Today’s piece is brief, but notable. This morning, Apple’s Senior Vice President of Services, Eddy Cue, testified in the Google remedy antitrust case. And he made two observations about the consequences of the case, which led Google’s stock to crater 7.5%, or $150 billion in value. Here’s the Google stock chart.
You can see the timing of when Cue went on the stand, but what’s interesting is that the stock drifted down for another two hours, which means that analysts were taking time to internalize what he had said and growing more pessimistic as the full ramifications of his comments sunk in.
So what did Cue say? Well, first, he said Apple is considering a revamp of the search experience on its iPhone. Right now, Google pays Apple more than $20 billion a year to be the search default, which is a key to the search company’s monopoly and the heart of the antitrust case. It’s essentially a shared search rent split between Google and Apple. In 2020 when the case was first filed, Apple considered creating its own search engine, fearing the loss of that revenue stream and looking for ways to replace it. Now it seems like something along that strategy is likely. Cue says that Apple might revamp its Safari browser to incorporate AI-powered search engines, which is a polite way of saying the company knows the game is soon up on selling the lucrative default position in Safari to Google.
The second thing he said is that Google search volume declined last month on the iPhone for the first time ever, presumably because people are beginning to use generative AI tools instead of ordinary search. This change is also a consequence of the antitrust case. Apple has already integrated OpenAI into its Apple Intelligence feature set; it did not choose Google, and one likely factor was the antitrust risk. Perplexity testified in the Google antitrust case, arguing that Google is blocking its distribution. Immediately after, it cut a deal with Motorola for distribution.
In other words, Google’s search monopoly may be starting to crack, which will put significant pressure on the company and force its cash cow ad business to be disciplined by competition. There are parts of Google that do compete, like its cloud business and office suite, but it has a money printing machine that might get taken away.
Wall Street seemed pretty stunned, not just by this legal development, but also Apple’s brutal loss in its unfair competition case against Epic Games, which will also hit the phone giant. I watched a half an hour long CNBC panel talk about Google and Apple and their antitrust problems. Panelists debated whether Google’s monopoly is cooked, how badly Apple’s services revenues are going to be hit, and possible strategies going forward. And that’s without evening mentioning yet another legal development yesterday, which is that the Antitrust Division asked, in a totally different antitrust case that Google lost, to split apart the company’s advertising software division.
There are broader implications here. Most institutional investors have piled into seven big stocks – Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla – such that the name the “Magnificent 7” is now shorthand among investors for this basket. But now that whole world might be ending, and Google and Apple will have to, as a panelist put it, “reinvent itself.” A different commentator went further. “Maybe the best thing ultimately is that Alphabet is split up,” he said. “Maybe that’s the best outcome for you as a shareholder.”
One of the very first pieces I wrote for BIG, six years ago, was titled Break-ups and stock prices, and in it, I described why investors do well during break-ups.
The granddaddy of all monopolies and break-ups is Standard Oil, John D. Rockefeller’s oil monopoly at the turn of the century that structured the most important business of the era. In 1911, the Supreme Court broke his company into 34 components, many of which went on to be some of the most powerful companies in the world, such as Exxon, Mobil Pennzoil, Conoco, Chevron, and so forth. Shareholders did fantastically well in the break-up, with Rockefeller quintupling his wealth.
Why did Standard Oil’s component parts do so well? And was the break-up responsible for higher stock prices? The answer is that the older monopolistic business structure was inefficient, and breaking up the company helped unleash technological innovation in the industry by enabling the use of a relatively unimportant part of Standard’s portfolio: gasoline.
In 1909, a Standard-employed chemist named William Burton invented “thermal cracking,” which was a way to vastly improve the process of turning oil into gasoline. The Indiana branch applied to headquarters to put $1 million into developing the process, but HQ said no. The company primarily sold kerosene, and while cars were increasing demand for gasoline – what was then seen as a relatively useless byproduct of oil refining – such an investment was simply too risky to what had become a lazy, slothful monopoly. After the break-up, Standard Oil of Indiana simply went ahead and began using thermal cracking, and eventually the whole industry was licensing patents from the company. While stockholders did fantastically well, Indiana shareholders did even better. The era of cheap gas came, or at least was accelerated dramatically, by the break-up.
As with Standard Oil, Google’s model is to leverage its market power across its various lines of business, to self-preference its own properties. There’s a lot of upside here in terms of retaining monopoly profits, but there is also a downside, which is that those lines of business, were they independent, would be more innovative and engage in profitable partnerships with firms outside the Google empire. As antitrust reduces the upside for collusion among Google subsidies, the cost of monopoly goes up. On the flip side, if YouTube, Search, Gmail, Cloud, Play, and Chrome became separate businesses, they’d be among the biggest companies in the world, and likely far more profitable than they are jammed together. What treasures lurk in the halls of Google, thwarted by Google managers? My guess is, many.
At any rate, this moment is a sea change for how Wall Street understands antitrust. Merger law matters to the market, because merger transactions drive certain hedge fund bets and investment banking fees. But I’ve never seen a monopolization case taken seriously before as a possible threat to the stock of two massive companies that are the basis for global investment flows. At least, not until today. As the legal problems pile up, investors might just start demanding Google break itself up preemptively. And frankly, they should. There’s no better time to do that than now, when they have the excuse of generative AI to make a big change.