August 8, 2016 – The text of this article is below, or click here to access our library.
Update on Timing and Global Implications
Recent developments provide context. Multiple ongoing EU investigations and several recent events in the U.S. have put Google back in the news as well as back in antitrust enforcers’ crosshairs:
• Renewed reports suggesting that the design of Google's search products may be influencing US elections.
• Recent remarks by FTC Commissioner Terrell McSweeny in which she identifies the staying power of Google and in which she calls the notion that platform monopolies are subject to disruption a “mythology.”
• A June speech on antitrust by Elizabeth Warren given at an event hosted by New America in which the Senator described her concern about platforms: “But Google, Apple, and Amazon also, in many cases, compete with those same small companies, so that the platform can become a tool to snuff out competition.”
• Concerns in U.S. Congress, expressed in a Senate hearing in March, about the need for a renewed focus on allegations of anticompetitive conduct by Google.
• A recent article in The Intercept by David Dayen about Google’s close ties to the current White House.
• An interview with Gary Reback in which he concludes that Google’s political ties have prevented it from enforcement in the U.S.
Remedies from shopping case: significant fine and non-discrimination standard. Currently, three EU competition cases against Google are pending: Google Shopping, Android, and search advertising. In the shopping case alone, a fine in the range of 3-7 billion euro, plus a nondiscrimination standard, could significantly affect Google because both the fine and the nondiscrimination standard could be applied over and over again in future cases against Google—in both the EU and other jurisdictions. Over the long term, if a non-discrimination standard is ultimately applied to all of the platforms that Google has market power in—search, android, and advertising—not only would Google’s business model be dramatically affected, but such rules would effectively create new neutrality rules for online commerce.
Timing. In April 2015, Vestager issued an S.O. formally charging Google with abusing its dominant position in search to steer traffic towards Google Shopping and away from competing comparison shopping services. The Commission narrowed its previous broad focus from search overall to the comparison shopping vertical, aiming to set a precedent for other verticals, such as travel, local, and mapping. On July 14, 2016, the Commission took further steps and issued a supplementary comparison shopping charge. Google will have until mid-September (i.e. eight weeks) to respond to this charge. From the date of the S.O. issuance, the typical timeframe for a decision is twelve to eighteen months, meaning a decision on the initial shopping charges would be expected either late this year or early next year.
Google had a three to six-month period to respond to the S.O., followed by hearings. After these hearings the Commission begins drafting a prohibition decision, which is submitted to the antitrust committees of the EU member states. Google can lobby the member states to attempt to influence the decision. Although the member states cannot override any decision, they can act in an advisory capacity to attempt to make some difference in the final decision. Once Google has had the opportunity to offer feedback to the member states, the Commission submits a draft and then publishes the decision. Parallel to the prohibition process, Google simultaneously can try to work to settle the case through the commitment process.
Android case could skip to front of enforcement line. If the Commission issues final decisions chronologically, the order would be Shopping, Android, advertising, and then potential future charges (i.e. scraping competitors’ news and image content). However, an Android decision could come first, as sources have noted that the Commission considers the remedies to Google’s exclusionary conduct on the Android platform to be fairly straight forward, allowing the Commission to move ahead with complainant support.
Myriad potential future cases. In addition to the cases already announced, Vestager has hinted at a number of additional cases that could be brought, including scraping, travel, maps, local, and other aspects of services on the android platform beyond app pre-installation issues. For example, the EU could open investigations into other aspects of Android, not just the app pre-installation issues.
In a recent CBNBC interview, Commissioner Vestager explained that while these are different cases, a common pattern exists among them, whereby Google continues to pursue a strategy of abusing its market position to preserve its dominant position in search. Moreover, she stated that when one considers the increasing (global) mobile market, one sees new behavior that fits this same pattern. So, while Vestager feels it is imperative to close cases to effectively abridge and end Google’s anticompetitive conduct to restore competition, she appears also prepared to open additional cases, if necessary.
For this article, we interviewed several antitrust experts, a search and comparison shopping expert, and a variety of business and legal experts who have closely followed or been involved in the EU investigations of Google, going back to 2009.
