How a break-up of Google could transform tech

The businesses of the biggest tech companies are like fortresses, flanked by high walls and encircled by moats. Their platforms are cornerstones of digital life that support billions of users. At the same time, their business ecosystems, the networks of partners and tech allies that circle in their orbit, make them hard to unseat. Since the pandemic, the profits and growth of Big Tech have lifted the entire US stock market.

All of this makes the US Department of Justice’s attempt to crack open Google’s core search business a seminal moment for the tech industry. This week, the US trustbusters followed through on a landmark antitrust court victory against Google in August with a wide-ranging proposal to shake up its business.

So far, this has only taken the form of a broad outline of the sort of sanctions the US government is considering asking a court to impose, as a way to deal with Google’s anti-competitive behaviour. It will present a firm proposal to the court on November 20.

But as the opening shot in the battle over a search business that produced $175bn in revenue last year, it points to a potentially historic upheaval in the tech world with a wide range of winners and losers.

The end result, for instance, could be to redirect the billions of dollars that Google pays other tech companies for their role in putting its search service in front of hundreds of millions of users. It could bring down prices for millions of advertisers, who a US judge has said are overpaying because of Google’s practices. And it could end the free availability of important pieces of Google technology, like its Android mobile operating systems and Chrome browser, which many software developers and gadget makers have come to rely on.

Most significantly, the changes could open the door to real competition in internet search for the first time since Google rose to prominence. And they could smooth the way in particular for a new generation of start-ups that hope to use generative artificial intelligence to loosen Google’s dominance, ranging from search engines such as Perplexity and You.com to pure-play AI companies like OpenAI.

The share price of Alphabet, Google’s parent, fell only 3 per cent on the news this week. For most investors, the effects of the antitrust case are still too distant and uncertain to factor into current valuations. But as the potential repercussions from the court loss loom larger, some investors are starting to pay more attention.

“It’s like the Roman empire: the government barbarians are at the gates,” says David Wagner, head of equities at Aptus Capital Advisors. He sold a position in Alphabet in August out of concern about the antitrust case, even if it is not clear yet exactly how things will end. “It’s hard to see [Google] escaping all of this unscathed.”

For all the potential impact, the DoJ still has a mountain to climb. Besides persuading a court to back the remedy proposal it eventually comes up with, it has to carry its case on appeal and, potentially, before the Supreme Court. And even then, most legal observers and Google rivals say there are no easy or straightforward ways to ensure greater competition.

“Monopolisation cases are difficult to win, but even harder to remedy,” says David Balto, an antitrust lawyer and former Federal Trade Commission official. “It’s very, very hard to change the nature of a market.” That is particularly the case, he adds, in businesses with network effects, where “there are natural reasons why you end up with dominant firms” — something common to many tech markets. 

To prevail, the DoJ will have to persuade the courts not only to block the specific Google practices that were judged illegal, but to adopt a package of sweeping changes that go well beyond the behaviour that was at the centre of the case.

This week’s filing from the DoJ follows a ruling in August by a federal judge, Amit Mehta, who sided with an argument by the US government and several US states. For more than a decade, he concluded, Google had used a series of exclusivity deals with other companies to ensure its search engine was given prime position in front of consumers on handsets and other devices, illegally squeezing out competitors.

The search giant has said it will appeal against the ruling. But it also says that if Mehta’s decision is upheld, there would be a simple — and limited — solution to right the alleged wrong: ban the sort of exclusive contracts that were at the heart of the case.

That in itself could have big financial consequences. It could end the $20bn a year that Google pays Apple for preferential access to iPhone users, part of the $26bn in all that it pays to guarantee distribution for its search engine. Ironically, Google itself could be a winner if these payments are blocked, since it claims that most users of devices like the iPhone would still opt to use its search engine.

If the court broke up Google, it wouldn’t change these monopolistic conditions

Yet while the DoJ has taken aim at these exclusive deals, it says it also plans to push for a much wider range of actions. Google has attacked this broader plan as “radical” and part of a “sweeping agenda” that goes far beyond the terms of the antitrust case. But its rivals say that if the courts truly want to bring about more competition, they have no choice but to back the kind of actions the DoJ is pitching.

In ruling against Google, the judge has already pointed to the self-reinforcing advantages it has gained as a result of its illegal behaviour. These include the massive data superiority that comes from being the clear market leader, enabling it to refine its search results more accurately than rivals. It has also been able to generate higher prices from its search advertising, hampering rivals that cannot monetise their search traffic at the same rate. To truly open up search, according to the DoJ, the courts need to pick away at these and other advantages that have entrenched the tech giant.

