European Commission sends formal charges to Google on comparison shopping services and opens separate investigation on Android

By Gabriele Accardo

On 15 April 2015, the European Commission sent a statement of objections to Google, alleging that the company is abusing its dominant position in the Internet search market, in breach of Article 102 of the Treaty on the Functioning of the European Union (“TFEU”), by systematically favouring its own comparison shopping product “Google Shopping” in its general search results pages.

In parallel, the Commission launched a separate formal investigation concerning the mobile operating system Android. The investigation will focus on whether Google has entered into anti-competitive agreements or abused a possible dominant position, in breach of Article 101 TFEU and/or 102 TFEU, in the field of operating systems, applications and services for smart mobile devices.

  1. The alleged abuse in the Internet search market

This investigation does not come as a surprise.

In fact, during the past four years, Google has been in talks with the European Commission to address four set of competition issues, including the way Google displays specialized search services vis-à-vis its own products (see Newsletter 1/2014, Newsletter 5-6/2013, Newsletter No. 2/2013, Newsletter 2/2010, for additional background). While the present investigation focuses on Google’s favouring its comparison shopping product, the Commission continues to investigate Google’s conduct with regards to the allegedly more favourable treatment of other specialized search services, as well as Google’s conduct in three other areas of concern: copying of rivals’ web content (AKA “scraping”), advertising exclusivity and undue restrictions on advertisers.

In February 2014, Google was very close to a settlement, having offered a comprehensive package of remedies to the Commission.

However, while complainants made their voices louder, the mandate of the previous Commission was about to expire, so it soon became clear that the new Commissioner in charge for Competition would take over the case.

In recent months, dark clouds over Brussels began to gather.

Last 27 November 2014 the European Parliament passed a non-binding resolution, which called on the Commission to “properly enforce the EU competition rules in order to prevent excessive market concentration and abuse of dominant position and to monitor competition with regard to bundled content and services.” While the appetite of politicians to get involved in the Commission’s own turf may be understandable, that resolution left many perplexed nonetheless.

Yet, even more striking were certain passages of the public speech that EU Commissioner for Digital Economy and Society gave just a day before the Commission sent charges to Google. Commissioner Oettinger hinted at some forms of regulatory actions allegedly needed to fill, amongst others, the gap between EU and US Internet platforms.

That speech was not mere propaganda. In fact, a leaked Commission’s draft document “A Digital Single Market Strategy for Europe” stated that “The market power of some online platforms in the digital economy raises a number of issues that warrant further analysis. The Commission will carry out a comprehensive investigation and consultation on the role of platforms, including the growth of the Sharing Economy. The Commission’s analysis will cover i.a. issues like those arising from the lack of transparency in the search results (involving paid for links and/or advertisement) and the way Platforms use the information they acquire, possible issues relating to fair remuneration of rights-holders and limits on the ability of individuals and business to move from one platform to another [update after Google decision]”. Even a distracted reader may wonder whether that “update after Google decision”, should simply read that either way Google shall adapt its business model to much more stringent requirements. The final version of the Digital Single Market Strategy for Europe and its accompanying Commission Staff Working Document have been released after this issue of the Newsletter had been completed, so these will be addressed in the next issue.

And let’s not forget another leaked document of last March, albeit the leak came from the other side of the Atlantic. As it may be recalled, the Wall Street Journal published the staff report (actually, the document only included every other page of the report) from the US FTC’s bureau of competition recommending the FTC to bring a lawsuit against Google. The leak raised lots of eyebrows because, in early 2013, contrary to the staff recommendation, the FTC’s commissioners voted unanimously (5-0) to end the investigation into allegations of search bias after Google agreed to some voluntary changes to its practices. In that respect, the statement by the FTC reads “The totality of the evidence indicates that, in the main, Google adopted the design changes that the Commission investigated to improve the quality of its search results, and that any negative impact on actual or potential competitors was incidental to that purpose. While some of Google’s rivals may have lost sales due to an improvement in Google’s product, these types of adverse effects on particular competitors from vigorous rivalry are a common byproduct of “competition on the merits” and the competitive process that the law encourages.” Specifically, the Commissioners held that “Product design is an important dimension of competition and condemning legitimate product improvements risks harming consumers. Reasonable minds may differ as to the best way to design a search results page and the best way to allocate space among organic links, paid advertisements, and other features. And reasonable search algorithms may differ as to how best to rank any given website. Challenging Google’s product design decisions in this case would require the Commission – or a court – to second-guess a firm’s product design decisions where plausible procompetitive justifications have been offered, and where those justifications are supported by ample evidence.”

Interestingly, in its press release, the Commission acknowledged the close cooperation in this matter with the European Commission’s Directorate-General for Competition. In the wake of the recent developments, it is not clear whether that sense of cooperation still exists, or whether the European Commission has had an after-thought about cooperating with the FTC.

Against this background, Commissioner Vestager assured that competition investigations are independent from politics and commercial interests, noting that one out of four individual companies that complained in this case is a US company, and that US companies also play a major role in complaining business associations.

While there is no doubt that Commissioner Vestager is independent from political pressure, too many actors appear very interested to jump onto the stage. The risk of confusion is real, let alone the risk that good and much needed measures to achieve the Digital Single Market in Europe get mixed with or, worse, traded for far-reaching regulatory measures in a sector that has thrived, and can only thrive, thanks to innovation, not regulation.

The preliminary conclusions in the SO

The grievances concerning Google’s alleged abuse in the Internet search market are well known.

