Not the result Google was searching for following expensive EC shopping spree

Published On 03/07/2017 | By James Darch | Enforcement, Litigation

On 27 June 2017, the European Commission announced that it had fined Google Inc. EUR 2.42 billion (~A$3.6 billion) for contravening EU antitrust rules. The Commission found that, between 2008 and 2013, Google had abused its dominant position in general internet search services by providing an “illegal advantage” to its own comparison shopping services, in breach of Article 102 of the Treaty on the Functioning of the European Union.

As part of DG Comp’s announcement, European Competition Commissioner, Margarethe Vestager, stated:

Google abused its market dominance as a search engine by promoting its own comparison shopping service in its search results, and demoting those of competitors. What Google has done is illegal under EU antitrust rules. It denied other companies the chance to compete on the merits and to innovate. And most importantly, it denied European consumers a genuine choice of services and the full benefits of innovation.

In addition to the eye-watering fines – the largest ever levied against a single company for an EU antitrust violation – Google has been ordered to cease the conduct within 90 days or risk additional fines of up to five percent of the average daily worldwide turnover of Google’s parent company, Alphabet Inc (one of the world’s biggest companies).

At the time of publication, Google was reviewing the Commission’s decision and had yet to decide whether it would appeal the finding.

Results of an extensive investigation

Although the Commission has been formally investigating Google’s search practices since November 2010, it was a formal complaint filed by Foundem (a UK-based vertical search engine) in November 2009, that was the catalyst for the EC to start probing Google’s behaviour in European markets.

During DG Comp’s investigation, which spanned over 7 years and involved filtering through mountains of evidence – including data from approximately 1.7 billion search queries – the Commission sent Google two Statements of Objections (one in April 2015 and one in July 2016).

Although Google came close to settling the claims with former Commissioner of DG Comp, Joaquin Almunia, it never quite got there. On three occasions, Google offered commitments (including in April 2013 and February 2014) to resolve the Commission’s investigation. However, these commitments were ultimately insufficient to address its concerns.

As blogged previously, Commissioner Vestager set the course soon after taking the reins of DG Comp in late 2014 indicating that she was keen to secure binding Commission decisions, rather than extract commitments from parties to settle allegations. This approach differs from her predecessor, Almunia, who tended to prefer settling antitrust claims by extracting commitments.

Conduct identified by the Commission

The European Commission concluded that Google is dominant in each national market for general internet searches throughout the European Economic Area. The Commission found that Google has been dominant in almost all 31 EEA countries since 2008 with Google’s market share exceeding 90% in most national markets.

The Commission determined that Google used its significant position in general internet services by providing its separate Google service – currently known as “Google Shopping” but originally called “Froogle” and later, “Google Product Search” – an illegal advantage in the separate comparison shopping market.

Comparison shopping websites (e.g. Shopping.com (an eBay company), Shopzilla.com, Pronto.com and Google Shopping) offer services by collating a variety of information on products, including pricing, from participating merchants and displaying this information on a results page.

Unlike fully integrated merchants which offer bundled comparison searches, together with the ability to purchase products directly from the merchant (e.g. Amazon and eBay), comparison websites redirect users to the merchants, via a click-throughs, where consumers can purchase the products directly. Comparison shopping services typically aggregate information about products for users and direct traffic to online merchants taking a commission for click-throughs and/or a percentage of purchase value.

DG Comp ultimately concluded that Google had given Google Shopping an illegal advantage in the comparison shopping market in two ways:

  • first, systemically placing Google Shopping in a prominent position in Google’s general search results (e.g. at the top of the search results or on the right hand side – see screenshot example below); and
  • second, demoting other competing comparison shopping services by pushing these websites down the list of Google’s general search results.

Source: Google search result on 28 June 2017

The Commission found that Google commenced this practice at different times across 13 EU countries, starting in the United Kingdom and Germany in early 2008 and most recently in a number of countries in November 2013.

Google search: “so what?”

One of the key issues underpinning the EC’s decision is that Google Shopping is not subject to Google’s generic search algorithms which generally aim to identify search results that are likely to be most relevant to Google users.

Although the Commission does not object to Google’s algorithms (an issue that was not initially clear in the investigation and something Google has staunchly defended) or its general search practices, the EC does object to Google leveraging its dominance in general internet search services by promoting its own Google Shopping services and discriminating against rivals.

The Commission found that this practice had a serious and adverse impact on competition in comparison shopping markets in a number of ways, including:

  • appearance in Google’s search results impacts click-throughs and internet traffic – according to certain studies and surveys, the ten highest search results on page one of Google search results receive approximately 95% of all clicks / traffic, with the effects even more pronounced on smaller devices (e.g. mobile devices); and
  • increased visibility of Google’s Shopping increases traffic while demoting rivals decreases their respective traffic – corresponding with Google’s implementation of its practices, Google Shopping increased traffic significantly while rival comparison services suffered material decreases in traffic on a sustained basis. For example, Google Shopping received a 45-fold increase in traffic in the United Kingdom whereas certain rival websites suffered and 85% decrease in internet traffic.