Search Neutrality: The Underappreciated and Likely Remedy in EU Shopping Case
Non-discrimination standard plus a fine are expected remedies. Experts broadly expect the EU to require Google to use future-proof, non-discriminatory, or “even-handed,” mechanisms in search. The Shopping S.O. explicitly outlined the Commission’s preliminary view: “…To remedy the conduct, Google should treat its own comparison shopping service and those of rivals in the same way.” This means that, “when Google shows comparison shopping services in response to a user's query, the most relevant service or services would be selected to appear in Google's search results pages.”
Several sources closely following the investigations also expect the EU to impose a non-discrimination standard, pointing to Vestager’s public statements, which specifically suggest such a standard. Thomas Vinje, FairSearch Europe counsel adds, “If there is such a decision, which is pretty likely, [it] would lay a basis for a broader decision going forward.”
Additionally, when asked how certain she was that the Commission would seek a non-discrimination standard, Shivaun Raff, CEO of Foundem, the lead complainant in the 2010 search case responded, “It would be surprising if the Commission did not pursue the broad, principle-based non-discrimination remedy endorsed by complainants and consumer groups, particularly as the Commission has already publicly indicated that this is its expected remedy. It is worth remembering that a non-discrimination remedy would simply ensure a return to the kind of comprehensive and unbiased search results on which Google built its formidable reputation and monopoly.”
Specifically, a non-discrimination standard is likely to include the following requirements:
• Positioning, ranking, labeling, and displaying competitors’ content in the same way as Google’s own;
• Sharing access/space on pages with competitors in a clear way that does not deceive or mislead consumers;
• Using an unfettered algorithm to generate organic search results in its shopping service;
• Applying the same system of penalties to its own service as it does to competitors.
The fine. A considerable fine is also expected. Reports earlier this year indicated that the anticipatory unprecedented fines could be anywhere from 3 to 7 billion euro. The fine would be calculated based on factors like the number of years of infringement and the gravity of the offense, capped at 10% of Google annual revenue. The Commission is also likely to impose terms in which Google would be additionally fined for every subsequent failure-to-comply violation, particularly if it is determined to be willful or due to gross negligence.
A non-discrimination standard could profoundly affect significant aspects of Google’s business model. While the fine amount would be unprecedented, experts widely agree that a standalone fine in the shopping case is not an effective deterrent; however, the cumulative financial cost of non-compliance penalties, complainant civil damages (if there is a prohibition decision), and possible future cases from both the EU and other jurisdictions poses significant monetary risk to Google.
Google’s history suggests that a non-discrimination standard also has the potential to profoundly affect Google’s business model. For many years, Google’s revenues—predominately based on ads—grew largely in line with the phenomenal growth in global search volumes. Because Google was so dominant in search, as search volumes grew, Google’s revenues grew in the same trajectory.
However, around 2006, the search market became more saturated, and search growth began to level off. When asked about Google’s change in business practices in an effort to continue to grow, Shivaun Raff explained, “Google recognized the need to look beyond its horizontal search service to adjacent markets. The specialized (or ‘vertical’) search markets of price comparison, travel search, local search and so on, seemed a natural choice…Google’s overwhelming dominance of horizontal search means that it plays a decisive role in determining what the vast majority of us discover, use, and purchase online. The essence of the Google search case is, starting in around 2006, Google began to exploit its unique market power in horizontal search to quietly steer users to its own growing stable of vertical search services and away from those of its
Raff continued, “A prohibition decision that puts an end to Google’s anti-competitive search manipulation practices is likely to have a substantial impact on Google’s current and projected revenues. We cannot know how much of Google’s forecast growth is predicated on Google’s continuing ability to commandeer the lion’s share of traffic and revenues of virtually any adjacent market of its choosing, but it is likely to be substantial.”
In short, much of the revenue growth for Google beyond 2006 can be tied to Google’s efforts outside of basic search with the result that these newer business lines are at greater risk of being affected by antitrust enforcement. In future articles, we will look more specifically at how cases related to Android—in which they have a dominant operating system—and advertising—in which Google has a vertically adjacent monopoly—could potentially have an even more fundamental effect on Google’s business if neutrality rules are applied to those platforms.
