wins, it will seek to at least split Google's ad management suite (GAM), and Google may also face a large number of compensation lawsuits from advertisers. Morgan Stanley believes that faced with Google's monopoly in internet search and advertising, the U.S. Department of Justice is mainly focused on addressing 3 issues: competition intensity, data scale advantage, and anti-competitive pricing.

In September, the U.S. stock market experienced another sharp drop in early August, with the tech-heavy Nasdaq falling 5.8% last week to enter a technical consolidation phase. On Friday, September 7th, all "FANG" stocks returned to their levels before the sharp drop on August 5th.

Will this Google case once again strike the already gloomy U.S. tech stocks?

Google's advertising business is like "Goldman Sachs or Citigroup owning the New York Stock Exchange"

After losing the first round of antitrust lawsuits a month later, Google once again stepped into the courtroom to face federal prosecutors. This time, the DOJ alleges that Google's monopolistic behavior in the digital advertising field has raised the prices for customers to advertise The focus has shifted to Google's advertising tools - a crucial part of Google's $200 billion digital advertising business. These tools enable ad buyers to easily purchase ad space and allow ad sellers, such as website owners, to sell their ad space.

The U.S. Department of Justice has accused Google of violating Sections 1 and 2 of the Sherman Antitrust Act: prohibiting anticompetitive behavior. The Department of Justice believes that Google has locked publishers and advertisers into its products.

Over the years, Google's advertising business has faced criticism because Google's ad tools (ad platform) are involved in multiple aspects of the market operation: buyers, sellers, ad trading platforms - giving Google unique market insights and potential control.

The U.S. Department of Justice cited a Google ad executive who stated that Google has multiple links in the ad sales process, likening it to "Goldman Sachs or Citigroup owning the New York Stock Exchange."

What will the Department of Justice and Google argue in court?

Specifically, the arguments of the Department of Justice and Google in this case.

The Department of Justice plans to demonstrate that Google has built unparalleled power through the acquisition of multiple companies, providing services that allow ad buyers to target users across the entire internet. For example, in 2008, Google acquired the leading digital advertising company DoubleClick, which led to the antitrust lawsuit known as the "DoubleClick trial."

The Department of Justice stated that Google's acquisition strategy "laid the foundation for Google's subsequent exclusive behavior throughout the advertising technology industry." The Department of Justice claims that Google controls 91% of the ad server market and unfairly uses its power to raise prices for customers advertising.

The Department of Justice points out that some publishers have had to turn to subscription and other alternative models to sustain their operations, while others have gone out of business. Publishers here refer to entities or individuals who own and operate websites, applications, or other digital platforms, earning revenue through displaying ads.

The Department of Justice plans to summon YouTube CEO and former Vice President of DoubleClick, Neal Mohan, to testify. The Department of Justice claims that DoubleClick's technology allows Google to require publishers to use Google's ad tools in some cases, meaning publishers cannot use competitors' services in some online ad buying processes.

The Department of Justice states that Google now monopolizes the ad business, resulting in reduced revenue for website creators and higher costs for ad clients. "In a non-monopolistic market, competition would lead to lower prices, the emergence of innovative ad tech tools would improve transaction quality, and reduce costs for market participants."

Now, let's look at Google's arguments.

Google has long refuted accusations of monopolizing the online advertising market, pointing out that competitors, including Meta, also have significant market shares Google states that there are many choices for both buyers and sellers in advertising, especially in the evolving online advertising market, where customers often mix different advertising platforms.

Every day, billions of ad auctions take place on the internet, and Google's ad tools adapt to this situation, always providing customers with competitive rates.

The Department of Justice's lawsuit is expected to slow down innovation, increase advertising costs, and make it difficult for thousands of small businesses and publishers to grow.

Regarding mergers and acquisitions, Google argues that the previous acquisitions of DoubleClick and AdMeld were not "destructive acquisitions," and regulatory agencies have approved these acquisitions.

Foreign media reports that both the Department of Justice and Google have prepared many witnesses. Witnesses that the Department of Justice may call include former Google Ads VP Jerry Dischler, Google AI CEO Sissie Hsiao, etc.; witnesses that Google may call include Google Assistant Engineering Director Nitish Korula, Meta VP Simon Whitcombe, etc.

What will Google face if it loses the lawsuit?

The key to this antitrust case lies in how Google uses its advertising product portfolio.

If the Department of Justice wins, it will seek to at least split up Google Ad Manager (GAM), a platform that allows brands to create and manage ad units, track ad campaigns, and allows publishers to sell ad inventory.

This is different from Google's flagship platform - Google Ads, which is mainly used by businesses to place ads on search engines, websites, YouTube, and other partner sites.

In a recent quarter, Google's parent company Alphabet's ad revenue was $64.6 billion, accounting for over two-thirds of total revenue. GAM Suite is part of Google's network business, with revenue of around $7.4 billion in the second quarter, accounting for about 11% of total ad revenue.

Furthermore, if the Department of Justice wins, Google may face a large number of lawsuits from advertisers who will seek monetary compensation. Analysts at Bernstein suggest that Google could face lawsuits of up to $100 billion.

Morgan Stanley believes that in the face of Google's monopoly in internet search and advertising, the U.S. Department of Justice is mainly focused on addressing 3 issues: competition intensity, data scale advantage, and anti-competitive pricing. Based on this, Morgan Stanley speculates on 4 possible outcomes that Google may face if it loses.

Outcome 1 (least likely): Allow users to make screen choices and cancel exclusive agreements.

Consumers will choose search engines based on product experience and brand. Data from Europe shows that despite the implementation of screen choice for users at the end of 2020, Google still maintains over 97% market share on mobile.

Therefore, this measure has a minimal impact on Google's business. Morgan Stanley estimates an impact on EBIT of -2% to +15% by 2028. The slight decrease in revenue for Google due to this measure may be offset by lower traffic acquisition costs (TAC) However, the judge hopes to change the situation where Google monopolizes the internet search field, so Morgan Stanley believes that the possibility of the U.S. Department of Justice taking this measure is the lowest.

Results 2 & 3 (more likely): Further correcting Google's data advantage and anti-competitive pricing, encouraging competitors to invest in the internet search field.

Morgan Stanley believes that taking a series of measures, including canceling exclusive clauses in RSAs, allowing users to make screen selections, allowing access to Google's "click/query/user" data, and controlling advertising bid pricing, will be more conducive to establishing a fair search competition environment, encouraging competitors to continue investing.

Under these measures, competitors in the search field such as Bing, GPT, etc., will continue to invest, drive differentiation of search engines, attract users, and have a significant impact on Google's pre-tax profits.

These measures may put pressure on Google's profitability in the short term, thereby accelerating Google's investment and innovation speed in search products.

Increased investment by multiple companies in the search field may also bring a better user experience, which is positive for society.

Result 4 (the worst case scenario for Google): Restricting Google's payment ability in distribution agreements.

Morgan Stanley stated that in the most severe scenario, in addition to the above measures, the Department of Justice may also propose restricting Google's ability to pay third parties, while allowing other competitors to bid freely.

This measure would have the greatest negative impact on Google, as it would make companies like Microsoft more competitive in bidding for Apple's display positions, and even potentially gaining a monopoly. Morgan Stanley stated that Microsoft has tried to win Apple's search contract, but due to Google's advantages in conversion rates, economic benefits, and user experience, Apple has repeatedly chosen to cooperate with Google.