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July 27, 2017

Google’s European Nightmare

Four Reasons Google's Antitrust Problems Are Far Worse Than You Think

Nearly every headline about the European Commission’s antitrust decision against Google focused on the record-breaking $2.7 billion fine the commission levied against the search giant. While the fine is eye-popping, it is undoubtedly the least important aspect of the decision.

In the future, we will likely remember this as a defining moment in Google’s history and a warning shot heard around Silicon Valley. To better understand why, here are four reasons the decision is far worse than you think:

1. The Odd Structure of European Antitrust Enforcement and its Very High Bar for Appeal

American reporting on European antitrust decisions rarely explains just how different the system is to our own. In the United States, antitrust enforcers gather evidence and make a case before a court or an administrative law judge who ultimately decides whether the company violated the law. The European Union, however, combined its investigative, prosecutorial, and decision-making functions for antitrust into a single body, the Directorate General for Competition (DG Comp).

In an article on some of the deficiencies of the European model, Ian Forrester explained it this way:

“The Directorate-General for Competition (“DG Competition”) of the European Commission is unique within that institution in that its officials have the power to investigate, raid business premises and private homes, question witnesses, reach conclusions, demand concessions, impose penalties and enforce those penalties, in court if necessary.”

Moreover, in reviewing single firm conduct (as opposed to mergers or cartel cases) Europe (and much of the rest of the world) use a far more restrictive “Abuse of Dominance” standard, whereas the Sherman Act’s “Monopolization” law used in the United States is generally considered more deferential to business conduct and decisions.

To make matters worse, European courts are notorious for being overly deferential to DG Comp. It’s incredibly rare for decisions taken by the Commission on single firm conduct cases (like the one against Google) to be fully overturned by the General Court, and appeals to the Court of Justice can only be made on questions of law.

TL;DR – The European Commission’s DG Comp is the investigator, prosecutor, judge, and jury all rolled up into one, and the courts have not been particularly sympathetic to appeals in the past.

2. The “We’ll Know it When We See It” Standard

Assuming Google fails to pull off a miracle in appealing the verdict, this ruling effectively turns Google Search into a regulated monopoly (facing the prospect for additional and significant non-compliance fines) for however long the deal lasts — usually 10 years.

Following the announcement of the decision, venture capitalist Steven Sinofsky offered up some insightful analysis via Twitter.

Sinofsky knows what he’s talking about. Following the European Commission’s decision that Microsoft violated European antitrust law by integrating Internet Explorer in Windows, Microsoft was effectively required to let the Commission review every remotely significant change to Windows, and competitors understood that the European Commission was a receptive ear to complaints. Further, instead of providing strict guidance or recommendations on how to comply with its orders, the Commission left that entirely in the hands of the company.

For Microsoft, the process proved incredibly costly: the evolution of Windows was bogged down in regulatory oversight, and faced product design being dictated by regulators, competitors and lawyers.

Google could face similar challenges in its ability to pivot Search and deliver new functionality customers demand. In the press release announcing the European Commission’s decision, it said:

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. It is Google’s sole responsibility to ensure compliance and it is for Google to explain how it intends to do so.

Regardless of which option Google chooses, the Commission will monitor Google’s compliance closely and Google is under an obligation to keep the Commission informed of its actions (initially within 60 days of the Decision, followed by periodic reports).

On paper, that may seem to be the ideal way of allowing Google to identify and propose solutions that are minimally disruptive to their technology and business. However, it actually locks them into a frustrating process of trial and error with the Commission. Commission representatives will not simply bless proposed remedies or new changes without opening up a whole new review process that includes competitor input.

TL;DR – Google Search is effectively being treated as a regulated monopoly with a regulator who operates with “We’ll know it when we see it” standard for non-compliance. Not a great environment for nimble innovation.

3. Just the Tip of the Iceberg for Google

This is just the beginning of Google’s competition battles in Europe. Beyond the ongoing back-and-forth over compliance with this order, Google has another series of antitrust-related probes on tap in Europe.

As noted in its press release, the European Commission has already come to the “preliminary conclusion” that Google abused a dominant position in two additional cases.

  1. the Android operating system, where 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; and
  2. AdSense, where the Commission is concerned that Google has reduced choice by preventing third-party websites from sourcing search ads from Google’s competitors.

And here is where things could cascade quickly for Google: the Commission will also continue examining the behavior of other “specialized Google search services.” Google uses the same basic strategy and conduct (which European regulators already found illegal) to integrate other services into its search results. With the legal bar effectively lowered based on the facts of this case, it’s only a matter of time before mapping, travel, weather and reviews services are also in the Commission’s crosshairs.

From a business perspective, the regulatory uncertainty around Google Search and Android has the potential to be even more disruptive for Google than the competition issues Microsoft’s faced.

TL;DR – Google could be mired in legal battles over Search and Android for years, and that could limit or slow their ability to innovate and respond to market trends.

4. Beware the Domino Effect on Other Digital Platforms

Many in European competition circles view Google as a symptom of the bigger problem presented by America’s dominant internet platforms. They view these companies as “essential platforms” and are exploring new ways to reign in these giants for years. U.S. tech giants even have a nickname in Europe these days — GAFA, for Google, Apple, Facebook and Amazon.

Given the climate in Europe, this case may embolden the European Commission and others to more aggressively pursue action against other internet platforms. The Commission is already preparing a new initiative to address what they believe are “unfair contractual clauses and trading practices identified in platform-to-business relationships and has also taken recent competition enforcement decisions related to this.”

One regulatory concept that is floating around Europe is borrowing the concept of network neutrality and loosely applying it the internet platforms as “platform neutrality.” This concept would be devastating for GAFA and seriously hamper innovation in the U.S. tech sector.

Finally, Europe is ground zero but these same issues are likely to be taken up by other regulators around the world. Most other nations developed antitrust enforcement laws and standards that are much loser to those of Europe than the United States.

TL;DR – European and other competition enforcers may be emboldened to pursue other internet platforms more aggressively based on their success with Google.

The monetary fine may be eye-popping, but the way this decision affects Google’s business practices in the future is far more important. This is just the the tip of the regulatory iceberg for Google, and the rest of America’s (and China’s) tech giants should be on notice.

competition disrupted

Also published on Medium.

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