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Europe has just hit Google with a record $5 billion fine. Expect fireworks.

- July 18, 2018

The European Commission, which administers antitrust policy in the European Union, has just hit Google with a record fine of 4.34 billion euros ($5 billion U.S.). This fine is intended to punish Google for the way in which it has structured the market for its operating system. Here’s what you need to know.

The massive fine is for “tying” the operating system to specific applications

Android is the operating system used by most smartphones that aren’t manufactured by Apple. It is, in principle, an “open source” operating system, which allows phone manufacturers to modify it in various ways. For example, Samsung’s popular Galaxy phones run Android but use a “skin” and various Samsung-branded applications to differentiate it from competitors’ products.

The E.U. has fined Google for linking the operating system too closely with Google’s search service. Thus, for example, if phone manufacturers want access to Google’s app store, they have to agree to pre-install the Google Search app and Google’s browser application (Chrome), which is designed to hook into Google’s business model. People with smartphones want to download apps. It is possible for phone manufacturers to set up their own app stores, but doing so would be expensive and also less attractive to consumers, since app manufacturers are unlikely to go through the bother. Thus, for example, Amazon.com has set up its own app store for people who use its Fire devices (which have an operating system based on Android), but the selection of apps is notably smaller than on Google’s own app store. (Jeffrey P. Bezos, Amazon’s chief executive and founder, owns The Washington Post). Google has also paid manufacturers and phone network operators for exclusively installing Google Search (i.e., not making other search options available as a pre-installed app) and has made it hard for manufacturers to sell devices running other Android-based operating systems, such as Amazon’s.

Even for a company as large as Google, the fine is a big deal — it accounts for nearly 40 percent of turnover. Perhaps even more worrying for Google is that the ruling, if upheld, will substantially constrain Google from engaging in these practices, perhaps damaging its business model in Europe.

Antitrust law is different in Europe and the United States

European antitrust law differs from U.S. antitrust in two important ways. First, the European Commission has greater ability to set the agenda. In the United States, antitrust enforcers have to rely on courts, and their power to convince judges that action is warranted is limited. They can reach negotiated settlements with the targets of antitrust actions — but these settlements are made in the shadow of court decisions (and the two sides’ beliefs about how courts might ultimately have ruled). In the E.U., in contrast, the European Commission can issue antitrust rulings on its own. These rulings can then be challenged by the target in the European Court of Justice. What this means is that in the United States, negotiations between the regulator and possible antitrust violators take place in the shadow of what the courts might do, while in the E.U., negotiations between the regulator and possible violators set the agenda for the court.

Second, U.S. antitrust law focuses overwhelmingly on harm to consumers, which typically involve higher prices. E.U. antitrust law also takes into account harm to competitors. Here, the fundamental intuition is that competitive markets provide greater innovation as well as lower prices. However, if competitors find themselves driven out of business by a monopolist, then innovation will suffer, even if prices don’t change. This means that E.U. regulators are more willing in principle to rule aggressively against companies such as Google (which was fined billions of dollars in 2017 over a separate antitrust matter).

E.U. and U.S. approaches to competition law are starting to diverge

E.U. and U.S. approaches to competition law are starting to diverge

It is hard to predict how the United States will respond to Europe’s action. The U.S. Federal Trade Commission’s chairman has said that the United States will study the ruling carefully. On the one hand, the current administration is far more skeptical of E.U. market regulation than previous administrations were. On the other, Google has far fewer friends in the current administration than it had under President Barack Obama.

What one can say is that the U.S. and E.U. approaches to antitrust are increasingly moving in very different directions. Once, the United States seemed willing to mount large-scale investigations of technology companies. However, in the 1990s, a similarly large-scale antitrust investigation of Microsoft (which was also accused of tying its browser too closely to its operating system) ended in disarray. This is not only a product of administration preferences but also of changes in how judges reason (many of them have been influenced by the “law and economics” approach, which tends to be skeptical about antitrust action), as demonstrated by the recent ruling over the AT&T-Time Warner merger.

E.U. and U.S. antitrust regulators used to informally coordinate. In the future they are increasingly likely to clash. The U.S. Supreme Court’s ruling last month in a case involving American Express  has large-scale implications for antitrust actions against companies such as Google in the future. It sets out a line of reasoning that will make it very hard to take antitrust actions against companies such as Google that operate different markets for advertisers and for consumers. Many kinds of antitrust action appear to be off the table, unless and until the Supreme Court changes.

However, the E.U. is likely to become increasingly aggressive. Over the past few years, European officials, politicians and civil society actors have become increasingly skeptical of large U.S. e-commerce companies and are increasingly willing to take regulatory actions that bring them into line with the European understanding of how markets should work. Antitrust policy, privacy policy and policy on online content rules are increasingly seen as instruments that can be applied toward the same broad goals, rather than different (and possibly conflicting) approaches to policy. The combination of U.S. timidity and E.U. aggressiveness on antitrust and related questions is almost certain to lead to increased transatlantic conflict in the coming  years.