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Rumors About the Alphabet, Inc Breakup Are a Little Premature

Tom Taulli

The meteoric rise of Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) seems improbable. Back in the late 1990s when the company was launched, and Google stock was still a question mark, there were already many top-notch search engines on the market.

Yet Google took an unconventional approach. The focus was solely on search not a portal play. In fact, the home page just had a search box in the middle!

But of course, the strategy turned out to be spot-on. Google also crafted a powerful business model, based on the clicks of simple text ads.

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As of now, Google stock has a market value of $747 billion and annual revenues are over $100 billion. The company also has been able to go well beyond search, such as with YouTube, Android, Gmail and Chrome.

Amazing, right? Absolutely. Yet there are some worries with Google stock. After all, there is buzz that the company could be the subject of more intense regulatory scrutiny. There’s even talk that Google could be broken up.

Google Stock and a Breakup

The main reason for this: The company is essentially a classic monopoly. Note that it controls a stunning 90% of the global market for search. In a sense, Google is the toll booth for online advertising. As a result, the company has been able to sustain substantial operating profit margins for quite some time (this is another tell-tale sign of a monopoly).

For certain industries, monopolies are actually inevitable. This is often the case where the foundation is a network. For example, this is what led to the dominance of AT&T Inc. (NYSE:T), as a nationwide phone system needs to be based on a single platform.

As for the modern digital industry, there are many networks and all have dominant operators. Facebook, Inc. (NASDAQ:FB) controls social networks, Amazon.com, Inc. (NASDAQ:AMZN) is the clear leader in ecommerce and so on.

Interestingly enough, something similar exists in the Chinese market. Tencent Holdings (ADR) (OTCMKTS:TCEHY) leads in messaging and Baidu Inc (ADR)(NASDAQ:BIDU) dominates search.

Antitrust Worries

OK then, so what does this mean for antitrust concerns? Well, in the United States, the law is focused on the consumer. The traditional model is that when a monopoly gains control there are usually price increases.

However, this is out-of-sync with the digital world. Hey, how much money do you pay Google? Chances are it is $0. But you still get tremendous value.

But it is important to note that the European model to antitrust is much different – that is, the focus is on the impact on competitors. And this is the Achille’s heal is for Google. Already the EU has lodged fines of up to $2.97 billion against the company. This was based on claims that Google manipulated its search algorithms to favor its own ecommerce properties.

A recent segment on 60 Minutes also highlighted this. Consider that the CEO of Yelp Inc (NYSE:YELP) made similar claims on the show.

Bottom Line on Google Stock

Given the legal structures, it seems highly unlikely that Google would face a break up from regulators in the U.S. There also appears to be little political appetite for it.

But Europe is the wild card. In fact, in terms of politics, it would be popular to try to break up Google. By doing so, the EU would have an opportunity to promote its home-grown internet industry, which would likely be a driver for growth.

Although, I think any action would take many years to litigate. Forcing the break-up of a company is an extreme act. And the U.S. would likely retaliate.

Instead, it seems more likely that there will be more restrictions and additional fines. While this will hamper Google to some extent, the process should be manageable.

It also helps that the company has a cash balance of $102 billion, which continues to increase year after year. In other words, it will have the resources to fight the battle against regulators, helping to mute the more extreme actions.

So for investors looking at Google stock, the potential of a break-up is not something to say “no” to making a purchase of the shares.

Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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