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Evidence Alphabet-Google Expects an Adverse EU Android Antitrust Remedy

This quarter EU antitrust authorities are expected to rule that Google is illegally dominant in the markets for licensable smart mobile operating systems and app stores for the Android mobile operating system, because Google evidently abused its dominance by contractually requiring Android device manufacturers and mobile network operators to install only Google search and make it the default search engine.

Importantly, this expected EU Android ruling occurs in the context of the EU’s seminal antitrust decision last June that: 1) ruled Google’s search services were dominant; 2) ruled Google abused that dominance by giving illegal advantage to its own comparison shopping service; 3) fined Google a record $2.7b; 4) imposed a cease and desist order on Google to stop this illegal behavior in 90 days (or face additional fines of up to 5% of Alphabet’s revenues); and 5) imposed a remedy that requires that rival comparison shopping services get treatment equal to what Google provides itself, a requirement that Google apparently has not been respecting.

What this all suggests is that the next ruling, fines, and remedies that the EU will consider in the Android case, are likely to be more adverse to Alphabet-Google’s business and model than the previous one.

Google’s strategic actions over the last two years confirm tougher EU outcomes are ahead for Alphabet-Google. Lets consider that evidence.

Just like poker players read other players “tells” for what they really think of the hand they are holding, Google has had three big “tells” that expose that Google is much more worried than they are letting on about the hand they hold in the EU antitrust process.

First, Google curiously announced a major restructuring of Google into Alphabet in August 2015. It was just a few months after the EU: issued a formal Statement of Objections that Google search was dominant and abused that dominance in comparison shopping; and announced a formal antitrust investigation against Google-Android.

Most tellingly, Alphabet was created very shortly after it became clear that EU antitrust chief Margrethe Vestager, had no interest in preemptively negotiating an antitrust settlement with Google, breaking with the pattern of her predecessor. Simply, Google’s future now involved real protracted EU antitrust prosecution of multiple Google antitrust cases, not the meaningless negotiations of the past.

Despite Alphabet being a curious and cumbersome restructuring, originally investors were hopeful for more transparency and more focus on new potential big revenue streams that Alphabet called “other bets.” However, the new structure has proven to be a disappointment given that it hasn’t meaningfully increased transparency and given that Alphabet’s “other bets” were ~1% of revenues when Alphabet launched and are still ~1% of revenues two years later.

In hindsight, Alphabet looks much more like a very effective structural bunker and protective moat system created to separate and shield the founders and the “other bets”/investments from expected EU antitrust fallout.

In transferring the Google CEO title to Sundar Pichai, Google co-founder Larry Page made antitrust Mr. Pichai’s problem and rebranded himself as CEO of Alphabet, a Berkshire Hathaway-like holding company investing in innovative big bets.

Since Google the brand has long been a verb, i.e. “to search,” it is telling that Alphabet’s re-branding minimizes Google as “G,” just one of the companies in the Alphabet holding company, despite Google comprising 99% of Alphabet’s revenues.

It’s also telling that most all of Alphabet’s “other bets” have purposefully shed the now iconic Google branding. That doesn’t make any sense at all, if all is well with Google’s #2 most valuable brand in the world worth over $100b. However, it does make sense if Mr. Page foresees real, serious, and protracted antitrust risks to Google’s brand long term.

In the antitrust context, Google’s actions with Alphabet, speak volumes. They are implicitly signaling that the Google brand and business are at substantial risk of substantial harm in the future, requiring substantial defensive restructuring to mitigate it.

Second, on October 4, 2016, Google curiously announced a new ‘Pixel Phone by Google,’ a direct competitor to the Apple iPhone, and all other smartphones,~5 months after the EU issued a formal Statement of Objections that Google abused its dominance by imposing contractual restrictions on Android smartphone manufacturers and mobile network operators.

Other than the timing, what’s telling is Google has offered its own smartphone before and discontinued it because of the strategic conflict problems that that particular line of business caused in the past.

In 2011, Google bought smartphone manufacturer Motorola for $12b to defend Android from patent lawsuits and then felt compelled to sell Motorola to Lenovo in 2014 for $3b. Google owning Motorola created a serious conflict of interest, i.e. being both a major competitive manufacturer of smartphones and the only licenser of the dominant Android mobile operating system to most smartphone manufacturers. Competitors feared Google self-dealing.

What would justify Google recreating at least part of the conflict of interest it sought to avoid just a few years earlier? New developments like antitrust remedy risks that could change the mobile ecosystem game entirely in the future, could justify it.

