Foreign Would you be surprised to hear that Google actually pays Apple billions of dollars every year just for Google search to be the default search engine on the iPhone and Mac Would it surprise you to learn that these payments amount to around one-fifth of Apple's total annual net income more than iPad and Mac combined. In this video, we'll explain how the default search engine is worth so much and why it has massive consequences for our society. What's up guys, and welcome back to Wall Street Millennial Google is more than 100 reliant on Advertising For fiscal 2022, Google Parent Alphabet reported revenue of 282 billion dollars. Four-fifths of that revenue is accounted for by Google's advertising business, and nearly three-fifths was accounted for by Google search ads, in particular, Even more alarmingly, advertising account for over 100 of Alphabet's operating profit.

In other words, their non-advertising businesses shaved off 15 of their total profit on an operating basis. Google dominates the internet search space. When was the last time you saw someone using Bing and they know that Google searches their trillion dollar Goose that lays the golden eggs. But not everyone is happy with Google's dominance in this lucrative industry.

On January 24th, 2023, the Department of Justice along with eight states both red and blue sued Google for anti-competitive activities. It comes less than three years after a previous lawsuit accusing Google of holding an unlawful Monopoly in internet search. The first suit was brought under the Trump and Administration. in the most recent one under Biden and the State Attorney's General that joined the Doj include both some of the most right-leaning states such as Texas Florida and South Carolina, as well as some of the most left-leaning States like California New, York and New Jersey.

In this video, we'll examine how Google became so powerful, why it's proven so hard to make an Anti-Trust case against them, and most importantly why their dominance is so dangerous to our economy foreign. The Department of Justice's 2020 and 2023 cases against Google are distinct and come from different angles, but have the same concerns at their cores. Their first lawsuit centers around Google's dominance and internet search, and their second lawsuit centers around their dominance in the Ad. Marketplace Both ask the courts to prevent Google from continuing their alleged anti-competitive Behavior.

The Doj says that Google acquired their dominance and search through a set of incredibly complex exclusivity agreements with phone and web browser companies, then using the massive profits from their Internet search. Monopoly they were able to force out competitors from even having a chance to gain a foothold in the market. So how exactly did Google do this through a combination of force and financial incentives to its business partners? Pure Internet Search is like a utility. Any reasonable besides tech company has the ability to create a decent search engine.

If I showed you a set of Google search results side by side with a set of Bing search results, there's a good chance you wouldn't be able to tell me which one is which the difference is that Google Search has become the default search engine for nearly every device and browser for more than in a decade. People don't even think about what search engine is used when they do a search on their phone or their computer. Yet, that search engine has always been Google for the vast majority of people ever since the early days. Now, the word Google has become synonymous with internet search to the extent that the idea of using anything else besides Google search seems weird and it didn't happen by accident.

Take Apple, the maker of the iPhone in Mac computers. iOS devices make up about 60 of mobile device usage. in the US and Macs make up about 25 of computers. If Google wants to become the dominant search engine, it must be the dominant search engine on both the iPhone and the Mac.

Imagine if hypothetically Apple were to create their own search engine Apple search and set it as the default on Safari. There's a very good chance that at least a portion of iPhone and Mac users would just go along with it to prevent any chance of this happening. Google gives Apple a significant percentage of all ad revenue from search queries on iPhones, iPads and Macs. This Revenue sharing agreement is so lucrative that Apple gets an estimated 8 to 12 billion dollars from it every year, accounting for somewhere in the range of 15 to 20 percent of Apple's entire net income.

Mac computers make up about 10 of Apple's business by sales, and the iPad makes up about seven percent. So simply making Google the default search engine is approximately as big a business for Apple as the iPad and Mac combined, But that's not enough to secure a monopoly in internet search. Google cannot be reliant on its Revenue sharing agreements with Apple. That's why they bought Android back in 2005 to compete in the nascent mobile device industry.

