Vestager announcing Google €4.34 Billion fine for breaking EU antitrust rules
Vestager announcing Google €4.34 Billion fine for breaking EU antitrust rules

A record fine from the European Commission (EC) might force Alphabet to change its business model. The Commission’s actions reveal that the risk of antitrust actions has greatly increased in Europe.

The business model for Alphabet’s popular Android operating system for wireless devices is an illegal practice that violated antitrust laws, an EC press release charges. Alphabet has 90 days to change how Android operates or it will face a fine of €4.34 billion (£3.87 billion).

The Commission found that Alphabet leveraged its position as the dominant search engine operator to become the dominant smartphone operating system provider. Alphabet achieved this by bundling the Google search engine, the Play Store, and the Google Chrome browser into Android, global law firm Linklaters revealed.

Alphabet systematically violated antitrust laws

Alphabet’s antitrust violations included requiring manufacturers to pre-install Google Chrome, and the Play Store in phones. That made those products the first choice of customers and discouraged the use of rival operating systems.

That gave those apps an unfair advantage over competing products. The commission also singled out payments Alphabet made to manufacturers that exclusively pre-installed the Google Search app. Another practice criticised was Alphabet’s efforts to prevent manufacturers from installing its apps on devices running alternative versions of Android.

Risks created by the antitrust actions are far greater than many people assume because they have the potential to disrupt the entire industry. A similar action against Microsoft in 1998 effectively destroyed that company’s software dominance.

Antitrust dispute could end Android

In 1998, Microsoft was bundling Internet Explorer to its Windows products. The US Justice Department blocked the practice, which helped open the door for Google’s entry into the search engine market.

There are some key differences, in 1998, Microsoft was selling software. Alphabet is effectively giving away Android and generating revenue by selling data. Critics charge that the EC’s action would force Alphabet to charge licenses for Android which would increase costs to consumers.

Strangely, Android-bundling is a good deal for consumers because they receive a wide variety of solutions pre-installed. The bundling violated antitrust laws because competing products were not given the same choice.

An obvious risk is that manufacturers would replace Android solutions with cheaper, inferior, products. Another would be chaos in the marketplace because Chrome accounts for up to 60% of the browser market share and 90% of the searches.

Losers would be consumers who would lose the convenience of pre-installed apps and might have to pay for solutions that are currently free. Smaller software providers might profit in the long run by getting more access to phone and tablet screens.

Alphabet’s limited choices

Alphabet is faced with three choices in this case. It can fight the fine, by appealing to the courts. Try to comply with the antitrust ruling by changing its business practices in the EU. Or try to work out some sort of deal with the European Commission.

The third alternative is the most likely because it would be easiest. A probable outcome would be for Alphabet to pay the fine and enter into an agreement to partially comply with the antitrust rules.

Alphabet can easily pay the fine it had $102.855 billion (€87.85 billion) in cash and short-term investments on 31 March 2018. Beyond that, it would not cost Alphabet very much to simply pre-install another browser, such as Opera, in Android phones.

The danger to Alphabet from that move would be giving Opera a chance to steal data and advertising revenue. The current Google business model is to sell the data generated from searches. Allowing competitors equal access would theoretically give them a chance to capture some of that data.

The most likely outcome of the antitrust moves is that Alphabet will have to provide an opening for potential competitors in Android. Whether one of those competitors will be able to capture a large percentage of Alphabet’s business is unknown.

The risk to advertisers and software providers is a totally disrupted market with new players. Unfortunately, it is not clear if those players exist and if they would have the resources to take advantage of the opportunities created by the European Commission.

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