Google Loses US Antitrust Case over Search Dominance, Credit Negative for Alphabet, Apple -Moody’s
Google loses a U.S. antitrust case over search dominance, a credit negative for parent Alphabet and Apple, Moody’s said in a commentary note. Google spent billions of dollars to improperly maintain a monopoly on the Internet search business.
The ruling is credit negative for Alphabet because it may need to alter its very profitable business model that made it a dominant force in targeted advertising. The magnitude of any potential changes will not be clear until the trial’s remedy phase is completed.
“We think the court could impose a range of remedies with varying effects on Alphabet’s financial and business models.”. Also, Alphabet will likely appeal the decision, which may take years to resolve.
The Justice Department asserted that Google paid billions of dollars a year to wireless phone, software, and hardware companies to lock in Google as the default search engine on their products.
Google’s agreement with Apple Inc. was, in particular, cited as an example of anticompetitive behaviour. Google argued that it faces intense competition and that the quality of its products is the reason for its success.
“We believe Alphabet’s scale, exceptionally strong credit metrics, robust liquidity and profitability mitigate the ramifications of the ruling”.
At 30 June, Alphabet held about $101 billion in cash and short investments, a debt/EBITDA ratio around 0.3X, and we expect the company to generate more than $77 billion in free cash flow this year, climbing to $88 billion by year-end 2025
Although it was not party to the government’s lawsuit, the decision is also credit negative for Apple because it stands to lose a highly profitable, substantial revenue stream.
According to court documents, Google paid Apple about $20 billion in 2022 under the agreement, making it the default search engine on Apple products. The potential financial implications for Apple will also remain unknown until the remedy portion of the antitrust case is resolved.
Other handset makers, wireless companies and browser developers have similar agreements with Google that may need to be reworked or terminated based on the result of the trial.
Alphabet faces more lawsuits in the US as well as regulatory risks in Europe in connection with Google’s display and ranking of shopping search results, distribution agreements related to the Android operating system and provisions in agreements Google had with AdSense for search partners.
These investigations have resulted in the European Commission imposing around €8.2 billion in fines so far, which Alphabet is appealing. The primary risk from these lawsuits and regulatory challenges would be an outcome that could materially alter the company’s profitability or business model.
The company has an estimated market share of more than 90% in online search, and last year, advertising revenue largely tied to that search business contributed more than three-quarters of Alphabet’s total revenue. Zenith Bank Spikes by 11% Ahead of Q2 Earnings
