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Google's Antitrust Case in Europe, Explained

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When the European Commission filed formal antitrust charges against Google (GOOGL - Free Report) , many people probably acknowledged the news and quickly stopped thinking about it. The complexity of antitrust law go right over most of our heads, and a corporation being accused of gaming the system isn’t exactly shocking. Besides, Google probably has a good enough lawyer to get out of this, right?

Even if we aren’t taking these charges seriously, Google and the European Union are. And the responses from both entities indicate that we should probably start paying attention too. But who can make sense of all of this antitrust hullabaloo?

The Charges

I’ll try to keep the explanation of the charges as simple as possible. Basically, the formal complaint that was filed on Wednesday surrounds Google’s search engine operations. Yes I know, all we hear about these days is Google’s smartphones and self-driving cars, but the company’s main business it still the old-school search engine.

The European Commission is accusing Google of unfairly favoring its own results over that of the competition. The main issue stems from this feature:

 

This sponsored link appears as an advertisement at the top of any shopping related searches, and it redirects to Google’s own “Shopping Unit”, an algorithm-based system that can tell when a user is shopping for a product and automatically suggests certain links.

Although this is what Wednesday’s charges focused on, it isn’t the only thing the Commission is looking at. The EU’s antitrust chief, Margrethe Vestager, confirmed that an ongoing investigation into Google’s practices surrounding travel and local services. Vestager also announced the launch of a new investigation into Google’s Android operating system, which is used by three-quarters of Europe’s smartphone owners.

Google’s Response

On Thursday, Google formally rejected the charges and sent a 150 page response to the European Commission. In a blog post summarizing the company’s defense, Google’s general counsel Kent Walker argued that the search engine’s practices actually facilitated competition.

According to Walker, Google has generated over 20 billion free clicks for other companies in the last decade, which has led to a free traffic increase of 227%. Walker also defended the Google Shopping Unit, saying that the current format promotes quality and is supported by user feedback.

“Our search engine is designed to provide the most relevant results and most useful ads for any query. Users and advertisers benefit when we do this well. So does Google. It’s in our interest to provide high-quality results and ads that connect people to what they’re looking for,” said Walker.

Why It Matters

If Google is eventually found guilty of these antitrust violations, the company faces a big fine. Technically, the Commission has the power to levy fines of up to $6.7 billion, which is equivalent to 10% of Google’s most recent annual revenue.

The EU has never actually used all of its fining power, but it has doled out multi-billion dollar antitrust penalties in the past. In 2000, Microsoft ( (MSFT - Free Report) was charged for issues surrounding its servers and the bundling of its media player, Web browser, and Windows operating system. In that case, Microsoft ended up paying $2.3 billion in fines, and company culture was changed forever.

Google’s response will now be reviewed by the Commission and the multiple complainants in the case, which includes Microsoft, Yelp ( (YELP - Free Report) , and several European tech and media companies. A lawyer for FairSearch Europe, one of Google’s competitors in the case, said “Google has decimated competition. Consumers have been harmed—and paid higher prices.”

Currently, Google holds a Zacks Rank #2 (Buy). The company recently announced a major restructuring plan that will make Google a subsidiary of a larger company to be called Alphabet, although the Commission said the plan will play no part in the charges. Google investors have always been concerned about the company’s ability to rein in spending, and a big fine certainly won’t help the bottom line.

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