Last Wednesday, EU regulators swung the antitrust hammer down on Google, imposing a record 4.34 billion euro ($5 billion) fine on the company for breaching EU competition policy rules by using its Android phone business “as a vehicle to cement its dominant position in general internet search.”
The decision attracted tremendous public interest not just because of the penalty—which represents nearly 5 percent of parent company Alphabet’s 2017 global revenues, and an amount higher than the GDP of 40 countries—but also because of the novel footholds it appears to establish for similar antitrust enforcement in the future. This is groundwork that may vastly empower European officials to bring similarly weighty monetary penalties against Google and other major U.S. technology firms in the future.
Yet though the European Commission’s strategy may be aimed at protecting the individual consumer in the face of a major market player, the Google decision may actually set off a chain reaction that will result in higher prices for smartphone consumers in the medium term. And this unintended consequence reveals a particular problem with the EU’s regulatory approach—and shows us just how broken antitrust enforcement has become on both sides of the Atlantic.
To start, it’s worth reviewing the key details of last week’s record-breaking fine. In it, the commission stated that Google engaged in three different kinds of anticompetitive practices that breached EU antitrust rules between 2011 and 2014. First, that Google required Android-certified device manufacturers to pre-install the Search and Chrome browser apps as a condition for licensing the Play Store (Google’s marketplace for Android-compatible apps). Second, that Google made payments to certain hardware manufacturers and mobile network operators to exclusively pre-install the Google Search app onto their devices. And lastly, that Google prevented device manufacturers wishing to pre-install Google apps from selling any device that uses an alternative version of the Android operating system if it was not approved by Google.
(Disclosure: Former Google CEO Eric Schmidt is also the former chairman of New America, a think tank where I was previously a fellow, and which is a partner with Slate and Arizona State University in Future Tense. Google, Schmidt, and his family foundation have also donated money to New America. In 2017, a former New America employee alleged that he was fired for criticizing Google, a charge New America denies. Google has also donated to Harvard’s Shorenstein Center, where I am currently a fellow.)
The regulatory sentiment underlying the commission’s decision is clear: that Google cornered the mobile ecosystem and internet browsing and search markets by using its market dominance and tremendous wealth to deny rivals the chance to compete for consumers.
There’s some truth to that. Android’s market share has steadily climbed over the past 10 years. In the first quarter of 2018, 86 percent of all smartphones sold worldwide ran on the Android operating system. But there’s another critical reason for that extraordinary growth. The only other player that presently enjoys a significant market share, Apple, only offers its mobile operating system when bundled with its iPhones and iPads—devices that many consumers throughout the world, Europeans included, find prohibitively expensive. By contrast, Google offers Android as a reliable, open operating system to a number of leading manufacturers, including those who sell smartphones at prices far lower than even the cheapest iPhones. In this way, Google saw how it offered Android as a trade-off: instead of vying for profits from directly selling use of its operating system on premium mobile phones (that it may or may not also sell), it sought profits in app-bundling commitments with the hardware and mobile companies that relied on the Android operating system.
Given the context of the burgeoning smartphone and mobile ecosystem in the mid-2000s and early 2010s, you can see why Google took this route. Back then, Google dominated the internet search market and, by that virtue, had already begun to dominate digital advertising. At the same time, the smartphone market was just beginning to take off. Everyday consumers the world over were, for the first time, able to afford these devices, and prices began to drop precipitously because of the intense competition to sell to this growing market. Google accordingly saw the opportunity to make a major investment. In 2007, it teamed up with a consortium of device manufacturers, wireless carriers, and chipset-makers to offer an open-source alternative to Apple’s iPhone-only iOS ecosystem. Google would eventually choose to make that operating system, Android, free to any manufacturer who agreed to Google’s licensing demands. The outcome for consumers was, in many ways, positive. It gave them the option of purchasing less expensive smartphones that came with a free and open operating system developed and maintained by a global tech powerhouse. The massive popularity of phones loaded with Android over the decade speaks volumes to the quality of the software and the power of letting consumers choose a device and adjust their experience on it to their liking.
To be sure, however, there’s no doubt that some of the ways Google pursued the “free” strategy hindered competitors in mobile search and web browsing, and that it did so in a way that also came at a cost to these same consumers. As the New York Times pointed out in an editorial reacting to the recent European Commission fine, this is particularly true of Google’s exclusionary requirements that demanded that cellphone manufacturers “not to produce devices with other versions of Android and that they install only the Google search app.” Such constraints create status quo bias, as the European Commission calls it, meaning that consumers are more likely to stick to these pre-installed Google apps because they may lack the time, awareness, savvy, or energy to look for alternative search engines (like Bing) or browsers (like Firefox or Opera). And that strategy certainly contributed to maintaining the search engine and web browser dominance Google still holds today.
But then again, if Google decided not to engage in these practices, then its fundamental business model underlying Android would likely have suffered. You could argue—as Google’s CEO Sundar Pichai does—that we might not see the vibrant app ecosystem that exists today, where at least we have two top-of-the-line platforms instead of one. Additionally, if Google had charged operators for the licensing of Android instead of taking payments in the form of bundling commitments, the end costs would have inevitably trickled down to individual consumers. It’s a vicious trade-off, and consumers shoulder costs either way.
