A Google Breakup Would Fit the EU's Logic

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(Bloomberg View) -- On Thursday, the European Parliament backed the idea of breaking up Google. It doesn't have the power to do it, but the legislators' decision is a notable part of a backlash against the remedial action Google took after the European Commission fined it 2.4 billion euros ($2.95 billion) for abusing its dominant position in shopping search. That backlash can lead to dire consequences for the search giant.

The commission found last June that by giving its own product comparison service, Google Shopping, prime "real estate" at the top search result pages, Google was hampering competition for independent shopping comparison websites. The company's remedy is to hold auctions for spaces in the special box in which comparison results appear if a user searches for a product to buy. Google Shopping bids in these auctions on the same terms as its rivals, and Google has promised to keep the service profitable so it can't outbid the competition every time with the company's vastly superior resources.

Yet, months after the remedy was applied, it's next to impossible to run into a non-Google offer in that box. The original complainants, notably the U.K. firm Foundem, have been campaigning to have Google declared non-compliant.

Foundem's argument is laid out in an interactive presentation released on April 18. The British company argues that even though Google claims to run Google Shopping at arm's length, it's merely an obfuscation, a meaningless accounting arrangement. In reality, Google as a whole still harvests 100 percent of the profit from the ads in runs after winning auctions -- plus 80 percent of the profits from competing services' ads in the form of their winning bids.

"While Google's promise to run Google Shopping at a notional 'profit' may allow rival services to bid their way into 'the box,' it does nothing to address the seismic inequality between bids that cost you nothing and bids that cost you most of your incentive and ability to innovate and grow," Foundem wrote in the presentation. 

The annual report on competition policy from the European Parliament's Committee on Economic and Monetary Affairs, which the legislature approved on Thursday, shows that at least some in the "Brussels bubble" that rules the EU are receptive to Foundem's argument. "Without a full-blown structural separation between the company's general and specialised search services, an auction-based approach might not deliver equal treatment," the report says.

This is not the first time the European Parliament has signaled its willingness to consider breaking up Google: It approved a non-binding resolution containing this option in 2014. This time, however, the reasoning is clearer and more logical. There's no way Google can create a level playing field in many areas of specialized search -- for example, for travel and local shopping options -- if its own divisions operate in these areas. Auctioning ad spots merely creates the appearance of competition.

The power to decide on Google's compliance rests with the European Commission and its most popular official, Margrethe Vestager. As commissioner for competition, she has made a point of keeping the matter of Google's breakup "open and on the agenda," if not under immediate discussion.

The commission has let on, however, that it's worried about the infrequent presence of competing firms in Google's shopping comparison box. The search giant's next report on its remedial action is due in May, and the antitrust officials are preparing for a critical reading. That's why Foundem and European legislators who believe Google's specialized search services should be spun off have stepped up their lobbying activity.

If Google is declared non-compliant, its parent company, Alphabet Inc., can be forced to pay up to 5 percent of its daily turnover for every day that it has violated the commission's ruling, meaning, theoretically, since last September. Taking Alphabet's average daily revenue in the fourth quarter of 2017 as a base, that's about $17.6 million a day for seven months and counting. This could end up being worse than the original fine, which Google is appealing. Even a breakup could be preferable to paying this sort of penalty for a protracted period.

In fact, Google would probably stand to lose little by spinning off specialized search businesses. It would still receive 80 percent of their profit as bids for ad space. Given Google's dominance in search almost everywhere it operates, it's almost as powerful in the ad market as the only newspaper in a small town was half a century ago. 

Competitors at Foundem understand such a solution wouldn't benefit them much. What they want is for Google to remove the ad-filled boxes altogether and let its supposedly impartial, generic search algorithm throw up product comparison options as ordinary search results. That, they say, would be the ultimate level playing field. A compromise solution, according to Foundem, would be to have Google sell ad space at a low fixed price that would cover its costs. 

I doubt either of these solutions will be acceptable to the EU. It can't very well ban Google from selling ads on search result pages or regulate the rates it charges. That would constitute almost Communist-style meddling with the market's working. A breakup would be a cleaner, less market-distorting solution. Google would keep its main product and the ability to sell ads through auctions or any other mechanism. Specialized search companies, including its former divisions, would be free to buy them or brave the ocean of "unbiased" plain-vanilla search results.

That appears to be the general direction of the commission's investigations into Google's other search businesses and its contract with Android phone vendors. The commission is slow and deliberate, and Google's powerful lobbying operation in Brussels is never idle, so one cannot rule out delays, compromises or even Google's outlasting Vestager. But it's quite likely that, despite its powerlessness in the matter, the European Parliament is ahead of the curve.

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

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.

For more columns from Bloomberg View, visit http://www.bloomberg.com/view.

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