Of the 261 acquisitions Alphabet Inc. — Google, to most of us — made between its 1998 founding and February of this year, just 10 were in excess of $1 billion in value. The largest of these, its 2011 purchase of Motorola Mobility for $12.5 billion, was double the value of its next largest purchase.
So, when the company announced in March it would pay $32 billion to buy the New York-headquartered cybersecurity startup Wiz, it took many by surprise. Not only was the magnitude of the deal out of character for the Silicon Valley tech firm, but the deal’s massive wager on the future of cybersecurity and cloud technology was multiples of the prior investments it had made in the sector.
The market seemed uncertain what to think of the deal. While trading in Google shares jumped 38.2 percent on the day the deal was announced, its value fell a seemingly inconsequential 2 percent from its $2 trillion market capitalization.
Investors may have been given pause over concerns about how federal regulators might respond to the deal. Google, after all, is the current target of antitrust and anti-competitive legal actions on four continents, and seemingly for good reason. In a U.S. case considering the company’s search engine and search advertising markets, Judge Amit Mehta of the U.S. District Court for the District of Columbia emphatically ruled in August that “Google is a monopolist, and it has acted as one to maintain its monopoly.” To make its point, the court noted the company’s control of nearly 90percent of all online searches in the United States in 2020, and 95 percent of all searches from mobile phones. Its next-largest competitor, Microsoft, had just 6 percent.
Since the Wiz deal’s announcement, the U.S. District Court for the Eastern District of Virginia added fuel to investors’ concerns when it, too, ruled the company was operating as a monopoly. In a postpartum analysis of that decision, the New York law firm Simpson Thacher wrote that “the court found Google liable for monopolizing both the market for open-web display ad exchanges… and the market for ad servers used by website publishers.” If that weren’t enough, the court ruled the company also linked its DoubleClick and AdX products to enhance its position. The U.S. Justice Department seeks divestiture of both.
Alone, neither Google Cloud’s nor Wiz’s cloud and cybersecurity businesses are listed among the top industry players. It remains to be seen whether the U.S. government can or will be able to try blocking Google from absorbing Wiz.
The DOJ will have to consider how Google’s market clout, internal funding, marketing know-how, and AI experience might develop when joined with Wiz’s easy-to-use platform and access to all major clouds and code environments. Among other things, the companies have highlighted their ability to lower the cost of implementing and managing security controls as a result of the acquisition.
The DOJ may have other factors in mind when it considers how to handle this deal. Several federal government agencies — as well as many major U.S. companies — have endured significant security breaches in recent years despite high-dollar cybersecurity precautions. Most notable among these was the 2019 attack on SolarWinds’s cybersecurity software by Russian actors. The company’s updates were found to have a further critical security flaw five years later. But SolarWinds is not alone enduring such attacks: Microsoft, Oracle Cloud, and IBM Cloud, all have reported security flaws that led to security breaches for their clients.
In light of these experiences, the Justice Department should give special consideration to how Google abused its monopolization power within its search and advertising businesses. The company was so secure in its control in 2020 that it conducted a three-month experiment testing the price elasticity of its search function, concluding that reducing the quality of its search results would not negatively affect its revenues. Rather, reducing the quality of searches may ultimately improve advertising revenue as searchers are forced to stay on the Google site longer to find the higher-quality search results they originally sought.
This, the court maintained, was further proof of its monopoly power: “Just as the power to raise price[s] ‘when it is desired to do so’ is proof of monopoly power … so too is the ability to degrade product quality without concern of losing consumers.”
This kind of recklessness is hardly a glowing endorsement for a company seeking to protect the intellectual property and trade secrets of commercial enterprises. It is even more disconcerting when it seeks to protect national security secrets for the U.S. federal government and its allies.
Time will tell whether the Justice Department has firm ground under antitrust law to reject Google’s acquisition of Wiz, it —not to mention other federal agencies — will have grounds for keeping a close eye on the company if the deal is ultimately approved.
