Google’s Antitrust Loss Could Change the Search Industry

[00:00:00] Welcome to Tech News Briefing. It's Wednesday, August 7. I'm Zoe Thomas for The Wall Street Journal. A federal judge has ruled Google engaged in illegal practices to preserve its search engine monopoly. The big question now, what comes next for Google, its partners and its competition?

[00:00:37] Our reporter Myles Krupa will join us with more on that. And, venture capital funding, which boomed during the pandemic, fell off a cliff two years ago as interest rates rose. But advancements in artificial intelligence are bringing back some of that enthusiasm for VC investing.

[00:01:00] We're starting with news from the venture capital world. Thrive Capital has raised $5 billion for its largest ever pair of venture capital funds. The firm, which was founded 15 years ago by Josh Kushner, has gained greater prominence in Silicon Valley's startup circles

[00:01:16] thanks to its close relationship with OpenAI. Thrive has invested hundreds of millions of dollars into the chat GPT maker since April 2023, and recently backed other AI startups. With more on this, we're joined now by our reporter Berber Jin.

[00:01:32] Berber, what does this $5 billion fundraising tell us about the broader VC market and how investors are responding to the AI boom? This fundraise shows that the AI boom has made investors a lot bolder. And you almost

[00:01:47] see a return to the 2020-2021 era of the startup market when interest rates were super low and startups were getting crazy funding rounds and investors were raising massive funds. Funds like Thrive are feeling like they can go big again and raise bigger funds

[00:02:05] to try and capture what they think will be a really big opportunity in AI. And it's a little bit of deja vu for the industry because two years ago, everyone in Silicon Valley was talking about how VC firms made a mistake by raising funds that were too big

[00:02:22] during the tech bull market. And there was a lot of talk at the time about the industry having grown too large and investors having lost the discipline that usually comes with startup investing, which is to write small checks as early as you can into companies.

[00:02:38] And so the fact that a firm like Thrive is raising so much money again, it shows the sort of cycles of VC and how a lot of it is tied to exuberance over technologies that, you know, we still don't know whether they're going to become financially successful opportunities

[00:02:55] or not. AI is attractive to investors, but the costs for training these generative AI tools, they are huge and they can vastly exceed revenue coming in from the technology. So what could that tell us for the future of these investments?

[00:03:10] We've seen a lot of AI startups go underwater specifically because the cost of creating these models is just way too expensive for a company that's not a tech giant like a Google or an Amazon. The margins you're getting are nearly as good as you would expect from a

[00:03:28] software company. That's why Thrive, when you think about the sizing of these funds, that may have played a factor in them choosing to raise much bigger funds than are normally the case for the industry. And that's something that investors are trying to play out in real

[00:03:43] time. People think over time as the technology gets better, it'll become cheaper. That's what you usually see in technology waves. The question is, when is that going to happen and what is that going to look like when it does?

[00:03:56] And just what does fundraising look like for non-AI startups? A lot of startups are still suffering from the market crash two years ago. You have a lot of startups that are overvalued. You have a lot of startups that are struggling to raise

[00:04:10] funding. A lot of startups in sectors like SaaS and fintech and crypto. And there's just also very few tech IPOs. And it's really difficult to get acquired right now as a startup because of the antitrust scrutiny. And venture investors rely on those types of exits to

[00:04:29] deliver returns for their own investors. That was our reporter, Berber Jinn. Coming up, the Oxford English Dictionary defines Google as a verb for web search. But what will happen to Google's search dominance now that it's lost a major antitrust case? That's after the break.

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[00:05:10] Awareness Partners. Google lost a historic antitrust case on Monday. A judge ruled that Google, which performs about 90 percent of the world's internet searches, acted illegally to preserve its monopoly. The Justice Department, which brought the case along with 38 states and territories,

[00:05:32] is celebrating the decision as a major antitrust win. Kent Walker, president of global affairs at Google Parent Alphabet, said, quote, The outcome of this case is likely to have ripple effects not only for the search giant, but also for its largest collaborators and competitors.

[00:05:55] Here to tell us more about that is our reporter, Miles Krupa. Miles, we'll find out the remedies, the fines or charges that Google has to make at another trial, which should take at least a few months. You've been speaking with antitrust experts.

