Google hit with another fine

08 Jan 2019 / EU Print

Hit me baby one more fine

Last July, the European Commission found that Google LLC had abused its dominant position within the meaning of article 102 of the Treaty on the Functioning of the European Union.

The abusive conduct entailed Google imposing restrictions on smartphone/tablet manufacturers and mobile network operators who supply devices using the Android operating system.

The commission found that Google’s conduct gave an illegal advantage to its internet search engine/app, Google Search. 

The commission fined Google €4.34 billion.

This penalty represents the largest-ever fine (both nominally and adjusted for inflation) imposed by the commission on an individual firm for competition law infringements, surpassing Google’s own, presumably unwanted, record: a €2.42 billion fine contained in the commission’s June 2017 decision for abusive behaviour regarding the online shopping comparison service, Google Shopping. 

Article 102

Article 102 prevents the abuse of a dominant position in the EU (or in a substantial part of it) that affects trade between member states.

Accordingly, before finding that an undertaking has infringed article 102, the commission must first establish that this entity has a dominant position.

A dominant position is defined as a position of economic strength that allows an undertaking to hinder effective competition being maintained in the relevant market by allowing it to behave, to an appreciable extent, independently of its competitors, customers and, ultimately, consumers.

Dominance per seis not illegal, but dominant entities are under a special responsibility not to hinder effective competition in the marketplace. Article 102 contains a non-exhaustive list of various types of abusive conduct.

These include limiting production, markets or technical development to the ultimate prejudice of consumers.

A dominant company may argue that its behaviour is objectively justified and thus does not infringe article 102. 

Scope of investigation

Following a series of complaints, the commission’s DG Comp launched its formal investigation of Google in April 2015. A year later, the commission issued a statement of objections (SO) to Google and its parent company, Alphabet Inc, alleging breaches of article 102.

The proposed findings focused on contractual restrictions placed by Google on both mobile device manufacturers and mobile network operators that sought to ensure that traffic was directed through Google Search.

The SO detailed the commission’s concerns regarding three types of conduct: illegal tying of Google’s search and browser apps; making payments conditional on the pre-installation of Google Search; and obstructing the development and distribution of competing Android operating systems. 

Google’s strategy

Google’s search engine/app is the internet search giant’s main source of revenue. Mindful of the shift from desktop to mobile internet browsing, Google acquired the entity that invented the Android mobile operating system.

Currently, approximately 80% of mobile devices in the EU operate on Android, with Google posting the source code behind each new version of this operating system online.

In principle, therefore, third parties may download the software before modifying it for use on their own or third-party devices. These alternative versions of the operating system are commonly referred to as ‘Android forks’. However, the published version of Android does not contain Google’s proprietary apps, such as Google Search and its internet browser, Google Chrome.

 

Market dominance

The commission found that Google is dominant in each national market for internet search throughout the 31 countries that currently comprise the European Economic Area or EEA (that is, the EU’s 28 member states plus Norway, Lichtenstein and Iceland).

The commission noted that, since 2008, Google has consistently held a high market share – above 90% in most cases – in internet search in each country and has thus been dominant.

Another factor indicating dominance is the high barriers to entry in the internet search market, largely down to network effects – the more customers use a search engine, the more attractive the latter becomes to advertisers.

This results in the generation of profits that are used to improve Google’s search offering, while also gathering data regarding customers, allowing Google to strengthen on both fronts. 

Control

Third-party manufacturers may license Android for use on their devices. Through its control of Android, Google (with a market share of over 95%) is globally dominant (excluding China) in the licensable smart mobile operating systems market. Network effects are also relevant here.

The more users of Android, the more developers invent apps for use by those consumers. The commission distinguished Android from integrated operating systems like Apple iOS or Blackberry, since these are not available for use by third-party smartphone/tablet manufacturers.

That said, the commission also examined whether the potential downstream competition posed by Apple in the sale of mobile devices could constrain Google in the upstream market for the licensing of Android.

However, DG Comp found that this threat was limited, since Apple’s iPhone or iPad are typically more expensive than devices running on Android.

Moreover, Google Search is typically the default search engine on Apple devices, so even if a user switched from Android to iOS, he/she would be likely to use the same search app.

Google’s app store, Google Play, represents the channel through which more than 90% of apps are downloaded on Android devices.

Similarly, Google Play does not face a competitive threat from Apple’s App Store, since the latter is only available on Apple-manufactured devices. Google is thus dominant in the market for app stores for the Android mobile operating system. 

