How Much Is Google Willing to Gamble in Its Staredown With the EU Competition Commissioner?

It’s odd to see how the US business press has underplayed the significance of a June 27 ruling by the EU competition minister Margrethe Vestager, which imposed fines of €2.4 billion (roughly $2.7 billion) against Google for anti-trust abuses in merely one aspect of its business, that of its shopping comparison service. The ruling also stipulated that Google make major changes to these services or face even larger fines for non-compliance (emphasis original):

Google has to respect the simple principle of equal treatment in its search results for its own comparison shopping product and rival comparison shopping products. Google has to apply the same processes and methods to position and display rival comparison shopping services in Google’s search results pages as it gives to its own comparison shopping service.

The underlying issue is that while it’s perfectly OK to be a dominant player, it’s not permitted to engage in “abuse of dominance”.

This week, the EU should get a preliminary indication of how much Google is willing to adhere to the anti-trust action. Google is coming up to the first milestone, a deadline when it is required to tell the EU what it will do. From Bloomberg:

Google faces a Tuesday deadline to tell the European Union how it plans to comply with an order to stop discriminating against rival shopping search services under threat of new fines that would add to a record 2.4 billion-euro ($2.9 billion) penalty.

The EU gave the Alphabet Inc. unit 60 days to propose how it would “stop its illegal content” and 90 days to make changes to how the company displays shopping search results when users start seeking a product. Those changes need to be put in place by Sept. 28 to stave off a risk that the EU could fine the company 5 percent of daily revenue for each day it fails to comply.

Mind you, even though this sounds urgent, this is the opening gambit in what is almost certain to be protracted arm-wrestling. And as we’ll explain, Google has no good options. Cooperating in large measure with the EU would be devastating to its business model. But fighting the EU in court and losing would be even more catastrophic.

Google’s response tomorrow will given an initial indication as to how it intends to proceed.

For those who don’t care to read the EU’s terse and well-written description of the legal foundation for its sanctions, the Financial Times gave an overview:

The commission found Google “systematically” gave prominent placement to its own in-house service, and demoted rival comparison shopping services in search results, so “even the most highly ranked rival service appears on average only on page four of Google’s search results”.

Mind you, the EU report found that results after page one got only 1% of total clickthroughs. You might as well not exist if you don’t appear on the first page. Again from the pink paper:

The ruling defines a new type of anti-competitive behaviour, stipulating that companies with a dominant market share cannot favour their own adjacent products or services. It may mean that Google no longer has a free hand in giving preference to its own services in search results….

European companies Tuesday’s decision would open the door to civil cases from hundreds of businesses that lost revenues after they were demoted on Google’s search results…

The decision could set a precedent for other industries that have complained of Google’s growing influence over the internet. Media companies said technology platforms and content companies would have to “build a fair and healthy ecosystem”.

Even worse for Google, the Commission ordered Google to change its practices in 90 days so as to end the abuses, or it would be subject to additional fines of up to “5% of the average daily worldwide turnover of Alphabet, Google’s parent, with any payment backdated to when the non-compliance started.”

Bloomberg reported on the day the fine was imposed, Google was in damage control mode, which suggests it wasn’t prepared for the outcome, perhaps the magnitude of the sanctions.

And this case isn’t the end of Google’s EU antitrust woes but just the beginning. Google engages in similar self-favoring practices across its lines of business. If the logic of the EU ruling were applied elsewhere, the search giant would have to radically revamp its business model and would almost certainly see a huge dent in its profits. As Bloomberg noted in June:

“The shopping reasoning applied to other services would totally impact Google’s business model,” said Ombline Ancelin, a lawyer at Simmons & Simmons in Paris. The decision means other specialized “vertical” Google search services such as maps, travel and restaurant reviews are effectively “on parole,” she added.

Bear in mind that the EU already has investigations underway for abuse of dominance with respect to Google’s Android and Adsense businesses.

But even though the issuance of fines would seem to be a watershed event, there is still a lot more likely arm-wrestling. First, Google is expected to challenge the ruling in court. Intel claimed to be “mystified” about what it should do about €1.06 billion of fines levied for anti-competitive rebates on sales of its chips. Intel expects to get a court ruling on September 6.

Vestager appears to be taking the tactic of greatly increasing the risk to Google if it doesn’t make a reasonable effort to comply via being explicit that the magnitude of additional fines could be deadly. At current revenue levels, 5% a day is $12 million, or over $4 billion a year. Admittedly, any additional fines would be a separate EU case. However, if Google were to play the high-stakes game of no or minimal compliance, and the EU Commission were to take Google to court and win, that would make the follow-on case of additional fines a slam-dunk. The issue would be how much Google should pay, not whether additional charges are warranted.

So it would seem that Google has to make at least some effort at playing ball with the EU because the downside could be catastrophic. And it can’t rely on the EU courts stepping back from issuing a ginormous fine against Google down the road, since US tech companies are already regarded with considerable suspicion in the wake of the Edward Snowden revelations and relations between the US and Europe are cooling considerably.

But the conundrum for Google is that meaningful compliance would whack its profits. And the EU is getting expert help so that it will be hard to fool them. From Bloomberg:

Regulators sought technical help in June to evaluate how Google complies with the order, setting a budget of up to 10 million euros to pay for experts in search engine optimization and search engine marketing.

Google may foot-drag simply out of the expectation that it can draw the matter out beyond Vestager’s time in office as EU competition chief, and that her successor might be more accommodating. But it’s not prudent to hope for a deus ex machina when the stakes are this high.

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