A United States District Court released its long-awaited opinion in the antitrust case filed by the Department of Justice, which alleged that Google built and maintained its market power through illegal actions. The court found that some of Google’s conduct was indeed anticompetitive. However, the proposed remedies were not as severe as many expected, with the court taking a more laissez faire approach than expected. The court noted that Google is taking steps to foster innovation within its ecosystem, and the birth of Generative AI applications presents genuine competitive challenges that may open the market.
At the center of this antitrust case were Google’s ‘Traffic Acquisition Costs’ (“TAC”) and their potentially explicit or assumed exclusionary nature. Google defines TAC as dollars “paid to our distribution partners who make available our search access points and services. Our distribution partners include browser providers, mobile carriers, original equipment manufacturers, and software developers.” 1 Said differently, Google pays smartphone software and hardware providers (such as Apple, Verizon, AT&T, Mozilla, etc) for providing their users easy access to Google Search. These TAC payments have grown significantly over time, expanding from $26.7B paid out in 2018, to $54.9B in the company’s most recent fiscal year.
TAC could be deemed anticompetitive if paid out on an exclusionary basis (i.e. if Apple could only receive payments from Google by blocking all competing browsers). However, Google argued these payments are more like a ‘thank you’ for simplifying access to Search. Testimony throughout the case revealed that most TAC payments are structured through ‘revenue share agreements’ (“RSAs”) between Google and distributors, and no longer on an exclusionary basis. Although earlier exclusive agreements were “found to violate the Sherman Act”2 (page 77)). For instance, AT&T may qualify to receive payouts from an RSA for “[placing] Chrome as a default browser”2 on a particular device (page 56). T-Mobile’s RSA included payment eligibility “by access point and device…but that there be no restrictions on alternative search services”2 (page 56).
Stay on Top of Market Trends
The Carson Investment Research newsletter offers up-to-date market news, analysis and insights. Subscribe today!
"*" indicates required fields
This shift proved crucial. Google disclosed that its updated contracts now eliminate exclusivity provisions. The court views this favorably, as the opinion states “These proceedings already have had a prophylactic effect on Google. It has updated its RSAs to align with its proposed remedies. Its new agreements remove restrictions on the placement and promotion of alternative search services and now permit distributors to select search products on a device-by-device, access-point by-access-point basis”2 (page 107).
Although exclusivity is lost, the court did not ban such payment structures in the future as they currently exist. The court reasoned that payouts through RSAs aren’t themselves exclusionary or anticompetitive, even when there are no real competitors in the market. In fact, they may serve to subsidize innovation at these partners. The court heard testimony that “Google’s partners uniformly emphasized the importance of Google’s revenue share payments to their own product innovation and operations”2 (page 81) though some admitted these agreements also “’froze’ the search ecosystem in place”2 and may have aided Google’s continued dominance (page 81). The court opined that the current agreements are legal and should even continue as banning payments may cause “downstream effects [on distributors]…some possibly dire”2 if these payments were reduced or eliminated (page 123).
Although many contracts offered distribution partners “limited flexibility…[with] no genuine competition for the contract”2 (page 79), the court reasoned that “because Google is the best search provider, [distributors] likely will maintain [Google] as the default [search engine]”2 even if payments were banned (page 121). Their product is simply miles ahead of competitors and probably could survive even without RSAs with distributors.
Summarizing the court’s opinion, banning RSAs at this time may likely: 1) do great harm to small distributors who rely on these payments, 2) reinforce Google’s market share as a result of decreased competition, 3) drastically increase Google’s profits, which 4) allows Google to fund more internal innovation and increase their chance of remaining dominant, and 5) a ban would likely not change user habits owing to the positive user experience of Google Search. While uncertain this would happen, the court viewed the potential of this harm from banning payments as “reason enough not to proceed with the remedy”2 (page 125). Talk about getting off easy.
To me, this court case raised more questions than answers. The court found Alphabet guilty of anticompetitive actions, but ordered no harsh remedy because it would boost their profits too much? If the court agrees that Google’s payments foster innovation, should they order them to increase payouts to pry open a monopolized market? Can a potential monopoly ‘buy’ their way out of harsh punishments by subsidizing distributors? And more forward looking: What happens if Google, or a GenAI competitor, tries to repeat this strategy in AI search or AI-assistants? If GenAI begins to pose genuine competition, will Google begin reducing RSAs? Undoubtedly, this court’s largely laissez faire opinion is in favor of Google, but investors may be well served to think about unintended consequences and implications for the future.
- https://www.sec.gov/ix?doc=/Archives/edgar/data/1652044/000165204425000014/goog-20241231.htm
- https://deadline.com/wp-content/uploads/2025/09/gov.uscourts.dcd_.223205.1436.0_4.pdf
For more content by Blake Anderson, CFA®, Associate Portfolio Manager click here
8370196.1.-09Sept25A
