Introduction
On 27 June 2017, the Commissioner Vestager announced
the European Commission’s (EC) decision to fine Google €2.42 billion
for abusing its dominance as a search engine.[1] The EC found that Google had given illegal
advantage to its own comparison shopping service over the services provided by
its competitors. While Google has appealed the EC decision to
the General Court,[2] it
appears that this is not the only competition concern facing Google in the
EU. In addition to announcing the
sanction in the comparison shopping service investigation, the EC also stated
that it had reached preliminary conclusions that Google has abused its dominant
position in relation to the Android operating system and Adsense.
In this post I will outline the EC’s conclusions in
the comparison shopping service investigation, and provide a brief summary of
the EC’s other two major Google investigations.
Comparison shopping service investigation
As stated above, on 27 June 2017 the EC announced that
it had decided to fine Google €2.42 billion for abusing its dominance as a search engine. This
investigation focused on whether Google had given illegal advantage to its
comparison shopping service.
In addition to paying the fine, Google had 90 days
from the date of the EC decision to stop its conduct or face further penalty
payments at the rate of 5% of the average daily worldwide turnover of
Alphabet, Google’s parent, for each day of non-compliance. The EC can also backdate these payments to
the date that the non-compliance started.
Given Alphabet’s annual turnover in 2016 was approximately $US90
billion, penalty fines for non-compliance could be as high as $US4.5 billion a
day.
The EC decided that Google was dominant in each
national market for general Internet search throughout the European Economic
Area, with a market share of more than 90%.
The EC found that Google advantaged its own comparison
shopping site “Google Shopping” (previously known as “Google Product Search”
and “Froogle”) by:
- Systematically giving its own product significantly better treatment by giving more prominent placements; and
- Demoting rival comparison shopping services, by providing them with a lower ranking in generic search results.
In other words, Google placed the results from its own
Google Shopping comparison site above the search results that Google’s own
generic search algorithm determined were the most relevant to the consumer’s
search. It also sometimes reserved space on the right hand side of the search
results to display its own results.
The EC also noted that Google’s main rivals in
comparison shopping were demoted on average to page 4 of the Google search
results. Rival sites were found to have
been demoted by at least two different algorithims, which were first used by
Google in 2004 and 2011. This resulted in a decline in clicks on these rival sites by more than 90%.
The EC found that Google’s conduct has started in 2008
in Germany and the United Kingdom and then moved to France, Italy, the Netherlands,
Spain, the Czech Republic, Austria, Belgium, Denmark, Norway, Poland and
Sweden.
The net effect of Google’s conduct was to assist
Google Shopping to make significant gains in consumer traffic at the expense of
its major rivals. As stated by the EC Google’s conduct resulted in the following
traffic growth of its comparison shopping service:
- United Kingdom – 45-fold increase
- Germany – 35-fold increase
- Netherlands – 17-fold increase
- Spain – 17-fold increase
- Italy – 14-fold increase
As concluded by the EC:
…Google’s strategy for its comparison shopping service
wasn’t just about attracting customers. It wasn’t just about making its product
better than those of its rivals. Instead, Google has abused its market
dominance as a search engine by promoting its own comparison shopping service
in its search results, and demoting those of competitors.
What Google has done is illegal under EC antitrust
laws. It has denied other companies the chance to compete on the merits and to
innovate. And most importantly, it has denied European consumers the benefits
of competition, genuine choice of service and innovation.
Android investigation
The EC summarised its Android operating system investigation
as follows;
The Commission is concerned that Google has stifled
choice and innovation in a range of mobile apps and services by pursuing an
overall strategy on mobile devices to protect and expand its dominant position
in general internet search.
The EU has claimed that Google is manipulating handset-makers and telcommunications companies by
forcing them to agree to exclusive deals to pre-install key Google apps, such
as Google Search and Google Play.
Google has also been accused of paying handset-makers and telecommunications companies to
pre-install Google Search, and preventing the sale of handsets using non-Google
versions of Android through “anti-fragmentation” agreements.
Most significantly the EC has announced that it
has reached a preliminary conclusion that Google’s conduct in relation to the
Android operating systems constitutes a breach of its dominant position in the
relevant market.
Adsense investigation
Finally, the EC’s Adsense investigation relates to
allegations that Google has reduced choice by preventing third-party websites
from sourcing search ads from Google’s competitors.
As
stated by the EC in its Statement of Objections:
Google
places search ads directly on the Google search website but also as an
intermediary on third party websites through its "AdSense for Search"
platform ("search advertising
intermediation").
These include websites of online retailers, telecoms operators and newspapers.
The websites offer a search box that allows users to search for information.
Whenever a user enters a search query, in addition to the search results, also
search ads are displayed. If the user clicks on the search ad, both Google and
the third party receive a commission.
The
EC’s concerns centre on Google’s agreements with a number of large third
parties for whom Google provides search advertising intermediation services,
also known as Direct Partners.
The
EC alleges that Google has breached antitrust rules by imposing the following
conditions:
- Exclusivity: requiring third parties not to source search ads from Google's competitors.
- Premium placement of a minimum number of Google search ads: requiring third parties to take a minimum number of search ads from Google and reserve the most prominent space on their search results pages to Google search ads. In addition, competing search ads cannot be placed above or next to Google search ads.
- Right to authorise competing ads: requiring third parties to obtain Google's approval before making any change to the display of competing search ads.
The
EC has claimed that the above practices have been in place for ten years.
The
EC stated that Google’s actions in relation to Adsense:
...have
artificially reduced choice and stifled innovation in the market throughout the
period. They have artificially reduced the opportunities for Google's
competitors on this commercially important market, and therefore the ability of
third party websites to invest in providing consumers with choice and
innovative services.
Again, the EC has formed the preliminary view
that Google has abused its dominant position in order to prevented existing and potential competitors,
including other search providers and online advertising platforms, from
entering and growing in this commercially important area.
Conclusions
It seems inevitable that the EC will
be imposing two further significant antitrust fines against Google in the near
future in relation to the Android and Adsense investigations. There is also a strong
likelihood that the fines for these investigations will be significantly larger
than the fine imposed in relation to the comparison shopping investigation.
While comparison shopping services are an
important part of Google’s business, it is arguable that the competitive impact
of Google’s alleged conduct in the comparison shopping area is not as
significant as the impact of its alleged conduct in relation to Android
operating systems and the Adsense product.
It is also arguable that the EC will see Google’s alleged conduct in
relation to Android operating systems and Adsense as a much more central part
of its overall business strategy and revenue streams.
While there has been some speculation that the EC
investigations are a precursor to a broader plan to ultimately break up Google
into a number of smaller companies, this speculation is fanciful. [3] Not only doesn’t the EC had the same monopoly break up powers that
exist in the US, but the US Department of Justice has shown very little
interest in even investigating Google’s conduct, much less in taking steps to force its
breakup.
The real question is whether Alphabet may itself
decide to break up Google into a number of separate companies at some time in
the future. However, what is clear is
that any decision by Alphabet to go down this path will not be dictated by a
fear of possible antitrust breakup, as was the case with the breakup of
AT&T in the early 1980's.
[3] https://qz.com/798791/these-are-the-eus-reported-plans-to-break-up-googles-goog-monopoly-powers;
http://www.latimes.com/opinion/op-ed/la-oe-strauss-digital-robber-barons-break-up-monopolies-20160630-snap-story.html;
https://www.nytimes.com/2017/04/22/opinion/sunday/is-it-time-to-break-up-google.html
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