Was the EU Right to Penalize Google?

July 10, 2017

“Don’t be evil”. If the EU’s case is accurate, Google doesn’t seem to have stuck closely enough to the core principle it has publicly and internally espoused since 2000. In case you’ve been on vacation or asleep for the past week or so and have not heard the news, on June 27th Margrethe Vestager, the EU’s anti-trust commissioner, announced via press release a record €2.42 bn. ($2.8 bn.) fine against Google for abusing its market dominance in search by manipulating search results to favor its comparison shopping service over those of competitors such as Nextag, PriceGrabber, Shopping.com, and Shopzilla, as well as smaller sites like Kelkoo and Foundem that appear to have suffered greatly from Google’s alleged abuse while Google’s shopping service has reportedly grown as much as 45-fold in market share in the past three years or so.

In contrast with U.S. anti-trust law, which is focused on protecting consumers against price-profiteering by a dominant vendor or service provider, the EU frames its assessment more in terms of the impact on competition. In the end, these two factors converge in loss of choice for customers through either higher prices or some other kind of friction including lack of beneficial innovation. To quote the press release directly:

“Google has come up with many innovative products and services that have made a difference to our lives. That’s a good thing. But Google’s strategy for its comparison shopping service wasn’t just about attracting customers by making its product better than those of its rivals. Instead, Google abused its market dominance as a search engine by promoting its own comparison shopping service in its search results, and demoting those of competitors.

“What Google has done is illegal under EU antitrust rules. It denied other companies the chance to compete on the merits and to innovate. And most importantly, it denied European consumers a genuine choice of services and the full benefits of innovation.”

As Nils Pratley, writing in the Guardian on June 28th, stated, the EU is asserting that Google “wasn’t merely giving its in-house service home advantage; it was massively distorting search results.” As Pratley goes on to say, this rigorous pro-competition view would benefit consumers everywhere, including in the U.S.” Speaking of the U.S., Pratley completes his thoughts thus: “The wonder is that U.S. regulators, who once upon a time had an honourable record of acting against powerful monopolists, have been so supine with the technology giants.” For years I’ve been alarmed at the apparent complicity – or at best apathy – demonstrated by anti-trust regulators in the U.S. in the face of the intensifying cartelization of industries such as commercial aviation, telecommunications, cable and broadband, and banking, let alone what’s now occurring in consumer tech.

While referring to more traditional industries, it’s important to acknowledge the different nature of monopoly in traditional industries like oil or railroads, where power derives from control of supply. Ben Thompson, who runs a tech strategy consultancy, Stratechery, describes the distinction in this way: “In the physical world, limited by scarcity, economic power comes from controlling supply; in the digital world, overwhelmed by abundance, economic power comes from controlling demand, and that control stems from a virtuous cycle that, for the reasons explained in the excerpt above, accrues to the dominant player in a space. In other words, to note that end users could go elsewhere is to ignore the reality that users are not dummies, and that network effects are the foundation of digital monopolies.”

Besides the comparison shopping suit, the EU is still reviewing two other cases against Google, one for steering business towards Adsense, its service for placing ads on independent sites, and the other in its Android business, for forcing smartphone and tablet makers to place Google’s search mapping, email, and other apps prominently on their device screens. Facebook will also need to be careful in light of its stranglehold in social networking and its rapidly increasing share of mobile advertising revenues along with Google (an emerging duopoly).

As Amazon increases its share of e-commerce it will have to be careful not to favor is music and video streaming services, e-books, and its Echo personal assistant, over competitors’ offerings. Of course, in its day Microsoft faced severe censure and even the possibility of a break-up from the EU anti-trust commission as well as the U.S. authorities, with respect to its Windows monopoly before mobile devices started to erode the market impact of its stifling hold on personal computer operating systems.

Although Google will inevitably appeal against the EU’s verdict, it is clear to me that the company needs to absorb the learnings from this experience and review its strategy. Users of consumer internet products and services congregate willingly around a clear number one because apart from the “network-effect” benefits, selecting the service they want to use becomes a no-brainer. This is a valid reward up for a company that achieves dominant share of a given category – up to a point. The turning point comes when users perceive that the benefits are beginning to be outweighed by new frictions that they begin the feel.