Which brings us back to the unintended consequences of the EU’s antitrust enforcement strategy. Yes, Google technically did engage in unfair—and, by EU standards, illegal—competitive practices imposing such restrictions related to its Android operating system. But many other market players engage in similar bundling practices, too. Consider, for example, the fact that Apple also employs discriminatory behavior with its iPhone business by pre-installing a number of Apple apps—the Safari mobile browser, Mail, Apple Maps, Siri—on all its phones. To take it a step further, the company doesn’t, for example, allow users to change their default web browser from Safari or their default maps app from Apple Maps (meaning you can, for instance, only one-click open a Mail link in the Safari browser). Apple also punishes those not using its iOS ecosystem by refusing to make some of its popular apps available outside of its walled garden—a drawback significant enough that some consumers looking to switch from an iPhone to a non-iPhone might reconsider because they’ll lose access to, for example, their iMessage app and network. We can find such “lock-in” effects across the web ecosystem, too. Amazon, for instance, has instituted policies to not sell Apple TVs or Google’s Chromecast devices in their store. Samsung, for its part, preloads its phones with its Bixby assistant and Samsung Pay software, discouraging consumers to look elsewhere for similar mobile services. And social media companies like Facebook have long been plagued with complaints about its users’ lack of data portability (something the EU’s new General Data Protection Regulation requires).
If we really want to protect “the possibility to compete on the merits” in ways that benefit consumers, it will require enforcing these measures across the entire industry. This means regulators must scrutinize all major players to determine whether they engage in practices that unfairly block consumer access to a good or service. Not just dock the one that happens to be the biggest or most unpopular in the moment.
But it’s not clear whether EU officials can or will effectively look at the smartphone market, or other large tech consumer marketplaces, as a whole. EU competition rules require that officials first establish that a player is a dominant player in its market before bringing a case against it. This system makes it difficult to go after industrywide practices and often leads to officials drawing very narrow lines defining the boundaries of a “market” in order to make a stronger case. In its most recent enforcement action against Android, for example, the commission premises its decision by establishing that it considers Google to be dominant in the market for “licensable smart mobile operating systems.” But that is a narrow definition that necessarily excludes Apple and its iOS from scrutiny. It’s also a seemingly arbitrary boundary considering it doesn’t reflect the larger smartphone marketplace in which these players compete.
And while it may make for a stronger case, the bigger question looms: Will the commission also bring action against Apple as the dominant player in its market for closed mobile operating systems? Perhaps. But if the scrutiny stops at Android, it won’t deter others from similar anti-competitive practices that do consumers harm. Furthermore, it’s likely that smaller, nondominant market players that engage in practices that, by the EU’s definition, are similarly abusive to consumers, will evade regulatory scrutiny altogether.
There’s every likelihood that this won’t be the end of seemingly arbitrary enforcement decisions. Industry enforcement officials around the world often take the European regulatory approach as a model given the continent’s cultural importance throughout much of Asia, Africa, and South America. As nations like Korea, Brazil, and Argentina look to regulate the technology sector, they turn first not to the United States, but to the European Commission for guidance and examples. Though they may find, given the huge popularity of Android in many of their respective countries, that it may be far more difficult to take similar enforcement measures because of pressure from their constituents.
As for the European Commission, it’s still unclear exactly what enforcement measures its antitrust executive Margrethe Vestager might pursue next. Last year the commission slapped Google with a $2 billion fine in a ruling that claimed the company had unfairly promoted its own shopping services higher than its rivals in searches. This year, it singled out Android among players in the mobile phone market. Among others, the commission has also laid smaller fines on Facebook over its WhatsApp deal and Qualcomm for an exclusivity arrangement with Apple. Looking at the political pressures on the commission, it’s not a stretch to imagine that it will move on to build a case for extracting concessions from leading digital companies like Google related to their dominance generated by advanced technologies like artificial intelligence systems. But since the current regulatory system requires the regulatory body to build these cases narrowly, it’s hard to see a path that meaningfully takes on anti-competitive practices that pervade entire industries here either.
There’s no doubt that the antitrust regulatory system—in Europe, the United States, and beyond—is broken. Its failures are most starkly on display when it comes to having healthy competition in the technology sector, an industry that now hosts some of the world’s most influential companies. We see this in the way these companies have made irreversible inroads in their respective marketplaces by engaging in anti-competitive behaviors, by hiding certain business practices from consumers, and by creating an information ecosystem that favors nontransparent algorithmic decision-making over openness.
In order to really address these problems, we need enforcement that’s more robust, more active, more independent, and less riddled with political motivations. Enforcement that takes on industrywide practices consistently, without disfavoring (or favoring) any one market player over other by creating arbitrary market boundaries. In particular, we need antitrust enforcement
that’s based on rigorous economic analysis that shows it will benefit consumers’ interests above all else. Not just showy, one-off fines.
The commission’s general approach to regulate Google may well be good for consumers, but only if it simultaneously considers the actions of all market players. Placing requirements and levying penalties on just one actor—even if it is the most visible, dominant player around—won’t be enough to ensure competition in the long term. Instead, it creates a game of political whack-a-mole—and one that ultimately fails to protect the consumer.