Episode 230 - Google is this close to being broken up

Google is the most popular search engine with no relevant competition. Anywhere in the world, Google Search dominates upwards of 90% of the market, making it a de facto monopoly by definition. But Google didn’t rise to dominance by consumer choice alone. It rose to that dominance, because it was the default option on every single service and platform available. Chrome, the most popular browser by far, defaults to Google Search. Safari, the default web browser on the iPhone and the entire Apple ecosystem, ships with Google Search out of the box. Firefox, which is a popular web browser among Linux users and open source enthusiasts, is also defaulting to Google Search. Android, the most popular operating system on the planet, comes with Google Search preinstalled on almost every smart device that isn’t Apple, with with the only exception for China.

Some may argue that Google is so popular because it is simply the best search engine out there. But one could also argue that Google is the best search engine precisely because it’s been the default across the board for decades.

People are free to change the defaults and some do. But the vast majority of the people stick to whatever the default settings are and forget them. https://www.propublica.org/article/set-it-and-forget-it-how-default-settings-rule-the-world

Defaults have power and that’s why Google spends dozens of billions of dollars every single year to pay other companies to set Google Search as the default at their services. And Google is willing to pay this much money, because the returns exceed costs multiple times over.

In the fourth quarter of 2023, Google spent almost $14bn to pay companies for this favor. And in those same three months, Google returned more than $48bn in revenue from Search. https://abc.xyz/assets/95/eb/9cef90184e09bac553796896c633/2023q4-alphabet-earnings-release.pdf

These default agreements go beyond just one-off payments. Any big company could make larger payment than Google and steal their deal. What makes all these companies choose Google isn’t some objective measurement of quality of different search engines. It is Google’s ace in their sleeve – a revenue sharing agreement. The magic of this is that if a company selects Google Search as the default on their platform, they get a cut of Google Search advertising revenue along the line. These revenue sharing deals are a real magic trick. They disincentivize companies from turning to Google’s rivals for similar deals. For example, Microsoft is also a multi-trillion-dollar global conglomerate and they could easily outbid Google’s offering. What Microsoft can’t do, is beat Google Search market dominance because their Bing market share is abysmal by comparison. Thus Google’s revenue sharing offer will always be more lucrative than any other search engine in existence by far.

These revenue sharing deals are secret and we were not supposed to know about them. But at an antitrust trial in Washington, Alphabet’s economic expert accidentally blurted out that Google pays Apple 36% of their Search advertising revenue from the Safari web browser. That would make it almost $20 billion a year. https://www.cnbc.com/2023/11/14/apple-gets-36percent-of-google-search-revenue-from-safari-alphabet-witness.html && https://www.bloomberg.com/news/articles/2023-11-13/apple-gets-36-of-google-revenue-from-search-deal-witness-says

It is these secret backdoor deals that had a US judge rule Google to be an illegal monopoly. When this news broke, I covered it back in August so you can watch that video for more detail.

But that was just a ruling of guilt. Now the U.S. Department of Justice seeks punishment. Until recently, we didn’t know what kind of punishment DoJ was looking for. But now we know. Last week the Justice Department came forward with this document called “proposed remedy framework” and this is what they want to convince the judge the US government should do to Google.

Their goal is not only to dismantle the company’s current monopoly position, but also to cripple its ability from ever forming a monopoly again in the future. And this is how they think they can achieve it. https://storage.courtlistener.com/recap/gov.uscourts.dcd.223205/gov.uscourts.dcd.223205.1052.0_1.pdf

The first thing on the list is to put an end to Google’s revenue sharing agreements and other forms preinstallation deals. This would mean no more billions paid to Apple and others to keep Google as the default search engine. It would also mean other companies would probably be barred from entering into these deals based on this precedence. A lot of these companies would lose on a lucrative revenue stream for essentially doing nothing and it would hurt them probably just as much as it would hurt Google. One such company is Mozilla. Mozilla develops Firefox and for them Google has been an open secret sugar daddy for many years. Now Mozilla will have to find different revenue streams if they want to survive in the browser market. Firefox is the only major browser along Safari not based on Chromium and losing Firefox could potentially give more power to Google Chrome.

The second form of punishment is probably the most exciting one. The DOJ seeks to stop Google from using its ecosystem for self-promotion of their own services above their competitors. The only realistic way this could be achieved is if Google products were broken up into separate companies. For this the DOJ considers and suggests breaking off Chrome, Google Play and Android away from Google Search. Their investigation correctly recognizes Chrome’s and Android’s powerful market positions. Which also means they will probably have to ban default settings and preinstallation altogether and request a choice dialogue upon first use instead. This in my opinion, would completely shatter Google’s power as a tech giant. The company would still exist for sure, Google Search would not go away. But we would see a lot more space open for competition taking a chunk off of Google-controlled market share.

And there is one more thing the Justice Department wants to do to Google and this is the most curious one in my opinion. They want to force google to open up their data sets and training data used for Google Search and AI-assisted features, and make them available for others. This I think would essentially turn Google into an almost fully open source company. Now the caveat is that Google is using a lot of personal and private data to improve their products. And the DOJ recognizes the privacy concerns so for that, they want to prohibit Google from using and retaining personal data that cannot be shared due to privacy concerns. If this passes, it would kill the entire business model of Alphabet as well as set the precedence for others in similar positions. Google’s whole shtick was to provide all of their services for free while hoarding planetary scale of everyone’s private data to monetize. If this proposal goes through, we would probably see the end of the surveillance business model for Google, as there would be no monetary value for them to collect and retain that private data. This would mean Google competitors like DuckDuckGo and others could take advantage of what Google kept a close guarder proprietary secret and build better search tools to compete with Google.

Buuuuuut….. there are some pretty heavy caveats to all of this. I usually go by the saying “nothing good exists without condition”. And there a lot of things that could turn this witchhunt into a whole lot of nothing.

First thing to notice, is that the DOJ uses the word “consider” quite a lot in this document. Which means there is no guarantee how much aggression they want to put behind their charge against Alphabet and whether any of that will go through. I am sure something will come out of this. Most definitely a fine, which in my view is never enough. Google is a global monopoly and they’ve been actively seeking and protecting that position for ever. But the problem is that if Google didn’t get there, it would most likely be Microsoft. So a real solution has to be structural. It has to address the fundamental behavioral tendencies of corporations to monopolize entire markets for themselves and eliminate all competition. Breaking Google up would be one such solution. But in the last one hundred years in US history, only one corporation was broken up as a result of anti-trust investigation and it reconsolidated into AT&T some two decades later.

Plus, we have to consider that these proceedings are dragging on for years. The probe into Google started in 2020, and ruling declaring Google illegal came in August 2024. Google will appeal every decision they can. And it is likely this will drag for several more years. During that time, administrations are likely to change. It’s the election year in the United States and this is an existential crisis for Google. The party heading the anti-monopoly movement in the US is the Democratic party. So it is in the best corporate interest of Google and their shareholders to put all of their lobbying effort against the Democratic party so that the administration changes and charges against Google are eased or dropped entirely. It is also possible that the current administration is just teasing to win popularity and then will play nice once the election is over. In either case, Google’s fate might not be decided by justice but politics. The way I see it, this would be the least desirable outcome.

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