The Daily Caller

The Daily Caller
A Google logo is seen at the entrance to the company A Google logo is seen at the entrance to the company's offices in Toronto September 5, 2013. REUTERS/Chris Helgren  

Implications of EU ruling Google abused its search dominance

Photo of Scott Cleland
Scott Cleland
Chairman, NetCompetition

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.

Scott Cleland is President of Precursor LLC, a consultancy serving Fortune 500 clients, some of which are Google competitors. He is also author of “Search & Destroy: Why You Can’t Trust Google Inc. Cleland has testified before both the Senate and House antitrust subcommittees on Google and also before the relevant House oversight subcommittee on Google’s privacy problems.