The EC has initiated a search for a third party to advise and monitor Alphabet Inc.'s (NASDAQ:GOOGL) implementation of changes related to the EU Comparison Shopping ruling. The "Call for Tenders" provides more visibility on potential changes to Google Shopping needed to avoid additional fines. Given the popularity and functionality of Product Listing Ads (PLA) and EC commentary, Bank of America Merrill Lynch believes some integration of competitive listings with PLAs is likely. If the firm assumes 20-30% of Google's revenues are eCommerce-related, 50% of those PLA-related, and 33% of those in Europe, the EC shopping changes could impact up to 5% of Google's business, although it anticipates some workarounds and a smaller impact.
The EC committed up to EUR 10mn for the implementation and monitoring contract covering up to eight years. The EC is specifically considering experts in search engine optimization, search engine marketing, and statistical and economic analysis, with initial requests to participate due July 21. The final party selected will be tasked with advising the EC on monitoring, analysis, and other elements with regards to Google’s subsequent implementation of the EC ruling.
The Call for Tenders suggests Google may be able to keep the PLA ad format, but some click share loss is possible as Google likely will need to share PLA space with competitors. Also, Google may need to disclose processes and methods for triggering and ranking the shopping unit (Google probably will not like as rankings are the secret sauce). Finally, Google will need to disclose the determination of the fee for display of competing comparison shopping services in the Shopping Unit (BAML is still not sure if Google will be allowed to generate listing fees from other shopping comparison listings in PLAs, but see this language as a positive).
The firm continues to expect Google to appeal the EC ruling, which may delay implementation of changes to Google Shopping. While regulatory challenges could remain an overhang for years to come (shopping compliance plus two remaining EU cases), BAML expects only modest impact on revenues and Alphabet’s valuation multiple. At 18x 2018E core GAAP EPS (the firm has not updated 2017 estimates for the $2.7bn fine), it believes valuation remains attractive.