According to EU logic, breaking up Google is smart move

On Thursday, the European Parliament backed the idea of breaking up Google.

It doesn’t have the power to do it, but the legislators’ decision is a notable part of a backlash against the remedial action Google took after the European Commission fined it €2.4 billion (Dh10.82bn) for abusing its dominant position in shopping search.

The commission found last June that by giving its own product comparison service, Google Shopping, prime “real estate” at the top search result pages, Google was hampering competition for independent shopping comparison websites.

The company’s remedy is to hold auctions for spaces in the special box in which comparison results appear.

Google Shopping bids in these auctions on the same terms as its rivals, and Google has promised to keep the service profitable so it can’t outbid the competition every time with vastly superior resources.

It’s next to impossible to run into a non-Google offer in that box. The original complainants, notably the UK firm Foundem, have been campaigning to have Google declared non-compliant.

Foundem’s argument is laid out in an interactive presentation released on April 18. It argues that although Google claims to run Google Shopping at arm’s length, that is a meaningless accounting arrangement. In reality, Google as a whole still harvests 100 per cent of the profit from the ads it runs after winning auctions – plus 80 per cent of the profits from competing services’ ads in the form of winning bids.

The annual report on competition policy from the European Parliament’s Committee on Economic and Monetary Affairs, which the legislature approved on Thursday, shows that at least some in the EU are receptive to Foundem’s argument. “Without a full-blown structural separation between the company’s general and specialised search services, an auction-based approach might not deliver equal treatment,” the report says.

This is not the first time the European Parliament has signalled its willingness to consider breaking up Google.

It approved a non-binding resolution containing this option in 2014. This time, however, the reasoning is more logical.

There’s no way Google can create a level playing field in many areas of specialised search if its own divisions operate in these areas. Auctioning ad spots creates the appearance of competition.

The power to decide on Google’s compliance rests with the European Commission and Margrethe Vestager. As commissioner for competition, she has made a point of keeping the matter of Google’s break up “open and on the agenda”, if not under immediate discussion.

The commission has let on, however, that it’s worried about the infrequent presence of competing firms in Google’s shopping comparison box. The search giant’s next report on its remedial action is due in May, and the anti-trust officials are preparing for a critical reading. That’s why Foundem and European legislators have stepped up their lobbying.

If Google is declared noncompliant, its parent company, Alphabet, can be forced to pay up to 5 per cent of its daily turnover for every day that it has violated the commission’s ruling, meaning, theoretically, since last September.

Taking Alphabet’s average daily revenue in the fourth quarter of 2017 as a base, that’s about $17.6 million a day for seven months and counting. This could end up being worse than the original fine, which Google is appealing.

Even a break-up could be preferable to paying this sort of penalty for a protracted period.

In fact, Google would probably stand to lose little by spinning off specialised search businesses. It would still receive 80 per cent of their profit as bids for ad space.

Competitors at Foundem want Google to remove the ad-filled boxes altogether and let its supposedly impartial, generic search algorithm throw up product comparison options as ordinary search results.

A compromise solution, according to Foundem, would be to have Google sell ad space at a low fixed price that would cover its costs. I doubt either of these solutions will be acceptable to the EU. It can’t very well ban Google from selling ads on search result pages or regulate the rates it charges. A break-up would be a cleaner, less market-distorting solution.

That appears to be the general direction of the commission’s investigations into Google’s other search businesses and its contract with Android phone vendors. The commission is slow, and Google’s lobbying operation in Brussels is never idle, so one cannot rule out delays or compromises. But it’s quite likely that, despite its powerlessness in the matter, the European Parliament is ahead of the curve.