The Google Android Case: Are the Sanctions Really Effective?

- Harjas Singh and Saurabh Gupta

Android is the most popular mobile operating system in the world. For developers, android is a part open-source, part propriety core software that provides a reliable framework for them ­­to use and develop their apps. For regular consumers, it is a convenient operating system, offering the best of apps – Maps, Gmail, Youtube, etc. These free-for-all apps are at the core of the Google Android Antitrust dispute, which shall be discussed in the paper. But first, this paper shall aim to summarise the Google Android[1]case, and then proceed to critically analyse the penalties awarded in the case for their effectiveness, before suggesting alternative sanctions that may be more effective in such cases.

The Google Android Case – A Summary

In April 2015, the European Competition Commission initiated a formal investigation to examine whether Google had entered into anti-competitive agreements or abused its dominance by tying its apps to the Android software.[2] The investigation sought to identify whether Google had illegally hindered the development and market access of rival mobile applications or services.

The Commission identified two markets – the upstream market for the licensing of Android to device manufacturers and the downstream market for end users. It then discussed that there were high barriers to entry in the licensable operating systems market. This was mainly due to network effects in the sense that the more users use a smart mobile operating system, the more developers write apps for that system. This in turn attracts more users. Further, competition in the downstream market did not sufficiently constrain Google’s position in the upstream market. It considered factors like high switching costs between Apple iOS and Google Android, higher price for Apple products, and consumers’ preference for Google services (like Google search) even after switching to Apple iOS to come to this conclusion. The Commission, through its market research, also concluded that Google, which had a market share of more than 95%, held a dominant position in the worldwide market (excluding China) for licensable smart mobile operating systems.[3] Further, it was also held that Google had a dominant position in the search engine market as well, with a market share of around 90%. This market too faced high barriers to entry.

The Commission also looked at the market for app stores for Android mobile operating system. It discussed that this market was also characterised by high barriers to entry and lack of competition, and held that Google held a dominant position in the worldwide market (excluding China) for app stores for the Android mobile operating system.Having identified the markets, the Commission now examined three aspects of Google’s conduct that may amount to abuse of dominance:

(i)Illegal tying of Google’s own applications or services Google bundled its apps and services with Android software, which made it mandatory for the manufacturers to pre-install all its apps. Since pre-installation creates a status quo bias, the Commission held that this practice reduced the incentives of manufacturers to pre-install competing search and browser apps, as well as the incentives of users to download such apps. This bundling arrangement, therefore, reduced the ability of rivals to compete effectively with Google. This was similar to a situation seen in case of Microsoft’s antitrust violations. Microsoft had abused monopoly power by bundling its web browser (Internet Explorer) as well as the Windows Media Player along with the Windows Operating System. It was held that such bundling restricted the market for the competing web browsers, and was violative of competition law principles.

(ii)Illegal payments conditional on exclusive pre-installation of Google Search Google granted significant financial incentives to some of the largest device manufacturers as well as mobile network operators on condition that they exclusively pre-installed Google Search across their entire portfolio of Android devices. While this practice was discontinued in 2014, the Commission still held this to be anti-competitive since Google’s competitors in the search engine business could not possibly compensate the device manufacturer across all devices for loss of revenue share from Google.

(iii)Illegal obstruction of development and distribution of competing Android operating systems Google, in order to be able to pre-install on their devices Google's proprietary apps, manufacturers had to commit not to develop or sell even a single device running on an any alternative version of Android that was not approved by Google (commonly referred to as ‘Android fork’). This, as per the Commission, reduced the opportunity for devices running on Android forks to be developed and sold. Therefore, the Commission held that Google denied the users access to further innovation and smart mobile devices based on Android Fork. This also gave Google the power to determine which operating systems could prosper. This was held to be anti-competitive.

Taking all this into account, Commissioner Margrethe Vestager, in charge of competition policy, concluded: “…[Google’s] practices have denied rivals the chance to innovate and compete on the merits. They have denied European consumers the benefits of effective competition in the important mobile sphere. This is illegal under EU antitrust rules.”[4]The Commission thus imposed a fine of €4,342,865,000 on Google, which is around 5% of the average turnover of the last three years of Google’s parent company, Alphabet. Further, it threatened to impose a penalty of up to 5% of average worldwide turnover of Alphabet for non-compliance with this decision.

