Key Points:

• Google faces a possible breakup due to an antitrust case, which could impact its market power.
• The Pixel 6, featuring advanced AI, struggles against the iPhone due to low market share.
• Investors should be cautious; a breakup could either hurt or create new opportunities.
• Google may be losing a step, and investors are calling for “the next Nvidia” to take its place. Read the report and decide for yourself.

Douglas and Lee discuss the challenges Google (NASDAQ: GOOG) is facing as the U.S. government labels it a monopolist in the search area, with potential ramifications including the breakup of its parent company, Alphabet (NASDAQ: GOOG). They explore how this could impact Google’s hardware ventures, specifically the Pixel phone, which has struggled to compete with Apple (NASDAQ: AAPL) and Samsung despite its advanced AI features. The conversation touches on the broader implications of a potential breakup, comparing it to historical cases like AT&T (NYSE: T). They also consider the possibility that Alphabet’s breakup could, in the long term, benefit investors if the individual companies perform well. The discussion concludes with plans to revisit the topic after the launch of Apple’s AI-enabled iOS and the Pixel’s performance in the market.

Transcript:

So our friends at Google, who the government has now deemed are monopolists in the search area.

Parent company, Alphabet.

We don’t know what’s going to happen there.

Obviously, it’s a federal case.

There are hundreds of billions of dollars in market cap at stake here.

We don’t know how long the appeal will take.

But ultimately, if the government prevails, it appears based on news reporting that they will ask Google to be broken into pieces.

And we don’t know what the pieces are, but we’ll get to that in a second.

While all of this is going on, Google, like Microsoft, many years ago, moved from just being a software company to being a hardware company.

Microsoft has PCs and game consoles.

You’ve got what’s called the Pixel at Google.

Right, that’s their phone.

They wanted it to compete with the Apple iPhone and the Samsung phones because the two of them, except for in China, they own the market.

They’ve never had any success.

I think we can just say that right up front.

So they just launched something called the Pixel 6.

They try to be like everybody else and they’ve got generations.

They put the number on there.

Sure.

They’ve got four models.

One of them has a folding screen.

And right now, Samsung has a folding screen too.

We’re back to the 90s?

We’re back to the folding screen 90s.

Now, here’s the thing.

It does have the secret sauce of Google’s best AI functions that would be used by…

It’s not carrier class like, you know, you’re at GM and that’s what you’re going to use.

But what they’ve done is they’ve done what Apple is saying now that they will do.

They haven’t done yet for the public.

And that is they’re going to have super duty AI functions on this.

So Google’s beating Apple out of the chute on this right now.

And I think if the thing does well, and it will be hard because their market share is very low with the Pixel.

It is going to be because the AI part of this product is extraordinary.

Yeah, and it would be interesting to see if this could be the catalyst for the Pixel and the Gemini AI and all that.

What if this could be a catalyst and Apple really does lag with their AI application, which as we’ve discussed, you know, ad nauseum will not be out until the OS 18 drops, which will be after the iPhone 16 is out.

So what if it did catch a big consumer buzz?

And the Pixel has always been cheaper.

It is an inexpensive product.

So let’s look at it for a second.

One of the reasons people do not buy Pixels is because they run the Android operating system.

There’s nothing wrong with the Android operating system, but since most people own an iPhone, they are used to the Apple iOS.

Apple has done a great job of making that the most consumer-friendly of all the operating systems in the world.

If you’ve used an iPhone and you move over to an Android-based smartphone, it’s not like, you know, turning on a switch in terms of making use of it.

Yeah.

Yeah.

It’s not like switching SIM cards.

Right.

So one of their challenges is to get people from Apple.

Samsung has a similar iOS.

So maybe you could get some of the Samsung people, but look, they really want iPhone people to come over because that’s, that’s the big win for them.

I think it’s very difficult for them to win here.

Brand, most people don’t even know what the Pixel is, number one.

Number two, an iOS that may be just as good in terms of what it can do, but not something people are familiar with.

The potential win, as you said, is you get some buzz because the AI applications on this are so huge.

But wait, if there is a breakup of Alphabet, the search function is almost certainly going to be separated from the OS function, which is absolutely separated from the browser function.

So you could end up with three companies.

The lead products are search, operating system.

If that happens, we can’t be absolutely sure how things go with the Pixel.

So I don’t think most people think about an antitrust case when they buy a product, but this is one of those rare cases where I would.

Yeah.

And, you know, like we have discussed in past discussions, this is not good for them.