Their first tactic was making Android open Source. That means that anyone can use the Android code for free. This appeased Android phone manufacturers like Samsung and LG and was key to driving adoption. Major manufacturers were willing to invest millions in creating Android phones because the open source model for Android would mean that they would ultimately retain control of their own devices.

or at least that's what they thought. Android is now the most dominant mobile device operating system in the world with 70 market share, and Google has successfully regained control of Android and Android phone manufacturers via a Carrot and Sticks model. Similarly to their agreements with Apple, they offer ad Revenue sharing to manufacturers, incentivizing them to use Google's Android ecosystem, but they also make it nearly impossible for manufacturers to opt out of it. If manufacturers like Samsung and LG want critical things like Google Maps, GPS and the Google Play Store, they must enter into various agreements with Apple.

These agreements generally do multiple things. They require that several Google apps are pre-installed on all their devices, including the Google Search app, Google Chrome, and YouTube and they even require that the Google Search widget is put on the default home screen of Android devices. These apps are often impossible for users to delete, even if they never use them. Second, these agreements prevent manufacturers from engaging in any activity that contributes to what Google calls the fragmentation of Android.

In other words, they can't create their own versions of Android even though Android is technically free and open source. If they do, they risk losing access to Google's revenue sharing as well as fundamental Google apps like the Google Play store, which is the only viable app store for Android. All this is to ensure that Google maintains control of all Android devices and therefore controls what search engine Android users use. And this strategy is bulletproof.

In 2014, Amazon released the Fire Phone. It ran on Amazon's own Fire OS operating system, which itself is based on Android Fire OS didn't buy into Google's search engine or App Store. Instead, it came pre-installed with Amazon's own versions of those things and also used Bing as the default search engine. Despite Amazon investing hundreds of millions of dollars over many years, the Fire Phone was one of their biggest commercial failures ever.

There are many reasons for its failure, but a big one is that the major phone manufacturers like Samsung and LG were reluctant to use fire OS They feared that doing so would put their deals with Google at risk. To this day, not a single other non-google controlled Android Operating system has become a significant player in the mobile device industry through their control over Android and their agreements with Apple Google. Search successfully secured about 95 of the mobile device market and a large portion of the personal computer market, and through the popularity of their own web browser Google Chrome and similar agreements with other popular web browsers like Firefox and Opera. they came to control about 90 of all internet search activities in the US.

With their dominance and search under their belt, they were then able to capture dominance in the online publisher advertising. Market. The online advertising market for Publishers is complex, but is made up of three main parts: the publisher side the ad exchange The Advertiser side Google currently has huge market share in all three parts. Think of a publisher, for example: Forbes or the New York Times.

If they want to put ads on their website, they pretty much have to use Google's products. Take a listen to this explanation from the Attorney General of Colorado one of the states who joined the Doj against Google. If you're a publisher and you have content that you want to have ads, you have to go to ask can I get ads filled on my website and then if you're an Advertiser and you want to place ads, you have to have tools to get access to getting it placed. So Within this segment of placed ads, Google has dominance both on the publisher side and on the advertiser side.

They've maintained dominance by acquiring companies and by adopting policies and squelching threats, all in violation of the antitrust laws. Google became dominant in the placed ad segment by leveraging its brand recognition, the dominance of Google Search, and its Financial Resources to Stamp Out Competition: Once they gained a critical mass in the market, they were able to force Publishers to use their tools if they wanted access to Google's pool of Advertiser demand, and to the extent that there were Rivals with competing Advertiser tools, Google simply acquired many of them. Now that they have dominance, there's little competition in this segment, allowing Google to extract insane amounts of money off of each publisher. Advertiser transaction.

It's important to note that Google's dominance in this space is separate from other large advertising companies like Facebook and Amazon. It's true that Google has a little over a quarter of the total digital ad. Market In the US, which is not exactly what you'd call a monopoly. Where they dominate is the place ad segment, which is completely separate from, for example, Facebook ads.

If you are a publisher with a website, you pretty much have to use Google's publisher ad server to place ads on your website to say that Google doesn't have a monopoly here because there's also Facebook and Amazon. That would be like if there is only one company that made cars and saying that they don't have a monopoly because there are other companies that make trains and airplanes foreign. The digital ad Market is complex, and because it is not consumer pacing, it doesn't have much public awareness. But it's clear that Google has become extremely wealthy due in large part to its dominance in the industry.

