Friday Reader Question

Every Friday in HX Daily, we want to do one of two things…

One approach will be sharing insights into concepts or philosophies that we think can be helpful in investing and in life. Many of these have to do with human psychology and how we can harness it to our benefit.

The other approach is to take reader questions that are submitted to us over the course of the week.

If you would like to submit a question for a future Friday HX Daily, please email us at [email protected]

Here is a question submitted to us by several readers this week…

Earlier this week, a federal judge ruled in favor of the US Department of Justice (DOJ)’s claim that Google had acted improperly and in a monopolistic fashion.

“After having carefully considered and weighed the witness testimony and evidence, the court reaches the following conclusion: Google is a monopolist, and it has acted as one to maintain its monopoly,” US District Judge Amit Mehta wrote in Monday’s opinion. “It has violated Section 2 of the Sherman Act.”

Almost a half dozen readers asked us what this means. This surprised us, and we don’t often answer questions about individual stocks. Given the interest, however, we decided it made sense to address this situation.

What does this really mean for Google? And Apple? And you?

First, let’s describe what exactly is going on here in an easy-to-understand fashion.

Google has negotiated contracts worth billions of dollars with key companies in the mobile telephone business. Mostly Apple and Samsung. These contracts position them as the “default” search provider on those phones.

This means that when you go use your phone to do an internet search – unless you actively go in and change the settings – you will automatically use Google for the search.

How many of you have ever gone in and changed the default search engine?

We are guessing that the answer is not many of you. We know that we haven’t.

Part of that is because we think Google is great. We are happy with the product.

The way to think about this deal is that the mobile handset companies own a piece of real estate. Think of it as a neighborhood with many houses (applications) and there is a street going into the neighborhood.

Google pays them a bunch of money so that their house will be at the front of the street, and everyone can see it.

Could another search engine (like Microsoft’s Bing) pay Apple and Samsung to have their house at the front of the street?

Absolutely. We are sure the handset companies will sell that spot to whoever is willing to pay the most money.

There are also no real arguments that Google is a bad search engine. In fact, the judge acknowledged that Google is recognized as the best search engine.

It is unclear how consumers are being harmed. We don’t pay for search engines.

So - what exactly is the problem?

Our view is that the “problem” is that politicians like to score points with the public by going against big technology. Whether there is harm to consumers or illegal activity is beside the point.

Why did the judge agree? At this point, much of our judiciary has become as politicized as the rest of our government.

Some argue that this judgment will be as monumental as past judgments that broke up monopolies like AT&T and Standard Oil.

We don’t think so.

What happens if Apple and Samsung make the default browser access non-exclusive? An open auction like sports rights.

It would be hard to argue then that other companies do not have access and are being disadvantaged.

We think that this will go into appeals for years, and eventually, sometime in two to five years, you will read about a settlement that is inconsequential to Google as a whole.

Remember that another administration may not pursue the same aggressive path as the current one.

Even if we are wrong about the eventual outcome, our legal process ensures that it will not happen quickly.

Do we think this judgment matters to Google?

In the next six to twelve months – we do not. We also do not think it will matter beyond that, but our view is that the focus with the stock should be on the earnings and that investors will forget about this quickly.