By Sam Schechner And Douglas MacMillan
The European Union hit Alphabet Inc.'s Google with a record $5
billion antitrust fine and ordered changes that could reshape the
business model underlying its biggest growth engine: mobile
phones.
In another rebuke to one of Silicon Valley's tech giants, the
bloc's antitrust regulator found Wednesday that Google had abused
the dominance of its Android operating system, which runs more than
80% of the world's smartphones, to promote and entrench the
company's cash-cow search engine.
The fine, Europe's largest so far related to antitrust issues,
is equivalent to about 40% of Google's 2017 net profit of $12.62
billion. For cash-rich Alphabet, however, the financial penalty is
potentially less onerous than the business changes Brussels has
demanded, which could give players including smartphone makers and
mobile carriers more leverage to extract payments from Google and
its rivals.
The EU ordered Google to stop making phone manufacturers
pre-install its search app and the Chrome web browser if they want
to pre-install Google's Play store, which is the dominant way to
download Android apps. The bloc also ordered Google to end
restrictions that discourage manufacturers from selling devices
that run unofficial versions of Android.
Google, which said it would appeal the decision, has rejected
the EU's contentions since the bloc issued formal charges over two
years ago. Google said Android, which is free for manufacturers to
use, has increased competition among smartphone makers, lowering
prices for consumers. Google also said the allegation that it
stymied competing apps is false because manufacturers typically
install many rival apps on Android devices -- and consumers can
download others.
"Today's decision rejects the business model that supports
Android, which has created more choice for everyone, not less,"
Sundar Pichai, Google's chief executive, wrote in a blog post
following the decision.
Alphabet shares ended the day little changed at $1,212.91.
The impact of any changes mandated by the EU decision on
Google's ability to target ads to users -- and to its profitability
-- is an open question. The two apps targeted in the EU decision,
Google's search and its Chrome browser, are extremely popular in
their own right. Consumers are likely to seek them out from an app
store even if they weren't preinstalled on the phone, said Tarun
Pathak, an analyst at research firm Counterpoint.
And while the EU ruling may have opened the door for device
makers that want to charge Google to pre-install its search and
browser apps, Google has its own leverage over manufacturers. The
internet giant could counter by demanding payment for Android. Mark
Mahaney, an analyst at RBC Capital Markets, has noted there aren't
many competing options.
Google's investment in Android dates back to 2005, when Google
paid $50 million to acquire a small startup behind a new
touch-screen operating system for phones. Google's wager was that
providing a free Android operating system for phones would hook
smartphone makers, allowing Google to disseminate apps and bolster
its online ad business in the emerging era of smartphones.
The strategy worked. Google is now a mobile superpower expected
to generate more than $60 billion in revenue this year from mobile
ads, according to eMarketer Inc. That amount would be 44% of
Alphabet's estimated overall revenue of $136 billion for 2018,
according to S&P Global Market Intelligence.
That dominance was partly achieved through a simple tradeoff: In
exchange for providing Android to smartphone makers free of charge,
Google encourages them to offer devices loaded with Google services
such as search, YouTube, Gmail and Google Maps. That allows Google
to gather vast amounts of data on consumers based on their use of
those popular apps and then devise and target ads.
Now, Google may be forced to offer new terms that give handset
makers and phone carriers more freedom to feature their own apps,
strike deals with Google's rivals or even charge Google for
pre-installing its apps.
"It could give the mobile phone companies, or the operators,
greater leverage to extract payment from Google," Mr. Mahaney said,
speaking before the EU decision.
Brussels has given Google 90 days to make the changes it is
demanding, including requiring Google to permit phone makers to
offer their own tailored operating systems based on Android's
open-source version. That requirement could make it harder for
Google to offer a single, standardized version of its mobile
software on which all Android apps can be used.
The decision, while applicable only in Europe, will require
changes in its relationship with global device makers that sell
products on the continent. Google doesn't break out its EU revenue;
in 2017 it brought in $36.05 billion in revenue from Europe, Middle
East and Africa, a third of its total, according to a securities
filing.
The EU ruling could ultimately benefit smartphone users by
helping mobile app makers compete with Google services by offering
better features and lower prices, said John M. Simpson, privacy and
technology project director at Consumer Watchdog, a Los
Angeles-based nonprofit.
Supporters of Google, however, contend that the company may have
less incentive to develop innovative Android products if it ends up
making less money from mobile phones.
The fine is the latest in a series of decisions in which the EU
has played the role of global tech regulator, moving with
particular force against U.S. companies on issues ranging from
competition to taxes to privacy.
The EU has also ordered the recovery of alleged unpaid taxes
from Apple Inc. and Amazon.com Inc., and is considering potential
new rules for internet platforms on topics ranging from hate speech
to copyright liability.
In May, the bloc began enforcing a strict new privacy law that
imposes new requirements on companies such as Alphabet and Facebook
Inc. that collect and use large amounts of personal data.
Wednesday's fine tops the EU's previous record penalty of
EUR2.42 billion ($2.82 billion) when the bloc last year ordered
Google to stop using its search engine to favor its own
product-advertising service over others. Google appealed that
decision but was required to implement it at the same time.
Earlier this year, shopping rivals complained that Google's
remedy has done little or nothing to improve the playing field.
Google said it has followed the letter and the spirit of the EU
decision.
Write to Sam Schechner at sam.schechner@wsj.com and Douglas
MacMillan at douglas.macmillan@wsj.com
(END) Dow Jones Newswires
July 18, 2018 20:17 ET (00:17 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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