Implications of EU Ruling Google Abused Its Search Dominance

Published September 27, 2013

Apparently EU antitrust authorities’ patience with Google has  limits.

The EU’s Competition Commissioner, Joaquin Almunia, said he will soon resolve his nearly three-year-old  investigation of Google’s alleged abuse of its search dominance.

The potential outcome that could cause the most change – a formal  EU Statement of Objections (SO) – warrants attention and analysis.

Not only does that enforcement outcome appear most likely, it also  would have large, under-appreciated implications for Google and the European  online economy.

Pending EU enforcement presents more risk to Google than the FTC’s  2012 Google investigation did. Google’s market share is higher in the EU than it  is in the U.S. – ~95% vs. ~75%. Moreover, EU competition law is much tougher  hence the likely EU remedies are more severe.

Furthermore, unlike the FTC-Google dynamic, EU-Google antitrust  enforcement has likely repercussions for other Google issues – data protection,  tax, and intellectual property enforcement – which compound the business risk to  Google.

Few Americans appreciate that Google generates a similar amount of  revenues in the U.S. and Europe — 46% in America vs. an estimated ~45% in  Europe.

Few also understand that while it can be legal to have an  unregulated monopoly in the U.S., it is illegal in the EU.

Under U.S. antitrust precedent Google’s systematic search tying  behavior to Google-owned content is not necessarily viewed as anti-competitive.  However, in the EU it is illegal for a company with dominance to extend its  dominance via tying the way Google routinely does.

If the EU issues a formal Statement of Objections, that means  Google is declared dominant (a monopoly) in the EU, and consequently must  operate under different competition rules than non-dominant firms.

The operational implications of this for Google are potentially  huge in Europe. Currently, competitors have the burden to prove they have been  harmed by Google. If ruled dominant, the burden is on Google to prove it did not  harm competition or competitors, when others complain to the EU.

Another important difference is that the EU process is much more  streamlined than America’s. In the U.S., the prosecutor (the DOJ or the FTC),  and the deciding judge are different. In the EU they are one in the same.

That means the issuance of a formal SO is not the functional  equivalent of a U.S. decision to prosecute in court. It is the functional  equivalent of a legally-binding court decision — that by the way — is very  rarely overturned.

Specifically, the U.S. FTC declined to prosecute Google in  court.

If the EU issues an SO as expected, it means the EU Competition  authority officially has concluded that Google is dominant and has abused its  dominance. After 6-12 months, and a possible hearing, the EU then would  formalize sentencing, i.e. remedies in an operative enforcement action.

While many are familiar with the EU’s headline-grabbing authority  to impose fines of up to 10% of revenues, that is unlikely to have much effect  on Google’s business.

Its cash reserves are ten times that amount, and Google’s top  executives own more than half of the company’s voting shares. Consequently,  Google’s leadership likely would view an EU fine as simply the cost of doing  business.

Thus the main event here would be if the EU decides to not allow  dominant Google to discriminate against competitors. This would prevent Google  from its lucrative systematic practice of self-dealing, i.e. placing  Google-owned content, products and services above competitors in Google’s EU  search results.

Imposing a traditional monopoly non-discrimination requirement on  Google in the EU, could bifurcate Google’s global business. It would require  Google to operate its core business fundamentally differently for the 500  million citizens of the EU than it does for others.

Since leveraging private data is the essence of Google’s search  advertising market power, an abuse of dominance finding could justify, and pave  the way for, much stronger EU privacy and data protection enforcement.

EU consumers potentially could opt-out of some data collection, and  the EU could justify requiring Google to store EU private data, on EU soil,  under EU jurisdiction, by a date certain.

Obviously, such a restriction on the current free flow of data  could have significant cost, efficiency, and profit implications for Google’s  American-cloud-model long term.

Concerning taxes, ruling Google an abusive dominant firm could pave  the way for the EU requiring Google, and potentially other companies, to pay  full EU taxes on the profits that they earn in the EU.

No longer being able to skirt most EU tax liability also could have  a significant effect on Google’s EU profitability long term.

Finally, one of the EU’s anticompetitive charges against Google is  that it used competitor-owned content without compensation. This established  Google pattern of property infringement for profit, could provide EU content  producers leverage to extract more value for their content from Google over  time.

In sum, how this EU-Google antitrust case plays out could be a  bellwether for how other EU-Google policy and enforcement issues play out for  Google and potentially other American companies.

This is not a narrow isolated competition case. This is a big one.  It has much broader implications than most appreciate.