In-depth Look at Implications for Other Regulators
Likelihood of follow-on enforcement globally. When Vestager released the first comparison shopping S.O., she announced that she was investigating Google’s manipulation of search results in other areas, including travel, local search, maps, and others. During this announcement, she also foreshadowed that the Commission would be formally investigating Google’s practices related to Android, its copying of competitors’ web content (i.e. ‘scraping’), advertising exclusivity, and restrictions on advertisers’ ability to use competing search platforms. Antitrust experts in Europe indicate that Vestager’s statement signals that she is leaving breadcrumbs for additional jurisdictions to follow the Commission’s lead. They argue that the Commission’s increasingly litigious, “post-Almunia” stance, and Google’s growing reputation in Europe as a repeat offender and persistent recidivist, set the stage for other jurisdictions to follow the Commission’s playbook in this and other cases.
Recap of Allegations and Process in Google Shopping Case; Google’s Incentives to Settle
Allegations center on favoring Google Shopping over competitors’ comparison shopping services in search. The Google shopping case evolved out of the 2010 search case where the basic point of contention was the same: Google’s leveraging of its dominant position in search to favor its own products and services in other verticals over those of competitors. The Commission’s S.O. alleged that, starting in 2008, “Google systematically positions and prominently displays its comparison shopping service in its general search results pages, irrespective of its merits.” Further, “Google does not apply to its own comparison shopping service the system of penalties, which it applies to other comparison shopping services on the basis of defined parameters, and which can lead to the lowering of the rank in which they appear in Google's general search results pages.”
In the EU, two possible outcomes of an antitrust case are a “commitment” decision or a “prohibition” decision. A commitment decision is the equivalent of a consent decree in the US. A prohibition decision is a determination of liability. In the former, Google, or in some cases the Commission or complainants, would offer proposals, known as “commitments,” to address the charges outlined in the S.O. If the Commission and Google can reach an acceptable agreement, a test marketing phase follows whereby stakeholders, including complainants, competitors, and customers, test the feasibility of the agreed upon resolution. If deemed acceptable to the market, Google is legally bound to the established terms, subject to fine for non-compliance.
In a prohibition decision, the Commission imposes remedies that would include a fine and some behavioral or structural changes. Google can either agree to accept the decision, pay the fine, and end or change its behavior, or appeal the decision before EU Courts. There are two possible rounds of appeals. First, Google has three months to file an Application to Annul before the EU General Court in Luxembourg. A second level of appeal is on Point of Law in the European Court of Justice, the Supreme Court of the EU. Each round of appeals takes on average two years.
Google has incentives to settle the case and obtain a commitment decision, but it also has incentives to drag it out in court. Several sources presented conflicting views of which incentives are greater, and we will delve deeper into that issue in a future report. No source could say with any degree of certainty which outcome was most likely.
Additional Pending EU Competition Cases against Google
Abuse of dominance in Android. In April of this year, the Commission charged Google with abusing Android’s dominant position in the mobile OS market to force manufacturers to adopt restrictions and requirements in licensing agreements that favor its own mobile products and services. Android OS accounts for about 80% of the world market for mobile phones. The charges alleged that Google forces all manufacturers using Android to tie, or bundle, its dominant products to its lesser dominant products and services as well as give its products preferential placement on hardware. As typical, following an S.O. issuance, Google was given several months to respond. However, it was reported earlier this month that Google has been given (an extra) 6 weeks to respond to these allegations, which is in the first week of September. In future reports, we will discuss this case in more detail, including potential remedies.
Abuse of dominance regarding AdSense. Also on July 14th of this year, the Commission issued an S.O. stating that Google has abused its dominant position in search advertising by artificially restricting third party websites’ ability to display search advertisements from Google's competitors. Through its “AdSense for Search Platform,” Google directly places search ads both on its own site but also acts as an intermediary on third party sites, including online retailers, telecoms operators and newspapers. This service, also referred to as "search advertising intermediation," allows sites to offer a search box that allows users to search for information. Whenever a user enters a search query, in addition to the search results, search ads are also displayed. If the user clicks on the search ad, both Google and the third party receive a commission.
According to the Commission, not only has Google had a dominant market position (~80%) in Europe in the last ten years, but also a large proportion of Google's revenues from search advertising intermediation stems from its agreements with a limited number of large third parties, called "Direct Partners." Google has 10 weeks to respond to these allegations, also an anticipated September 2016 deadline. In future reports, we will discuss this case in more detail, including potential remedies.