The Trump administration sued Google on Tuesday in what is the largest antitrust case against a tech company in more than two decades.
At the heart of the government's lawsuit is a secretive deal under which Google allegedly pays billions of dollars a year to Apple to ensure that its search product is the default on iPhones and other Apple devices. Google has similar agreements with other companies, but the size of the Apple deal makes it especially crucial to the search giant.
The deal: Google CEO Sundar Pichai and Apple boss Tim Cook, met in 2018 to discuss how their companies could work together to drive search revenue growth, according to the DOJ. A senior Apple employee wrote to a counterpart at Google following the meeting: "Our vision is that we work as if we are one company."
What Google gets: The agreement covers roughly 36% of all general search queries in the United States, according to the DOJ. The suit also claims that almost 50% of Google's search traffic originated on Apple devices in 2019.
Very few people change their default search engine on Apple devices. Google is then able to monetize all those eyeballs.
What Apple gets: In exchange for access to its massive user base, Google pays Apple billions of dollars a year in advertising revenue. Apple may be getting $8 billion to $12 billion annually, according to the suit.
Big deal: The arrangement is so important to Google that losing it would be a "Code Red" situation for the search giant, the DOJ said.
"Google pays Apple billions to be the default search provider, in part, because Google knows the agreement increases the company's valuable scale; this simultaneously denies that scale to rivals," the suit argues.
Google has described the DOJ suit as "deeply flawed."
"People use Google because they choose to, not because they're forced to, or because they can't find alternatives," Kent Walker, the company's senior vice president of global affairs, wrote in a blog post.
"Like countless other businesses, we pay to promote our services, just like a cereal brand might pay a supermarket to stock its products at the end of a row or on a shelf at eye level," he continued.
Walker also specifically addressed the deal with Apple.
"Our agreements with Apple and other device makers and carriers are no different from the agreements that many other companies have traditionally used to distribute software," he said.
What's next? Justice Department officials did not rule out a breakup of Google on a call with reporters.
"Nothing is off the table," said Deputy Attorney General Jeffrey Rosen, who warned that if DOJ did not file suit now, "we could lose the next wave of innovation" and that "Americans may never get to see the next Google."
The great user boom is slowing at Netflix
The flood of users who rushed to Netflix at the start of the pandemic is receding, my colleague Clare Duffy reports. Shares in the company dipped in premarket trading on Wednesday after it posted slowing growth in new subscriptions.
The company said it added 2.2 million net memberships in the three months ended September 30, down from 6.8 million new memberships during the same period in the prior year. Netflix now has nearly 195.2 million subscribers, lower than the 196.2 million Wall Street analysts had projected.
Netflix posted earnings of $1.74 per diluted share on $6.4 billion in revenue. Analysts had projected earnings of $2.13 per share on revenue of $6.38 billion, according to Refinitiv.
Momentum: Netflix has thrived in 2020 as people were stuck at home during the global health crisis. The company posted colossal subscriber gains over the past two quarters, which helped drive its stock up nearly 70% this year. But there have been questions about whether it can continue that momentum, especially as competition from other streaming providers ramps up.
The company attributed the slowing growth in new memberships during the third quarter to its "record first half results" — suggesting that because so many new customers subscribed during the earlier months of the year, fewer were left for the third quarter. Netflix had initially expected to add 2.5 million new paid memberships during the quarter.
Netflix has added 28.1 million paid memberships during the first nine months of 2020 — more than the total number of new paid memberships in all of 2019. The company said that "retention remains healthy and engagement per member household was solidly up year over year" during the quarter.
Looking ahead: Netflix forecasts adding another 6 million new paid memberships during the final three months of this year. That would bring total new memberships for the year to 34 million, still well above the previous annual high of 28.6 million in 2018.
"The state of the pandemic and its impact continues to make projections very uncertain, but as the world hopefully recovers in 2021, we would expect that our growth will revert back to levels similar to pre-Covid," the company said in a release.
Tesla's bet on China is paying off
Tesla began making cars in China about a year ago to bolster its presence in the world's largest auto market. Now the country is becoming an even more critical part of its global strategy, my colleague Michelle Toh reports.
The electric automaker will soon start exporting Chinese-made Model 3s to markets including Germany, Italy and Switzerland, Chinese state-run news outlet Xinhua reported Monday.
CEO insight: Elon Musk has called the Shanghai Gigafactory, which first began churning out cars in October 2019, a "template for future growth."
Wedbush Securities analyst Daniel Ives said that Tesla's continued operations in China remain "the linchpin to [its] production and distribution."
"Tesla is using this as a strategic advantage to go after other regions and pockets of Europe," he said.
In a research note on Sunday, Wedbush predicted that the company's "shining [Gigafactory] success in China" would help it deliver better-than-expected earnings on Wednesday.
The Chinese auto market is predicted to become even more critical in the coming years. "Ultimately, we see China representing 40%+ of global sales for the company potentially by early 2022," Wedbush analysts wrote.
Verizon, Ericsson, Baker Hughes and Abbott Labs will publish results before the opening bell.
- Chipotle, CSX, Tesla and Whirlpool are up after the close.
- EIA data on crude oil inventories is out at 10:30 a.m. ET