Recently, the Chief of the European Commission’s Anti-trust division, Margrethe Vestager, issued a Statement of Objections against Google Inc. (GOOG, Financial) for abusing its dominant position in the online search and Android OS phone market. Google’s bundling of partner and in-house applications within its Android operating software for smartphones has come under scrutiny by European officials.
Earlier in 2012, the EU had urged Google to alter search engine services such that Google’s first-party sites and applications aren’t promoted in its Internet search results and advertisers weren’t forced into restrictive deals. Google was also accused of removing content of rival websites from search results without consent or warning. Last year, Google responded by offering to make concessions, but the EU rejected its proposal. French and German ministers and powerful consortium of tech companies reportedly stalled Google’s attempt to settle the case without charges.
Previously, the Federal Trade Commission of the U.S. had levelled similar charges against Google. But despite the staff of the government agency recommending action against the software company, the investigation was closed in 2013. Google did revise its ad policy and gave websites the option of choosing to be excluded from search exclusions. But it still promotes its sites and services, such as Travel, Maps, News etc, in the web searches.
Other European anti-trust cases
Microsoft Corporation ( MSFT) was accused of anti-trust activity by EU officials because of bundling first-party apps within Windows OS software. The case ended in 2009, after 10 years, with the software company paying an approximate €2.2 billion in fines. But it did little to push Microsoft off of the top spot in the personal computers market.
Chipmaker Intel Corporation (INTC, Financial) was also hauled up by European officials for creating a near-monopoly for itself in the microprocessor market. The hardware manufacturer was fined €1.1 billion after a 15-year legal battle. Nevertheless, Intel continues to dominate the market.
Now, Apple’s (AAPL, Financial) offshore tax setup in Ireland and Amazon’s (AMZN, Financial) tax arrangements in Luxembourg, as well as, Facebook’s (FB, Financial) private data policy are also under the investigative eye of the European officials.
In Defence of Google
Senior Vice President of Google Search, Amit Singhal, wrote a lengthy defence for the software company in the official Google Blog.
“Indeed if you look at shopping—an area where we have seen a lot of complaints and where the European Commission has focused in its Statement of Objections—it’s clear that (a) there’s a ton of competition (including from Amazon and eBay (EBAY), two of the biggest shopping sites in the world) and (b) Google’s shopping results have not harmed the competition,” he said, “Any economist would say that you typically do not see a ton of innovation, new entrants or investment in sectors where competition is stagnating—or dominated by one player. Yet that is exactly what’s happening in our world. Zalando, the German shopping site, went public in 2014 in one of Europe’s biggest-ever tech IPOs. Companies like Facebook, Pinterest and Amazon have been investing in their own search services and search engines like Quixey, DuckDuckGo and Qwant have attracted new funding. We’re seeing innovation in voice search and the rise of search assistants—with even more to come. It’s why we respectfully but strongly disagree with the need to issue a Statement of Objections and look forward to making our case over the weeks ahead.”
The European Market
90% of all internet searches in Europe are hosted by Google Search, according to USA Today. StatCounter puts that market share at 92% in Europe. Either way, this is higher than Google’s market position, regarding web search, in the U.S., which stands at 64%.
USA Today surmises that Google has captured 81% of the global mobile operating system market with Android. IDC claims that Google’s Android runs 71% of all phones in Europe. Again, this is much higher than the 48% of the mobile OS market Google has captured at the home turf.
If the EU proves the bundling charges against Google to be anti-competitive, Google will be forced to provide Android devices without Youtube, Google Search, Maps and Play store pre-installed, in Europe. This would open up the mobile app market, at least in Europe, for rivals such as Microsoft.
Conclusion
If Google is unable to successfully prove its rebuttal of the charges against it, it may be forced to pay a fine of close to €6 billion or $6.4 billion. This represents 10% of the total revenue earned by the company in 2014. But it is not the cash that Google will have to cough up that should worry investors.
It is the fact that Google losing the legal battle could loosen its hold on the lucrative and profitable European market, which makes up one-third of Google’s top line earnings. Coupled with a strong U.S. dollar and a weakening euro, it will definitely shave off a good chunk of Google’s earnings in the years to come.
Analysts are already speculating the risks attached to Google’s top management getting embroiled with a long-haul legal battle. The biggest risk is that this would curb the software company’s urge and ability to innovate, especially in the European market.
