On Monday, August 5th, Eastern Time, a US judge, Amit Mehta, made an important ruling confirming that Google has formed a monopoly in the internet search market. He cited Microsoft, the most famous technology antitrust case in American history. $GOOGL.US$ Weinstein pointed out:

This ruling has striking similarities to the Microsoft antitrust case 20 years ago. In 1999, a federal court ruled that Microsoft illegally exploited the market advantage of its Windows operating system, and excluded competitors such as Netscape Navigator browsers. The settlement agreement in 2001 forced Microsoft to stop placing competitors at a disadvantage in the personal computer business.

Just as Microsoft was found guilty of abusing its market dominance in the Windows operating system, Google also faces legal sanctions. Google's landmark case was initiated by the government in 2020, accusing the company of making it difficult for competitors to enter the market through various barriers, while using its huge user base and various services to constantly enhance its own status in a cyclical manner and maintain its dominant position. The court ruled that Google violated the antitrust law - section 2 of the Sherman Act, which explicitly prohibits monopolistic behavior.

Judge Mehta pointed out in his 300-page verdict:

"The final verdict of this case is quite similar to the conclusion of the Microsoft browser market case. Just as in the Microsoft case, relevant agreements ensured that the usage rate of Netscape Navigator cannot reach the key level that constitutes a substantive threat to Microsoft's monopoly position. Google's distribution agreements restricted the search queries of competitors to avoid substantial threats to competition."

In addition, Judge Mehta emphasized the importance of "default settings". This mainly refers to Google's default search status on Apple's iPhone and Samsung devices. These partnerships require Google to pay them huge fees each year, while users rarely choose non-default search engines. Judge Mehta wrote: "Although users are free to choose to access Google's competitors through non-default search channels, in reality they seldom do so."

Judge Mehta announced that another trial will be held on September 4th, and the court will discuss and decide how to deal with Google's monopoly behavior, such as what kind of fines or changes are required. At that time, Google has the right to appeal, and experts predict that this legal process may take about two years. Microsoft also appealed after its initial defeat and eventually reached a settlement with the US Department of Justice.

Some legal experts believe that the most likely outcome is that the court will require Google to cancel some exclusive agreements. The court may also suggest that Google makes it easier for users to switch to other search engines. Although fines are an option, the greater risk is that Google may need to change its business practices, which could weaken its profitability. For example, if Google is no longer seen as the default search engine on smartphones, it may lose a large part of its business in its core market.

In the second quarter, Google Search and other businesses contributed $48.5 billion in revenue to Alphabet, accounting for 57% of its total revenue. After the ruling was announced, Google's stock price did not fluctuate significantly. On Monday, affected by panic selling caused by the US recession warning, Google A fell 4.45%. On Tuesday, risk aversion receded, and Google A fell slightly by 0.6%, closing at $158.29. On Wednesday, Google A rose more than 2.8% at one point before halving the gains.

AI may become new evidence for Google's non-monopoly? In the upcoming appeal, Google may emphasize the role of artificial intelligence in market competition, a new situation that the Department of Justice did not fully understand when it filed the lawsuit initially. However, since Google's position in the field of artificial intelligence was surpassed by OpenAI's ChatGPT, Google has been trying to play down this point.

Neil Chilson, former chief technology expert of the US Federal Trade Commission and current director of the Prosperity Research Institute's AI policy, believes that the development of artificial intelligence has placed Google under more competition, which may be good for Google because it can use this to prove that it is not a monopolist. Chilson pointed out: "The court ruled that Google illegally maintained a monopoly position in the general search field (ordinary search services). This is partly because the definition of the market is relatively fixed and mainly looks at traditional search engines. Now there are some new competitors, such as vertical search service providers like Amazon and artificial intelligence services like ChatGPT. These new technologies and services may completely change Google's traditional search advertising business model."

"This case was built on the legal basis of the Microsoft case," said Sam Weinstein, law professor at Cardozo Law School and former antitrust lawyer for the Department of Justice.

"The development of artificial intelligence has made Google face more competition, which may be good for Google because it can use this to prove that it is not a monopolist." Chilson noted: "The court ruled that Google illegally maintained a monopoly position in the general search field (ordinary search services). This is partly because the definition of the market is relatively fixed and mainly looks at traditional search engines. Now there are some new competitors, such as vertical search service providers like Amazon and artificial intelligence services like ChatGPT. These new technologies and services may completely change Google's traditional search advertising business model."

Judge Mehta did not mention possible remedies in his ruling, so investors and analysts can only wait patiently. Experts believe it is unlikely that Google will be forced to split.

Sam Weinstein pointed out: "The government has been explicitly and implicitly indicating that they are building the legal basis of this case based on the Microsoft case."

Weinstein said:

In the Microsoft case, some obvious business lines can be divested, but in the case of Google, this is not so obvious. In the case of Section 2 of the Sherman Act, it is rare to require divestiture of business.

The trial, which is scheduled to begin on September 4, will provide some key answers. Bill Baer, who has served in the Federal Trade Commission and the Department of Justice's Antitrust Division, said that the Microsoft case provides a strong precedent for the charges against Google. It is currently difficult to predict what remedies the Department of Justice will seek, and what conditions the judge will accept.

In the Microsoft case, Judge Thomas Penfield Jackson found that Microsoft required all computer sellers to pre-install Microsoft's browser Internet Explorer in their Windows operating system, and threatened these companies with punishment if they installed or promoted other companies' browsers (such as Navigator) on computers.

Microsoft has two major businesses, the operating system (Windows) and applications (such as Office), which allows it to suppress competitors through unfair means. To solve this problem, Judge Jackson suggested that Microsoft be split into two independent companies, one only for Windows and the other only for office and other application software, so that no company could control both the operating system and application markets at the same time and reduce unfair competition.

After Microsoft's successful appeal, the U.S. District Court of Appeals ruled that Microsoft could not retaliate against device manufacturers for installing multiple operating systems (such as installing Windows and other systems at the same time). At the same time, Microsoft had to provide programming interfaces to other software and hardware companies that were the same as those used by Microsoft so that they could easily run on Windows.

Nicholas Economides, an economics professor at the New York University Stern School of Business, pointed out that the similarity between the Google case and the Microsoft case is very obvious, and he said:" My first reaction to this ruling is that Google seems to have lost everything. This defeat reminded me of the victory the Justice Department won over Microsoft."

Editor/ping