Google faces DOJ probe over Character.AI deal, Bloomberg Law reports

The U.S. Justice Department is investigating whether Alphabet's Google violated antitrust law through its agreement with AI startup Character.AI, specifically examining if the deal was structured to avoid formal merger scrutiny. The probe focuses on a licensing agreement granting Google access to Character.AI's large language model technology and the hiring of Character.AI's co-founders, with regulators concerned about potential anti-competitive effects amidst a broader trend of tech giants forming similar AI partnerships; the investigation is in its early stages and may not lead to enforcement action.

Analysis

The U.S. Justice Department (DOJ) has initiated an antitrust probe into Alphabet's (GOOGL) agreement with AI startup Character.AI, specifically investigating whether the deal, which grants Google a non-exclusive license to Character.AI's large language model technology and involved hiring its co-founders, was structured to bypass formal merger scrutiny. This development contributes to a 'moderately negative' overall sentiment (-0.45) and a more pronounced negative sentiment for GOOGL (-0.7). While Google states it has no ownership stake and Character.AI remains separate, the probe is in its early stages and may not result in enforcement. However, this scrutiny is not isolated; similar arrangements by other tech giants, such as Microsoft's (MSFT) $650 million deal with Inflection AI and Amazon's (AMZN) hiring of Adept AI talent, have also attracted regulatory attention, signaling a broader regulatory concern over competition in the rapidly evolving AI landscape. This investigation adds to Google's existing regulatory pressures, including separate DOJ lawsuits concerning its search market dominance and digital advertising technology, and an FTC-backed proposal for Google to share search data.

Key Decisions for Investors

• Investors in Alphabet (GOOGL) should closely monitor the DOJ's probe into the Character.AI deal, as an adverse finding could introduce new restrictions on its AI partnerships and talent acquisition strategies.
• The heightened regulatory scrutiny extends beyond Google, affecting other major tech companies like Microsoft and Amazon involved in similar AI deals, indicating a potential sector-wide risk factor for investments predicated on aggressive AI expansion through such partnerships.
• Given Google's existing antitrust litigations, this additional investigation amplifies the company's overall regulatory risk profile, potentially impacting investor sentiment and warranting caution regarding its future growth trajectory in AI.