Lawmakers, including both Democrats and Republicans are unified in their stance against big Tech including Google. However, industry experts and lawyers think that the Doj may be facing an uphill battle to convince the courts that Google violated the law according to former FTC policy director and Doj: Anti-Trust lawyer David Balto Where the Doj's lawsuit breaks down is showing that Google's dominance harms consumers. It does show that Google uses its dominance to extract more money from Publishers and advertisers, but current Anti-Trust law wants to see evidence that actual consumers are harmed by monopolistic Behavior through higher prices. Google is, um, you know, does have a large market share in that market, but is that going to be sufficient? What the Justice Department is going to have to show is that ultimately consumers are harmed by exclusionary conduct that by Google that effectively substantially raises prices to Consumers and that part isn't really tied together here in this complaint.

Foreign. So why does any of this matter to regular people like you and me? Who cares? If Google searches how everyone searches on the Internet, it's probably better than being anyway. And why does it matter that online Publishers and advertisers have to use Google's tools, the majority of people won't be able to notice any impact. Where it does make a difference is for any business that does online advertising as well as Publishers content creators and anyone else who wants to monetize their content through ads.

if you just set up a small business let's say a home renovation company, you need to get your first customers in today's day and age, If you want to compete, you pretty much have to spend on digital advertising. It's not uncommon for new businesses to spend something like 30 to 40 percent of their revenue on marketing. Let's say that after you pay all of your expenses including marketing employee salaries rent Etc you're left with a 10 net profit margin. Since Google takes around a third of all advertising dollars that pass through its platform, there's a very good chance that Google is making more money off of your marketing than your entire business made.

On the other side of the coin, if you're a publisher, are selling ads via Google's ad exchange ecosystem. Google is likely making 50 of your entire ad. Revenue Unless you have greater than 50 margins, they are likely making more profit off of your business than you are. a similar analogy can be made about Google Search If there were more competition in search that could theoretically reduce the amount of money that Google takes from Google search ads that could add up to billions of dollars in profits for advertisers per year and mean the difference between staying in business and going bankrupt.

There are arguments to be made in favor of Google though Google Search is probably the best search engine available today, especially considering its integration with things like Google Maps flights, Finance Etc and their advertising offerings are extremely valuable to advertisers, especially considering their Advanced ad targeting made possible by all the user data they collect. It's not like no one benefits from using Google's products, and they do have competitors. The question is, do they deserve to take as much from advertisers as they do just for the service of connecting advertisers to the people who create content and running the Google search servers. If you compare the digital ad Marketplace to a stock exchange, the difference is orders of magnitude.

Of course, they're very different things, but Google takes around 50 cents for each dollar that actually goes to a publisher just for facilitating the transaction. In contrast, someone who wants to buy a stock only has to pay a tiny fraction of a percent in the form of commissions and exchange fees, especially considering that most brokerages offer zero commissions these days. One of the reasons is because there are many stock exchanges that can P for flow, pushing their prices to Rock Bottom With Google search and placed ads, there is no competition. There is only Google The complication with Google search is that it's not a coercive.

Monopoly In other words, Google never did anything to force consumers to use Google search versus Bing or Yahoo. That's because they never had to. Internet search is free to use, so in the beginning people just use whatever was the most convenient or whatever worked the best. That ended up being Google Search Now people use Google search because it's what's the most familiar in most.

Industries If one company becomes dominant, its smaller competitors can lower their prices and win over consumers, thereby forcing the dominant company to also lower their prices. But with Internet search, you can't win over consumers by lowering prices because everyone uses Google Search for free. Google can charge advertisers their true customers however much they want without any risk to the dominance of Google search. This is a breakdown of what's so great about Free Market composition.

As a consumer, it feels weird to think about Google Searches dominance being a threat to our free market system, but when trillions of dollars are on the line, the stakes couldn't get any bigger. All right guys, that wraps it up for this video. What do you think about Google's dominance in Search and placed ads? Do you think the Doj is right to want to break them up? Let us know in the comments section. Below In the meantime, thank you so much for watching and we'll see in the next video.

Wall Street Millennial Signing out.