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Russia's Yandex Wins a Victory Against Google in Its Home Country

By Jamal Carnette, CFA - Sep 15, 2015 at 6:00PM

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Yandex accused Google of unfair bundling. Apparently, Putin and Co. agree.

Source: Google.

Although the search giant is considered one of the most-respected companies and services in the United States, it's safe to say Google (GOOG 2.32%) (GOOGL 1.88%) isn't as admired abroad. In Europe, the company has faced a few issues with various governments: The governments of France, Germany, and Spain tried to force Google to pay to link to its newspaper websites. When Google removed or threaten to remove the publishers from Google News, those governments quickly reversed course.

In addition, another issue emanating from the European Union is putting strain on the relationship between Google and the E.U.: the right to be forgotten. Under the ruling, Europeans could ask Google to delink material from search results at the person's request, provided it was no longer relevant. The search engine has complied on the disparate European versions but still faces criticism as search results on its U.S. site remain unaltered.

For the transcontinental nation of Russia, however, Google faces a new legal challenge related to its competitive practices. The complaint, filed earlier this year, centered on what Yandex (YNDX -6.79%) alleges is unfair bundling in regard to Google's suite of services and Google as the default search suite on its Android-based mobile operating system. More recently, it seems Putin and Co. agree with Yandex at the expense of Big G.

This is a big issue for Google's business model
At the heart of the issue is Google's Android monetization model. Although Android OS is an open-source platform in theory, in reality it is anything but. For the type of experience smartphone consumers are accustomed to, however, you essentially need to include Google's APIs, or application programming interfaces, and that comes with a catch. To mesh with third-party apps for push notifications, among other needed features, you essentially need to include Google's suite of apps.

The issue, Yandex claims, is that this amounts to essentially unfair bundling of services that ultimately hurts competition and innovation. It's expected that Google may have to allow versions of Yandex search feature on its devices, maybe even preloaded on the actual device, and perhaps pay some sort of fine or fee if the ruling stands. Even if this is a jingoistic, retaliatory ruling for a homegrown competitor at the expense of a company domiciled in a country that's led devastating sanctions against Russia, there's a big risk for Google here.

The real fear for Google: EU
Although Google is by far the market-leading operating system in China, the company extracts very little value from units sold there. That's because unlike other places, China has essentially blocked Google from using its APIs, Gmail Google Maps, and Google Docs apps in favor for its home-grown competitors. In addition, Google's search engine has been blocked. So while Android has a huge installed base, it's not a particularly lucrative group of users. And while it doesn't appear Russia is going to go full-on nationalistic, any government-induced competition hurts.

That said, the biggest fear is that this sentiment spreads to the greater European Union. For example, when it comes to mobile search engines, Google's worldwide market share is roughly 92%. The EU also has an open investigation into Google's use of its Android ecosystem to discourage carriers from putting rival apps on phones as well. If Russia's ruling becomes a canary in the coal mine, portending more antitrust regulations from seemingly hostile European regulators, Google's search dominance could be affected.

 

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Alphabet Inc. Stock Quote
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GOOGL
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Yandex N.V. Stock Quote
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YNDX
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