• Alphabet (GOOG, GOOGL) is going to allow Spotify (SPOT) to run its own billing from their Google Play downloads
• Alphabet and other gatekeepers are facing similar rule changes and pressure from an EU Digital Markets Act (DMA)
• Don’t get too worried about the effect on Alphabet’s revenue: “Other” revenue is less than 11% of Q4, and this also included wearables and YouTube non-advertising revenue

Alphabet (NASDAQ:GOOG, GOOGL) announced on Wed. March 23, that it will allow Spotify (NYSE:SPOT) to run direct billing from customers who elect to be billed by Spotify. Their Spotify subscriptions from a future Spotify Android app download would allow Spotify to run billing. There is no indication GOOG stock will be hurt from any changes of the normal Google Play 30% revenue take (15% on the first $1 million in revenue).

However, during the same week, on Friday, March 25, the E.U. passed the Digital Markets Act (DMA). The DMA rules will do something similar with Alphabet and other “gatekeeper” tech companies. The Wall Street Journal called this the “most sweeping pieces of technology-regulation to go into effect next year.” It covers the app ecosystem, online shopping and online advertising, and will generally force Alphabet and Meta Platforms (NASDAQ:FB) to allow non-direct billing.

The DMA will also affect search rankings prohibiting Google and companies like Amazon (NASDAQ:AMZN) from ranking their own products and services ahead of those offered by smaller competitors in search results.

Will This Be a Big Deal?

As for the Spotify deal, it seems clear that this will not have too large an effect on the company’s ongoing and future revenue. The reason is that Google Play is only one part of the “Google Other” component of Alphabet’s revenue.

For example, the latest earnings release for fourth-quarter 2021 showed that “Google Other” revenue was $8.161 billion out of a total of $75.325 billion for the quarter. That works out to 10.8% of the total revenue.

However, page 30 of the 10-K report for 2021 shows that this category also included Devices and Services, as well as YouTube subscription and hardware revenue (non-ad-based sales). Page 34 of the 10-K says “Other” revenue growth was driven by YouTube first, then Google Play app and in-app purchases, then wearables and phones.

So, even if Google Play took up to 40% of the total, its effect on sales is still less than 5% of the total (i.e., 0.40 x 0.10834 = 0.o43). Moreover, this change might reduce the Google Play “take” revenue. Let’s say that all the “take” revenue falls by one-third from 30% to 20%, that is a 10% reduction of a 4.3% portion of sales, or about 0.43% of sales (less than one-half of one percent). That could easily be made up for with higher growth in bottom-line sales.

The Effect of the DMA on Sales

However, the DMA search ranking issue could be more problematic. On Jan. 19, 2017, The Wall Street Journal reported that Google used its search to “hawk” its own products and often ranked them higher.

If that has continued, it could have given the company an unfair advantage somehow. However, again, we have to keep this in proportion. Wearables and phones have the smallest portion of the “Google Other” category. And the “Other” category itself is less than 11% of revenue.

At best it is probably no more than 25% of 12% or 3% of total sales if that. And this relates to the change in revenue. So it probably affects only half of that amount at best or 1% to 1.5% of total sales.

Where This Leaves Investors in GOOG Stock

In my last two articles, I pointed out that Alphabet makes a huge amount of free cash flow (FCF). These revenue model issues won’t likely even go into effect in a full manner until next year. So it will not affect FCF very much.

And even if they do, Alphabet’s natural growth rate will likely cover up any of the detrimental effects. If GOOG stock dips as a result of these points, value investors should take advantage of the bargain price.

On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.