Google's EU Issues Don't Spell Doom, but Could Harm Profits

 | May 21, 2018 | 12:36 PM EDT
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Alphabet/Google (GOOGL) currently gets about 30% of its revenue from the EMEA region, and a healthy chunk of that comes from EU countries. It's unlikely that the EU's ongoing antitrust cases against Google will do serious damage to its top line, but they could have some effect on its bottom line.

Back in 2016, the European Commission (EC) charged Google with abusing its search dominance to bolster its own shopping search engine (Google Shopping) relative to rival platforms, as well as to demand unfair advertising terms from third-party websites that integrate Google Search via the AdSense for Search program. Notably, it also accused Google of abusing Android's market position by (among other things) demanding that smartphone and tablet OEMs make Google the default search engine on their phones in order to have access to the Play Store.

Google was hit with a $2.8 billion fine last June over the shopping search issue (it's currently being appealed) The company addressed the EU's complaints related to shopping search in September by giving rival shopping search engines the ability to join Google Shopping in bidding for shopping ad inventory on Google Search. However, the complaints related to Android and third-party sites remain outstanding.

This dispute is in the spotlight once more following the Sunday airing of a 60 Minutes segment called "The Power of Google." The segment featured commentary from several critics of Google's market power and search practices, including Yelp (YELP) CEO Jeremy Stoppelman and EC chief Margrethe Vestager.

Though Google's shares slipped a little on Friday after a preview of the 60 Minutes segment appeared, they're up slightly over 1% in trading on Monday, joining a broader market rally.

It should be noted that outside of the fine, which could very well be overturned on appeal, the EU shopping search dispute didn't do much damage to Google. Google's shopping search ads have continued seeing strong growth in Europe and elsewhere, and giving rival comparison shopping engines a chance to bid on Google's inventory may have actually served to boost European sales.

And the AdSense for Search dispute might do limited damage too: Excluding traffic acquisition costs (TAC -- ad revenue-sharing payments to partners such as publishers, OEMs and carriers), only 6% of Google's ad revenue comes from third-party sites and apps. And much of that is believed to come from businesses other than AdSense for Search, such as the DoubleClick display/video ad unit and the AdMob mobile ad network.

However, the Android dispute is a little more worrisome, since it could give OEMs more leverage to demand higher revenue-sharing payments in exchange for making Google the default search engine on their Android devices. That's a big deal, since Android is estimated to have a 70%-plus mobile OS share in big EU markets such as Germany, France, Italy and Spain (its mobile ad revenue is probably a bit lower, since Android users on average have lower incomes than Apple iOS users).

One only has to look at how much Google is believed to be paying Apple (AAPL) for the right to be default search engine for the Safari browser and iOS's core search feature to see how higher revenue-sharing payments could take a toll. Last August, Bernstein estimated Google would pay Apple $3 billion in 2017. And in its Q1 report, Google disclosed TAC expenses for its own sites and apps grew to 13% of revenue from 10% a year earlier; the company has said a revised 2017 deal with a mobile partner (believed to be Apple) has contributed to TAC growth.

That said, the fact that Google Search is even more dominant in Europe than the U.S. gives it leverage in any revenue-sharing talks with OEMs. Research firm StatCounter estimates Google had a 91.6% European search share in April, with a 97% share claimed on phones. If Samsung or Lenovo was to replace Google Search with, say, Bing, on its European phones, it probably wouldn't sit well with many consumers.

In addition, the fact that the U.K. will be out of the EU come March 2019 thanks to the Brexit vote raises the possibility that any Android changes imposed on Google by the EC won't apply to the U.K. In 2016, when Google was still breaking out its British revenue, the U.K. accounted for slightly over 10% of the company's global revenue.

For those reasons, the EC's battles against Google are hardly a reason to panic, even if there is some risk that the company's bottom line will be affected by one of those battles.

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