The Commission concluded that, as a result of Google’s illegal practices and the distortions to competition, Google Shopping made significant market share gains at the expense of its rivals. The Commission found that this deprived European consumers of the benefits of competition on the merits, namely genuine choice and innovation.

Interestingly, although the Commission found separate markets for comparison shopping services (e.g. Shopping.com, Coupons.com, etc) and merchant platforms / online marketplaces (e.g. Amazon, eBay and Etsy), the EC concluded that even if they were included in the same market, Google’s practices would still have distorted competition as comparison shopping services would be the closest competitors in any broader market.

This is a point of contention for Google as reflected in a blog post by Google’s Senior Vice President and General Counsel, Kent Walker, on the day of the decision, suggesting that the European Commission “underestimated” the value of, and competitive restraint imposed by, big online merchants such as Amazon and eBay in online shopping decisions. Google’s appears to consider that it “compete[s] with Amazon and other sites for shopping-related searches by showing ever more useful product information” with Walker labelling Amazon a “formidable competitor”.

Searching for remedies

According to the Commission, the record EUR 2.42 billion fine – which is more than double the largest fine levied against a single company by the EC in an antitrust case (in 2009, the Commission fined Intel Corporation EUR 1.06 billion for abuse of dominance in central processing units – currently on appeal to the European Court of Justice) and around twice what analysts were predicting – reflects the gravity and duration of the infringement. The penalty was calculated on the basis of revenue attributable to Google Shopping services in the 13 EEA countries where Google Shopping was supplied during the relevant period.

In addition, the Commission has ordered that Google must cease its illegal practices within 90 days, and not engage in any similar practices, or risk further fines and/or enforcement proceedings. As part of this requirement, Google must respect the “principle of equal treatment” in its search results for Google Shopping and competing comparison shopping services. Google must apply the same processes to display and position rival websites as it gives to its own without any discrimination.

Given the significant impact the decision is likely to have on Google’s market share in comparison shopping services, and revenue it derives from that part of its business, Google is weighing up whether to appeal the decision – Google has until 6 September 2017 to decide.

It is not clear whether Google might also seek interim relief from the General Court to stay the implementation of the Commission’s decision (principally, the requirement to cease the conduct within 90 days) and, in parallel, launch a substantive challenge to the EC decision. However, a grant of interim relief from the General Court would require Google to demonstrate urgency and that it would suffer “serious and irreparable harm” if forced to comply with the Commission’s decision. In 2004, the General Court denied Microsoft’s application for interim relief in relation to the Commission’s abuse of dominance case against it.

Separately, the Commission has issued a request for tender calling on experts to assist the EC ensure that Google complies with its direction. Under the tender, the Commission is prepared to spend a maximum of EUR 10 million monitoring Google’s compliance with the decision.

Decision is potentially just the tip of the search bar

The Commission’s decision could only be the tip of the proverbial search bar for Google. Google is likely to face further scrutiny from other national regulators outside of Europe which could result in further fines and/or onerous commitments.

For example, a US Senator has renewed calls for the US Federal Trade Commission to re-open its investigation into Google (which it closed in January 2013 following commitments from Google to address its concerns) to determine whether Google may have “unfairly disadvantaged competitors and limited consumer choice [in the United States]”.

In Australia, it is not apparent whether the ACCC is investigating Google’s search practices. The last time the ACCC publicly tested Google was in 2013 – alleging that Google had mislead consumers through use of AdWords – the High Court unanimously found that Google had not contravened Australia’s consumer laws. However, with the introduction of the “effects” test under our section 46 misuse of market power provisions, it will be fascinating to see whether the ACCC probes Google’s practices going forward (including in light of developments with regulators in other jurisdictions).

In addition to a prospective assault from regulators around the world in light of the decision, it seems likely that plaintiff law-firms may be lining up to take another chunk out of Google’s very healthy bottom line in the form of follow-on actions.

Commission’s Google shopping spree seems likely to continue

With Commissioner Vestager’s statement that the Google “decision is a precedent”, it will be interesting to see how this impacts the Commission’s two other investigations with Google in its cross-hairs, namely the EC’s investigations into:

  • Google’s Android operating system – which is probing whether Google has stifled choice and innovation in a range of mobile applications and services by protecting and expanding its dominant position in general internet search; and
  • Google’s use of AdSense – which concerns whether Google’s restricted or prevented third-party websites from displaying search ads from Google’s competitors.

More generally, some commentators have suggested that the Commission’s assault on big US tech firms, including Apple, Amazon and Facebook, is part of Europe’s wider objective to curtail successful US companies to the benefit of European rivals, as part of a broader political agenda. However, this is something Brussels has strenuously and repeatedly denied.

Regardless of the merit of such claims, it remains clear that large US companies (including Google) will continue to be focus the European Commission, particularly in circumstances where the Commission is keen to remove barriers and unlock opportunities as part of its pursuit towards an EU single market for the digital age.

Keep Googling us to stay updated!

Photo credit: Image courtesy of Sébastien Bertrand (“European Commission”) licensed under CC BY 2.0. Remixed to B&W and resized.

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About The Author

James Darch is a solicitor in the competition and regulatory team at King & Wood Mallesons in Sydney. Outside of work James enjoys travel, golf, the beach, trivia and dining.

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