The investigation by state attorneys general into the advertising practices of Alphabet's Google (NASDAQ:GOOG) (NASDAQ:GOOGL) is reportedly expanding to its Android and search businesses, a big deal in what is already a massive probe.
With pressure coming from both sides of the aisle, including presidential hopefuls, and with the attorney general of pretty much every state (48 of them, plus Washington, D.C., and Puerto Rico) investigating Google, the Internet giant is in the regulatory crosshairs. But you wouldn't know it from the stock's performance: Alphabet's shares are up 23%, even in the wake of the expanding probe.
But those shares may not continue their upward trajectory for long. The skepticism on the part of lawmakers and regulators is seeping into other aspects of Google's businesses, including its recent $2.1 billion acquisition of Fitbit.
In September the 50 attorneys general first announced an investigation into Google's advertising practices, focused on whether it used its dominant position to unfairly benefit over its rivals.
In addition to looking into its ad supremacy, the attorneys general want to know how Google uses all the data it amasses on consumers. The probe is being led by Texas Attorney General Ken Paxton. At a recent meeting, according to CNBC, Paxton said he would back expanding the inquiry to cover Google's search and Android units. It's not clear which states will take the lead in those investigations, or if and when any related subpoenas will be issued.
The expanding review should worry investors
The expanding review isn't good for Google, even if investors are shrugging it off. As the states up the ante, it underscores how much power they have to investigate the Internet search giant. State attorneys general aren't beholden to special interest groups and lobbyists, so they aren't held back when conducting an inquiry. They tend to be more aggressive than the federal government in conducting antitrust probes, but have fewer resources. With 50 attorneys general on board with the Google investigation, they'll have many opportunities to share information and pool resources.
Google's Android business could be hurt if the investigation results in any changes to its operations. It's a leader in mobile with its Android OS, which is used by a slew of device makers, all of which have to preinstall its apps and app store. That makes it hard for rival operating-system makers to compete. It's also the reason Google was slapped with a record $5 billion fine by the European Commission. As part of the settlement, Google has to allow users in the European Union to choose which search engine they want when setting up an Android device; Google is also prohibited from requiring its apps to be installed with its Android OS. Those same requirements could be pursued by the states in the expanded probe in the U.S.
On the search front, states could look into whether Google uses the data and advertising dollars it earns from search to promote its own products and services over competitors'. It currently has new services that benefit from Internet search traffic.
Google may not get out of hot water this time
Google has long been able to escape much of the ire of regulators in the U.S. with no more than a slap on the wrist, but with big tech a current target, it may not be so lucky this time around. It has Sen. Elizabeth Warren joining Democratic lawmakers in calling for more regulation, and President Donald Trump accusing it of a liberal bias. Even its Fitbit acquisition isn't safe from regulatory scrutiny.
In a recent hearing on Capitol Hill, Rep. David Cicilline, a Democrat from Rhode Island who chairs the House Judiciary Committee's antitrust subcommittee, questioned how Google could make a $2 billion acquisition of Fitbit at the same time it faces different antitrust investigations on the federal and state levels. "The hubris of the executive team to pursue an acquisition of this size while under federal and state antitrust investigations is astonishing," Cicilline reportedly said.
Fitbit makes wearable fitness devices, and is seen by Google as a way to enter that market. Privacy groups have also raised concerns about Google's acquisition of Fitbit, arguing it already knows too much about consumers and shouldn't be given yet another way to gather information. Critics want the Federal Trade Commission to investigate the deal.
Despite record fines overseas, Google has gotten by relatively unscathed in the U.S. It continues to expand into new markets, make acquisitions, and grow its advertising revenue, all while regulators and lawmakers cry foul. For its third quarter, it was able to post double-digit growth in revenue and earnings.
It also has a stock that has risen in price even in the wake of more scrutiny. Whether that continues, as the probes intensify -- or worse, its acquisition of Fitbit gets blocked -- is anyone's guess. But one thing is sure: Regulators are closing in on one of the world's largest tech companies.