The European Commission ruling this morning on Google’s “illegal conduct” of preferential placement for its own Product Listing Ads (PLAs) has far reaching implications.
The company has 90 days to comply and must inform the EU of its plans for implementation within 60 days. In addition to the record breaking 2.4 billion-Euro fine, Google also risks additional fines of up to 5% of daily revenue. Margrethe Vestager, the EU’s antitrust chief noted, "As a result of Google’s illegal practices, traffic to Google’s comparison-shopping service increased significantly, whilst rivals have suffered very substantial losses of traffic on a lasting basis." The case for bias is clear cut. Rival comparison sites typically appear on the fourth page of search results, robbing them of the 95% of clicks that occur on the first search page.
While not exactly small change found down the side of the couch, with $90 billion in cash at hand, Google can afford the fine. What is more problematic for Google is that it may have to recalibrate a well-honed marketing machine that is responsible for the vast majority of revenues. Further, for Google and its peers, this may be the thin end of the wedge for increased regulatory scrutiny across other digital services within their ecosystems, including payments.
Tipping Google’s Cash Cow
This ruling did not happen overnight. The EU decision has taken seven years to be made. The company that the EU was investigating in 2010 was primarily known as a search engine and very different to the company it is today. With the proliferation of Android devices, Google has become far more pervasive in the physical world via services such as Waze and Android Pay. Nonetheless, more than 86% of Google’s revenues are still derived from advertising, with all other products and services to some extent fueling the specificity and relevance of the advertising algorithms.
What has changed since the start of the investigation compared with where the market is today, is the usage of mobile for search. In 2015, Google confirmed that the majority of its searches were performed on mobile devices. Given that mobile devices are, by definition, not static, searches are more likely to be contextual, based on location and real-world calls to action. Google search is in many respects, the first point in a process that links into a host of other Google products and services such as video, maps and payments. By recalibrating Google’s search algorithm, the connective tissue between these separate services may be severed. Vestager referenced that the EU might also need to take a closer look at Google’s behavior concerning maps, travel and restaurant reviews, meaning the threat is real.
Who owns the customer?
Arguably, in the current state of "net neutrality," there should be equality between all searches, with no particular entity putting its thumb on the scale. While the definition of "neutrality" when it comes to the WWW is highly subjective, it is understandable that the EU would deem Google’s attitude to PLAs as anti-competitive on a perceived level playing field of the Internet. The question however is, where is the line drawn? A previous EU ruling against Microsoft’s anti-competitive strategy in Europe required the company to no longer bundle its media player with MS Windows software. It is plausible that a similar argument could be made for proprietary software and services embedded on Android and Apple devices for competitors that feel emboldened by today’s ruling.
In this scenario, Google is in a better position, offering a relatively open platform on Android devices for competition to coexist. Apple, on the other hand, has been notoriously protective of native apps and access to device hardware such as the NFC antenna. Could the EU force Apple to allow Android Pay on its iPhones? Given levels of adoption of both Apple and Android Pay at this time, it is unlikely to rise to the level of EU anti-trust scrutiny. Nonetheless, it is worth considering as these ecosystems eventually scale that they may be required to become more inclusive of others.
Google has 90 days to determine how to recalibrate PLA display strategy, but may have a longer period to adapt to the ruling. With EU regulation moving at glacial speeds, Vestager said the case is likely to stay on her desk "for quite some time" as regulators monitor how Google deals with the order "for a number of years."