Google asked to remedy concerns over alleged abuse of its dominance

By James Robinson, Associate Analyst, Regulatory Telecoms, Ovum

After more than 18 months of investigation, the EC has presented Google with its concerns over the search engine’s business practices. European commissioner for competition Joaquin Almunia has written to Google’s executive chairman Eric Schmidt outlining the EC’s concerns and requesting that Google provide appropriate remedies.

The letter follows an antitrust investigation into the company that began in late 2010, having been prompted by complaints from Google’s rivals in the online search market. It is alleged that Google abused its dominant position through unfavorable treatment of competing services. A final decision in this case has not yet been reached, although the EC has identified four main concerns with Google’s conduct.

The EC’s concerns relate to how Google displays its vertical search services, “copies” content from competitors, negotiates exclusivity arrangements with partners, and imposes contractual restrictions on software developers. The EC is hoping that Google complies with its requests, and believes that these points need to be addressed quickly. However, Google is (for the moment) holding its ground against the allegations. It has been given until “early July” to present appropriate remedies, otherwise it will face formal action.

Google’s alleged conduct could infringe EU competition law

In November 2010 the EC began a formal investigation into Google in response to accusations that the search engine giant had abused its dominant position in the online search and advertising market. The investigation was triggered by Google’s rivals (British shopping comparison site Foundem, Microsoft-owned shopping portal Ciao, French legal search engine, and German maps firm Hotmaps), which complained of unfavorable treatment of their search services within Google’s unpaid and sponsored search results. The investigation yielded four main concerns.

The EC’s first concern relates to general search results on the Internet, and the way that Google also displays links to its own vertical search services. The EC is concerned by the preferential treatment Google gives to its own vertical search services compared to those of its competitors. Second, the EC is concerned that Google’s copying of material from competing vertical search services could reduce its rivals’ incentives to invest in the creation of original content, to the detriment of consumers. Third, the EC has concerns over agreements between Google and its partners that result in de facto exclusivity and shut out other providers of search advertising intermediation services. The fourth and final concern relates to Google’s AdWords platform – a system Google uses to auction space on its results pages. The EC is concerned that Google is imposing contractual restrictions on software developers that prevent the “seamless transfer” to other platforms for search advertising.

The EC will hope for a quick resolution to the competition problem

Despite the threat of formal action from the EC, Google has so far rejected claims that it has abused its dominant position, and is seeking clarification of the violations it has allegedly made. Google’s mantra is “don’t be evil”, and when the investigation opened in 2010 the company said that it has always endeavored to do the “right thing” by its customers and the industry as a whole. Google has also stated that, although it believes that it behaves in the interests of other parties and is in line with EU competition law, it recognizes that there is room for improvement and will work with the EC to settle any concerns.

Google is the clear market leader, with approximately 90% of the European search market. However, it should not be assumed that just because it is dominant the firm has abused, or will abuse, that position. There are significant up-front costs involved in indexing trillions of web pages, but economies of scale amass as the business grows, benefiting users. Google has succeeded by moving first and innovating, and argues that it is facing far greater competitive pressure today than it was when the EC began its investigation. It is likely that the EC will be keen to avoid a protracted competition case like the decade-long battle with Microsoft, especially in what Mr Almunia has described as “fast-moving markets”.

Google could face a fine of up to 10% of its global turnover

The EC’s policy on fines for breaches of European competition law is set out in article 23 of Regulation 1/2003. Article 23(2) provides for very substantial fines to be imposed where firms infringe the rules, and gives the EC the power to levy a fine of up to 10% of an undertaking’s global turnover in the preceding business year. The EC is required to have regard to the gravity and duration of the infringement, but any fine should have a sufficient deterrent effect. Google therefore faces a potential fine of almost $4bn should it be found guilty of unlawful behavior.

If Google provides remedies that address the EC’s concerns, Mr Almunia has stated that his team will begin work to finalize a remedies package. Such a “commitment decision” would satisfy the EC and would mean the avoidance of formal proceedings. However, if this process fails, ongoing formal proceedings will continue, which would likely lead to a statement of objections and fines. Mr Almunia believes that the industry would value a prompt resolution to the matter, and has given Google “a matter of weeks” to offer an acceptable proposal of remedies for each of the EC’s points.

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