Google Betting Big on Being Able to Overturn EU Antitrust Decision; Effectively Thumbs Its Nose at Compliance

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.

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19 comments

  1. Foppe

    FWIW WRT the Intel case, this is from last October:

    LUXEMBOURG/BRUSSELS (Reuters) – Intel’s (INTC.O) fight against a record 1.06 billion euro ($1.16 billion) EU antitrust fine received a boost on Thursday when a top Europe court adviser questioned whether the U.S. chipmaker’s actions had really harmed competition.

    The opinion from Advocate General Nils Wahl at the Court of Justice of the European Union (ECJ) amounted to a rare setback for the European Commission, underlining the tough battle ahead as it takes on Apple (AAPL.O), Qualcomm (QCOM.O), Google (GOOGL.O) and Amazon (AMZN.O) in various competition cases.

    “Intel’s appeal against the imposition of a 1.06 billion euro fine for abuse of its dominant position should be upheld. The case should be referred back to the General Court for a fresh review,” Wahl said in a non-binding recommendation.

    He said the General Court failed to establish that the rebates and payments offered by Intel were anti-competitive and that certain deals between the firm and Lenovo harmed European consumers. These were key elements of the Commission’s 2009 decision.

    (And this is precisely what the ECJ ruled.)

    As I see it, there are three possibilities:
    1. they flunked the original case by their own standards, but this can be proven under the law (and note that there is so much evidence that their behavior harmed competition that it’s not even remotely funny), and this is merely a procedural set-back.
    2. the law as defined is blind to anti-competitive behavior of this nature, but the EU, back in 2009, was run by people who wanted to prove a point, and so Intel lost at that time, for political reasons.
    3. Proving this under extant law is possible, but the EU project is starting to be taken over by people who don’t even believe in consumer protection any more, and this ruling heralds the beginning of the end to any pretense that the EU does things for citizen-consumers.

    If 2 or 3, Google may have caught on to this, and/or may have been hoping for this.

    1. Yves Smith Post author

      Based on what I read of the EU commissioner’s ruling (a short but very well argued document) the case that Google’s competitors in travel were harmed by its policies is awfully strong. Over 50% of the users click on the first link on a search page. Less than 1% click on a page 2 link. The competitors were relegated to low page 1 slots or later pages. They saw big revenue declines.

      So given the clear harm, I would think the only issue is the level of damages, and whether the EU competition commission overshot. And the bigger issue would seem to be that the EC can force compliance if the fines are high enough. If Google can’t get the fines down to a “cost of doing business” level, and these are not that, it will lose even if it nominally wins the case and gets only some relief.

  2. Arizona Slim

    If I were the betting type, I would be doubling down on DuckDuckGo. Because Google’s dominance of search is coming to an end. And this case is just the first of many.

  3. justsayknow

    “Google, which is an arm of the US security apparatus,”
    This is what makes the tea leaves hard to read.

  4. DJG

    Verstager, quoted: 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?”

    Yves mentions how provincial the negotiating team is, and I assume that Google’s management is thoroughly provincial. Like a lot of tech companies, Google’s idea of diversity is likely to be to hire a right-wing Indian-American.

    So you have the disastrous U.S. business culture determined to collide with European public administration. Google is likely hoping for regulatory capture, but the quote from Verstager above sure doesn’t sound like a U.S. regulator. Google also is engaged in the disastrous U.S. business culture of tax avoidance and endless blathering about fines. What Google is hoping for here is that the company can wear down the EU regulators (by appeals to the EU higher-ups and pulling strings, as the article notes), negotiate a big reduction in the fine, and then sign a compliance agreement that ignores any criminal intent. But the European system of governance doesn’t usually allow any of these: These are features of Anglo-American law. And waiting to overturn a court decision in the Continental system of law is a bad gambit, too, because the Continental system doesn’t overturn decisions the way the U.S. system does. The lower-court ruling isn’t likely to be voided.

    And as Arizona Slim says, set your browser to Duck Duck Go.

  5. Ed

    Why does the EU have the ability to cripple an American company like this? I don’t understand how international businesses work especially on the internet but it seems strange they can unilaterally claim 5% of their revenue based on their Court’s decision.

    1. PKMKII

      What’s there to be confused about? They’re doing business on EU soil, over EU internet backbones, ergo they have to comply by EU anti-trust policies. Alphabet can always choose not to do business in the EU. If a European business has operations in the U.S., would you expect them to be immune from CFPB/IRS/EPA/etc. fines?

