Anal­y­sis: Google may face years of reg­u­la­tory ac­tion

The Star Early Edition - - INTERNATIONAL - Foo Yun Chee and Eric Auchard

BE­YOND the head­line-grab­bing €2.4bil­lion (R35.2bn) fine that EU anti-trust reg­u­la­tors have lev­elled against Google, the in­ter­net gi­ant is likely to be shack­led for years by Tues­day’s prece­dent-set­ting de­ci­sion defin­ing the com­pany as a mo­nop­oly.

The rul­ing opens the door for fur­ther reg­u­la­tory ac­tion against more cru­cial parts of Google’s busi­ness – mo­bile phones, on­line ad buy­ing and spe­cialised search cat­e­gories such as travel – while eas­ing the stan­dard of proof for ri­vals to mount civil law­suits show­ing Google has harmed them.

So far, in­vestors have shrugged off the EU’s threat­ened crack­down, with the shares of Google’s hold­ing com­pany, Al­pha­bet, down 1.8 per­cent in early US trade amid a con­tin­ued sell-off in tech­nol­ogy stocks. The stock has dou­bled in the two years since Euro­pean au­thor­i­ties vig­or­ously stepped up in­ves­ti­ga­tions into Google. It trades just be­hind ri­val Ap­ple as the world’s most valu­able stock, with a mar­ket cap­i­tal­i­sa­tion of $666bn (R8.6 tril­lion).

Mon­i­tor­ing

The real sting is not from the fine for anti-com­pet­i­tive prac­tices in shop­ping search ser­vices but the way the EU has thrown the is­sue back to Google to solve, which means the com­pany won’t be able to com­ply through an easy set of tech­ni­cal steps.

In ef­fect, the com­mis­sion is forc­ing Google to demon­strate that ri­vals have made sub­stan­tial in­roads into its busi­nesses be­fore there is much chance of it be­ing let off the reg­u­la­tory hook. EU com­pe­ti­tion chief Mar­grethe Vestager promised Google was in for years of mon­i­tor­ing to guard against fur­ther abuses.

“Just be­ing put on no­tice can limit Google’s strate­gic op­tions into the fu­ture,” Matti Lit­tunen, a dig­i­tal me­dia and on­line ad­ver­tis­ing an­a­lyst with En­ders Anal­y­sis in Lon­don, said.

The EU’s 2004 rul­ing that Mi­crosoft had abused its dom­i­nant mar­ket po­si­tion in Win­dows and other mar­kets is now seen as hav­ing cur­tailed the soft­ware gi­ant’s moves over the sub­se­quent decade to ex­pand more quickly into mar­kets such as on­line ad­ver­tis­ing, open­ing the way for Google’s rise.

Putting the onus on the com­pany un­der­lines reg­u­la­tors’ lim­ited knowl­edge of mod­ern tech­nolo­gies and their com­plex­ity, Ford­ham Law School pro­fes­sor Mark Patterson said. “The de­ci­sion shows the dif­fi­culty of reg­u­lat­ing al­go­rithm-based in­ter­net firms,” he said. “Anti-trust reme­dies usu­ally di­rect firms that have vi­o­lated anti-trust laws to stop cer­tain be­hav­iour or, less of­ten, to im­ple­ment par­tic­u­lar fixes. This de­ci­sion just tells Google to ap­ply ‘equal treat­ment’, not how to do that.”

The EU rul­ing is a warn­ing shot for two con­tin­u­ing EU probes into Google’s An­droid mo­bile oper­at­ing sys­tem and AdSense ad sys­tem, said Richard Wind­sor, an in­de­pen­dent fi­nan­cial an­a­lyst who tracks com­pe­ti­tion among the big­gest US and Asian in­ter­net and mo­bile play­ers, in­clud­ing Google.

“If the EU turns around and says Google can no longer bun­dle its Google Play app store as a de­fault fea­ture on many An­droid smart­phones, this opens up the mar­ket to other hand­set mak­ers to put their own soft­ware and ser­vices front and cen­tre on their phones,” he said.

Lit­tunen agreed, say­ing although Google may be able to meet EU ob­jec­tions in the AdSense case by mak­ing rel­a­tively mod­est changes to its ad­ver­tis­ing sys­tems to en­able web­site cus­tomers to run ads from Google ad­ver­tis­ing ri­vals, the An­droid case has many com­pli­cated fac­tors with no easy so­lu­tion.

More im­por­tantly, Google must find ways to change its busi­ness prac­tices with­out harm­ing its very lu­cra­tive ad­ver­tis­ing busi­ness model, which ac­counted for about 85 per­cent of the $90.3bn in rev­enue of Al­pha­bet in 2016.

“The EU’s iden­ti­fi­ca­tion of ‘su­per-dom­i­nance’ in in­ter­net search through­out the Euro­pean Eco­nomic Area is con­firmed and will pro­vide a cor­ner­stone for the as­sess­ment of other on­go­ing cases, es­pe­cially re­gard­ing An­droid and AdSense,” said Jonas Ko­po­nen, com­pe­ti­tion chief at Lin­klaters law firm in Brus­sels. “This could re­sult in a pro­found change to the com­pany’s busi­ness mod­els.”

Yet an­other worry for the com­pany could be a wave of law­suits in the fu­ture. “We can ex­pect to see a se­ries of dam­ages claims brought by the ri­vals that were ex­cluded from the mar­ket by Google’s con­duct,” said Peter Wills, the co-head of com­pe­ti­tion law for Bird & Bird in Lon­don.

With Vestager giv­ing no ground in her record de­mand last year to col­lect €13bn in un­paid taxes from Ap­ple and stop­ping Google from squeez­ing out ri­vals, other tech gi­ants will prob­a­bly think twice be­fore test­ing her fur­ther.

PHOTO: BLOOMBERG

An at­tendee uses a Day­dream View vir­tual re­al­ity head­set dur­ing an event at Google’s of­fice in Lon­don last year.

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