The EU May Cost Google More Than a Fine

(Bloomberg Opinion) -- Google investors have fixated on two big worries about the company: its climbing costs and the potential stings of regulatory crackdowns. On Wednesday, those twin concerns may have united into an interrelated tangle of anxiety. 

On the regulatory front, European antitrust officials slapped a $5 billion fine on Google parent company Alphabet Inc. for what they said was the company’s abuse of its Android mobile operating system to favor Google’s apps and technologies. Alphabet disagreed with the European authorities and said it would appeal.

The fine will hurt a little, but the EU’s ruling has been expected for some time, and investors didn’t react much to the news. Google has now cleared two of three possible European regulatory actions without an immediately significant blow.

But the big unknown is how Google might change its business practices to satisfy the Europeans. Depending on Google’s response, the balance of power could shift between the company and its partners, including the manufacturers of Android smartphones, in a way that could drive up the company’s costs and crimp profits. It would be more evidence of the literal price that comes with being a tech superpower. (Feel free to cue the tiniest of violins.)

The EU May Cost Google More Than a Fine

If the EU action frees Samsung, Motorola or other Android gadget makers to cut deals to load their phones with Microsoft’s Bing or the Firefox web browser or anything else under the sun instead of (or in addition to) Google’s versions, that could force Google to dangle incentives to its Android partners to ensure Chrome, Google search, Google Maps and other company properties remain front and center on those devices.  

This is a completely hypothetical risk for now. It’s up to Google to figure out how to comply with European regulators’ demands for changes in how it treats Android. The company may decide people will choose to use its apps and other technologies of their own accord, as many people do on iPhones and iPads that don’t arrive already loaded with most Google apps and services.

But if this scenario comes to pass, the regulatory effects then bleed into that other twin of Google investor angst, climbing costs.

Already, Google pays more than $9 billion a year — more than triple its costs from 2013 — to ensure widespread distribution of its web search engine, apps and other technologies that let it dot the digital world with advertisements and harvest data to better target those ads. 

The EU May Cost Google More Than a Fine

Those costs come from arrangements such as payments to Apple to make Google the built-in web search option on its Safari web browser and to makers of Android smartphones and phone companies to ensure Google’s search box and apps are prominent on phones and tablets. As smartphones become the primary computer for many people, Google doles out more of these web traffic fees than it did when personal computers dominated our technology lives. 

Investors have become almost comically concerned about Google’s payments to its mobile and web distribution partners, which climbed 53 percent in 2017. Combined with the advertising sales that Google shares with its advertising partners, all these payments to ensure Google’s dominance totaled about $22 billion in 2017, or almost half of Alphabet’s basic costs for its products. It’s easy to imagine the European regulatory action may nudge those costs up further. 

The potential ripple effect is another example of how it’s getting more expensive for technology titans to keep their grip on power. Sure, some of them, like Google and Facebook, are enjoying the high-profit fruits of their lock on important corners of industry. But it won’t be cheap to stay that way.

Those two and the other tech superpowers are spending more on things like computer centers, mostly to stay ahead of other internet giants. Regulatory and social demands are hitting them in the wallet, too. Facebook, for example, is spending like crazy on people and technology to weed out misinformation and interference of its social network. To keep growing, Amazon, Apple, Google and others are also branching into new and costly areas of businesses such as internet entertainment.

All that spending may pay off handsomely in the future, but at the moment it’s eating into profits — and regulators are taking a big bite, too.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shira Ovide is a Bloomberg Opinion columnist covering technology. She previously was a reporter for the Wall Street Journal.

©2018 Bloomberg L.P.