A potential break-up of the company has been the most eye-catching — and controversial — aspect of the DoJ’s suggested remedies. The authorities pointed to the Android mobile operating system, Chrome web browser and Play mobile app store, suggesting a break-up would be limited to stripping Google of important channels that currently guarantee wide distribution for its search engine.

On its own, however, a break-up along these lines might have little direct effect on competition. Android and Chrome themselves have strong network effects that make them more attractive, the more people use them. Also, as standalone companies, they would have strong incentives to continue contracting with Google to carry its search engine.

“If the court broke up Google, it wouldn’t change these monopolistic conditions,” says Michael Cusumano, a management professor at the Massachusetts Institute of Technology. A break-up would also be an overly harsh punishment for a company that has achieved much of its success through its search innovations, he adds.

If the DoJ were to press ahead with the idea and prevail, forcing Google to spin off Android and Chrome could cause upheaval in the wider tech world. Many hardware makers, from smartphones to televisions, have been able to use Android and Chrome free of charge, something that might change under a new owner. According to Google, the dislocation this would cause in the tech world should make any court reject the idea out of hand.

The company’s critics, however, say that such side effects are sometimes a necessary part of fixing a market distortion. According to Megan Gray, who was a FTC lawyer and is former general counsel at search engine DuckDuckGo, the sheer scale of Google’s wrongdoing and the long period of its anti-competitive behaviour make the likely “impact zone” of remedial action across the tech industry particularly large. But any negative effects should be balanced over time, she adds, by consumer benefits stemming from “better search, more start-up companies, more employment opportunities, more innovation”.

A second DoJ suggestion — that Google should be forced to give its rivals access to the core data on which its search business runs — has attracted less public attention, but could have a profound impact.

The data would include all the search queries entered into Google and the results the company returns, as well as the various factors it takes into account — known as ranking signals — when deciding how to respond to a query. Essentially, this would prise open its search engine “black box”, enabling others to reproduce its results or make their own adjustments to refine the service. 

I almost feel bad for [Google] if they have to reveal all the things they do on the AI training side

According to Google, handing over search queries would jeopardise the privacy of its users, making the idea a non-starter. Rivals such as DuckDuckGo, however, point out that no directly personal user data would be involved, and claim that there are ways to weed out search queries that might accidentally serve to identify a user.

Google also complains that the data-sharing proposal would expose some of its most important trade secrets and other intellectual property, undermining one of its most important competitive advantages. That gets short shrift from rivals, who say that courts have not held back from forcing infringing companies to open up their IP in the past. After losing a landmark antitrust case nearly 25 years ago, for instance, Microsoft was forced to disclose proprietary technical information to rivals so that they could interconnect more easily with its software.

Besides sharing data, the DoJ has also suggested that Google should give rivals access to its advertising network, potentially enabling them to generate as much money on their own search traffic as Google itself does.

“The problem at the moment is, even if you build a better search engine, you can’t monetise it without advertising on top,” says Richard Socher, chief executive of search service You.com. “The ad part [of the DoJ’s remedies] will give more people conviction to try and break it [Google’s monopoly].”

Potentially, one of the biggest impacts of the DoJ’s proposals could be felt in generative AI. The case could become the first regulatory skirmish over the outlines of the emerging AI market and helping upstarts make bigger inroads into Google’s markets.

“The DoJ has a decent chance of chipping away at Google’s search by aligning itself with genAI start-ups,” says Paul Gallant, an analyst with Cowen in Washington.

The Big Question

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One proposal, for instance, would prevent Google gaining the same kind of unfair distribution advantage for its AI services that it has achieved for search. Concern about a restriction like this has probably already caused Google to hold back from reaching a distribution deal to put its Gemini AI service on Apple’s iPhones, says Gallant.

The DoJ also says the company should be forced to give competitors information about the design of its AI-powered search features and other services.

“I almost feel bad for [Google] if they have to reveal all the things they do on the AI training side,” says Socher at You.com. Such a move would “unlock” considerable value for many other companies.

These proposals amount to “a pretty comprehensive game plan to help” the new generative AI start-ups, says Gallant. But even some Google rivals question whether the courts would go so far. “Those are some big swings [from the DoJ],” says Socher. “I will be surprised if all of those land.”