European Union regulators recently filed formal antitrust charges against Google (NASDAQ:GOOG) (NASDAQ:GOOGL), alleging its search engine favors its own comparison shopping services over third-party sites.
In 2012, the EU expressed concerns that Google favored its own search services, forced advertisers into restrictive deals, and scraped content off rival sites without permission. Google subsequently offered to make various concessions, which the EU rejected last September.
The initial charges regarding Google's comparison shopping practices are narrow, but the case will likely grow. New EU antitrust chief Margrethe Vestager, who took over the post last November, is examining other businesses -- including travel and local services -- in which Google faces similar complaints. Vestager also launched a separate probe into Google's bundling of first-party apps in Android smartphones.
Let's take a closer look at what Google is accused of, and how this antitrust battle could impact Google's business.
Is Google a bully?
Google controls 92% of the search market in Europe, according to StatCounter. That's significantly higher than its 64% share of the U.S. search market. Even with that lower domestic market share, the Federal Trade Commission previously probed the company regarding similar charges of restrictive ad agreements, illegal scraping of third-party sites, and search bias.
Those charges were dropped in 2013 after Google made some concessions. To address the restrictive ad agreements, which discouraged marketers from advertising on rival search engines, Google revised its policies. As for the scraping allegations, Google let sites opt out of the practice. Yet it made no concessions regarding search bias -- Google still promotes its first-party sites over rival third-party ones.
Today, Google faces the same predicament in the EU as it did in the U.S. with the FTC. But while the FTC quietly rolled over, the EU is taking a hard line.
What about Android?
Google Android powers 71% of smartphones in Europe, according to IDC. Again, that's much higher than its 48% share of the U.S. market. European regulators also aren't the first people to complain about Google's bundling strategies with Android.
Many developers, such as members of the Android Open Source Project, have argued that Google has turned Android, an open source OS, into a closed one with its own apps and services. In their view, Google is doing exactly what Microsoft did when it bundled Internet Explorer and Windows Media Player with Windows in the late 1990s.
If the EU decides that Google's bundling of first-party apps in Android is anticompetitive, it might be blocked from pre-installing those services on Android devices across Europe. That would give Microsoft and other rivals a chance to crack the market.
How will this affect Google?
If Google fails to rebut the EU's charges, it could be fined over €6 billion ($6.4 billion), which would be equivalent to 10% of its 2014 revenue.
But based on historical settlements, the fine probably won't be that high. In 2009, the EU fined Intel €1.1 billion for abusing its dominance of the microprocessor market. Over the past several years, the EU fined Microsoft a cumulative total of €2.2 billion over its bundling practices. Therefore, the fine itself probably won't hurt Google too badly.
However, Google's competitive position in the region could be weakened if it loses the ability to promote its own first-party sites, and has to unbundle critical apps such as Search, Gmail, Maps, and Drive from Android. The European market accounts for over one-third of Google's top line, so a weakening presence on the continent could definitely impact earnings. A strong U.S. dollar and weak euro would exacerbate the problem.
Other troubles ahead
Google faces other problems in Europe. As an extension of its 2014 ruling on the "right to be forgotten," the EU wants Google to let all users worldwide remove "outdated" search listings about them. Last November, the European Parliament proposed a breakup of Google's European operations, although it has no legal power to do so. Google also faces various tax, copyright, and data protection issues in a number of European countries.
Therefore, Google investors should follow the EU antitrust story closely, since it could eventually impact all aspects of the company's European operations.