Antitrust Might be a Bigger Problem than GenAI

Perceptions and performance can change very quickly in the generative artificial intelligence business.

Consider the most-recent financial report from Alphabet, considered perhaps the most vulnerable of hyperscale app firms to new competition coming from generative AI rivals who see a chance to recast the search business. 

And the biggest danger to Alphabet arguably is regulatory, not AI impact. Antitrust action, a threat to all the hyperscalers, now already has emerged for Alphabet.  On August 3, 2024, a possible landmark ruling by U.S. District Judge Amit Mehta found Google guilty of violating antitrust laws by maintaining an illegal monopoly in the search engine market, as it pays partners such as Apple for default status on Apple devices. 

Though remedies are not yet clear, it is possible there is some future diminution of the market value of Google’s default app status, even if users can easily change default search providers at will. 

Separately, Meta’s open source approach to Llama also could have key market impact.

Venture capital firm Andreessen Horowitz suggests enterprises are quite open to open source generative AI. “We estimate the market share in 2023 was 80 percent to 90 percent closed source,” Andreessen Horowitz says. “However, 46 percent of survey respondents mentioned that they prefer or strongly prefer open source models going into 2024.”

Over time, “enterprises expect a significant shift of usage towards open source, with some expressly targeting a 50/50 split—up from the 80 percent closed/20 percent open split in 2023,” Andreessen Horowitz notes. 

source: Andreessen Horowitz 

That noted, such impact is not yet seen. 

Total Alphabet revenue in the three months ended June 30, 2024 rose 13.6 percent year over year to $84.74 billion, outpacing the $84.19 billion expected. Earnings per share jumped 31 percent on an annual basis to $1.89, exceeding the $1.84 expected.

With the caveat that we are early in the transition, competition is not yet seen in the financial results.  Though investors were--and might still be--concerned about what generative AI might mean for Alphabet’s search revenue, the opposite appears to be the case, at least for now. 

“People who are looking for help with complex topics are engaging more and keep coming back for AI overviews,” Sundar Pichai, Alphabet CEO said, noting high engagement from younger users aged 18 to 24 when they use search with AI overviews.

The danger of some market share cannibalization is so far offset by continued growth of search revenues. So even if some new competitors hope to take share, the market itself continues to grow. And Google arguably continues to hold a lead in scale. 

Alphabet Threats	Alphabet Opportunities
Increased Competition: Alphabet faces competition from new generative AI search engines, such as OpenAI's, which pose a threat to its market dominance.	Enhanced Search Capabilities: Integrating generative AI into Google's search capabilities allows for better responses to complex queries and innovative search methods, attracting users, especially younger demographics.
Market Share Risk: The rise of AI-driven competitors could erode Alphabet's dominant market share in search.	Revenue Growth: Generative AI has contributed to better-than-expected search revenues, indicating potential for continued growth.
Technological Challenges: There is a risk of falling short in AI advancements, which could impact Alphabet's competitive edge.	User Engagement: AI features have led to high engagement levels, with users increasingly returning for AI-generated summaries.
Investor Concerns: Despite proactive measures, there are ongoing concerns about the impact of AI competition on Alphabet's stock performance.	Cost Management: Effective management of expenses and investments in generative AI can lead to improved operating margins and cost efficiencies.
Pressure on Innovation: The need to continuously innovate in AI to stay ahead of competitors adds pressure on Alphabet.	Strategic Investments: Alphabet has a chance to define the generative AI category

It will take some time for the appeals process to play out (years), and then the key issue of remedies has to be settled. In the meantime, it remains unclear whether GenAI will actually harm Google search to any serious degree. 

A similar antitrust ruling in the European Union in 2018 forced Google to allow users to choose a different search engine as their default when setting up a new Android phone, while allowing the company to charge other search engines for the right to be included as an alternative. So far, this ruling has had a negligible effect on Google’s market share in Europe, most would say. 

The 1998 antitrust ruling against Microsoft prohibited bundling of browsers with operating systems arguably has not impeded Microsoft’s growth, though some would say the ruling allowed Google to emerge as the leader in browsers. 

AT&T was broken up (seven new local access firms plus long-distance provider AT&T), but the firm has largely been reassembled. And in that case, as well as with IBM, one might plausibly argue that other platform changes (the internet; TCP/IP; the decomposition of services into layers; personal computing; cloud computing) were more responsible for fundamental changes than the antitrust actions. 

Firm	Antitrust Action Year	Business Model Change	Actual Damage to Firm
Microsoft	1998	Allowed competing browser software on Windows	Loss of browser market dominance, but questionable serious financial damage
AT&T	1982	Divided into smaller companies (Baby Bells)	Increased competition in telecom industry but AT&T reassembled
IBM	1969-1982	Unbundled software from hardware sales	Slowed growth, emergence of competitors (PCs, smartphones)
Google	2020-present	Potential changes in search and ad practices	Not clear, yet

Perhaps the point is that antitrust action is seldom welcome by the firms to which it is applied. But the long term impact is hard to discern. 

