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Google shrugs off EU fine, damage to hinge on rivals' plans

Jul 22 2018 12:07
Natalia Drozdiak and Mark Bergen, Bloomberg

Europe’s record $5bn fine against Google, levied on Wednesday morning, marks the biggest regulatory attack yet on technology giants. But investors and analysts largely shrugged off the ruling’s potential to immediately dent Google’s business.

The real damage will hinge on how aggressively Europe cracks down on Google’s lucrative agreements with smartphone makers and carriers going forward - and how quickly Google rivals like Amazon.com and Microsoft pounce.

Amazon and Samsung, a Google partner, have already started pushing into web search with their voice-activated products.

As expected, the European Commission declared Google’s conduct with its Android mobile operating system anti-competitive and ordered the company to cease its behaviour, suggesting it change its contracts with phone makers. That targets Android’s greatest asset for Google: The way it distributes its lucrative services, such as search, its web browser and its app store, to more than a billion devices.

The European ruling took direct aim at those three services.

Market capture

Google gives Android mobile software for free to handset makers but coerces them to pre-install Google’s apps if they want the Play app store, which offers more than a million programs. The search giant also pays phone manufacturers, telecommunications carriers and other browser makers to run Google’s search engine and collect user data, deals the company doesn’t disclose.

Thanks to those agreements, Google has captured almost $50bn in yearly mobile ad-market sales, or a third of the global market, according to research firm EMarketer.

The European Union (EU) has left it up to Google to decide how it changes the way it puts search and web-browser apps on Android mobile devices.

"I have made no suggestions as to how Google should solve this," said EU antitrust chief Margrethe Vestager. When questioned by Bloomberg Television, she said “the obvious minimum” is that the "contractual restrictions disappear".

Analysts largely downplayed any short-term impact on Google primarily because the ruling doesn’t bar the company from getting its services on devices - for instance, because of consumer interest. "The consumer is likely to just simply download the apps for Google’s services if and when they get new Android phones  much as they already do when they get new iPhones," Credit Suisse analyst Stephen Ju wrote in a note after the ruling, adding that the firm expects "minimal impact."

Shares of Google parent company Alphabet closed flat at $1 212.98 in New York on Wednesday, after earlier falling 0.7%.

Vestager on Wednesday suggested there were various possibilities for Google to monetise Android, for instance, through the revenue it makes from apps sold through its Play app store. Alternatively, Mountain View, California-based Google could replicate Apple’s model, under which the operating system works only on Apple gadgets and devices. Eric Sheridan, an analyst at UBS Research, noted that the EU ruling may accelerate Google’s own nascent line of phones and other hardware. While that could solve regulatory compliance issues with Android, hardware investment poses a threat to Google’s margins.

However, the bigger impact could come if some of Google’s foes, such as Amazon or Microsoft, which runs rival search engine Bing, cut deals to place services on more devices. Amazon has already started to do this with its Alexa voice-based assistant, a competitor to Google search. Web browsers that compete with Google’s Chrome may also make moves.

"We are hopeful the result will help level the playing field for mobile browsers like Firefox, and to foster openness that creates and sustains competition and innovation," said Denelle Dixon, chief operating officer of Firefox owner Mozilla.

In blog post responding to the ruling, Google CEO Sundar Pichai emphasised the choices the Android operating system offers handset makers and carriers. Web browsers like Firefox and Opera "have been downloaded more than 100 million times," Pichai wrote.

In the Wednesday ruling, the EU said that some of Google’s revenue-sharing contracts with Android partners constituted "illegal payments." In 2014, Google stopped these types of deals, which doled out large payments to handset makers and carriers to run Google search exclusively. Still, Google has continued to cut one-off payments to individual partners and web browsers that ensure its search engine is the default.

No knocking out Google

Even if rival browsers knock Google’s Chrome web browser out of the market, that doesn’t mean they knock out Google. Mozilla cut a separate agreement earlier this year with Google to be the default search engine for the Firefox browser.

Opera Software, which runs the Opera browser, said in a recent filing that Google provided 43% of its revenue in 2017 for a similar deal. Those deals will keep Google’s cash cow front and centre even if its smaller services are cut off from more consumers.

In a filing on Wednesday morning, Google’s Alphabet said the $5bn fine would accrue as a one-time net loss in the second quarter. "But the real threat to revenue from possible limitations on data collection may be dodged," Bloomberg Intelligence analysts wrote on Wednesday.

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