        1. PKMKII

          Why not? I know we like to think of the Internet as having to be an unregulated wildness, but it’s really no different than any other international transaction. If they can shut down certain financial transactions from crossing borders, there’s no reason they can’t block certain IP addresses from overseas, if the entities behind them are determined to be malignant. Especially given how much of the internet infrastructure is public.

  6. LarryB

    Another wild card in all of this is how the Trump administration might react to Europe imposing a multi-billion dollar fine on an American company. They would almost certainly try to retaliate.

    1. PhilM

      A “wild card” is the perfect term. Google was snuggled right up with Hillary during the election, and yet, one still has no way to know what Trump will do here.

      Intel’s extensive dirty tricks used against AMD are still resented in tech circles, for they went far beyond simple abuse of marketing: many tools of the IT trade were “fixed,” including compilers and benchmarks that were optimized to favor Intel chips. How encouraging to see that some governments will still fight for free-market capitalism, which means, first and foremost, competition.

      When the European EU GDPR goes into effect in a bit more than a year, Google and Facebook’s “big data” business models will be as worthless in Europe as they are in China. Good riddance to them.

      1. Outis Philalithopoulos

        Yes. Speaking of Intel’s efforts against AMD, have you seen Agner Fog’s extensive posts on the subject, e.g. here?

        1. PhilM

          I had not, indeed, seen those; all I got was the “cocktail-party” caliber stuff on Slashdot and ElReg, which is usually “who-struck-John” back-and-forth without any real sourcing. By contrast, that forum is a great set of primary-source material.

          It only takes one brave soul to take the time and ferret these things out: but the cost to that individual is significant. The Intel AMT debacle; the Intel Puma debacle; the Intel C2000 debacle; all of these multi-billion-dollar failures had to be brought out by one person, who, in the process, looked merely Quixotic, until at last the proofs were irrefutable, even with Intel’s Orwellian NDA system.

          It’s the only thing holding the battleship of monopolism back even a little over here in the US.

        2. Lambert Strether

          In case people haven’t clicked through to Outis’ amazing link, here’s an amuse bouche in the form of the headline:

          Will Intel be forced to remove the “cripple AMD” function from their compiler?

          Holy moley. Then I asked myself, When did the rot set in? And was reminded of “Reflections on Trusting Trust” by Ken Thompson. From the abstract:

          Ken Thompson’s “cc hack” – Presented in the journal, Communication of the ACM, Vol. 27, No. 8, August 1984, in a paper entitled “Reflections on Trusting Trust”, Ken Thompson, co-author of UNIX, recounted a story of how he created a version of the C compiler[1] that, when presented with the source code for the “login” program, would automatically compile in a backdoor to allow him entry to the system. This is only half the story, though. In order to hide this trojan horse, Ken also added to this version of “cc” the ability to recognize if it was recompiling itself to make sure that the newly compiled C compiler contained both the “login” backdoor, and the code to insert both trojans into a newly compiled C compiler. In this way, the source code for the C compiler would never show that these trojans existed.

          I guess that would make the entire *nix ecosystem a phishing equilibrium, no?

          NOTE
          [1] In the article, Thompson calls this “the cutest program I ever wrote.” For some definition of “cute”…

    2. Yves Smith Post author

      Silicon Vally gave the functional equivalent of zero money to Republicans. With a few individual exceptions like Peter Thiel, they are all in with Team Dem.

      Moreover. Trump’s nationalism has greatly reduced the willingness of European governments to play ball with him. Trump pissing on the Paris climate accord, even though it was largely symbolic, got a lot of Europeans very upset. He has repeatedly told them to pay up for NATO. That is the one thing that does give the US some bona fide leverage over the Europeans, that we greatly subsidize NATO. No one comes close to paying the 2% of GDP that they are supposed to chip in (the UK pretends to but we let them fudge their numbers so that a lot of stuff they would have done anyhow that are not really NATO-related spending are allowed to be classified as counting for the NATO computation).

      The EU has been discussing in a serious way doing more of their own defense spending, since the US is no longer seen as a reliable partner. And they have a lot of upside, since making their own military expenditures means sending the money to their own manufactures. Why should the Europeans be largely on the sidelines in the global arms merchant game, particularly since the US has gotten so heavily into military pork that it is a high cost producer with white elephants like the F-35 as its next gen products?

      1. MK

        Re: Trump – Alphabet is intergal to the US intel apparatus. Mix with some America First concerns and Trump might easily side against the EU in the end.

        Poof – any EU fine is converted to past-due EU NATO expenditures. EU wipes the NATO dues slate clean and Alphabet business model is not crippled.

  7. Lambert Strether

    > That sort of provincialism

    A reminder (applicable also to Uber) that these guys just aren’t that good. Or at least not that good at the things they have induced us to think they are good at.

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