Google's Pending Billion Dollar-Plus EU Fine Could Point to a Hard Line In Other Disputes

 | Jun 16, 2017 | 8:51 PM EDT
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It has hardly been a secret that the EU has been taking a markedly harder line on Alphabet Inc./Google (GOOGL) over the last couple of years than U.S. regulators since Margrethe Vestager took over as head of the EU's antitrust agency in 2014. And so it's not too shocking that the agency appears set to impose a hefty fine on the web giant for allegedly unfairly promoting its Google Shopping ads relative to third-party shopping services.

All the same, considering the strength of the arguments that Google had made in defense of Google shopping, and how the FTC and other regulators probing Google have limited their probes to other issues, a big EU fine over this matter doesn't bode well for how Brussels will rule on the two other matters it has levied charges against Google over.

On Friday, June 16, the Financial Times reported the European Commission is expected to levy a large fine over the prominent placement its gives to Google Shopping ads (formerly known as Product Listing Ads) within search results, and how such placement puts rival shopping search platforms (for example, PriceGrabber or Shopzilla) at a competitive disadvantage. Two sources indicate the fine could top the €1 billion ($1.12 billion) penalty Intel Corp. (INTC)  received from the EC in 2009.

The report suggests regulators were unconvinced by Google's November 2016 defense of its Shopping ads, which appear at the top of relevant search result pages and on a standalone Google Shopping site. There, Google pointed out that the EC's definition of shopping services excluded Amazon.com Inc (AMZN) , which a large percentage of consumers in the U.S. and Western Europe now directly visit to search for goods, rather than searching via Google. It also made the obvious point that many consumers find Google Shopping ads, which are typically accompanied by a photo and a price, to be useful when doing product searches, and that consumers are free to start a product search at a comparison shopping site or rival search engine.

The report also suggests the EC is unworried about stoking trade tensions with the U.S. -- after having settled with Google on several matters in 2013, the FTC is only believed to be probing Google over its Android app bundling requirements. In 2015, President Obama claimed the EU's attacks on Google amounted to protectionism, and -- given his trade rhetoric -- it's not hard to image President Trump making a similar claim. On the other hand, Google's ties to the Trump Administration aren't exactly as strong as its ties to the Obama Administration.

As far as Google's European ad sales go, the stakes in its EU battle are fairly high. Google's AdWords search ad business is still easily the company's biggest cash cow, and Shopping ads now account for a large percentage of the AdWords purchases made by online retailers -- particularly when buying search keywords that don't involve a specific brand. Shopping ads have especially seen big growth on smartphones, where they can take up quite a lot of screen real estate.

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Going forward, Google's efforts to let shoppers pay for items promoted via Google Shopping on Google's own site should provide the business a lift. As should its attempts to bring Shopping ads to YouTube, image search results and third-party sites and apps. For online retailers not named Amazon, Google Shopping has turned into a pretty vital marketing channel. One that had much to do with 44% annual increase (53% on Google properties) seen in the company's paid ad clicks and impressions in Q1.

If Google had to stop showing Shopping ads in its search results in favor or regular text ads, that would undoubtedly hurt its EMEA revenue, which accounted for 33% of the company's Q1 revenue. And it can't be overlooked that the EC has the right to fine a company up to 10% of its annual sales over a violation, and up to 5% of its average daily sales for each day that it fails to implement a proposed remedy beyond a set time. However, chances are that Google will appeal any adverse decision on this issue, in which case a final ruling might not arrive for years.

Of course, Google's EU problems aren't limited to its Shopping ads. The EC also accuses the company of unfairly restricting competition by requiring third-party sites using Google Search to show a minimum number of Google ads on their site, and to have the final say on where ads provided by rivals appear. And it accuses Google of harming competition by requiring Android OEMs wanting access to Google Play to exclusively pre-install Google Search, make Google a device's default search engine and refrain from using a third-party version of Android such as Amazon's Fire OS.

The Android dispute is at least as big as the Google Shopping dispute, and one where -- as shown by the FTC's probe and Google's recent settlement with Russian regulators -- the EC actually isn't alone in raising concerns here. The dispute over ad policies for third-party sites is arguably smaller, since the lion's share of Google's search traffic now comes involves its own site and apps.

But considering the precedent the EC is on the verge of reportedly setting in the Google Shopping dispute, it's easy to see the agency imposing 10-figure fines and recommending big policy changes in those battles as well. Over the long run, Google might be able to settle its European disputes without paying an exorbitant price, depending on how appeals courts rule and what kind of political pressure the U.S. applies, but its legal time is likely to get a heavy workout along the way.

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