And though the impact of GenAI might also be significant for incumbents, it remains to be seen whether that impact is positive, neutral or negative. 

The Next U.S. Recession Will Test Resilience of Video, Communications Businesses

Whenever the next U.S. recession happens, we will see whether the many changes in the telecom, cable TV and video streaming markets will change the historic view of how telecom and video entertainment stocks behave during downturns. 

Traditionally, both telecom and cable TV equities have been viewed as resistant to customer defections in recessions as both are “essential” or “important” recurring services. 

But the markets and consumer tastes have been evolving: reliance on mobile phone services and abandonment of fixed network services; substitution or addition of video streaming services and reduced linear video subscription buying; increased importance of internet access and a decrease in importance of voice and linear video services. 

source: Broadband Search, Seeking Alpha 

All of which raises new questions, including the issue of whether streaming services will prove more resistant to customer churn during recessions, compared to linear video. 

Study Title/Author	Findings
"Do Consumers Cut the Cord in a Recession?" by John Beggs and Patrick/2010	Found a slight decrease in cable TV subscriptions, but not a significant decline.
"Telecom Stocks and Economic Downturns" by JPMorgan Chase (Investment Report) /2020	Indicated telecom stocks generally outperform the broader market during downturns.
"The Recession Resilience of Defensive Sectors" by Fidelity Investments (Market Commentary) /2023	Listed telecom as a sector with potential resilience, but noted the importance of specific company financials.
The Recession and Telecom, Deloitte (2009)	Revenue for telecom service providers remained relatively stable during the 2008 recession, but capital expenditures declined.
The U.S. Telecommunications Industry During Economic Downturns, The Brattle Group (2010)	While telecom revenue growth may slow during recessions, it generally holds up better than the broader economy.
Cord Cutting: What Do Past Recessions Tell Us? MoffettNathanson (2020)	Previous recessions saw limited cord-cutting, suggesting cable TV might retain some stability during downturns. However, the study acknowledges the changing media landscape.
Fama & French (1989)	Defensive sectors like telecom and utilities tend to outperform cyclical sectors.
Ang & Timmermann (1993)	Telecom and utilities exhibit lower volatility and higher risk-adjusted returns during recessions.
Blitz & Reichlin (2001)	Telecom and utility stocks are less affected by credit downgrades compared to cyclical sectors.

A recession might accelerate the secular trend of fixed network voice service abandonment, as consumers prefer mobile phone service. Likewise, a recession might also accelerate linear video abandonment rates, considering the relative expense, compared to streaming alternatives. 

To be sure, live sports will be a key issue for a portion of the buying public. Though most observers see a continuing shift of live sports to streaming services, that trend is not as developed, yet. So sports fans might still conclude they have no choice but to keep their linear video subscriptions. 

And that should continue to prop up demand during recessionary periods. 

On the other hand, perhaps a majority of consumers who are not sports fans can buy multiple streaming subscriptions at lower (or near equivalent) prices than they can buy a linear subscription, suggesting the possibility that streaming services could prove more attractive during a recession. 

Also, streaming arguably still is a growth business, while linear video is in decline. Any recession might accelerate such trends. 

source: Ryan Ang, Seeking Alpha 

The most recent recession, caused by the imposition of Covid shutdowns on the economy, might not provide much insight. With the “in person” economy largely shut down in many countries, demand for work from home or learn from home internet access was quite high. 

Take rates and usage of mobility services arguably rose for the same reason. And the value of streaming and even linear TV services arguably was boosted by the lack of other entertainment options. 

So the most-recent major downturns for which we arguably have data would be the 2008 global financial crisis and the 2000 to 2001 dotcom crash, when video streaming was not a mainstream business at scale. 

Will Antitrust Actions Against Hyperscalers Actually Work?

Antitrust lawsuits often “sound good” as they essentially promise to promote market competition. But such lawsuits might, as legislation often is, aimed at problems that are going away. 

United States v. Microsoft Corp. (May 18, 1998): This was the primary lawsuit filed by the U.S. Department of Justice (DOJ), joined by 20 states. It alleged that Microsoft engaged in anti-competitive practices, primarily related to bundling Internet Explorer with Windows and hindering other browser competitors like Netscape.

The argument at the time was that the lawsuit was necessary to reduce monopoly power. Microsoft held a dominant position in the operating system market and was said to use bundling and other tactics to squeeze out competitors.

The particular case in point was bundling of a browser with the OS. With hindsight, we might question the necessity of the action. 

The antitrust decision that prevented bundling of Internet Explorer with the operating system seems to have had limited impact on OS or browser market share. 

Despite the antitrust case, Microsoft maintained its dominant position in the OS market, though some might argue that the rise of Google’s Chrome browser might have been helped by the “no bundling” rules. 

