This week the EU issued a formal antitrust ultimatum to Google: recommend acceptable remedies or face prosecution for abusing monopoly power. This action has sweeping ramifications and enables one to make several educated conclusions.
I. Ten Conclusions Summary
1. EU has called Google's bluff on being cooperative.
2. Google is busted.
3. "Preferential treatment" is 99% of this EU-Google fight.
4. "Preferential treatment" is Google's business strategy.
5. As a self-declared publisher, Google competes with the web.
6. Google's latest "knowledge graph" implicates preferential treatment.
7. Google's search to knowledge transformation is a classic bait and switch.
8. Google is not going to settle with the EU.
9. A $4b fine may be just the cost of doing business.
10. This is the beginning of the beginning of Google's antitrust troubles.
II. Ten Conclusions in Detail
1. EU has called Google's bluff on being cooperative. This phase is about politics and PR -- i.e. which side appears to be most reasonable publicly given Google's public popularity. To appeal to the public and media, Google launched a preemptive PR charm offensive saying that Google is: fully cooperating with authorities, search is free speech, and any proposed antitrust cure would be worse than the disease. Simply, Google argues it's too cute to prosecute. However, in a savvy public response, the EU laid out its tentative conclusions and most publicly offered Google the choice to propose its own remedies as part of a negotiated settlement -- or face prosecution. The EU has called Google's bluff; Google must now show its remedy cards to maintain its perceived "cooperative" public stance.
2. Google is busted. Negotiation process twists and turns aside, we now know directly from Mr. Almunia, the EU's antitrust decision maker, that there are two possible outcomes here, and both result in Google having to change anti-competitive ways it does business. The quick-resolution choice allows Google to avoid a fine by submitting acceptable antitrust remedies that can be reviewed by complainants/competitors and "market tested", before being made "legally-binding" by the EU. The other protracted choice is for Google to get fined up to 10% of revenues, after the EU issues a formal Statement of Objections (that Google has little chance of overturning,) that when finalized is also legally binding. Practically, this is no longer about guilt but about sentencing.
3. "Preferential treatment" is 99% of this EU-Google fight. While the EU laid out four concerns, the first, Google's "preferential treatment" for its own content, is the effectively the whole ball game given that Google has already immediately signaled via the WSJ that the other three can be fixed without much of a fight. Moreover, the three concerns that can be resolved are practices that affect only small parts of Google's business, while the EU's first and top concern affects the very essence of Google's business.
4. "Preferential treatment" is Google's business strategy. Early on Google figured out that the data Google collected about what people most searched for was essentially a fail-safe business guidebook for Google to use to learn what most popular content, products and services Google should own and provide to users directly in order to cut out the information middleman -- their competitors. Google quickly realized that any time Google had passable popular content to offer, it automatically could rank it high in search results, and then whenever people clicked on Google's offering, Google did not have to share any of that advertising revenue with competing publishers. Simply, Google learned self-dealing was massively more profitable than revenue sharing with "partner websites."
5. As a self-declared publisher, Google competes with the web. In making a free speech argument in this antitrust context, Google has made a monumental blunder in that it is essentially admitting that it is now a publisher with editorial discretion and not the unbiased search engine of others' web content -- that they have long represented Google to be to the public. The self-incrimination implications of this tactic and business change are staggering. If Google is indeed now a publisher, then it is effectively admitting that every other website publisher on the web is either an existing direct competitor, or a potential direct competitor. In becoming an unabashed publisher, Google has spotlighted its powerful financial self-interest to rank Google content higher than most any web content, regardless of what is best for users. Problematic for Google is that this is not just an antitrust defense, it is formal Google policy. One of Google CEO Larry Page's first CEO decisions was to rename, remake, and re-imagine Google's core search group as the "knowledge" group.
6. Google's latest "knowledge graph" implicates preferential treatment. To understand how central preferentially treating Google content has become to Google's overall business and search strategy, consider Google's recently announced "knowledge graph" which unabashedly preferentially treats Google's own increasingly comprehensive database of Google-owned "knowledge" over all other information on the web. While Google's publicly-represented mission is to "organize the world's information and make it universally accessible and useful," in practice it has degenerated increasingly into publishing Google-owned information for the world's consumption -- like most every other publishing website does. In other words, Google is becoming less about "searching" the Internet for information for users and more about steering users to Google's proprietary knowledge mall. This begs the question: why does Google need open access to everyone else's content for free, if Google is now focused on providing users Google-owned knowledge?
7. Google's search to knowledge transformation is a classic bait and switch. The problems with Google's antitrust defense -- that the evolution of its search engine into a knowledge engine is innovation that benefits users -- are two-fold. First, Google built user trust based on public representations that Google worked for user interests, offered unbiased search, and would never manipulate search results for partners' gains. Then switching to an opposite publisher model, once Google became dominant, is a classic "bait and switch" deceptive and anti-competitive business practice. Second, Google has is not fairly represented Google's increasing financial conflict of interest with users' interests. Simply, Google's market dominance combined with its standard practice of self-dealing is a big antitrust problem.
8. Google is not going to settle with the EU. "Preferential treatment" is the EU's central ongoing antitrust concern, but at the same time it also is central to Google's success. In other words, their fundamental positions are polar opposites. Tellingly, most all of Google's new advertising growth comes from preferential treatment of one form or another for YouTube, Android and display advertising over competitive offerings. The reasons Google doesn't think it has done anything wrong are: first it is in denial that it is dominant and hence has special legal obligations to not harm competition, and second "preferential treatment" is standard Google practice and the very essence of Google's business strategy and success. Simply, Google understands "preferential treatment" is Google's "special sauce;" they are not going to give it away without a fierce fight.
9. A $4b fine may be just the cost of doing business. To the extent that Google views preferential treatment generally as the wellspring of Google's success, a potential one-time fine by the EU, while painful in short term, can financially be viewed by Google's leadership as the cost of doing business -- when one considers the many tens of billions of dollars in profits and retained earnings to date and going forward that the wellspring of "preferential treatment" produces for Google and its shareholders. Simply, a one-time 10% or ~$4b fine to a company that enjoys a gross profit margin of 62% and has $48b in cash, is next to nothing; its one $4b golden egg vs. the proverbial goose that lays $4b golden eggs monthly.
10. This is the beginning of the beginning of Google's antitrust troubles. Given that the EU effectively has concluded that Google is a monopoly abusing its market power, EU antitrust involvement in Google's business likely will continue as far as the eye can see. And the EU is not alone in investigating Google; the U.S., South Korea, Argentina, Brazil, and India are investigating Google as well and Australia and others could also begin formal antitrust investigations. Moreover, the U.S. FTC is several months behind the EU in their investigation, as they just sent out to subpoenas to a variety of affected companies. Since Google is a global company that likes to standardize everything for efficiency's sake, the public findings of the EU will provide all other antitrust authorities with a wealth of evidence that will help them greatly in their investigations and potential enforcement actions. This is not an isolated one-off investigative dynamic here, but a much more effective cumulative and collaborative global enforcement dynamic. Furthermore, once sovereign jurisdictions declare Google a monopoly in their individual jurisdictions, it will open the floodgates for private civil antitrust suits for compensation and redress. Given the strong likelihood that Google does not settle because preferential treatment is its business strategy and special sauce, Google's serious global antitrust problems appear destined to last a decade or more.
