What if Google just broke itself up? A tech insider makes the case

Indian Express

4 days ago

Written by David Streitfeld
Google has lost two important antitrust cases in the past year. Its search business is threatened and its stock is stalled. Federal prosecutors are pushing for it to divest various businesses. Unless the company can pull off a few miracles in court, it will be forced to shrink.
There's another possibility. Instead of resisting change, Google could accelerate it. It could spin off huge chunks of itself into independent entities.
That would be a very Silicon Valley power move: Break yourself up before courts can break you up. In an era when Big Tech is under suspicion, a maneuver like this would probably be applauded across the political spectrum. For a company that used to have the motto 'Don't be evil,' such redemption might be irresistible.
The Department of Justice wants Google to sell its Chrome browser and ad network, and maybe its Android mobile business, to fix its monopoly problems. But Gil Luria, a technology analyst with D.A. Davidson & Co., an investment firm based in Montana with $6 billion under management, is thinking bigger. Much bigger.
He published a research note May 12 saying Google had become a conglomerate. This was not a compliment. He meant that Google offers an array of products and services that often have little relationship to one another, including the Waymo self-driving taxi service, YouTube, a cloud storage business, a search firm and an ad network.
Google's $2 trillion stock market valuation is driven by search advertising, which generates more than half of its revenues. Search is also the part of the company under the most pressure as artificial intelligence begins to answer queries. Google searches in Apple's Safari browser fell for the first time ever in April. That's one big reason Google shares are down more than 9% this year.
Other parts of Google are not getting their due. If Waymo were publicly traded, Luria argued, investors might give it something close to Tesla's $1 trillion valuation, especially since Tesla's self-driving cab ambitions are little more than a concept at this point. The same goes for YouTube when compared with its rival Netflix, a Wall Street darling.
Luria estimated that all the parts of Google could separately be worth more than $3.7 trillion, or nearly double the company's valuation now. 'Investors want a big-bang breakup, not isolated spinoffs,' he wrote.
The benefits would not just be financial, he said. Competition would be stoked. Unleashed engineers might create things as amazing as the original Google search engine, which awed people who first used it a quarter-century ago.
Luria knows his proposal is a long shot. 'The likelihood of the Google board proceeding in this direction is probably less than 10%,' he said in an interview. 'But it goes up every day.'
The analyst's analysis got a fair amount of traction in the financial press. The moment was right: Google was arguing to Judge Amit Mehta of U.S. District Court in Washington that its punishment for illegally monopolizing online search should be relatively light.
The government and Google met in court again Friday for closing arguments in the penalty phase of the trial. A decision by Mehta might come this summer. Google has said it will then appeal. Barring some sort of wild card from President Donald Trump, the process could slog on for years.
Google's troubles were compounded by a second antitrust trial. That one, over Google's advertising technology, resulted in another decision against the company in April. The penalty phase will take place later this year. Google is likely to appeal that case, too.
Other asset managers say the logic of a breakup is clear to them.
'While breakups often promise to unlock shareholder value in theory but fail in practice, this case appears to be an exception, one where real value could be realized,' said Gene Munster, managing partner at Deepwater Asset Management.
There is a precedent here. In the early 1980s, the national phone company, AT&T, had been fighting off the Justice Department for years. Worried that it would lose the case, AT&T agreed to voluntarily break itself up. It kept the long-distance lines and shed the seven regional companies that offered local calling. For the next decade, at least, competition reigned.
Google declined to comment directly on Luria's arguments. A spokesperson pointed to a blog post that said the Justice Department's 'proposal to split off Chrome and Android — which we built at great cost over many years and make available for free — would break those platforms, hurt businesses built on them, and undermine security.'
It also sent a list of ways it is still innovating. Among them: Nielsen has ranked YouTube the No. 1 streaming platform for the last two years.
Adam Kovacevich, CEO of Chamber of Progress, a trade group funded by Google and other tech companies, said Google needed to be big and think big.
'It's a company the size of a cruise ship,' he said. 'Could it split itself into four yacht-sized companies? Sure. But what would be gained? Google is locked in an intense competition against the other cruise ships — Apple, Meta, Amazon. And there are some opportunities only a cruise-ship-sized company can tackle, like AI.'
If a split encourages competition, proponents argue, that will benefit Google's ad customers, who will see lower prices. Employees might be more challenged working for a smaller company, where it is easier to move higher.
'The breakup of Google would only hurt people who would otherwise benefit from unlawful market power,' said Barry Barnett, an antitrust lawyer at Susman Godfrey. 'These might include Google executives, whose compensation could fall; startups, which could get lower buyout offers from Google or none at all; and rivals like Apple, which could see chances to share revenue vanish.' Google pays Apple $20 billion annually to be the default search engine on the Safari browser.
Looming over any discussion of a voluntary breakup is the weight of history. Beyond AT&T, there are few examples of a successful company willing to pull itself apart. Companies that are in permanent slumps have regularly done it, however.
General Electric, whose roots go back to Thomas Edison in 1892 and which was once as iconic as Google, split itself into three companies last year after skittering close to death. Hewlett-Packard, another iconic company suffering a long-term decline, broke itself in two in 2015.
Microsoft, an earlier antitrust target, is often cited as a company that may have benefited from either an imposed or voluntary breakup. The government won its monopoly case against the company in 2000, and the judge ordered it to divide in two. That decision was reversed on appeal, and the parties settled. Microsoft took a confrontational approach to the case from the beginning, and in the end, it paid off.
Google is taking the path now that Microsoft went down 25 years ago, Luria said.
'It's saying, 'We are not breaking up, and we'll fight you tooth and nail in court,'' he said. 'Microsoft might have won, but the stock was flat for 10 years. They were so focused on fighting the Department of Justice they didn't notice the rise of mobile devices or cloud computing.'
After the government sued Microsoft, David Readerman of Endurance Capital Partners said, 'litigation was a major distraction to Microsoft business unit heads: email retrieval, depositions, et al. There were Xerox document copying centers fenced under the buildings for security reasons.'
Microsoft did not recover its momentum until Satya Nadella became CEO in 2014.
Google's competitors would presumably be happy with smaller Googles, although maybe not. IBM had a dominant position in computing for years, if not decades, probably even greater than that of Google now. The government pursued an antitrust case against it starting in the late 1960s.
Some in the industry thought this was a problematic move. Dick Brandon of Brandon Applied Systems, a computer consulting firm, told The New York Times in 1972 that 'I would prefer to compete against one I.B.M. than two, three, four, or even eight similarly managed competitors without the present gloves that have been tied on in fear of antitrust action.'
Another issue shadowing any talk of a breakup: Owing to Google's unusual share structure, major changes could never be undertaken without the approval of the two founders, Larry Page and Sergey Brin. And founders tend to be emotionally attached to what they have created.
But 'never say never,' said Kovacevich, who worked in public policy at Google for many years.
'Larry and Sergey like bold, unconventional moves,' he added. 'Could they decide at some point this would be beneficial to the company? Sure. Any business leader should keep all options on the table.'