They’re not going to just say, oh, OK, well, we’ll do this and that, because, you know, in addition to them just being caught censoring data from Trump’s assassination, you really can’t do that in this day and age.

And Elon Musk has proven why.

So you have to think that they’re going to really, the DOJ is really going to try to tear them apart.

I think they’re going to take a really solid swing on this.

And the only thing they may be able to do is to say, is to acquiesce and say, okay, we’ll, we’ll split it up.

Well, you have to remember, and you do, this almost happened to Microsoft.

It was very close.

Yeah.

It was within days and Microsoft knuckled under on a couple of things.

And if you go back further than that, it did happen to AT&T.

AT&T, right now people think of AT&T as being basically a cell phone company.

AT&T at one point was the telephone company for the whole United States.

The entire United States.

There was no competition.

The phone company.

And they had something called Bell Labs, which meant that they also had the premier R&D operation for things that had to do with telecom.

Now, what happened was, is that they were deemed a monopoly and they were broken into seven regions.

Okay.

And then there was separately from that, they had the research arm and they were, you know, the U.S. West and Bell South and Southwestern.

And some of those reemerged.

But what was at that point, probably one of the three or four largest companies in the United States was shattered into ten pieces by the federal government said, you’ve got to fix this.

And the fix was the company was literally shredded.

So worst case for Alphabet right now is they end up being three or four companies instead of one.

And when that happens, you lose all your leverage, right?

One of the things that happens right now is when you download the Android, it’s got the Google search and the Gita all bundled together.

And for search, you know, they call up Apple and say, we’ll give you billions of dollars to be, you know, on the…

And all of that leverage, most of that goes away.

So this is a conversation we’re having about whether you buy a Pixel or not, but the ramifications for Google right now, the Pixel is in the press a lot for the next few days, but that ain’t what’s going on.

The Pixel is, is got a backseat to something that I would guess is going to play out with the…

You know, with what you get with federal appeals, it’ll probably play out over the next year or two.

But I would say this.

Forget how well the Pixel does, unless it’s ludicrous.

Doesn’t matter.

Didn’t move the needle anyway.

If you’re an investor in Alphabet right now, the play is the federal courts.

That’s it.

You’ve already got all the search.

You’ve already got all the search.

Yeah, and Alphabet’s just been absolutely hammered this year compared to the other magnificent seven giants.

And…

Be careful, investors.

Be careful here because this could be a value trap at one point, which it doesn’t seem like because it’s such a gigantic company.

But it barely moved on the Pixel news and the product news.

People don’t care and they know what’s on the burner.

Yeah.

Well, I’m going to make one last comment about this, which obviously you can decide to refute.

One of the things that happened if you did the right trades is when AT&T was broken up, you had ten dollars you got…

It was broken up so you…

Right.

…dollar this one a dollar that would it…

Right.

There is a chance that if…

If Alphabet was broken into pieces and you took the whatever the stock price was that day when you got the distributions of all the shares in the companies, there’s a chance that some of these will perform well.

And if that is the case, it may be that if you hang on to all, you know, the stock in each of these units, you might do better than if you owned Alphabet.

So I wouldn’t simply say you lose out if Alphabet gets broken up, but you’re taking the risk of whether or not the pieces do better than the whole.

I think that is a very, very good thought.

And it would have been the case had you held all those bells, those baby bells as they split up, because they either merged or got bought out or you know, where the 10 went to six or whatever is still kind of out there, you know?

So, yeah, I think you’re right because I mean, Android alone is huge, you know, and it’s, and the, the younger gaming people, especially who game on their phones and, you know, game on their, on their laptop type of stuff, they like the Android system because apparently they…

For the young, it’s much more adaptable than the Apple OS.

So yeah, I think you’re right.

I think Android alone as a standalone could be worth a lot of money.

Well, you want to stay tuned.

It may be a year or two, but if you think about this, if there is a breakup, as we get closer to it, every analyst on Wall Street who wants to get a little PR or thinks they know what they’re talking about is going to start to tell you what each piece is worth.

Yeah, we’re going to be recommending to you whether or not you hold that share in Alphabet the day before the breakup or whether you sell it that day.

So we’re not going to wait that long to come back to this.

I think let’s do this.

Pexels coming out, iPhone comes out, gets the new AI enabled iOS.

So let’s get back together when both of them have been launched and Apple has launched its AI.

So both of them have everything in the market.

Let’s come back to this then and see how the two did.

Yeah, I think that’s a good idea.

And, you know, they’ll be out in September with the 16, but the, you know, when the 18 iOS comes out, I guess we’ll find out then.

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