Alphabet Could Be Broken Into These 3 Pieces

After an investigation that took almost a year and a half and covered what it said were the monopoly practices of Apple, Amazon, Facebook and Alphabet, the House Judiciary subcommittee on antitrust released the details of its work and its recommendations. Alphabet Inc. (NASDAQ: GOOGL) in particular has several large operations that might be spun out if the government presses for a breakup of the company. The three most likely candidates to be spun out are search engine Google, the Android OS business and the massive YouTube video site.

There is precedent for the breakup of a huge American company. The most recent example is AT&T, which was broken into several regional public corporations in 1984. A similar conclusion for the Alphabet situation would be the largest since then.

Alphabet dominates three major tech sectors. The first is search. It has 92% of the U.S. market. The second is its Android operating system, which runs on hundreds of millions of cellphones and smartphones around the world. Android’s only major competition is Apple’s iOS, though it runs only on Apple hardware. The third part of Alphabet that is much larger than its competition is YouTube, which has about 75% of the video platform market in America. This includes video sharing sites but not streaming video businesses like Netflix. YouTube’s dominance is based on its video ad revenue share, which is driven, in part, by Google’s video search results.

Google’s search function is bundled into the Android OS when it is loaded onto phones and that gives it a huge advantage over its search competitors. Google is also the dominant search engine on iPhones. The relationship with Android guarantees that as each new generation of smartphones is released, Google will remain the default search engine. Google’s position among search engines means it gets almost all the sector’s advertising revenue. That, in turn, gives it pricing power. Google’s share of all digital advertising in America is about 40%, which extends its dominance well beyond search advertising.

The Android OS does not only help Google. Its presence on phones drives the use of other Alphabet products, including Google Maps, Gmail, YouTube, Google’s Chrome browser and Google’s calendar app, among others. If decoupled from Google by law, Android OS installations likely would need to feature other search engines, email, calendars, spreadsheet software and browsers. Android might keep its position as the largest mobile OS, but it would need to promote software that competes with other Alphabet product lines.

YouTube also benefits from Android. Specifically, it gets, according to those who believe Google is a monopoly, favorable search results and therefore traffic from Google. If so, it indexes ahead of its video site competitors in search results, which in turn, drives up its traffic. It is a perfect cycle to boost YouTube viewership, and therefore its ad revenue. It is estimated that YouTube ad revenue will be as high as $20 billion this year, a major component of Alphabet’s total top line.

A government antitrust case against Alphabet could take years to resolve because it would work its way through levels of the federal court system. Nevertheless, it is not hard to see how Alphabet’s three primary businesses benefit one another and stifle competition. In terms of locating and breaking out operations, Google’s structure is not complex.