New regulations threaten Google’s ad business

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Alphabet Inc. is a multinational company based in the United States. It develops technology products and services related to software, the internet, and electronic devices. The main branch of this company is Google, with all the additions it has, such as Gmail, Google Play, Google Maps, Google Drive, and YouTube. 

One of the main sources of revenue for Alphabet through Google is the advertising business. After the acquisition of DoubleClick Inc. in 2008, Google’s advertising business has been growing at a very fast pace.

In fact, in the results presented for the first quarter of 2022, Google had a year-on-year growth of 32.3%, registering a value of $44.68 billion.

It seems normal if you analyze the situation. Google has a competitive advantage because it is present in the vast majority of advertising business links in all the previously mentioned areas, in addition to the revenues generated by the Google network properties involved in AdMob, AdSense, and Google Ad Manager.

For this reason, Google’s advertising business is very profitable; however, there is a threat that needs to be paid close attention to.

Due to the enormous monopolistic advantage that Google has in the advertising sector, a new bill is being considered, which has endangered this business. As soon as the news of this alleged new regulation broke, Alphabet’s shares dropped 1.7% and ended Thursday with a 1.4% drop. 

What is the law being proposed? It is called the Digital Advertising Competition and Transparency Act. It was introduced by the Republican Party, and it aims to reduce the monopolistic advantage that exists in the technological ad industry.

According to this act, companies with advertising revenues over $20 billion in annual digital transactions will not be able to participate in more than one link of the digital advertising ecosystem. In case there are companies that do not adhere to the law or are not transparent with their processes, customers could sue them. 

If this bill comes through, not only Google but Facebook would also be affected. Alphabet and Meta Platforms would have up to one year to change and comply with the new rules imposed.

Several Democratic Senators such as Mike Lee (R., Utah), Ted Cruz (R., Texas), Amy Klobuchar (D., Minn.) and Richard Blumenthal (D., Conn.) have supported and co-sponsored the bill. Mike Lee said, “When Google simultaneously acts as both seller and buyer and runs an exchange, that gives it an unfair and undue advantage in the marketplace that does not necessarily reflect the value it is providing… When a company can wear all of these hats simultaneously, it can engage in conduct that harms everyone.”

Of course, Google also has its defense, a company spokesperson stated that “Google’s and many competitors’ advertising tools help U.S. websites and apps fund their content, help businesses grow, and help protect users from privacy risks and misleading ads.” 

This is not the first time Alphabet will be dealing with a situation related to antitrust investigations and other legal and governmental issues. Despite the threats, 30 out of 30 analysts gave GOOGL stock a ‘Buy’ rating, expecting a 47.8% upside potential.

We will have to wait to see if the project becomes a reality and indeed, Google must comply with the law. What changes do you think the company would make to its ad business? Do you think the company’s stock will be affected more than the downturn suffered this week? Would you invest in Alphabet?

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