[00:06:09] What do they think are potential consequences Google could face? Most people's best guesses center around, one, potentially breaking these contracts. Google pays on the order of $20 billion a year in advertising revenue to Apple to be

[00:06:27] the default search engine in Safari web browser and Apple devices when you take them out of the box. And what people think is most likely is that the judge will issue an injunction or somehow

[00:06:41] force Google and Apple to dissolve those kinds of contracts. Google also has them with Samsung, for instance. Another possibility that's also subject to some uncertainty is maybe Apple will have to start offering what we call a choice screen. So when you open up your iPhone or you open

[00:07:00] up your web browser, you'll be presented with a few different options of search engines and you'll have to pick which one you want to be the default instead of having it selected for you. When the iPhone first launched in 2007, Google started sharing revenue with Apple in exchange

[00:07:17] for being that default search engine on iPhone Safari browser. If Google isn't the default search engine on Apple, how much money could Google lose? If it's no longer the default, Google has estimated in the past that if Apple swapped out another

[00:07:33] search engine for the default, Google could lose 60 to 80 percent of the queries they get from Apple devices, which could translate to more than $30 billion in revenue losses at the top end. I'll caveat that by saying it's possible that if Google isn't allowed to pay Apple for placement

[00:07:53] that people will still choose to make Google their default search engine on Apple and Samsung devices. And Google will get basically all of the same benefits it does now just without having to pay Apple

[00:08:05] and these other device makers. So there is potential, some analysts think, that Google could lower the costs that it bears having to pay these third parties while still getting most or even all of the advertising revenue it enjoys today.

[00:08:22] Let's talk a little bit about the impact this could have on the device makers, starting with Apple. What effect could it have on the iPhone maker? This is effectively free revenue for Apple as it currently stands. They don't have to do a ton

[00:08:35] to make Google the default search engine on their devices. At a time when Apple is trying to diversify away from hardware sales into software and services and these licensing deals, they're losing potentially a pretty big revenue stream with very low costs within a few years.

[00:08:53] You reported that Google also pays Samsung an undisclosed amount to be the default search engine on the company's phone. So how could this decision affect Samsung? It's a similar story for Samsung as it is with Apple. Something on the order of 80 percent of Google searches

[00:09:09] on Samsung devices come from the Chrome web browser, which comes pre-installed, and something called the Google search widget that also comes pre-installed on Samsung devices as part of their agreement with Google. If that were to go away, there would be fewer touchpoints for people to access Google

[00:09:25] and thus fewer queries and less revenue going to Samsung. What could this mean for Microsoft, which makes the search engine bang? It's a huge opportunity for Microsoft. It's invested billions. They've sort of been investing billions

[00:09:39] for this day, when competition can be opened up a little bit more and users can be nudged in different ways towards Microsoft instead of Google. The chief financial officer, Amy Hood, said last year that basically every percentage of market share they gain

[00:09:54] can translate to $2 billion in ad revenue. The advent of generative AI has also sparked conversations about how search is changing. How could players like OpenAI benefit from this ruling? In general, if Google is hobbled in any way by the remedies, by just the ongoing legal battles,

[00:10:13] if it distracts them in any way, that's just also an opportunity for OpenAI to attract talent, to move fast, build products that Google maybe can't because of a legal overhang. OpenAI has built a search engine that they just announced last month.

[00:10:30] It's perfect timing for them to soldier on in the wake of this decision. I'm just going to note quickly too that News Corp, the owner of the Wall Street Journal, has a content licensing partnership with OpenAI. Miles, what did the judge say about AI and search?

[00:10:47] What the judge said in his ruling is he doesn't really see evidence to date that generative AI is basically a one-for-one replacement. is still a thing and will continue to exist.

[00:11:00] And that is partially in his eyes why this is such an important moment to rule in this way. All right, that's our reporter Miles Krupa. Thanks for joining us. Thanks, Zoe. And that's it for Tech News Briefing.

[00:11:12] Today's show was produced by me and Julie Chang with supervising producer Katherine Millsop. I'm Zoe Thomas for The Wall Street Journal. We'll be back this afternoon with TNB Tech Minute. Thanks for listening.