Will Europe's Privacy Concerns Affect Google?
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Europe is known to have relatively strong consumer protection laws, and a number of countries have threatened Google (NASDAQ: GOOG) with fines in the wake of the PRISM tracking scandal. While talk of enraged European regulators sounds dangerous, it isn't likely that there will be a serious hit to Google's bottom line. France's fine for the street view snooping fiasco was a whopping 100,000 euros--chump change for a company that brought in $3.3 billion in total net income last quarter.
What Is the Worst that Can Happen?
By adding up all of the potential fines, Google is facing a total bill of a couple million Euros, nothing more. The United Kingdom has changed its cookie law and tried to make consumer's rights clearer, but websites in the country continue to operate perfectly well. Google is very profitable in the United Kingdom, with a market share around 90%, and it is not like things will change any time soon. On a separate note EU antitrust regulators have required Google to change how it displays some of its results, but these changes are not monumental.
There is a good chance that Microsoft (NASDAQ: MSFT) won't be left out of the party. Its Bing search engine is nowhere near as prevalent in Europe as Google, but PRISM is reported to be involved with Microsoft. If the company is fined a couple million Euros it won't be a big hit for the company, as its total net income of $6 billion last quarter.
If anything, Microsoft may benefit from tighter European data privacy laws vis-à-vis Google. Google runs massive third party ad networks with its Adsense program. Microsoft has no expansive ad network like Adsense and it is less exposed to the online advertising market. In 2012 Google made net digital ad revenues of $32.7 billion dollars while Microsoft made $1.7 billion. To increase its Adsense revenue, Google collects as much user data as possible and then sells ads based upon these profiles. If Europe significantly decreases the amount of data that companies can collect, Google could see its revenue fall. For the time being this is just a distant possibility.
A Possible Winner in the Midst of the PRISM Scandal
Yandex (NASDAQ: YNDX) is the most popular search engine in Russia. By focusing on the Russian market and developing a quality local search experience, it holds a market share around 60%. With the Cold War still relatively fresh in the Russian government's mind, Russian American relations can be very chilly. Although the cold war might be over, the Russian government is doing all that it can to push the U.S. out of Eurasia. In fact there is talk of a Eurasian Union, and Russia is very excited to regain some of its former strength.
If the Russian government feels that U.S. companies like Google and Microsoft are a national security risk due to their invasive data collection practices, there is a good chance that Putin will make new laws that favor non-U.S. firms like Yandex.
Yandex's financials are backed up by strong product growth. It released its own browser and operates one of the larger alternative Android stores. Also, in the mobile sphere Yandex is the default search engine on all Windows 8 devices in Russia, Turkey and the CIS states. The company has no debt, a profit margin 29.8%, an earnings before interest and taxes (EBIT) margin of 38.2% and a return on investment (ROI) of 23.5%.
Google's and Microsoft's financials are not weak. Google's profit margin of 20.9%, EBIT margin of 25.3%, and ROI of 14.3% are lower than Yandex's, but still strong. Microsoft isn't as dependent on the internet and it has a profit margin of 21.6%, an EBIT margin of 28.9% and a ROI of 18.5%. Overall Google and Microsoft are two profit tech giants, while Yandex is the smaller and higher margin player.
Europeans don't like the idea of America's PRISM program, but they are only threatening big tech companies with fines of a couple million euros. For tech giants like Google and Microsoft these fines are minuscule and will have little material impact. In the wake of recent privacy allegations the Russian search engine Yandex may be the real winner. Given the Russian's governments aggressive stance toward the U.S., it is very likely that it will introduce policies that favor local firms and hurt U.S. firms with strong ties to the NSA.
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Joshua Bondy has no position in any stocks mentioned. The Motley Fool recommends Google and Yandex. The Motley Fool owns shares of Google and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!