Knowledgeable sources have told major media outlets that on Monday, more than half the state attorneys general in the U.S. will be jointly announcing a wide-ranging probe into how Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) subsidiary Google is operating its advertising business. At issue are questions of data collection, privacy, and possible antitrust violations. It will join a number of other tech industry probes and investigations by regulators here and overseas.
But for MarketFoolery host Mac Greer and senior analysts Emily Flippen and Jim Mueller, these investigations may be less interesting than what these agencies and officials hope to accomplish with them. In this segment of the podcast, they dig into the long-term picture, the historical context for anti-monopolist actions, and how these probes impact the investment thesis for Alphabet and its fellow tech giants.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
This video was recorded on Sept. 4, 2019.
Mac Greer: Let's kick off with Google and reports that more than half of the U.S.'s State Attorney Generals are gearing up for an antitrust investigation into Google's advertising. Now, Emily, we're expecting an announcement, according to these reports, next week. This happens against a context where there are a lot of other Google investigations. We've got a House Judiciary Committee looking into Amazon, Apple, Facebook, and Google. We've got a Justice Department reviewing big tech. And we've got the E.U. Where does it end? And what do you make of the state investigations?
Emily Flippen: Well, first of all, I love covering rumors on this show. [laughs] Although it seems like these rumors, given all the contacts you described, might have a little bit more veracity to them. It's no surprise that they're going after Google. Mind you, it could be other companies as well. Google, obviously an advertising, monolithic company, but the other big guy is Facebook as well. I don't think any big advertising company is out of the crosshairs here. But it begs the question of, what are we looking for? What is the outcome from investigations? Is it a breakup of companies like Google? Is it a breakup of companies like Facebook? I tend to think not. That's what some lawmakers may want. But the issue does become partisan at a point. I think that what we're looking at here is probably going to be a stifling of these companies' ability to acquire, to innovate, to expand their market share when it's already so great. When people think about Google, it may not occur to them how big it is, in terms of its advertising business. But Google not only essentially owns search in the United States, but they also own YouTube. All the ad-based videos you see on YouTube are also coming from Google. Google owns AdSense and AdWords, all of these platforms that work with advertising, and external sites as well, and they're advertising their own products on top of it. It really does pose a lot of conflicts of interest.
Greer: OK, let's get into that. I want to share a quote from Louisiana's Attorney General Jeff Landry. This is about what we think is going to come down with all the State Attorney Generals next week. Here's what the Louisiana Attorney General has to say. He says, quote, "Google gets to pick winners and losers because the system is rigged in their favor. Continuing down this road will kill online publishing, or Google will control who stays and who goes."
Jim Mueller: It's a pretty bold statement right there.
Flippen: It really is.
Greer: That's why I shared it.
Mueller: But I have to wonder if some of this thinking isn't stuck in the 20th century, even in the 19th century. The breakup of Bell, the breakup of Standard Oil, those are all 20th century stories, and early 20th century for Standard Oil. That's more where the monopoly was built up and imposed upon the customers. Here, with Google and Facebook and others, the monopoly is being chosen by the customers. For Amazon, people are going to Amazon to buy. People are going to Google to search, and Google's search engine is the best, or near the best, if it's not the best, so the advertisers are going where the eyeballs are. The company is not imposing the monopoly --
Greer: So, no harm is being done?
Flippen: Harm is happening.
Mueller: Harm is probably happening. You can argue that they're collecting too much data, but people also freely volunteer that data. They turn on the tracking on their iPhones, or smartphones, so that they can get the advertising for the stores they're walking by and so on. So how much harm is being done. Whether regulations need to come in and force a breakup or something like that, I don't know. It's a sticky issue, for sure. We have to figure out what the best outcome is. But I'm not necessarily convinced a breakup is the solution.
Greer: OK, I'm a Google or Alphabet shareholder. Should this way on my investment thesis at all? Or do you see this as noise?
Flippen: Unfortunately, I think the space is almost naturally monopolistic, in the sense that Google is the best aggregator of eyes, aggregator of search. That's, as a result, where the advertising revenue goes. As a shareholder, it's almost a good thing in the sense that it shows the power that the company has over the consumer. Despite the fact that we have all these issues, you as a consumer are still probably going to be searching with Google. So, while I am concerned about the penalties, we just saw a penalty come through for Google, I think it was, they reached an agreement with the FTC over some advertising issues they had geared toward kids, and the penalty was a $170 million fine. That's less than 1% of their advertising revenue for the quarter. So, as a shareholder, when I see this relatively light slap on the wrist for what could be a big not only privacy issue but advertising issue aimed at kids, it does make me wonder if the penalties, and when the penalties come down, if they're actually going to have a material impact on the business.
Mueller: Slap on the wrist? That's a slap on the pinky.