If Alphabet-Google fears an adverse EU Android antitrust ruling and remedy in the coming months that would prohibit Google from locking in manufacturers and carriers, Google would greatly benefit strategically from having the real option of its own Pixel smartphone business to pivot to, and build around. That’s because Google’s Pixel smartphones could potentially use Google’s non-Android, Chrome operating system that currently powers Google’s Pixelbooks i.e. Chromebooks. Google’s Chrome operating system is arguably better for Google’s long-term, cloud-first architectural model than Android is.

In October 2015, the WSJ first reported that Google was planning to merge in 2016 its mobile Android operating system with its PC Chrome operating system used by Chromebooks. When Google launched its new Pixel smartphone in October 2016, senior Google insiders teased that the Google Pixel phone may be a stepping stone to Google’s next generation, “Andromeda” operating system that would integrate its Android and Chrome operating systems.

It is very telling that the Andromeda, Android-Chrome operating system did not launch as expected.

Has Google changed its mind about merging them for now to have more strategic options up its sleeve to mitigate a potential adverse EU Android remedy?

Or does Alphabet-Google have plans to try and technologically moot the expected EU Android antitrust remedy by arguing that the Andromeda OS or the Chrome OS are not Android, and therefore not subject to any EU antitrust remedy? Poof! Antitrust risk innovated away? [Forewarned is forearmed.]

Third, September 1, 2017, Bloomberg learned from an Alphabet Inc. filing with the FCC that Alphabet had quietly completed its Google-to-Alphabet legal restructuring into “XXVI Holdings Inc.” -- i.e. Alphabet converted Google and the Alphabet “other bets” subsidiaries, into LLC legal entities.

Bloomberg reported that Alphabet said the legal change to LLCs won’t alter the way the business pays taxes. It also quoted Dana Hobart, a litigator with the Buchalter law firm in Los Angeles, who explained the apparent reason for Alphabet switching to LLCs: “The change helps keep potential challenges in one business from spreading to another. By separating them, it allows the parent company to limit the exposure of the various obligations of the LLCs.”

Evidently, these recent legal LLC restructurings are designed in part to partially protect Alphabet and the “other bets” from the metastasis of Google LLC’s substantial pending antitrust liabilities in Europe.

In sum, Google’s strategic moves spotlighted above are ‘tells’ that Alphabet is much more worried about the EU antitrust risks than they are letting on, and much more proactive in potentially mitigating or mooting those risks than many may appreciate.

We’ve learned over the last decade that Google is exceptionally clever and determined to evade accountability for its actions, especially in the antitrust arena. It has proven it will do whatever it takes.

Google also has significant and real strategic options with its Pixel line of devices and its Andromeda and chrome operating systems. And it likely has more strategies to try and delay and/or neuter much of the EU’s Android remedy, like it already has gamed the EU’s search/comparison shopping remedy and gamed the U.S. antitrust process for the last five years.

U.S. Implications:

Lastly, don’t miss the effect that the EU Android ruling and remedy could have on the Google U.S. antitrust front.

Tellingly in the U.S., Google is furiously trying to keep the U.S. Google antitrust frame on the FTC’s 2013 rationale for shutting down all Google antitrust investigations, by recently volunteering to extend its compliance with the FTC’s expired, five-year, lightly-binding commitments: to not restrict its advertiser customers’ freedom to avail themselves of competitive alternatives; and to not scrape the proprietary content of their competitors and represent it as their own.

The coming EU Android antitrust ruling and remedy for American company Alphabet-Google will naturally put a spotlight on what the U.S. FTC/DOJ has been doing, or not doing, for the last five years since the FTC’s  questionable shut-down of most all antitrust oversight of Google, January 3, 2013. Specifically, does the current FTC still consider its now expired 2013 FTC-Google findings up-to-date and in step with current antitrust thinking and competitive realities?

Another specific question that needs answering is why did the FTC shut down the FTC Staff’s “extensive investigation” of Google-Android in 2013 without an FTC vote or public explanation, when it did for the four other antitrust matters they investigated? This is relevant because the EU antitrust authorities have now charged Google with a bread-and-butter Android antitrust case, and the evidence for an FTC-Androidopoly case in the U.S. has long been clear -- e.g. Android had ~200m users in 2012 and has >2b today.

All that said, 2018 looks like it could be the tipping point year when real antitrust accountability comes to Alphabet-Google.

 

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Scott Cleland served as Deputy U.S. Coordinator for International Communications & Information Policy in the George H. W. Bush Administration. He is President of Precursor LLC, an internetization consultancy for Fortune 500 companies, some of which are Google competitors, and Chairman of NetCompetition, a pro-competition e-forum supported by broadband interests. He is also author of “Search & Destroy: Why You Can’t Trust Google Inc.” Cleland has testified before both the Senate and House antitrust subcommittees on Google.

 

 

 

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