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Google has lost a significant U.S. antitrust case concerning its dominance in the search engine market, a development Moody’s has flagged as credit negative for both Alphabet, Google’s parent company, and Apple. The court ruling found that Google spent billions of dollars to unfairly maintain its monopoly in internet search.
According to Moody’s, this legal setback poses a potential threat to Alphabet’s highly lucrative business model, which relies heavily on targeted advertising. The extent of the impact will become clearer once the trial’s remedy phase concludes. Moody’s noted that the court could impose various remedies, each potentially affecting Alphabet’s financial and operational strategies differently. Alphabet is expected to appeal the decision, a process that could span several years.
The U.S. Justice Department highlighted that Google invested billions annually to secure exclusive agreements with wireless carriers, software developers, and hardware manufacturers to ensure its search engine was set as the default option. The deal between Google and Apple was specifically cited as an example of anti-competitive behavior. Google contended that its success stems from intense competition and the superior quality of its products.
Moody’s believes Alphabet’s substantial scale, strong credit metrics, and robust liquidity will help mitigate the effects of the ruling. As of June 30, Alphabet held approximately $101 billion in cash and short-term investments, with a debt/EBITDA ratio of about 0.3X. The company is projected to generate over $77 billion in free cash flow this year, with expectations to reach $88 billion by the end of 2025.
Although not a party to the lawsuit, Apple is also negatively affected by the ruling as it stands to lose a major revenue source. Court documents reveal that Google paid Apple around $20 billion in 2022 to be the default search engine on Apple devices. The financial implications for Apple will remain uncertain until the remedy phase of the antitrust case is resolved.
Similar agreements between Google and other handset manufacturers, wireless companies, and browser developers may also be subject to revision or termination based on the trial’s outcome.
Furthermore, Alphabet faces additional lawsuits in the U.S. and regulatory scrutiny in Europe concerning Google’s handling of shopping search results, Android distribution agreements, and AdSense provisions. The European Commission has already imposed fines totaling approximately €8.2 billion, which Alphabet is appealing. These ongoing legal and regulatory challenges could potentially disrupt Alphabet’s profitability and business model.
Google maintains a market share exceeding 90% in online search, with advertising revenue tied to this sector accounting for more than 75% of Alphabet’s total revenue last year.
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