Here is why the European Commission fined Google $2.7B, and how it could have been avoided
Quite a lot has been written about the recent $2.7 billion fine levied on Google, much of it simply wrong. Here is how to think about this type of competition law case, and yes, I am an expert:
- The European Commission launches competition law investigations based on complaints.
- This specific complaint first came from a UK shopping comparison site called Foundem and took seven years to reach the announcement of the fine.
- European and US competition laws are quite similar. When there is a major case that seems to violate competition law on both sides of the Atlantic, the US Department of Justice and the European Commission can agree which of them will pursue the case. This avoids companies having to duplicate legal and other resources, so is a good thing. I do not know factually whether the DOJ made such an agreement for this case, but they did so for the very similar case I was involved in.
- The general legal principle that matters here is that a company that is dominant in one market is not allowed to use that dominance to decrease competition in a different market.
- For European Commission cases, the rule of thumb for ‘dominance’ is a 40% market share. I believe the US DOJ does not have a well-established rule of thumb, though they operate on the same general principle.
- The way the Commission decides that a market exists is simply by observing the existence (or not) of competitors who are active in that space alone.
- It is of course perfectly legal to be ‘dominant’. However, the rules change for you if you are ‘dominant’. Apple, for example, does not have dominance in the PC market. It therefore does not have to observe the same rules as Microsoft, which is dominant in the PC operating system market. (Going back in time, the Commission ruled that web browsers were a separate market, since Netscape competed there, and that Microsoft could not therefore use its OS dominance to squash Netscape by favoring Internet Explorer over Netscape or any other available browser when customers installed a new Windows operating system or PC.)
- It was easy for the Commission to observe that www.foundem.co.uk and other similar sites competed to earn money in the UK comparison shopping site market. So the separate market exists. The market was fragmented and nobody was ‘dominant’.
- Since Google had over 40% share of the search market, they were therefore forbidden from using their search dominance to squash competitors in the comparison shopping site market.
- The easiest way of avoiding the competition law issue would have been for Google to publish ‘independently objective criteria’ for how shopping price comparison search results would display, and ensure that the same criteria applied to both themselves and to the large number of small competitors in this new market. Google did not do this.
- Trying to claim that you are not dominant in search when you have over 40% market share is pointless.
- Claiming that the result of your business tactics do not harm consumers is also pointless, as the consumers were not the ones who complained.
- Since the Commission cases always take a long time, the correct way for companies to address competition law issues is to modify their business practices during that period. It then becomes relevant to take the following position: “While we do not agree with your interpretation of competition law, we have now changed our business practices, so there is no need to continue the case.” Of course that all needs to be true.
The tactic described in point number 13 is what we used when I was the business leader assigned to the European Commission’s case against Digital Equipment Corporation. The case was about hardware maintenance. The Commission contended that the price discounts we gave when customers bought hardware and software maintenance together made it impossible for third party hardware maintenance companies to compete with us. The Commission defined the maintenance of DEC hardware as a market, based on the fact that there were companies who did only that.
We changed our business practices, made them transparent to customers and competitors, and were able to negotiate a settlement with the commission and the plaintiff that meant we had no fine to pay. We simply had to commit to continue the new business practices. Google could have adopted the same tactic, but did not. I don’t know why. They have no chance at all of winning the legal case if they lodge an appeal. I suppose the fine could be changed, up or down.
OK, one final anecdote. Just after the DEC case, the Commission started the browser case against Microsoft, with Netscape as the main plaintiff. I was headhunted and interviewed by Microsoft to run licensing operations in Europe and work on the case. During the interview with the corporate head of licensing, he asked me what the probability was that Microsoft could win the case. I told him it was 0%, and why. He told me that while both he and the legal team were tended to agree, Bill Gates did not, so he could not hire me. Of course Microsoft lost. The principles of the loss were the same as in the current Google case.
I was the first non-lawyer to be published in a particular legal journal on this sort of case, I believe my explanations are accurate. That’s all I want to say on the subject for now. If you believe my explanations are out of date or wrong in some way, feel free to comment below and I will correct or remove this article if necessary.