In the case of Google’s dominance in search, this point may be reached when, for example, search users perceive that Google is indeed favoring its own “companion” services in other categories over those of competitors in search results, in the process “demoting” competitive offerings to page 3 or 4 of the search results (equivalent to a competitors being thrown into a dead zone, as others have observed), or it can occur when users begin to mistrust the company’s motives regarding use of their personal data and shopping habits. To date, in the U.S. users are fairly at ease regarding the use of their surfing and buying behavior to feed them relevant ads, but in many European countries users are less happy about so easily giving up their privacy to vendors whose motives they aren’t entirely comfortable with.

Backlash growing against FAANG companies

As has been copiously publicized since the 2016 presidential election, consumers are becoming queasy about fake news and other unwelcome incursions on their private online domain, apparently without curation by Google (YouTube), Facebook, and others to keep out phony articles and videos. And the much-chronicled bad behavior of Uber’s CEO and entire leadership (mostly now fired from their executive roles), plus discomfiting incidents such as periodic sexual harassment cases against venture investors, entrepreneurs and others in the tech world, are engendering a mistrust of Silicon valley in general.

Major advertisers are beginning to mistrust the assertions of Google and Facebook regarding the effectiveness of advertising campaigns, obstructed by fraudulent counting of clicks, and opaqueness of each service providers’ advertising effectiveness metrics. Add to this the staggering valuations of the FAANG group of companies – Facebook, Amazon, Apple, Netflix, and Google (Alphabet). It was Jim Cramer, the effusive TV stock market anchor, who first coined this acronym to capture the collective impact that they are having on the markets. As of June 9, 2017, their total market caps totaled around $2.5 trillion, which as Investopedia tells us is about the size of the entire economy of France and 13% of the U.S. economy.

It’s only a matter of time before, particularly in the increasingly divisive, populist and anti-media environment in the U.S., before a serious backlash against Silicon Valley ensures. More importantly, the idea of breaking up one or more of the giants, from Google to Amazon to Facebook may not be such a distant possibility. So what’s a dominant FAANG company to do?

Strategic lessons for Google

This is quite evidently a critical time for consumer internet behemoths to (re)learn how to win friends and pacify enemies. In major B2C businesses, where a winner-take-all mentality and network effects are prevalent, it’s natural that leading contenders do everything they can to occupy the number 1 position in their key categories and markets. As the EU’s case makes clear, winning that dominant position is not a sin. The anti-trust problem arises when they start acting the bully, forcing partners, customers, and users to comply with their rules, or else, consequently crimping competition and/or abusing customer choice or privacy.

This is essentially what Google is accused of, and among the “FAANGUs”. I can’t resist including Uber, which although still privately funded has in essence the size and fire-power of its public cousins. Facebook, Apple, Amazon and of course Uber have frequently demonstrated similar bullying tendencies in the past. As a side note, Netflix doesn’t (yet) seem to have demonstrated the nasty edge or the secretiveness of its colleagues in this highly valued group.

Besides becoming easier to deal with and more scrupulous in its competitive practices, Google should demonstrate credible self-policing and should, for example, implement more rigorous content curation (especially on YouTube) and more transparent metrics on advertising data effectiveness before regulators decide to apply heavy policing from outside. In showing real good faith in these respects, they may be able to soften the restrictions that will inevitably be applied against them by the EU in different parts of their business, and make customers feel more trust in the company’s motivations.

It might be too much to expect from Google’s leaders, but I guess what I’m saying is that Messrs. Page and Brin and their leadership team should seriously examine their world view and their business strategy. Do they really believe that they deserve to dominate every category that has any imaginable adjacency to their search franchise? In other words, do they really believe that they can always deliver a better service experience than specialists in categories such as comparison shopping (the object of the EU’s fine), payment systems, social networking (a past failure with Google+), autonomous vehicles, or virtual/augmented reality? Would they not become a more influential and enduring company if they played nice and encouraged competition around their advertising-powered search franchise and even their Android business, in effect building interdependent ecosystems in each rather than exerting a monopolistic but eventually unpopular and inefficient dominance? It might be worth keeping in mind what happens when a dominant colossus becomes so large, unwieldy and blind that it misses out on the next wave(s) – who can forget Microsoft a decade ago, missing out on mobility despite its late and desperate acquisition of Nokia, after being very late to the internet several years before that.

Finally, I believe Google would be better advised to practice a more realistic innovation and market development strategy aimed at, on one extreme, equipping mature offerings such as YouTube with a more effective business model that includes user privacy and content curation and, at the other extreme, avoiding early market disasters such as the misbegotten introduction of Google Glass a few years ago.