In essence, the statement of objections alleges that Google treats its own “Google Shopping” service more favourably in its general search results, compared to rival comparison shopping services. This artificially diverts traffic from these rival services stifling innovation and hindering their ability to compete to the detriment of consumers,

More specifically, the Commission’s preliminary conclusions are:

  • Since 2008, Google has systematically positioned and prominently displayed its comparison shopping service in its general search results pages, irrespective of its merits.
  • Google does not apply to its own comparison shopping service the system of penalties applied to competing services, which can lead to the lowering of the rank in which they appear in Google’s general search results pages.
  • Froogle, Google’s first comparison shopping service, did not benefit from any favourable treatment, and performed poorly, whereas its subsequent comparison shopping services “Google Product Search” and “Google Shopping” experienced higher rates of growth as a result of the alleged abusive conduct, to the detriment of rival comparison shopping services.
  • Users do not necessarily see the most relevant comparison shopping results in response to their queries. Incentives to innovate from rivals are lowered as they know that however good their product, they will not benefit from the same prominence as Google’s product.

In brief, as those who still go shopping at supermarkets may understand, this is no different than what supermarket chains do with their private labels. While supermarkets also know a lot about our tastes (guess what customer loyalty cards are made for), the main difference is that shelf space in supermarket alleys is rather scarce, whereas virtual space on Google search pages is not. One may wonder though whether another important difference is that Internet users are considered somewhat lazier when they browse the Internet than when the same individuals go shopping and browse the shelves in search of their favorite cola.

A remedy Google can’t refuse (to offer)?

Allegedly without the aim of seeking to interfere with either the algorithms Google applies or how it designs its search results pages, the Commission takes the preliminary view that in order to remedy the allegedly abusive conduct, Google should treat its own comparison shopping service and those of rivals in the same way. Accordingly, the Commission expects that when Google shows comparison shopping services in response to a user’s query, the most relevant service or services would be selected to appear in Google’s search results pages.

It is hard to imagine that the Commission’s wishes would not interfere with the algorithms applied by Google or the product design, an approach that clearly clashes with that of the Federal Trade Commission, briefly illustrated above.

Under Article 9 of Regulation 1/2003 Google may still offer commitments, albeit of a different nature than those offered last year (see Newsletter 1/2014).

But if Google is not willing to offer something more substantial than it did in 2014, under Article 7 of Regulation 1/2003, with the decision finding an infringement of the EU competition rules, the Commission may impose any behavioural or structural remedies which are proportionate to the infringement committed and necessary to bring the infringement effectively to an end. In such cases, the Commission can also impose a fine of up to 10% of the worldwide turnover of the undertaking concerned.

The difference between a prohibition decision under Article 7 and a commitment decision pursuant to Article 9 of Regulation 1/2003 is that the former contains a finding of an infringement (and may come with a fine) while the latter makes the commitments binding without concluding on whether there was or still is an infringement.

  1. The investigation concerning the mobile operating system Android

The second investigation concerns Google’s mobile operating system Android, the leading operating system for smart mobile devices in the European Economic Area.

Other mobile operating systems include Apple’s iOS (which is proprietary to Apple and runs only on iPhones and iPads) and Windows Phone (which is used on Microsoft’s and other manufacturers’ smartphones and tablets).

Android is an open-source mobile operating system that can be freely used and developed by anyone. The majority of smartphone and tablet manufacturers, however, use the Android operating system in combination with a range of Google’s proprietary applications and services. In order to obtain the right to install these applications and services on their Android manufacturers need to enter into certain agreements with Google.

The investigation will focus on the following three allegations:

  • Whether Google has illegally hindered the development and market access of rival mobile applications or services by requiring or incentivizing smartphone and tablet manufacturers to exclusively pre-install Google’s own applications or services, in particular Google’s search engine;
  • Whether Google is hindering the ability of manufacturers of smartphones or tablets, who want to use the Android operating system, from being able to use and develop other open-source versions of Android (so-called “Android forks”);
  • Whether Google has illegally hindered the development and market access of rival applications and services by tying or bundling certain Google products with other apps and services.

In brief, the Commission will assess if, by entering into anticompetitive agreements and/or by abusing a possible dominant position, Google has illegally hindered the development and market access of rival mobile operating systems, mobile communication applications and services in breach of either Article 101 TFEU and/or Article 102 TFEU.

While there are some similarities with the Microsoft case concerning the PC operating system market, it is still too early to say whether the conclusion will be the same.

Some interim thoughts

The last four years have seen Google under the spotlight in different European venues, often portrayed as a villain or the 800-pound gorilla in the room.

What is striking, however, is that the debate in Europe has not done much to change the way we (Europeans) see and reward innovation, and more generally “merit”. Arguably, this is at the root of a bunch of problems that some in Brussels or in other European capitals believe can be solved with more regulation.

In a recent interview, US President Obama, answering a question concerning the investigations that Google and other US Internet companies face in Europe, somewhat provocatively said “We have owned the Internet. Our companies have created it, expanded it, perfected it in ways that they [European companies] can’t compete. And oftentimes what is portrayed as high-minded positions on issues sometimes is just designed to carve out some of their commercial interests.

President Obama’s statement, however exaggerated, should be taken as an encouragement to do more to support innovation: it is true that US companies are at the forefront of innovation, especially in the Internet space, but it is not true that European companies are mere followers that cannot compete but for the intervention of regulatory measures.