The Big Threat Hanging Over Google

   2024-05-04 13:05

If you’re lying awake at 3 a.m. one night, try reading the Justice Department’s 509-page “proposed finding of fact” in its antitrust lawsuit against Google’s search business, a revised version of which was filed with the court on Tuesday. You likely won’t make it past the extensive table of contents before you fall asleep. Even so, getting through the document is probably worth it, at least for investors in Google’s parent company, Alphabet.

For those people, understanding the government’s case is essential. A government victory could impose restraints on Google’s search business, its cash cow. And depending on what those constraints are, they could hurt Google’s earnings power enough to affect its ability to keep up in artificial intelligence.



We’re a long way from there, for sure, but a final decision on the case is getting closer. Today the judge overseeing the case heard closing arguments from both sides. Perhaps not coincidentally, Google stock was conspicuously flat even as the rest of the stock market rallied. Investors are surely conscious of the threat posed by the search case (which is separate from the antitrust lawsuit over Google’s ad tech business). And the earnings updates from major tech companies in the past two weeks help put things into perspective.

As much as we associate Apple with minting money, it actually generated less cash than either Microsoft or Alphabet in the March quarter. In fact, according to analysts surveyed by S&P Global Market Intelligence, Alphabet this year will generate more cash from operations—$131 billion—than either Apple or Microsoft.

The difference is that Apple returns nearly all of the cash it generates to shareholders, and the other two don’t. As we’ve talked about a lot this week and last week, Alphabet and Microsoft spend a portion of their cash on capital expenditures—things like servers and data centers, which are necessary for AI development—and return much of what is left over to shareholders. (It’s a bit more complicated than that, but you get the gist.)

This year, for both Microsoft and Alphabet, capex spending is soaring, so that balance will shift a bit. Apple, in contrast, can return so much money to shareholders because its capex spending is tiny. As Chief Financial Officer Luca Maestri explained on Thursday night during the company’s earnings call, Apple shares the cost of its capex investments with its suppliers. (For more on Apple’s relationship with its manufacturing partners, see our story today.)

The rise of large language models sparked worries last year that LLMs could hurt Google’s search dominance and profits, because AI-powered searches are so expensive to run. We reported this week that Google has slashed the cost of those searches, even as its search market share has stayed strong. The real threat to search, and to Google’s earnings power, remains the federal government.

  • It was a big week for Tesla news. Steve LeVine scooped the news that Tesla was cutting about 500 people in the company’s Supercharger division, including that division’s senior director. That’s a big deal and it’s unexpected: Becky Peterson reported that the group was told a few weeks ago that Elon Musk thought Superchargers were very important for the business. Becky also wrote an in-depth story about the state of Tesla’s self-driving technology, including its testing in San Francisco’s Sunset District.

  • Speaking of people leaving Tesla, Steve LeVine launched the Tesla Diaspora Database for Pro subscribers, which tracks 90 Tesla alumni who have left the company and now occupy the highest ranks of other battery, autonomous vehicle, and electric vehicle companies.

  • Yueqi Yang gave us an inside look at BlackRock’s crypto journey, which culminated in its blockbuster launch of a bitcoin exchange-traded fund in January.

  • Anita Ramaswamy analyzed why the boost in operating profit margins reported in recent days by Microsoft, Alphabet, Meta Platforms and Amazon might not last. Hint: It’s got to do with AI.

  • Wayne Ma explained in detail how Apple keeps its manufacturing expenses in China low by transferring manufacturing know-how from companies to its suppliers in China.

  • Sahil Patel scooped that Google has a new deal with News Corp to help fund the publisher’s development of AI-infused products and content (more here).

  • Start your weekend reading with Akash Pasricha’s profile of Whoop CEO Will Ahmed, complete with a workout and an ice bath, a play-by-play recounting of the company’s history, and a deep dive into how Whoop has fared in its competition with Apple, Samsung and other wearables giants.

  • Microsoft is making sweeping changes to the structure of its security business, including by making some executives’ pay hinge on Microsoft’s success in reducing security breaches, executive vice president Charlie Bell said in a statement Friday. Microsoft’s threat intelligence organization will now report to CISO Igor Tsyganskiy, Bell said (more here).

  • Cloud security startup Wiz has abandoned its $200 million bid to acquire rival security firm Lacework after conducting due diligence, according to someone familiar with the company’s thinking. The Information first reported last month that Wiz was in advanced talks to buy Lacework. News of the deal talks falling apart was first reported by Calcalist (more here).

New from The Information reporters:

By Jon Victor Exclusive: Two Senior OpenAI Executives Leave Company

By Wayne Ma Exclusive: How Apple Boosts Chinese Suppliers With Know-How From Foreign Companies

What We’re Reading

Everything Apple Plans to Show at May 7 ‘Let Loose’ iPad Event

TikTok Tells Advertisers: ‘We Are Not Backing Down’

Upcoming Events

Thursday, September 5—The Information’s San Francisco AI Summit The Information’s AI Summit, taking place in September 2024 in San Francisco will bring attendees to the forefront of this fast-moving industry and all the questions that come along with it. Space is limited. Tickets go on sale soon.

Monday, October 7—The Information’s 2024 WTF Summit Save the date: The premier event for women in tech media and finance is heading back in Napa Valley from 10/7-10/8. Connect with top professionals, and gain insights on AI, fintech, media and investing. To get your brand involved, contact [email protected].


Original Source