Will Google really be broken up?

After so much turmoil, how will the U.S. Department of Justice ultimately sanction Google?

The antitrust case against Google has been ongoing for four years. With the election of Trump as president and the imminent reappointment of new leadership in the Justice Department, this significant case is entering a critical phase.

Yesterday, Goldman Sachs analysts Eric Sheridan and Alex Vegliante categorized the potential actions the Justice Department might take into three main types:

1. Restrict Google from being the default search engine on third-party devices;

2. Require Google to divest the Android operating system and limit Google's bundling of its own services on Android devices;

3. Require Google to implement multiple data licensing and information-sharing agreements.

Despite the threat of a breakup, Goldman Sachs remains optimistic about Google in the medium to long term. The analysts stated:

“We believe that Alphabet's current valuation has priced in significant adverse factors, but we recognize that due to the uncertainty of the antitrust case, the valuation multiples investors are willing to pay may continue to be suppressed.”

Other Wall Street firms are also optimistic about Google. JP Morgan and Stifel maintain their "overweight" ratings, with target prices of $212 per share and $200 per share, respectively. Baird and Evercore ISI believe Google can outperform the market, with target prices of $205 per share.

Yesterday, Google C fell over 4%, currently reported at $169.24 per share.

1. Restricting Google from being the default search engine on third-party devices may have limited impact on Google's market share

The default search engine agreements that Google has with third-party original equipment manufacturers (OEMs) and distributors, such as Apple, are a key point in this antitrust case. Goldman Sachs stated that the court may rule that Google cannot pay third parties for the default search engine position, which could lead to several scenarios:

1. Another search engine pays device manufacturers to become the default search engine on third-party devices;
2. Third-party OEMs and distributors voluntarily implement a "choice screen" on their devices, allowing consumers to select a default service from a range of potential services, especially the default search engine;
3. Google must implement a "choice screen" on Android devices.

However, Goldman Sachs believes that introducing a "choice screen" may have limited impact on Google's market share, as consumers may still prefer to choose Google Search.

2. Requiring Google to divest the Android operating system and limit Google's bundling of its own services on Android devices could pose significant resistance to Google's search business revenue

The U.S. Department of Justice has submitted to the court, in addition to requiring Google to divest the Chrome browser, Google must also divest the Android operating system. More importantly, Google is prohibited from re-entering the browser market for five years after divesting Chrome, which restricts Google's investments, acquisitions, or collaborations in competitive search engines or AI search products.

Goldman Sachs stated that if Chrome is indeed divested, it will pose significant obstacles to Google's search business revenue, as it not only limits the volume of search queries but also restricts Google's access to first-party data across services through unified user logins.

Additionally, the court may require Google not to bundle its own services on Android, such as Play, Chrome, etc., meaning Google cannot pre-install its own applications and services on Android devices and set Google Search as the default search engine.

As mentioned above, if the court chooses to take this measure, it may require Google to introduce a "choice screen," but Goldman Sachs believes this will have little impact on Google's search market share on Android devices. The 2018 EU antitrust case against Google showed that the introduction of a "choice screen" only resulted in minimal market share loss for Google.

3. Require Google to implement multiple data licensing and information-sharing agreements, which may lower the entry barriers for search engines

The U.S. Department of Justice may require Google to implement multiple data licensing and information-sharing agreements, which would benefit competitors in the search engine market, third-party publishers, search advertisers, and others.

First, the Department of Justice may require Google to open its index and models used for search and provide user and advertising search data (up to 10 years), share advertising data (up to 1 year), search results, ranking signals, etc.

It is worth noting that Google has already signed agreements with some third-party search engines, allowing these search engines to generate their own results pages based on Google's search results, but the usage is restricted; for example, Google prohibits these search results from being used on mobile devices.

Goldman Sachs expects that these measures may lower the entry barriers for search engines, as other companies can quickly start using Google's index, models, or search results. However, even though the entry barriers may be lowered, building a successful and scalable search engine involves many other critical factors, such as the ability to effectively organize underlying data and develop user-friendly products based on the index, matching user query volume and advertising budget scale, etc., which are not necessarily guaranteed