Illegal tying

Google offers a bundle that includes Google Search and Google Chrome in addition to Google Play.

However, a manufacturer cannot pick and choose between these services. Since consumers expect to have Google Play pre-installed on their devices, not least because this facility cannot be independently downloaded, this means that Google Search and Google Chrome are almost always available on Android devices.

The commission found that pre-installation clearly favours the incumbent.

In other words, Google’s search app is used much more frequently on Android devices (where it is, of course, pre-installed) than on devices using Windows Mobile, where consumers must download Google Search themselves.

Google counter-argued that the tying of both its search and browser apps was necessary to gain a fair return on its investment in the Android operating system.

The commission rejected this stating that Google would still have earned significant revenue from search advertising without the relevant restrictions.

In sum, the commission found that the tying of the search and browsers apps to the app store was an abuse of Google’s dominant position. 

Illegal payments 

Google gave significant financial incentives to device manufacturers and mobile network operators, on the condition the sole search engine they installed across their relevant devices using the Android operating system was Google Search.

The commission’s investigation showed that this conduct stifled competition, because the provider of a rival search engine would not have been able to compensate a device manufacturer or network operator for the loss of the revenue from Google across all smartphones/tablets.

Dismissing the arguments that the relevant conduct was necessary to persuade manufacturers and network operators to supply Android devices, the commission found that Google’s exclusivity payments were an infringement of article 102. 

Illegal obstruction

In order to pre-install Google’s proprietary search and other apps, manufacturers had to commit to Google not to supply even a single device based on an Android fork.

This conduct closed an important route to market for competing apps. The commission noted that this provision restricted innovation to the detriment of consumers who were denied access to alternative Android systems.

The commission rejected Google’s argument that these restrictions were necessary to prevent a fragmentation of the Android system, since no robust evidence was presented that Android forks would be adversely affected by technical glitches.

Again, the commission found that this conduct was an abuse of Google’s dominant position. 

Overall impact 

The commission found that these three categories of abuse were a key part of Google’s strategy to reinforce the dominance of its internet search engine.

The tying practices ensured the pre-installation of Google Search and Google Chrome on nearly every Android device, whereas the exclusivity payments to manufacturers/network operators strongly reduced any incentive to install competing search engines.

Reducing market access of the latter apps prevented them from gathering data, which made their respective products less attractive to advertisers.

The fine

The commission’s fine reflects the duration and gravity of the infringement and is based on the value of Google’s revenue from search advertising services on Android devices in the EEA.

In its decision, the commission ordered Google to stop the three categories of abusive behaviour within 90 days and to refrain from any other conduct that has the same aim or impact.

That said, Google is entitled to adopt a fair, reasonable and objective approach to ensure the proper functioning of Android devices using Google’s suite of apps. On the other hand, manufacturers must be free to supply devices using Android forks.

Google’s other challenges 

Google’s EU competition woes are not limited to the Android case. In addition to the Google Shopping decision, which is currently under appeal to the General Court, the commission is also investigating AdSense (a Google product that allows third parties to place banner ads on its websites).

In its July 2016 SO, the commission outlined its concerns that Google may be abusing its dominant position by preventing these third-party websites from sourcing search ads from the search giant’s competitors.

Moreover, there is the possibility of Google being forced to deal with various proceedings in the national courts from third parties who seek to rely on the commission’s findings. 

Next steps

This decision signifies the end of but one chapter in the ongoing dispute between the commission and Google. 

In October, Google confirmed that it has appealed the commission’s Android decision to the General Court. Around the same time, press reports suggested that Google had changed its licensing model.

Google apparently plans to charge manufacturers a royalty per device, depending on size of the smartphone/tablet and country of sale, for using apps such as Google Play and Google Maps.

Fee size

However, companies can reduce the size of the fee by agreeing to bundle Google Search and Google Chrome.

In addition, the manufacturer would benefit from a slice of Google’s advertising revenue. It remains to be seen whether these proposals resolve the commission’s competition concerns. If not, Google may face daily fines of up to 5% of its parent’s average daily turnover.

Given that Alphabet generates revenues of approximately USD $300 million per day, this fine could – depending on the duration of any non-compliance with the July 2018 decision – be very significant.

Key issue 

The key issue of the commission’s decision to fine Google is the extent of the responsibility a dominant undertaking has not to hinder competition when it develops new products and services.

While gaining a dominant position is not illegal, the clear lesson from the Android case is that a dominant undertaking needs to be very careful in how it tries to maintain or bolster its market share. 

Cormac Little
Cormac Little is head of competition and regulation at William Fry