What does Google's $1.4 billion settlement with Texas over data privacy indicate for the online search market?

According to the Zhitong Finance APP, on May 9 local time, Texas Attorney General Ken Paxton announced that Google (GOOGL.US) has agreed to pay $1.375 billion to reach a principle settlement with Texas over allegations of violating user data privacy. In 2022, Paxton sued Google for illegally tracking and collecting user privacy data related to location, incognito mode, and biometrics. A Google spokesperson responded that the settlement resolves a series of "old claims," some of which involve product policies that the company has changed, stating, "We are pleased to put these issues behind us, and we will continue to build strong privacy controls in our services."

The agreement addresses several claims made by Texas against the search giant in 2022, involving geolocation, incognito search, and biometric data. The state alleges that Google "illegally tracked and collected users' private data." For example, Paxton claimed that Google collected millions of biometric information, including voiceprints and facial geometry records, through products and services like Google Photos and Google Assistant.

In a statement, Paxton said, "In Texas, large tech companies cannot operate above the law. For years, Google has secretly tracked people's activities, private searches, and even their voiceprints and facial geometry through their products and services."

Paxton stated that the $1.4 billion is the largest amount that U.S. states have reached in a settlement with Google regarding such data privacy violations. In the past two years, Texas has previously reached two other significant settlement agreements with Google, including a settlement reached in December 2023, where the company agreed to pay $700 million and make several other concessions to resolve allegations that it has been stifling competition against its Android app store.

Meta also agreed to a $1.4 billion settlement with Texas over a privacy lawsuit that accused the tech giant of using users' biometric data without their permission.

Paxton noted that the settlement sends a message to tech companies that he will not allow them to profit by "selling our rights and freedoms."

In the AI revolution, is antitrust accelerating a major reshuffle in the online search market?

This brings to mind a decade ago when Microsoft was under scrutiny from the Department of Justice, a prominent Silicon Valley lawyer proposed a theory regarding antitrust cases: "The trial is the remedy." This theory suggests that forcing monopolists to defend their actions may open up space for other companies (especially newcomers) to innovate in the market.

Just as it is believed that Microsoft missed the shift to mobile platforms due to its intense focus on its antitrust case with the Department of Justice, testimony and internal documents indicate that Google may be lagging in adopting artificial intelligence due to its own antitrust trial.

In the case of Google, testimony and other evidence provided during the second phase of the trial emphasized how artificial intelligence affects its core online search business and opens up new deals for startups Apple's services chief Eddy Cue explained why Apple chose OpenAI's ChatGPT instead of Google's Gemini product to build the new AI search feature for the iPhone. He also stated that Apple is "actively considering" improvements to its Safari web browser to focus on AI-driven search engines. His comments suggest that, despite Google's efforts to protect its dominance in the core search business, AI companies have successfully established a viable alternative for internet Q&A.

Columbia Law School professor Tim Wu referred to this as the "police on the side" effect: when monopolists know that someone is watching their every move, they become more cautious to avoid being seen as suppressing competition. Wu, who served as a competition advisor to President Biden from 2021 to 2023, stated that the whole point of monopoly trials is "to change the status quo."

The second phase of the Google case focuses on how to address the illegal monopoly behavior ruled by a federal judge last year. After closing arguments on May 29 and 30, Judge Amit Mehta will decide whether to break up Google by divesting the Chrome browser or to restore market competition in other ways.

Gail Slater, head of antitrust at the U.S. Department of Justice, stated at a meeting on Friday that the search market has been "frozen" in terms of competition for 20 years. She asked, "How can we unfreeze this block of ice? Of course, the key to all of this lies in scale and data. And this will be crucial for future competition."

Lee-Anne Mulholland, Google's vice president of regulatory affairs, published a blog post after the trial, stating that the DOJ's proposal is "extreme" and would harm industry competition. She said, "During weeks of hearings, we heard from a range of well-funded companies eager to access Google's technology so they wouldn't have to innovate themselves. But what we didn't hear is how the DOJ's extreme proposal would benefit consumers."

