First, the Russians, now this.
Last month, a Russian judge fined Alphabet’s (GOOGL) two undecillion rubles — say what? — for restricting the country’s state media channels on YouTube, which the search engine giant owns.
The figure — a 2 with 34 zeros right behind it — is many times greater than the entire planet’s GDP, which the International Monetary Fund pegs at about $110 trillion.
Kremlin spokesman Dmitry Peskov admitted he “cannot even pronounce this number” but urged “Google management to pay attention.” Google, by the way, is worth just over $2 trillion.
While Russian officials have said the number is “filled with symbolism,” the U.S. Department of Justice is playing for keeps.
On Nov. 20, the DOJ said in a court filing that it wants Google to sell off its Chrome browser to level the competitive playing field for search engine rivals.
A sale of Chrome “will permanently stop Google’s control of this critical search access point and allow rival search engines the ability to access the browser that for many users is a gateway to the internet,” the DOJ lawyers said in the filing.
The government also asked for a divestment of Google’s Android mobile operating system or a contingent Android divestment based on the effectiveness of other conduct-based remedies.
Google exec blasts proposal as ‘wildly overboard’
In addition, the DOJ wants to stop Google from making multibillion-dollar deals to lock in its dominant search engine as the default option on Apple’s (AAPL) iPhone and other devices.
Alphabet’s “Search & Other” segment generated $49.4 billion, accounting for 56% of the company’s total revenue for the quarter.
In August, a federal judge ruled that Google held a monopoly in the search market.
The government filed its case in 2020, charging that Google controlled the general search market by creating strong barriers to entry and a feedback loop that sustained its dominance.
Kent Walker, Google’s chief legal officer, wrote in a blog post that the “DOJ’s approach would result in unprecedented government overreach that would harm American consumers, developers, and small businesses — and jeopardize America’s global economic and technological leadership at precisely the moment it’s needed most.”
“DOJ’s wildly overbroad proposal goes miles beyond the Court’s decision,” Walker said. “It would break a range of Google products — even beyond Search — that people love and find helpful in their everyday lives.”
Alphabet is spending billions on AI development and infrastructure as it rolls out its Gemini technology over the whole of its product suite.
The DOJ also wants to stop Google from favoring its own services, such as YouTube and Gemini.
Last month, the company posted stronger-than-expected third-quarter earnings and impressive gains in its cloud division.
Alphabet shares fell about 6% in the days after the DOJ filed its motion. However, the company’s stock, as of Nov. 22, is up 18% year-to-date, and it has risen nearly 21% from a year ago.
The DOJ filing moved several investment firms to issue research notes about the implications of the government’s proposal.
Wells Fargo analyst Ken Gawrelski said the Department of Justice’s proposed remedies in Google’s search antitrust case is “close to worst-case scenario,” according to The Fly.
The Justice Department has made a “relatively dramatic ask,” but the case is far from over, including a likely DOJ leadership change, Gawrelski said.
DOJ plan is worst-case scenario for Alphabet
Gawrelski said he views the DOJ’s remedy filing as the likely worst-case scenario for Google and sees an opportunity for further negotiation in proposed remedies with the upcoming change in DOJ leadership.
The analyst also said he sees “meaningful risk” to Google’s competitive position due to the behavioral remedy proposal prohibiting the company from paying for search distribution.
The DOJ’s structural remedy proposal of Chrome separation, if accepted by the judge, potentially puts at least 15% of Google search revenue at risk, Gawrelski contended. He kept an equal weight rating on Alphabet.
JPMorgan analyst Doug Anmuth said the DOJs “very comprehensive set of remedies” includes parts that he believes are “more punitive than expected,” including around consumer choice limitations and syndication of search data and ads.
The DOJ seeks to “prohibit Google from offering anything of value” to Apple and other third-party distributors, which could disincentivize Apple from offering consumer choice and instead push Apple to explore other options, including shifting default search from Google to a competitor such as Microsoft (MSFT) , OpenAI, or some combination of those or other providers or to try building or buying search themselves.
While the DOJ’s final proposal should represent “the worst possible remedies,” the analyst said that he expects Google’s proposed final remedies due on December 20 to be “much more modest. ” He ultimately believes the judge’s final decision next summer will be more balanced between the DOJ and Google’s remedies.
JPMorgan has an overweight rating and $212 stock price target on shares of Alphabet.
Evercore ISI analysts said they believe the government’s proposed array of remedies was “mostly as expected” given press reports in recent days indicating that the government would propose forced divestiture of Chrome and a potential divestiture of Android.
However, the firm said it views the government’s proposed limitations on distribution agreements as “draconian” and given the roughly 6% downward move in Alphabet shares today calls this “likely a negative surprise vs. investor expectations.”
The firm’s “quick checks with legal experts” suggest a near-term negotiated settlement is unlikely and that the case could continue to act as an overhang on shares until a final judgment on remedies is received, likely in August of next year.
Evercore maintained an outperform rating and $205 price target on Alphabet shares.