Problems with the Sanctions Imposed

While the fine imposed by the Commission is the largest it has ever imposed on a company, this section will discuss whether this fine is the appropriate remedy or not in light of the goal of enforcement mechanisms.[5]

(i)Google Already Derived Substantial Benefits from Android The Commission looked at Google’s dominance for the past seven years. This meant that the Google had been allowed to derive illegal benefits from its dominant position in the market for seven years. Indeed, Google earned a revenue of €5.25 billion from the Android Play Store in 2017 alone. In comparison, the fine of €4.3 billion is hence, too little too late. The Commission must be proactive to ensure that enterprises are not allowed to derive huge profits by abusing their dominance for years. As things stand, a simple cost-benefit analysis would show that an enterprise stands to benefit from abusing its dominance, even if it is penalised for it later, in the long run. The kind of dominance that Google enjoys in the markets identified initially in the paper, are characteristic of the network effects that have already impacted the markets permanently. The penalty imposed may not lead to a reversal of the damage already done.[6]

In 2004, a similar situation of bundling had arisen in the Microsoft Case. EC then had forced Microsoft to release a version of Windows without Windows Media Player and later offer a browser choice screen, which allowed users to select a web browser other than the previously default Internet Explorer. However, it was later discovered that the this version of the Windows had no buyers.[7] Microsoft had already reaped the benefits of the network effects of their antitrust activities. In this case as well, consumers are unlikely to buy a version of Android without Google’s services. Thus, it can be argued that the EU decision has come 5-8 years too late. While the fine and the instruction for discontinuation of antitrust activity may lead to better competition in the long run, Original Equipment Manufacturers (OEMs) will have to offer Google services in the short run in order to satisfy the consumer demand and to be competitive.

Moreover, the consumer demand has been manipulated to a level where even if OEMs do not provide Google Services as part of the handset, consumers are likely to download these from the app stores in order to satisfy their needs.[8] All of this adds toward the gravity of the infringement committed, which is a relevant factor in deciding the amount of fine under the European Union policy.[9]

(ii)The fine is miniscule compared to Google’s economic power Alphabet generated a turnover of €96.3 billion in 2017.[10] It also earned a net profit of €10.5 billion, despite incurring a fine of €2.42 billion in the Google Shopping case.[11] Before 2017, it had witnessed a rise of €2-3 billion a year in its profits.[12] This year, Google generated a profit of over €8 billion each in the third quarter alone.[13]Thus, Google will continue to be among the top 10 companies of the world in terms of profit, despite the fine.[14]

Economic theorists and Behavioural analysts suggest that businesses today are becoming more and more risk averse.[15] This is due to increased professionalism, increased scale of operations, social factors like education and other means of social conditioning as a part of the modernized word today. Research suggests that the fines can be a great deterring factor for such risk averse management.[16] However, the way fines are calculated needs assessment.

Under the European Union policy, there is first a calculation of a basic amount of fine, which may be adjusted depending on various mitigating or aggravating factors.[17] The calculation of the basic fine is based entirely on the value of sales, with consideration given to the gravity and duration of the infringement. Thus, as stated earlier, the fine calculated in the Google Android Case too, is one that is based on Google’s sales.

It is important to note that while the amount of fine is unprecedented and may look massive prima facie, but for a company as big as Google, whether such a fine entails deterrence needs to be asked. There can be different ways of computing fines. One way can be to levy a fine on the basis of the company’s turnover, as done in this case. However, for a company like Google, where the profit margin is high,[18] such a fine may not be an effective deterrent.[19] An alternative to this approach can be seen in the form of a fine which is calculated on the basis of profits. Such a fine is better placed to be a deterrent as it can provide a constant impact which a sales or assets approach cannot.[20]More importantly, attacking the profits of a firm is a better measure especially for firms having a multidivisional structure, one like Google. While only one division may have committed the antitrust violation, a fine that attacks the profits generated cumulatively by all the divisions builds pressure on the company to restrict any such violation in the future.[21]

​(iii)Aggravating Factor This antitrust violation is the second offence by Google, after the Google Shopping Case. According to the EU policy, a basic fine may be adjusted according to various aggravating and mitigating factors. Repeat offence is an aggravating factor according to the policy,[22] and thus the fine should have been set taking this into consideration.