Explosive News on Google and Apple Deal

Since 2003, Apple has collaborated with Google in the online search field by setting Google's search engine as the default option on its devices, allowing Apple to earn up to $20 billion annually. Cue was closely involved in the negotiations for this deal—indeed, he testified about it during the first phase of the DOJ antitrust case in 2023. Mehta ruled last year that Google illegally monopolized the search market through exclusive deals, including its relationship with Apple.

However, the iPhone maker chose ChatGPT for its recent AI deal. Although this partnership is not exclusive, Apple has not signed an agreement to add Google's AI language model Gemini to its phones. This week, when Cue appeared in the DOJ's second phase trial regarding how to remedy Google's illegal behavior, he hardly mentioned Gemini.

Cue's performance in October 2023 stands in stark contrast to his previous testimony. Two years ago, Cue's testimony seemed forced and even somewhat awkward, as he was contractually obligated to defend the deal between Apple and Google The U.S. Department of Justice is conducting an antitrust trial against Google, a subsidiary of Alphabet

On Wednesday, Cue's speech was filled with passion as he expressed his excitement about the astonishing power of artificial intelligence, calling it the fourth technological revolution of the past 35 years. During the speech, Cue repeatedly mentioned the AI startups Perplexity and Anthropic's Claude.

Cue seemed to hint at the search survival threats described in Silicon Valley over the past two years. Although the operation of AI chatbots is not entirely the same as that of search engines and cannot fully replicate them, many believe they pose a challenge to the traditional way people use the internet to find information.

Users can now receive instant AI-generated answers directly from the chatbot without having to receive a list of links pointing to various sources on the open web, and the chatbot's responses are drawn from a vast existing database of human-generated content.

In response to Cue's testimony, Google stated that as users shift from text-based searches to voice and image-based searches, the overall number of queries from Apple devices has increased.

Other witnesses believe that the trial against Google has opened up business opportunities for other companies. The sudden resurgence of the search market is not coincidental but rather a byproduct of the Google antitrust case itself. Dmitry Shevelenko from Perplexity clearly stated that without the U.S. Department of Justice's antitrust lawsuit against Google, the recent collaboration between Google and Motorola would not have been successful.

Perplexity's Chief Business Officer Shevelenko stated in his testimony last month that it was only because Google was "under pressure" that mobile manufacturers "agreed to have some conversations with carriers and browsers."

Google worries about its search business being overturned by AI

In fact, even before the U.S. Department of Justice launched an investigation into Google in 2019, it had already identified the key technologies behind the large language models that today's AI startups rely on. The government argues that because Google holds a dominant position in the market, it has not fully leveraged this innovation. It wasn't until November 2022, when OpenAI's ChatGPT took the world by storm, that Google truly began to integrate it into its search engine.

Google insists that it invests billions of dollars in innovation each year and is waiting to launch AI features so that it can do so responsibly.

Wu stated, "For monopolistic companies, innovation is difficult because they fear that innovation may erode their revenue." He pointed out that, for example, AT&T's (T.US) innovation division, Bell Labs, invented dozens of practical technologies, including the answering machine and the technology behind mobile phones. However, AT&T refused to bring these technologies to market, fearing that people might reduce their use of landlines.

The same "fear of ending that model" is also evident in Google's internal documents regarding AI. In a meeting record from October 2024, Google executives pressured the Gemini team, inquiring about the impact on Google's search and advertising business and when they could start integrating ads into AI applications Google's Vice President of Ads and Commerce, Vidhya Srinavasan, told the panel: "We have not yet lost search/ad traffic, but she believes it is inevitable, and we should prepare for the success of Gemini. She hopes to accelerate Gemini's profitability through advertising as soon as possible... 'This is an ominous sign.'"

Google stated that the company has not yet found AI encroaching on its search business, with only a small portion of homework and coding queries changing