When Eric Schmidt, Google’s executive chairman, met the E.U. Competition Commissioner Margrethe Vestager in early March, he knew he couldn’t just rely on his charm, like he had done with her predecessor, Joaquín Almunia.
Eight employees, most of them engineers, accompanied Mr. Schmidt on his trip in an attempt to win over the commissioner with facts.
The trip was to no avail. Europe’s foremost competition watchdog announced last month that her department now has enough evidence that Google has been abusing its dominant position in the search engine market to begin an anti-trust investigation.
The inquiry will also look into whether or not the Internet giant has used its Android mobile software to push its own mobile apps into the market at the expense of competitors.
In the worst case scenario, Google will face a penalty of up to 10 percent of its turnover, which amounted to $66 billion (€59.3 billion) in 2014.
A fine of $6.6 billion would be a new record, by far breaking the current record of €1.06 billion ($1.79 billion) that chip manufacturer Intel had to fork out. But Google could easily pay the penalty from its coffers, which are lined with around $65 billion.
What is much more of a threat than the fine is the possibility that the E.U. investigations and other legal actions might constrain the huge company’s competitive carte-blanche.
E.U. penalties can be a good indicator that companies are either neck-deep in economic trouble or just about to slip into turmoil. Before Google, that held true for Microsoft and Intel.
“I am optimistic that the Europeans will put an end to the search manipulation of the Internet giant.”
In March of 2004, then E.U. commissioner for competition Mario Monti fined software giant Microsoft almost €500 million for abusing its market advantage with the Windows operating system.
Back then, Brussels feared that Microsoft might hog the just-emerging online video market by preinstalling its Media Player software. Later, the E.U. added even higher fines when Microsoft tried to push its Internet Explorer browser through Windows.
Today, that period under former CEO Steve Ballmer is considered the company’s lost decade. Not because of the record penalties – those were petty cash for Microsoft. But rather because the software firm was unable to shape the Internet with the E.U. competition guardians watching. Microsoft’s search engine Bing today only has a 3 percent market share worldwide. And Google’s YouTube is the globally leading video platform.
Microsoft was unable to get a foothold in the booming market for mobile devices, despite the dominance of its Windows OS. With less than 3 percent market share, Windows is barely present in the tablet segment. The big players are Apple’s iOS and Google’s Android.
Intel has a similar story to tell. In May 2009, the E.U. commission imposed the €1.06 billion fine on the world’s leading chip manufacturer because the company had abused its market dominance in computer processors to restrict competitors like U.S.-based AMD.
Intel’s processors continue to dominate the market for PCs and servers. But when it comes to mobile processors, Intel has never been able to gain a strong footing. Qualcomm, ARM and Samsung have been ruling this growth market.
Google is now heading for a similar setback.
At first glance, the company is in splendid shape. In Europe, the search engine accounts for 96.6 percent of all online queries, in North America it’s 67 percent according to the market researchers of Comscore.
Nevertheless, prices for Google ads have been dropping for three years. The reason is that many Internet users have made the switch to smartphones and tablets.
On those devices, online searches don’t play much of a role. Instead, any required info is presented via apps.
Online retailers such as Amazon therefore aren’t dependent on Google anymore to reach customers, but can address users directly through their own apps and online services.
Google’s feared competitor Facebook is cleverly harnessing the mobile internet market. The fact that Facebook, unlike Google and Apple, doesn’t have its own mobile operating system turns out to be an advantage. That way, Facebook can use its apps as mediators between all systems – and establish them as a gateway to the mobile Internet.
While Google was often the start page for many users on their laptops and desktops, for today’s smartphone users it’s rather Facebook with its photo and messaging services such as Instagram, WhatsApp and Messenger.
Google is still dominating the mobile advertising market, according to market researcher eMarketer. But Facebook quadrupled its market share to 21.7 percent since 2014, as eMarketer found, while Google’s piece of the pie shrank from 52.6 to 46.8 percent.
In theory, the solution is simple. Google just has to better market its smartphone apps such as Google search, Google maps or Gmail, and use them as gateways to mobile Internet.
But under the watchful eyes of the anti-trust authorities that will be difficult – especially as the Danish commissioner’s investigation will also encompass the dominance of Google’s Android.
The allegation is that Google has forced smartphone producers who rely on Android, such as Samsung and HTC, to offer additional Google apps and services.
The operating system runs on 80.7 percent of all smartphones worldwide, according to the U.S. consultancy Gartner.
It’s clear that Ms. Vestager is not as willing to compromise as her predecessor, Mr. Almunia. The Spaniard had banked on a settlement with Google to prevent the process dragging on for years as in the case of Microsoft. But since Google was only willing to make minor concessions, Mr. Almunia never got far.
Ms. Vestager, however, is not afraid of repeating the Microsoft scenario. Her employees are making good use of their experience in the Microsoft case for the current Google investigation – especially Deputy Director General Cecilio Madero, one of the first officials on the Microsoft case in 1999.
Ms. Vestager said she was giving the case top priority.
“The speed with which she has acted so far underlines her determination,” said Thomas Vinje, lawyer of Fairsearch, an alliance of twelve plaintiffs against Google, including Microsoft, Oracle and Nokia.
In the United States too, the mood has changed since it recently became public that experts of the U.S. anti-trust authority FTC had already considered penalties against Google in 2012 for manipulating search results in favor of its own services.
Back then, Google was spared for political reasons, said John Simpson of the California-based consumer protection organization Consumer Watchdog. “I am optimistic that the Europeans will put an end to the search manipulation of the Internet giant,” he said.
Ms. Vestager is currently focusing on the price comparison site Google Shopping in order to create a legal precedent. Her officials have proof that Google has positioned its own service in particularly well visible spots in searches.
The same might have been true in specialized search engines, such as for holidays, flights, hotels and maps. Officials are currently investigating whether Google is copying web content from competitors, practicing exclusive advertising and restricting advertising companies.
“She still has many arrows in her quiver,” said a source in one of the plaintiff companies. “Google is floored by Ms. Vestager’s approach,” said a manager at another firm. “They have to first get themselves in order.”
Video: Margrethe Vestager on “Defining Markets” at the Presidents Summit.