Google penalised: Consumers, innovation are end-victims

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New Delhi | Published: August 2, 2018 1:35:02 AM

The European Commission’s decision affects Google’s core business model in Europe, and the company might decide to finance Android through licensing fees, which, ultimately, would increase the cost of handsets and tablets.

Google penalised: Consumers, innovation are end-victims

Recently, the European Commission (EC) imposed the biggest ever antitrust fine on Google—of $5 billion—for abusing its dominant position in relation to its Android operating system. This is the second time that the EC—Europe’s antitrust regulator—has penalised Google for its business practices. In June 2017, the EC had fined the search giant 2.42 billion euros for illegally prioritising Google’s own comparison shopping service, in its search results, over similar other services. A third EC antitrust investigation is ongoing against Google for abusing its market power in its AdSense online advertising business, and a decision is expected later in the year.

Today, 80% of all smartphones and 60% of all tablets, the world over, use Google’s free and open source operating system—the Android. It is free, and it works better than the now-discontinued alternatives such as Windows Phone and Symbian. So, what is the EC’s problem with Google? The EC’s yearlong investigation concludes that Google has leveraged its dominant position in the Android operating system to “cement its dominant position” in the general internet search—Google’s main source of revenue.

Anyone buying any Android phone must have found certain Google apps—including Google Play Store, Google Search and Google Chrome browser—pre-installed in their smartphones. Did anyone wonder why? The device manufacturers were required to pre-install Google’s search app and browser app (Chrome) as a condition for licensing Google’s app store (the Play Store). Google also paid device manufacturers and certain network operators to exclusively pre-install Google Search across their portfolio of Android devices. The EC held that this greatly reduced the device makers’ incentive to pre-install other competing search and browser apps. The EC relied upon empirical data that consumers typically stick with such pre-installed apps, resulting in the foreclosure of rival search and browser apps. The EC then concluded that Google’s such market practices have denied European consumers the benefits of effective competition in the important mobile sphere.

The legal reasoning that the EC adopts to correct Google’s alleged market abuse is eerily close to the now much-discredited enforcement action in the 1990s by the US Department of Justice (DOJ) against Microsoft, where Microsoft was sanctioned for bundling its flagship Internet Explorer web browser software with its Windows OS, enabling Microsoft to gain market share in web browsers (at that time, web browsers were payware, not freeware) over competitors like Netscape Navigator and Opera. Not only has DOJ’s foreclosure theory in the Microsoft case been discredited, such alleged foreclosure occurred in a world without apps, or appstores, or user-driven device customisation available with a few swipes and clicks.

So, how plausible is the EC’s foreclosure theory? How many of us would use either Google’s search or browser apps just because it is pre-installed on our Android smartphones or tablets? Given that the competition is only “one download away”, consumers are free to download any competing browser of search apps, even if they are not pre-installed. The Android platform does not have any technical or economic constraints preventing users from downloading other non-Google apps.

Customer preference for these Google apps is not because they come pre-installed but more because of their better quality and efficient features. Non-Android smartphone users regularly download Google’s search and browser apps, where such apps do not come pre-installed. On the other hand, customers regularly prefer non-Google apps like Facebook, Dropbox and WhatsApp, even when their Google equivalents come pre-installed in the Android devices.

It is not a good thing when any competition agency undermines innovation, and the EC’s decision against Google does so at two levels.

w One, consider the billions of dollars of investments that have been made by Google to develop Android as a free, open source platform. Moreover, it is not a static, one-time investment for Google, and requires continuous rounds of investments to develop the platform further. The EC did not even consider that Google’s business model is to offer Android for free, and its business practices ensured that an increased traffic on Google Apps would finance the Android R&D cost. The EC’s decision affects Google’s core business model in Europe, and the company might decide to finance Android through licensing fees, which, ultimately, would increase the cost of handsets and tablets. In the end, it is the European consumer who suffers.

w Two, the EC’s $5 billion fine represents more than 30% of Google’s annual R&D investments (2017 figures), and the company could decide to cut its R&D costs or, at least, slow down Android-related R&D expenditure. In fact, the company, in its recent annual report filed with the US Securities and Exchange Commission, stated it is uncertain of the impact of these penalties on its financial stability. Such innovation concerns are not reflected in the EC’s calculation of the fine or how it is not disproportionate, given that the EC also issued a “cease and desist” order correcting Google’s market conduct for the future.

In addition, the EC order prevents Google from contractually preventing device manufacturers who pre-install Play Store or Google Search from selling any devices running on competing Android operating systems (Android forks). The EC found that this practice restricts the development of new open source version of Android. However, the EC failed to evaluate efficiencies generated from such restriction on Android forks. It maintains the technical integrity of the Android ecosystem and this ultimately benefits consumers. It also fundamentally preserves the attractiveness of the Android ecosystem for app developers. In fact, app developers would not code or code far fewer apps for multiple versions of forked mobile OS. This ensures lower prices, greater output and innovation for app developers. It also allows consumers to easily switch between devices, increasing competition and innovation among device manufacturers.

India’s antitrust system

How could this decision affect India’s antitrust authority—the Competition Commission of India (CCI)? India’s antitrust system is modelled on that of the EC, and the CCI has often adopted a European consumer protection approach to its enforcement of India’s competition laws. A host of high-tech companies are being investigated by the CCI, and the Indian regulator has also penalised Google `136 crore for unfair business practices in the online search market.

Hopefully, India will not follow the EC’s erroneous lead. The CCI, in the past, has often based its decisions on the subjective benchmarks of “fairness” (fair price, fair contractual terms), ignoring pro-competitive effects or those of innovation and economic growth of a sector. Such antitrust enforcement—especially for high-tech firms—without linkages to any identified anticompetitive effects could end up injuring one of India’s most dynamic sectors.

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