Google is legally a monopoly – how will this impact markets?

We'd probably suspected for years that Alphabet’s Google (NASDAQ: GOOG) search engine unit effectively had a monopoly on the way we navigate the internet. There are other search engines out there and other web browsers, but hardly anyone ever bothers to use them. And “googling” something has become so commonplace that we have turned it into a verb. 

But now it is official. A US court has ruled that Google is legally a “monopoly” and that it was guilty of exploiting its dominance to squash competition and stifle innovation. In a 277-page ruling, Judge Amit P. Mehta argued that the company has done everything in its power to maintain its lock on the market and muscle out potential rivals. 

It remains to be seen what happens next. But if the ruling stands, it will enable the US government to take action against the company, and potentially even try to break it up. If that happens, it will be the biggest anti-trust action since the telecoms industry was broken up in the 1980s, or the oil industry at the start of the 20th century.

MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

How will the fact that Google is legally a monopoly impact global markets?

That matters to investors, of course. Alphabet is a huge company, worth $2 trillion, and Google is at the core of its business model. There is probably not a portfolio in the world that does not have some exposure to it one way or another. How it gets broken up, and whether it can maintain its profitability, will have a huge impact on the markets. It will have greater significance than just that, too, changing the way businesses around the world work. Here are three ways it could fundamentally alter the way the global economy operates.

• First, it would lower advertising costs.
  One of the main issues with Google is that its lock on online advertising drives up prices. That makes it harder for smaller companies to break into the market, it potentially offers an unfair advantage to established players and it makes it difficult for start-ups to get any attention.
  If online advertising were more competitive, costs would come down and we could expect many markets to become more open, with more choices easily available. It is hard to see how that would not benefit consumers. 
• Secondly, we would see the launch of more apps, as controls on what can and can’t be sold through the operating system on all of our phones are loosened. Through the app stores, the two major mobile operators keep control of what most of us can and can’t access through our smartphones. If the systems were more open – and especially if Apple were to be broken up at the same time – then it would create space for a lot more new apps to be launched, again widening the choice for consumers, and creating opportunities for rapid innovation. 
  Indeed, one of the reasons many venture capitalists now support a break-up of Google is precisely because they think it would kick-start an increasingly stagnant industry. Google may well have been one of the great successes of venture capital, but it has become an obstacle to start-ups.
• Finally, breaking up Google would lower costs, lead to more innovation and accelerate the shift to a digital economy. We may think the internet is ubiquitous, but McKinsey estimates it accounts for just 3.4% of global GDP. There is huge room for growth – that figure could hit 10% or 20% over the next decade – and breaking up the dominant players may be the key. How the split happens will make a huge difference. Google might be forced to divest its Chrome web browser and its Android mobile operating system. It could be forced to place its search engine into a separate company, ring-fenced from the rest of its operations. 
  Alternatively, it might have to split out its advertising operation, or accept oversight of how it sets prices. But, however it happens, if Google gets broken up, marketing and product strategies will have to change dramatically. In the end, the change will be for the better, for the simple reason that more competition is always beneficial – but it will be a very long and messy process, with lots of casualties along the way.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.