The big story in tech is the government’s antitrust suit against Alphabet (NASDAQ:GOOGL,NASDAQ:GOOG). How will this effect GOOGL stock?
The Justice Department claims Google has a monopoly on search. It does. The suit is co-signed by 11 states. More may follow separately.
The suit is being compared to U.S. vs. Microsoft. That ended with a consent decree placing hundreds of “no-men” into Microsoft (NASDAQ:MSFT), who kept it from innovating for a decade, until the decree expired in 2011. I saw this with my own eyes during my brief stint as a market analyst in the mid-2000s.
Microsoft is now back and bigger than ever, having learned an important lesson. If you’re going to be an evil monopolist, don’t do it in a consumer market.
Google Stumbled
When I last wrote about GOOGL stock a few weeks ago I said they had become lazy under CFO Ruth Porat. She has drained the company of its creativity to please Wall Street, where she formerly worked at Morgan Stanley (NYSE:MS). Running a tech company to please Wall Street, I feel, is stupid.
Outside its search business, free thanks to its ad market, Google is a follower company. It copied Amazon (NASDAQ:AMZN) in selling its cloud and voice-activated devices. It copied Apple (NASDAQ:AAPL) in designing a phone. It copied Microsoft in office applications. For a while it even copied Facebook (NASDAQ:FB) with a social network.
Google has innovated. Its search engine is innovative. Its cloud was innovative. But since co-founders Larry Page and Sergey Brin backed away, it has not been innovative. Worse, it has done this in consumer markets, in full view of anyone who hates the Cloud Czars.
In the process, like Microsoft in the 1990s, it abused what it won through innovation and investment. It now offers restaurant reservations like Yelp (NASDAQ:YELP) and travel reservations like Expedia (NASDAQ:EXPE).
A Political Battle
The lawsuit sets off the first big political battle of the next administration, whoever wins power.
Google doesn’t just have activists arrayed against it, but competitors like AT&T (NYSE:T), which have huge lobbying shops. Politicians are also thundering against the other Cloud Czars, which they insist on calling “big tech.”
Words matter in this case. Big tech just means you’re big. To be a Cloud Czar, you must have invested billions of dollars per quarter, starting when that looked risky, building a global network of scaled data centers. These centers provide services to billions at prices starting at $0.
The Clouds have an innovative business model. They’re funded with cash flow, not debt. The previous generation’s services, AT&T’s phone lines and Comcast’s (NASDAQ:CMCSA) cable, were funded on debt, which demands an immediate payback. What the cash flow model demands, on the other hand, is growth.
This model isn’t unique to America anymore. China’s Cloud Emperors – Alibaba Group Holding (NASDAQ:BABA), Baidu (NASDAQ:BIDU), and Tencent Holding (OTCMKTS:TCEHY), funded their clouds with cash flow as well. Any move against the Cloud Czars’ cash flow will be cheered in Beijing louder than a LeBron James dunk.
The Bottom Line on GOOGL Stock
Google has a way out of this. It can sign a consent decree covering its consumer services. It can make peace with competitors like Yelp and Expedia, then focus its effort on business services. This is just what Microsoft did. (Younger consumers may not know that the “MS” in MSNBC refers to the company. It was originally a joint venture with Microsoft.)
No one cares much if you buy out your competitors in business services. No one stopped Oracle (NASDAQ:ORCL) from doing that in the 2000s. In business services, change and innovation can kill a monopolist fast. No one is trying to break up Microsoft. No one mourns Oracle becoming less valuable than Salesforce.com (NYSE:CRM).
But Google needs to decide what it will be when it grows up. Politicians also have a hard question to answer. How do you control the cloud without killing the cash flow that made its services free?
At the time of publication, Dana Blankenhorn had long positions in AMZN, MSFT, AAPL and BABA.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn.
