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Alphabet’s (GOOGL - Free Report) Google is looking at a 4.34 billion euro ($5 billion) fine for anticompetitive behavior in the EU. Google’s alleged wrongdoing constitutes the leveraging of Android to unfairly promote its own search service with the compulsory pre-installation of its app bundle, exclusion of rival search and browser apps from pre-installation (it stopped excluding rival search in 2014), and assuring that its hardware partners don’t make phones using Android forks.
It will also have to pay up to 5% of average daily global revenue for non-compliance after the expiry of 90 days. During this time, it can either stop the three malpractices or request delayed implementation while it appeals. Google said it would appeal although it will transfer the amount of the fine to a separate account and provide for it from its $100 billion+ cash reserves.
Google’s defense remains that its strategy allows it to offer a free operating system to hardware makers and prevents fragmentation of Android, making it worthwhile for app makers to develop on the platform. It’s also then more useful for consumers, since they get a device out of the box that just works. Moreover, it has facilitated the launch of more than 24,000 smart devices from more than 1,300 different brands, some at very low price points, indicating that many people/entities gained from Android.
The Question of Apple
The fragmentation argument may have made sense several years ago when device makers feared Apple (AAPL - Free Report) and its walled garden because it was the only place to go for quality. But today, Apple is barely a fifth of the market (albeit the best part) while Android is 4X its size.
Since the competitive dynamics have changed, Apple dominating the high end of the market is less of a concern today than Android dominating everything else. As Vestager points out, iPhones aren’t a sufficient check on Google's dominance because their price makes them more difficult to adopt. So "what would serve competition is to have more players."
Google CEO Sundar Pichai’s response was therefore not surprising: "We are concerned that today's decision will upset the careful balance that we have struck with Android, and that it sends a troubling signal in favor of proprietary systems over open platforms."
Not So Negative for Google
But the EU has left enough wiggle room for Google. It hasn’t said that Google won’t be able to outbid smaller search players to get pre-installed on devices or be set as the default.
It also hasn’t said that Google is obliged to provide its apps to devices built on Android forks (the app bundle includes 11 different apps, including Maps, Gmail and Docs, the EU is unbundling just Chrome and Search from Play). So devices built on Amazon’s (AMZN - Free Report) Fire OS (for example) may have to make do without some of its services but will still have access to the Play Store.
Since users are familiar with Google services, hardware makers are more likely to stick with them in most cases rather than experiment with something new (other than from a company like Amazon that is). There is also Pichai’s veiled threat to consider: “the Android business model has meant that we haven't had to charge phone makers for our technology, or depend on a tightly controlled distribution mode.”
Telecoms may also choose to avoid distractions at a time when they are vying with each other to be the first to launch 5G services.
Why Google’s Monopoly Is a Problem
Growing to be a monopoly on the strength of good products is not in itself illegal. But there are two situations when it can become a problem. The first is when it effectively raises prices and the second is when the dominant position is used as leverage to dominate another/adjacent market.
Google and other technology companies that rely on data have risen to prominence on the back of solid products and because the government has taken a casual approach to their anticompetitive behavior. In a sense this was because unlike traditional monopolies, modern tech monopolies don’t raise prices. Now that they are taking over even more of our lives, the government has started to take notice.
But in order for a company to be adjudged abusive, it has to be shown that it resorted to unfair competitive behavior including the exclusion of other companies from the market. The courts have reportedly taken the view that this can be conclusively proved only when the dominating company has taken over at least 50% of the adjacent market using these tactics. This is hard to prove and difficult to reverse. So this is something that the legal system has to change if it wants to truly go after such behavior.
An Even Bigger Problem
The problem with Google being the dominant search engine is not just related to its own wrong doing, of which there is some evidence.
It’s also related to the way information is disseminated online. If Google becomes the sole gateway to information, its company policies, principles and values will determine the way the world consumes information, which is anything but healthy. Moreover, it becomes easier for anybody wanting to game the system to put fake news and other harmful stuff in circulation.
At the end of the day, the company has too much data on us that we have not been able to quantify or price adequately. So we don’t know what we have “paid” for Google’s “free” services. Also, since this data isn’t shared with the competition, they are incapable of improving their products or serving us equally well, thus further cementing Google’s dominant position.
The EU has taken some important first steps to break Google’s monopoly, but it will probably require much more to bring in the kind of competition it envisages. If all else fails, the tech titans will have to be regulated like utilities. But that is a story for another day.
It's hard to believe, even for us at Zacks. But while the market gained +21.9% in 2017, our top stock-picking screens have returned +115.0%, +109.3%, +104.9%, +98.6%, and +67.1%.
And this outperformance has not just been a recent phenomenon. Over the years it has been remarkably consistent. From 2000 - 2017, the composite yearly average gain for these strategies has beaten the market more than 19X over. Maybe even more remarkable is the fact that we're willing to share their latest stocks with you without cost or obligation.
