Alphabet's Historic Antitrust Ruling 'Credit Negative' For Google's Parent And Apple, Says Moody's: 'May Need To Alter Its Very Profitable Business Model'

Alphabet, Inc. GOOGL GOOG faced a setback this week after a U.S. District Court judge ruled the company engaged in unfair business tactics to dominate the internet search advertising market. Following the ruling, credit rating agency Moody’s said it sees the development as a credit negative for the company.

Ruling’s Ramification: Alphabet may need to alter its “very profitable business model” that made it a dominant force in targeted advertising, Moody’s said in a report published Wednesday. The magnitude of the changes may not be evident until the trial’s remedy phase, it said.

“We think the court could impose a range of remedies with varying effects on Alphabet’s financial and business model,” Moody’s said. It noted that the Department of Justice argued that Google paid billions a year to wireless phone, software and hardware companies for them to have Google as the default search engine on their products. To make its case, the rating agency noted the deal Alphabet has with Apple, Inc. AAPL for Google to be the default search engine on iOS devices.

Analysts estimate that Alphabet may have paid Apple $20 billion in 2022 for this purpose.

Google countered with the argument that it faces intense competition and the secret behind the success of the Google Search is its quality, Moody’s said.

Alphabet's “scale, exceptionally strong credit metrics, robust liquidity and profitability,” will likely mitigate the ramifications of the ruling,” the rating agency said. As of June 30, Alphabet held about $101 billion in cash and short investments, a debt-to-EBITDA ratio around 0.3X, it said.

Moody’s expects Alphabet to generate more than $77 billion in free cash flow this year, and $88 billion by year-end 2025.

The firm expects Alphabet to appeal the decision. In the eventuality of the appeal, the trial may drag on for years, it said.

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Negative For Apple: Moody’s sees the federal court’s ruling as a credit negative for Apple as well despite the tech giant not being a party to the lawsuit. Apple stands to lose out on a highly profitable steady stream of revenue, it said.

“The potential financial implications for Apple will also remain unknown until the remedy portion of the antitrust case is resolved,” it said

Moody’s also noted that other handset makers, wireless companies and browser developers having similar agreements with Google may have to rework the agreements or even terminate them depending on the outcome of the trial.

Alphabet faces other lawsuits in the U.S. as well as regulatory risks in Europe related to “Google’s display and ranking of
shopping search results, distribution agreements related to the Android operating system, and provisions in agreements Google had with AdSense for search partners,” it said.

The European Commission has imposed 8.2 billion euros ($9 billion) in fines, which Alphabet is contesting, Moody’s said, adding that “the primary risk from these lawsuits and regulatory challenges would be an outcome that could materially alter the company’s profitability or business model.”

The company has over 90% share in the online search market and advertising related to search business contributed more than three-quarters of Alphabet’s revenue last year, the rating agency said.

Moody’s has an Aa2 stable credit rating for Alphabet, premised on the company’s leading market position in search, online video through YouTube, mobile operating systems through Android, and digital advertising.

Alphabet ended Wednesday’s session at $158.94, up 0.41%, according to Benzinga Pro data.

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