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Why the EU is going after Google and not Apple

Why the EU is going after Google and not Apple

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On April 20th, 2016, the European Commission announced that its year-long investigation of Android had led it to believe that Google might be violating European Union antitrust laws. The Commission issued a statement of objections to Google and Alphabet (Google’s parent company), launching a formal antitrust case against them, along with a brief public statement that represents the best window into what is going on.

The EU believes that Google holds a dominant position in three related markets, and that it is using that position to distort competition. The EU claims that Google limits access to key aspects of the Android ecosystem by insisting that phone makers install Google search and Chrome apps. The EU also said that Google blocks phone makers from producing phones that run alternative versions of Android (a so-called anti-fragmentation agreement barring firms from using Android forks). Finally, the EU also believes that Google has illegally paid device makers and mobile phone companies to preinstall Google search exclusively.

The EU believes that Google holds a dominant position in three related markets

The new EU case tries to regulate the general search market but is also a dispute about how to think about openness in platform markets. Google argues that Android is open-source and that means that anyone can build whatever flavor of Android they want. Google would say that makes competition possible in the Android ecosystem — and oh, by the way Europe, go look at Apple’s world, where there is zero competition on operating systems or handsets. Why, Google would argue, are you bothering us and not Apple?

We have to start with search to understand that. In May 2010, the EU announced that it was investigating Google’s practices in online search, as it believed that Google might be favoring its own websites over those of competitors, such as Yelp. That investigation ran for more than five years, with Google offering different settlements (each rejected) that would have required Google to change how it linked to so-called vertical search sites.

We have to start with search

Then in April 2015, the EU announced that it was finally bringing a formal case against Google, but that case was much narrower than the original 2010 investigation, limited only to Google shopping. At the same time, the EU made clear that it was continuing to investigate Google’s online search behavior.

In the new Android case, Europe is attempting to control Google’s effort to move its strong position in search from the desktop into mobile and also trying to set standards for competition in platform markets. That makes the EU’s new Android case a two-fer for it: address search (the mission launched in 2010) and try to bolster competition in mobile phone software where Android’s market share far exceeds that of Apple.

Google’s claim that Android is open-source is true but is also something of a red herring. Chunks of the software are open-source under a version of the Apache Software License, but other pieces of core software are proprietary. The code available in the open-source part of Android doesn’t necessarily offer all of the functions that you want in your mobile-phone ecosystem. That approach is one way of structuring competition. From the get-go, it bakes in the possibility of more natural competition in the operating systems than we see in Apple’s phone stack.

But Europe is saying that isn’t enough and the mere fact that some competition is possible doesn’t mean that a firm with a dominant position won’t be tagged for abusing its power. Abuse of a dominant position is a central no-no of European antitrust law, and the preliminary view of the European Commission is that Google holds a dominant position in three different markets, which the EU calls "general internet search services, licensable smart mobile operating systems, and app stores for the Android mobile operating system." When Google requires phone makers to install Google search and Chrome if they want to preinstall Google Play, the EU believes that Google is using its dominant position in the Android App Store market to help extend its dominant position in search from the desktop to mobile.

That makes the EU’s new Android case a two-fer

This is not a surprising reaction for a government official charged with protecting competition. Officials want to ensure fair competition where they can, and blocking the ability of a firm with a dominant property to use that property to distort competition in related markets is a natural desire for an antitrust official. A firm that links together its products in a way that leverages a dominant product has to understand that it is likely to attract antitrust inquiry.

The EU also believes that Google is limiting Android competition even more directly. The EU’s second claim is that Google insists that firms sign "anti-fragmentation agreements" if they want to preinstall Google proprietary apps. That agreement seems to block firms from selling devices running Android forks. It’s an interesting clause, and we could have a lively debate about what we think is the right number of competing Android operating systems, but from a competition perspective, the question is whether we want one firm to make that decision. Without more information, the clause itself looks like a pretty naked limit on competition.

The EU is acting here as it has before

As to fragmentation, the EU is acting here as it has before. In 2004, the EU forced Microsoft to release versions of Windows with and without the Windows Media Player in an effort to force more competition in the media player space and prevent Microsoft from extending its dominance over the desktop into new media. The EU voted in favor of fragmentation even though it knew that would be more expensive (and the remedy itself was a complete bust). Competition isn’t necessarily cheap.

When the EU started chasing Google in 2010, the market leaders in phone operating systems were Nokia and Symbian. Markets do change on their own and you might think that the EU would tread lightly given its poor track record of achieving meaningful remedies in its pursuit of Microsoft and the rapid changes we have seen in the mobile phone market.

You might think that the EU would tread lightly given its poor track record

At the same time, no one seems to be particularly good at figuring out which platforms will endure and which ones will be pushed to the sidelines. The EU clearly has a more natural inclination to intervene in these markets than currently exists in the US. And I suspect they they believe that the costs of getting this wrong are low. What happens if Google has to walk away from tying search and Chrome to Google Play or has to give up the anti-fragmentation clause? I assume that Google is assessing just that right now. Forking Android successfully isn’t an easy task (as Amazon’s track record makes clear). And Google may have already reaped enough from the Google Play tie that it isn’t essential to continue. These are contract changes and wouldn’t seem to require direct changes in Google’s products.

And of course looming over all of this is Apple. Apple became Apple through the iPod and then the iPhone, not because of anything that the EU did in regulating media players. In the iOS system, Apple is exactly the firm that decides how much competition it allows (zero on operating systems and handsets, an extensive amount on some apps). So far at least, the EU has shown no desire to head inside the Apple ecosystem. Its willingness to chase Google here clearly reflects its continuing efforts to regulate Google’s core search business, and perhaps a belief that given Android’s numerical dominance in phone sales, Google is actually a bigger target than Apple. And the obvious remedy here is just about changing contract terms — no tying of search and Chrome to Google Play and no anti-fragmentation clause — and the EU presumably believes that is workable even if it isn’t clear that it will accomplish anything. Where exactly would the EU start if it instead focused its attention on Apple?