What’s at stake in the Google/Epic Games fight

Tech giants are accustomed to embracing regulatory risk — but investors may be realizing that the latest developments facing Alphabet’s Google (NASDAQ:GOOG) (NASDAQ:GOOGL) might have a more serious bite.

Alphabet stock was mellow near the flat line Tuesday, but shares fell 2.5% Monday after a judge ruled that for the next three years in the United States, Google must allow developers to bring their own app stores to the Android mobile operating system, to rival Google’s own Play Store.

The judge’s ruling also established that Google must otherwise allow Android apps to be downloaded from other sources, and banned the company from blocking in-app payments.

The ruling is a follow-on to last December’s victory by Fortnite maker Epic Games, who had pursued Google in an antitrust case claiming that Alphabet ran an app store monopoly on Android. In that case, the jury sided with Epic on the issue that a 30% cut of user payments was high, and that Google was striking side deals with rivals to fend off competitive efforts.

Google is appealing the new ruling with the stance that there’s clear competition between Google and Apple (AAPL), and the changes to the app store “put that at risk and undercut Android’s ability to compete with Apple’s iOS.”

In a separate case, Google (GOOG) (GOOGL) and Alphabet investors are awaiting recommended remedies from the Justice Dept. after Google was found to have monopolized the search market.

What’s the impact of the new Epic Games-related injunction? At the heart of the dispute isn’t just abstract app freedom — but the cut that Alphabet extracts from user payments in the Play Store (settling between 15%-30% of payments). Those payments have been estimated to make up some 20% of Alphabet operating income, or close to $1.5B in total.

Epic Games is majority owned by its CEO Tim Sweeney, though Tencent (OTCPK:TCEHY) maintains a 35% stake and Sony (SONY) a 5.4% holding.

From Sweeney’s perspective, a three-year window (assuming it holds up on appeal) in the U.S. “means all app developers, store makers, carriers, and manufacturers have 3 years to build a vibrant and competitive Android ecosystem with such critical mass that Google can’t stop it.”

Alphabet (GOOG) (GOOGL) stock has risen 17% in 2024 — but it’s 15% off its 52-week high from July. The company reports its Q3 earnings later this month, with analysts forecasting earnings per share will rise nearly 19% to $1.84, on revenue growth of 12.5% (to $86.28B).