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Google Looking at More Fines in the EU

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The Financial Times and Politico have broken the story that the EU is getting ready to fine Alphabet (GOOGL - Free Report) for its monopolistic practices regarding Android. They also say that the fine could be significantly higher than the $2.7 billion charged last year over Google Shopping.

Since the European Commission’s report isn’t out, its reasons for charging Google aren’t clear as of now. But complaints against Google include the company’s policy of requiring hardware manufacturers to pre-install its suite of apps while preventing them from pre-installing certain competing apps.

As investigations are generally long-winding, they allow the accused, in this case Google to make changes to deal with certain objections. So Google has in the meantime relaxed its rules regarding the pre-installation of competing apps.

The case started with Yandex, which was the dominant search engine in Russia, losing significant market share to Google as a result of this policy. One might argue of course that in this case Google increased competition in the market dominated by Yandex. But the EU, to which Yandex went, decided to pursue the case anyway.

Google’s arguments (from earlier on) do look convincing:

The EU isn’t considering Apple (AAPL - Free Report) as Google’s competitor, although its own findings showed that they do in fact compete. So Android being offered free to hardware makers means that many more hardware companies could take a shot at the market and many more and cheaper devices could enter the market, thereby increasing choice for customers.

Second, Google’s bundling creates a consistent Android experience across devices and prevents fragmentation, which is both expensive and cumbersome for developers since a fragmented ecosystem would require them to make multiple versions of their apps. Destroying this balance would kill the app ecosystem hurting millions of developers.

Third, hardware makers can also pre-install competing apps (Google apps now make up a third of pre-installed apps).

Fourth, the pre-installed Google bundle is free for hardware makers and users. Moreover, since Google earns from app usage, this helps it provide necessary support to Android and Play at no extra cost to users.

Fourth, Google doesn’t prevent any user from downloading any app of their choice from Play Store. It says that the average Android user in Europe downloads an additional 50 apps over the lifetime of their device. So if they prefer any app over Google’s, they are free to download it (they probably can’t delete the Google apps although this may not be such a big problem since they occupy a very small part of device memory).

To Conclude

Google’s position is rather unique because it has successfully created an ecosystem of not just developers but also hardware makers, content providers and advertisers. While this has created some tensions between various parties and its ability to earn profits from the system has been questioned, it’s impossible to deny Google’s contribution.

So the EU fine is not the end of the story. Google is definitely a monopoly of huge proportions but the service it provides is so unique that the EU will be hard pressed to find an alternative solution that’s also fair for all concerned.

We are at a point in history where we are re-thinking the concept of monopoly. Is a monopoly always evil? What about Amazon (AMZN - Free Report) then, for instance, which has the effect of lowering prices across the industry? And what is the best way to regulate benevolent monopolies, if I can use that term? There are no easy answers. So these are questions that we will continue to debate as the Internet grows to take over even more of our lives. In the meantime, Google’s ordeals could well continue.

Google shares carry a Zacks Rank #3 (Hold). But better investment ideas are captured in the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

 

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