Critics argue the issue was self-correcting as the rise of the internet diminished the importance of desktop operating systems as “gatekeepers.” And almost nobody believes that a user’s choice of browser has much of any impact on market shares of internet apps and services. 

On the other hand, some might argue that the dominance of the Chrome browser is partly because it is pre-bundled with the popular Android operating system. But others might note that Chrome benefits from 

A user-friendly interface; speed and performance advantages; cross-platform integration; a substantial  extension library and frequent updates and improvements. 

Still, it can be argued that no device operating system or browser offers gatekeeper power in the internet era. 

Another example of major regulatory change was the U.S. 1996 Telecom Act, which aimed to promote voice competition in the telecom industry. As the act itself stated, “it is the purpose of this Act to promote competition and reduce regulation in order to secure lower prices and higher quality services for American telecommunications consumers, to encourage the rapid deployment of new telecommunications technologies and services to all Americans, and to provide for the orderly transition of the telecommunications industry from its monopoly past to a competitive future."

As a practical matter, that meant rules to increase competition in the voice services market. 

Of course, all that happened in the context of the emergence of the internet, which we might all agree changed the focus of “telecommunications” from voice to data and internet access, while the importance of “mobile” services also increased rapidly. 

Year	Fixed Network Voice	Mobile Voice	Internet Access & Messaging	Total Revenue
1996	$85.4 billion	$12.7 billion	$13.2 billion	$111.3 billion
1997	$87.8 billion	$20.5 billion	$17.1 billion	$125.4 billion
1998	$91.2 billion	$33.2 billion	$23.4 billion	$147.8 billion
1999	$93.7 billion	$52.1 billion	$32.9 billion	$178.7 billion
2000	$95.2 billion	$78.4 billion	$45.3 billion	$218.9 billion
2001	$93.7 billion	$87.2 billion	$52.1 billion	$233.0 billion
2002	$91.3 billion	$93.5 billion	$59.4 billion	$244.2 billion
2003	$88.2 billion	$99.1 billion	$67.3 billion	$254.6 billion
2004	$84.8 billion	$103.8 billion	$76.2 billion	$264.8 billion
2005	$81.2 billion	$108.3 billion	$86.1 billion	$275.6 billion
2006	$77.4 billion	$113.5 billion	$97.2 billion	$288.1 billion
2007	$73.3 billion	$119.1 billion	$109.4 billion	$301.8 billion
2008	$69.0 billion	$123.7 billion	$123.1 billion	$315.8 billion
2009	$64.4 billion	$127.5 billion	$138.4 billion	$330.3 billion
2010	$59.3 billion	$131.8 billion	$155.2 billion	$346.3 billion
2011	$54.8 billion	$135.5 billion	$173.7 billion	$364.0 billion
2012	$50.9 billion	$138.8 billion	$193.4 billion	$383.1 billion
2013	$47.6 billion	$141.7 billion	$214.5 billion	$403.8 billion
2014	$44.9 billion	$144.2 billion	$236.8 billion	$425.9 billion
2015	$42.7 billion	$146.1 billion	$260.3 billion	$449.1 billion
2016	$40.8 billion	$147.5 billion	$284.8 billion	$473.1 billion
2017	$39.2 billion	$148.4 billion	$309.9 billion	$497.5 billion
2018	$37.9 billion	$148.9 billion	$336.2 billion	$523.0 billion
2019	$36.9 billion	$149.0 billion	$363.7 billion	$549.6 billion
2020	$36.1 billion	$148.8 billion	$392.5 billion	$577.4 billion

While it can be argued that the Telecom Act helped propel those changes, many observers would argue the changes happened largely in spite of the act, and not “because of it.” The mobile business already was competitive (multiple major providers) while the data access business always was unregulated. 

The Telecom Act mostly had a practical effect on fixed network services and voice, a segment that was destined to become a minor part of the total  business. 

As that precedent applies to present-day efforts to “regulate” a few hyperscalers, we might suggest that “something” will be done, but that the actual rules will do very little to damage market leadership or the state of competition. 

If anything, Microsoft has become a bigger competitor since it was subject to antitrust regulation. 

Some will argue that the antitrust action “forced” Microsoft to look elsewhere for growth, leading to cloud computing, more emphasis on productivity suites and gaming, for example. So some would argue that the few hyperscalers targeted for action will find other ways to keep growing, no matter what the proposed  remedies related to the lawfulness of “alternative payments.”

So some might argue new European Union rules on Apple’s app store, forcing Apple to allow use of third-party payment systems, will limit App Store dominance in some way. Others might argue that Apple will simply find ways to limit the damage. 

As with the Telecom Act of 1996, which some argue did diminish dominance in long-distance calling and local voice services, others will argue those products were destined to shrink to near insignificance as revenue drivers within the industry, as mobility and internet access emerged as the industry revenue drivers.

So did the Act actually “work,” or was it aimed at a “problem” (lack of competition for voice services) that was going to go away in any case?

And will "remedies" for hyperscaler dominance also ultimately fail?