Image: Bigstock
Google to Take EU Ruling in Stride
Alphabet’s (GOOGL - Free Report) Google is looking at a 4.34 billion euro ($5 billion) fine for anticompetitive behavior in the EU. Google’s alleged wrongdoing constitutes the leveraging of Android to unfairly promote its own search service with the compulsory pre-installation of its app bundle, exclusion of rival search and browser apps from pre-installation (it stopped excluding rival search in 2014), and assuring that its hardware partners don’t make phones using Android forks.
It will also have to pay up to 5% of average daily global revenue for non-compliance after the expiry of 90 days. During this time, it can either stop the three malpractices or request delayed implementation while it appeals. Google said it would appeal although it will transfer the amount of the fine to a separate account and provide for it from its $100 billion+ cash reserves.
Google’s defense remains that its strategy allows it to offer a free operating system to hardware makers and prevents fragmentation of Android, making it worthwhile for app makers to develop on the platform. It’s also then more useful for consumers, since they get a device out of the box that just works. Moreover, it has facilitated the launch of more than 24,000 smart devices from more than 1,300 different brands, some at very low price points, indicating that many people/entities gained from Android.
The Question of Apple
The fragmentation argument may have made sense several years ago when device makers feared Apple (AAPL - Free Report) and its walled garden because it was the only place to go for quality. But today, Apple is barely a fifth of the market (albeit the best part) while Android is 4X its size.
Since the competitive dynamics have changed, Apple dominating the high end of the market is less of a concern today than Android dominating everything else. As Vestager points out, iPhones aren’t a sufficient check on Google's dominance because their price makes them more difficult to adopt. So "what would serve competition is to have more players."
Google CEO Sundar Pichai’s response was therefore not surprising: "We are concerned that today's decision will upset the careful balance that we have struck with Android, and that it sends a troubling signal in favor of proprietary systems over open platforms."
Not So Negative for Google
But the EU has left enough wiggle room for Google. It hasn’t said that Google won’t be able to outbid smaller search players to get pre-installed on devices or be set as the default.
It also hasn’t said that Google is obliged to provide its apps to devices built on Android forks (the app bundle includes 11 different apps, including Maps, Gmail and Docs, the EU is unbundling just Chrome and Search from Play). So devices built on Amazon’s (AMZN - Free Report) Fire OS (for example) may have to make do without some of its services but will still have access to the Play Store.
Since users are familiar with Google services, hardware makers are more likely to stick with them in most cases rather than experiment with something new (other than from a company like Amazon that is). There is also Pichai’s veiled threat to consider: “the Android business model has meant that we haven't had to charge phone makers for our technology, or depend on a tightly controlled distribution mode.”
Telecoms may also choose to avoid distractions at a time when they are vying with each other to be the first to launch 5G services.
Why Google’s Monopoly Is a Problem
Growing to be a monopoly on the strength of good products is not in itself illegal. But there are two situations when it can become a problem. The first is when it effectively raises prices and the second is when the dominant position is used as leverage to dominate another/adjacent market.
Google and other technology companies that rely on data have risen to prominence on the back of solid products and because the government has taken a casual approach to their anticompetitive behavior. In a sense this was because unlike traditional monopolies, modern tech monopolies don’t raise prices. Now that they are taking over even more of our lives, the government has started to take notice.
But in order for a company to be adjudged abusive, it has to be shown that it resorted to unfair competitive behavior including the exclusion of other companies from the market. The courts have reportedly taken the view that this can be conclusively proved only when the dominating company has taken over at least 50% of the adjacent market using these tactics. This is hard to prove and difficult to reverse. So this is something that the legal system has to change if it wants to truly go after such behavior.
An Even Bigger Problem
The problem with Google being the dominant search engine is not just related to its own wrong doing, of which there is some evidence.
It’s also related to the way information is disseminated online. If Google becomes the sole gateway to information, its company policies, principles and values will determine the way the world consumes information, which is anything but healthy. Moreover, it becomes easier for anybody wanting to game the system to put fake news and other harmful stuff in circulation.
At the end of the day, the company has too much data on us that we have not been able to quantify or price adequately. So we don’t know what we have “paid” for Google’s “free” services. Also, since this data isn’t shared with the competition, they are incapable of improving their products or serving us equally well, thus further cementing Google’s dominant position.
The EU has taken some important first steps to break Google’s monopoly, but it will probably require much more to bring in the kind of competition it envisages. If all else fails, the tech titans will have to be regulated like utilities. But that is a story for another day.
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Alphabet shares carry a Zacks Rank #4 (Sell). For companies worth buying instead, take a look at the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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It's hard to believe, even for us at Zacks. But while the market gained +21.9% in 2017, our top stock-picking screens have returned +115.0%, +109.3%, +104.9%, +98.6%, and +67.1%.
And this outperformance has not just been a recent phenomenon. Over the years it has been remarkably consistent. From 2000 - 2017, the composite yearly average gain for these strategies has beaten the market more than 19X over. Maybe even more remarkable is the fact that we're willing to share their latest stocks with you without cost or obligation.
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