European trustbusters torpedo Google

Alphabet Admirals Sergey Brin and Larry Page had better tell Captain Sundar Pichai to close the watertight doors—lest the search and advertising ship sink in the North Sea, where depths reach 700 meters (2,300). Brrrr. Are the lawyers handing out life preservers? Will paralegals man the water pumps?

Today's expansion of the European Union Competition Commission's investigation into Google business practices makes a really bad situation much, much, much worse. Problems are these: Adding advertising to anticompetitive charges; expanding investigation to four monopolies (AdSense, Android, search, shopping services); citing exclusive contracts as violation of the law; and narrowing the applicable market for search shopping competition, thus blowing apart one of Google's major counter legal arguments. Kaboom!

Exclusive Problems

The Competition Commission released additional Statement of Objections that strike Google's core business, from perspective of revenue. The agency sees search, shopping, and advertising as working in tandem. But twin conjoined monopolies AdSense and search create barriers to competition. Search enables advertising, which during first quarter 2016 accounted for 90 percent of Google revenues. Read that number again. No other part of the European Commission's antitrust assault poses more jeopardy than inclusion of the ad business.

Exclusivity is the weapon capable of sinking good ship Google. Trustbusters in Europe, and also the United States, look enormously unfavorably at monopolies that engage in exclusive agreements, whether implicit or implied, that protect market dominance—or expand it. During Microsoft's U.S. Antitrust trial, legal experts and sources familiar with the government's case shared similar sentiment: Exclusive contracts tipped the scales from aggressive free-market competition to monopoly-protecting anticompetitive behavior.

I covered Microsoft's antitrust case from its start in May 1998 to its conclusion in November 2002. The charges laid out today are eerily similar in texture. Quick qualification: Monopolies are not necessarily illegal here or on the Continent. Additionally, the European Commission hasn't charged Google with illegally obtaining its monopolies but violating antitrust laws to protect them. Regarding Adsense:

A large proportion of Google's revenues from search advertising intermediation stems from its agreements with a limited number of large third parties, so-called 'Direct Partners'. The Commission has concerns that in these agreements with Direct Partners, Google has breached EU antitrust rules by imposing the following conditions:

• Exclusivity: requiring third parties not to source search ads from Google's competitors.
• Premium placement of a minimum number of Google search ads: requiring third parties to take a minimum number of search ads from Google and reserve the most prominent space on their search results pages to Google search ads. In addition, competing search ads cannot be placed above or next to Google search ads.
• Right to authorize competing ads: requiring third parties to obtain Google's approval before making any change to the display of competing search ads.

The Commission takes the preliminary view that the practices, which have been in place for ten years, hinder competition on this commercially important market...

These practices have enabled Google to protect its dominant position in online search advertising. It has prevented existing and potential competitors, including other search providers and online advertising platforms, from entering and growing in this commercially important area.

Monopoly Comparisons

As point of comparison, Microsoft used like-appearing tactics during the latter 1990s:

• Exclusive agreements assured content partners and others would only support Internet Explorer, forestalling Netscape.
• The company compelled many PC partners, like Dell and Gateway, and other partners to preinstall IE.
• Similarly, Microsoft restricted Windows licensees in other ways, by, for example, dictating what could appear on boot-up flash screens or what application shortcuts could be placed on the desktop.
• By way of co-marketing dollars, implicit threats to withhold windows licenses or raise prices for them, and other strong-arm tactics, the company leveraged its monopoly to protect Windows from Netscape evolving into a web-based rival operating system (like Chrome and Chrome OS are today).

Microsoft acted from a position of overwhelming dominance. Ninety percent of Intel-based PCs ran Windows; nearly as many the Office suite. The EC finds that "Google is dominant in the market for search advertising intermediation in the European Economic Area (EEA), with market shares of around 80 percent in the last 10 years".

Stateside, the Justice Department and state attorneys general argued that twin monopolies and Windows and Office created "applications barrier to entry". The EC's market-dominance actions against Google and parent company Alphabet are more sweeping. To reiterate with additional European market share estimates: Android (80 percent); AdSense (80 percent); search (90 percent); and shopping services.

Unquestionably, Google tightly ties services and platforms. The Competition Commission could fine the company and even divest products—as it did with Microsoft, which was compelled to sell separate Euro versions of Windows without Internet browser or media player.

No-Stop Shopping

Alphabet and Google have 10 weeks to respond the Statement of Objections and eight weeks to supplemental Statement regarding shopping. There, the European Commission destroyed one of the company's major defensive arguments:

The Commission has examined in detail Google's argument that comparison shopping services should not be considered in isolation, but together with the services provided by merchant platforms, such as Amazon and eBay. The Commission continues to consider that comparison shopping services and merchant platforms belong to separate markets.

In any event, today's supplementary Statement of Objections finds that even if merchant platforms are included in the market affected by Google's practices, comparison shopping services are a significant part of that market and Google's conduct has weakened or even marginalized competition from its closest rivals.

The question everyone should ask: If Europe, why not the United States? To repeat: Antitrust law on both continents lets little room for exclusive agreements that preserve monopolies by forestalling competition that causes consumer harm.

Photo Credit: Shutterstock/Everett Historical