Google is taking a risky, aggressive posture in dealing with a massive anti-trust fine in one aspect of its business. Some background from an August post:
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…
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.”….
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.
Google did submit a proposal to the EU competition authority by the deadline. However, in a story broken by Reuters today, it appears that Google is merely going through the motions: it is complying procedurally, but not substantively. Reuters, which broke the story, gave it an astonishingly, and almost certainly inaccurate, pro-Google headline: Exclusive: Google offers to treat rivals equally via auction – sources.
As the article explains, Google offered a variant of this very same remedy in negotiations with the predecessor to competition minister Vestager, who also was less vigorous in anti-trust enforcement. As Reuters explains, that proposal was not accepted, which led to the €2.4 billion fine. Google’s competitors argue that the new scheme is even worse:
In its proposal submitted to the European Commission on Aug. 29, the company said it would allow competitors to bid for any spot in its shopping section known as Product Listing Ads, the sources said…
Google, whose parent is Alphabet Inc, sought feedback from four to five competitors and it was overwhelmingly negative, the sources said.
The adverse reaction could undermine Google’s efforts to win over EU antitrust regulators.
Three years ago, the world’s most popular internet search engine made a similar offer in an attempt to settle a long-running investigation by the Commission and avoid a fine. That was ultimately rejected following criticism from rivals and discord within the EU executive.
Under that proposal, Google would reserve the first two places for its own ads. The new offer would also see Google set a floor price with its own bids minus operating costs.
The offer does not address the issues set out by EU competition regulators, the sources said.
“This is worse than the commitments,” one of the people said, who requested anonymity.
The European Commission said the onus was on Google to comply with its cease and desist order.
If you listen to an interview with Verstager on Bloomberg yesterday, she gives a measured explanation of what is actually a pretty tough position. Starting at 10:10:
EU Competition Commissioner Margrethe Vestager: It remains to be seen how Google will live up to this…We got a first draft of what they were thinking…I think it was about two weeks ago. We got a broad outline about what they are thinking. But the thing is it’s not up to us to approve. It is for Google to find a way to live up to the decision. And this is of course is very important. If Google does not live up to the decision, then we will start investigating, “Well, what is the situation, and is competition still harmed, so that consumers would have lesser choice than they would otherwise have?”
Interviewer: So come the 29th of September, or however many days after, you’re not satisfied. When does fining start? When do you begin to calculate and assess fines against Google if they haven’t met the burden you would like them to meet?
Vestager: Well, actually we can backdate the fines, so it can start from the first date we can find that there’s been noncompliance with the decision. So, for example, if we find competitors complain, consumers may complain, “Well, this was not what it was supposed to be,” if we find reason, then we will start investigating, we can pre-date the fines if we find there was a breach of following up on the decision.
Mind you, this is consistent with earlier reports, but may make the process a bit clearer to readers.
1. Google was already expected to start complying as of the date of the ruling and the competition commission put Google on notice that it was prepared to levy massive additional fines in the case of non-compliance.
2. Google was also required to tell the competition minister how it was going to comply. I may be reading too much into Vestager’s comments, but the “first draft” comment may indicate that Google’s plans are sketchier than they ought to be.
3. It does not appear that the EU competition commission can saddle up on its own to go after a company in the absence of complaints, but given how vocal the companies that have been hurt by Google are, this procedural distinction is unlikely to make much practical difference.
So by not complying to a significant degree, Google is risking being hit with potentially even bigger fines from the date of the decision. Admittedly, the formalities of the process of issuing additional fines would probably take years, but massive fines are still massive fines. Yet Google’s proposal looks a lot more like it is thumbing its nose at the EU rather than trying to comply. If the critics are right and this plan is worse than the plan Google offered up in 2013, this is Mafia-style negotiating when Google is no position to make the EU an offer it can’t refuse.
I can come up with only two guesses: either Google is making a massive bet on being able to win in court or it is suffering from Brexit-level delusion. Note the two are not mutually exclusive.
Google also appears to be relying on American “talent,” as in former US diplomats, to act as its strategists; you would expect a Bloomberg article yesterday on a shakeup of its policy team to mention senior Europeans if there were any. That sort of provincialism may be contributing to Google’s potential mis-assessment of its downside. Google, which is an arm of the US security apparatus, may have been relying unduly on being able to pull strings in Washington and having its allies lean on European officials. That strategy became less workable after the Snowden revelations.
Google, as it said it intended to, filed an appeal against the fine in September, after the date when Google submitted its proposal to the EU competition commissioner. Mind you, it is perfectly reasonable to pursue two strategies at the same time, that of trying to get the decision reversed and that of trying to stop or reduce further damage by complying. But as we noted, it’s hard to see the Google proposal as anything more than going through the motions.
TechCrunch pointed out that Intel got a ruling from the ECJ that might help Google. But note this decision came down after Google filed its proposal with the EU competition commission, so it can’t have informed that action. From TechCrunch:
In June the EC judged that Google had given the service “an illegal advantage by abusing its dominance in general Internet search” — accusing it of promoting Google Shopping in organic search results while simultaneously demoting rival services — issuing a record-breaking €2.42 billion (~$2.73BN) fine for the antitrust violations.
It’s that decision which Alphabet/Google will be hoping to overturn, buoyed by the fact that earlier this month Europe’s top court, the ECJ, ruled that a lower court should review an earlier failed antitrust appeal by Intel, pertaining to a 2009 €1.06BN EC ruling.
In the Intel case ECJ judges said the lower court must re-examine their decision to uphold the antitrust judgement — saying the court had failed to properly analyze economic aspects of the case.
And while the two cases are clearly different — and the Intel verdict remains a partial one at this stage (the sanction has not been overturned as yet) — it’s certainly unusual for Europe’s courts to rule against Commission verdicts, offering some hope to Google’s lawyers they can successful argue against the regulator’s rationale.
Notice that the interpretation of the ruling is a tad optimistic. The ECJ did not overturn the competition commission’s ruling against Intel. It told the lower court to review its decision. That may lead to a lowering of the fine, but it might also lead to the court redoing its analysis in a way that addresses the ECJ’s objections. I hope lawyers familiar with civil law procedure will pipe up as to whether this analysis could include making additional findings of fact.
As a very savvy lawyer once told me, “Anyone who tells you the odds of winning a case are 70% does not know what he is talking about. Litigation is a crapshoot.” And Google has an awful lot riding on this wager.