(iv)Specific Increase for deterrence The European Union policy on setting of fines also provides for situations where the fine may be increased in order to increase deterrence.[23] In such instances, the fine imposed on undertakings which have a particularly large turnover may be enhanced in order to ensure greater deterrence. Moreover, the Commission shall also take into account the need to increase the fine in order to exceed the amount of gains improperly made as a result of the infringement. In the instant case, the network effects which have massively impacted the consumer behaviour and preferences need to be considered as improper gains accruing to Google due to its violations. This should lead to an increase in the amount of fine, which would result in the deterrence required.

(v)Historic Perspective Microsoft Case[24] Twenty years ago, Microsoft lost the antitrust case against the government of the United States. The case revolved around the monopolization of the internet browser market by Microsoft, which was the world leader in the operating system market. Microsoft was selling its operating system and internet browser as a bundle, and this meant there was little to no opportunity for any other internet browser to have an impact on the market. At that time, the argument furthered by Bill Gates and a few others was that such antitrust regulations impede technological development. Little did they know, the regulations in fact proved to be a boon for innovation. Had this monopolization been allowed, competition would’ve been restricted in not only the browser market, but surely other markets as well. Who knows maybe Google as we know it today would’ve been a company not half as big as Bing, while today it surely leads the search engine market and is making antitrust headlines of its own.

Google’s case is indeed similar to the Microsoft antitrust case as mentioned above, especially in relation to bundling. Some believe that the two cases are very different, however that debate is for another time. The point of contention here is whether the fine is an effective remedy in itself to limit behaviour that impeded competition. The two cases illustrate different remedies. In the Microsoft Case, the European Commission made sure that other options of browsers are provided to the consumers, thus making sure that the desired objective of more competition was realised. So, a direct instruction was given with regard to the steps needed for ensuring better competition in the market. In the Google Android Case however, such steps have not been taken and a mere instruction for discontinuation of the violative conduct has been made. This alone cannot be an effective deterrent.

Google Shopping Case[25] In this case, there was an allegation that google misused its dominant position in the general search engine market to gain competitive advantage by placing its own comparison shopping service more prominently. Google was thus fined €2.42 billion by the European Commission. The fine however, has not been as effective as it was thought to be. The end has not been achieved as effectively as it was hoped, which was to allow greater competition in the comparison shopping market and to protect the interest of smaller competitors. This is significant from the fact that still, only 6% of the slots available on the European version of Google’s search engine are taken by the rivals to Google’s comparison shopping service. A remedy that could’ve solved the problem here was to create a clear distinction in the comparison shopping services, by dividing the visible space into two parts – one showing Google’s shopping service and the other showing the alternatives. However, this was rejected. Due to no particular prescription of a remedy, Google now auctions the space for these shopping service providers to appear alongside the merchant websites, which leads to more and more revenue for Google. The rejected seems to be the fairest of all here. However, all of this leads to the conclusion that a fine alone may not be an effective deterrent, and there is a need for an equitable remedy to be prescribed in clear terms.  

Conclusion The culmination of all this analysis is that there has to be something which disincentivizes Google from undertaking any such activities in the future where competition is hampered, and thus acts as a deterrent. The European Commission could do this in a number of ways. A few things that have been suggested in this regard can be - compelling Google to allow competing app stores to distribute its apps, which would make it easier for other firms to launch competing app stores. Another option would be to give consumers a choice, when they first boot up their phone, over which apps they want to use in default. All of this, along with an assessment of fines based on aforementioned recommendations, can go a long way in ensuring better competition in the market.

*Singh is a IV Year B.A. LL.B (Hons.) student and Gupta is a II Year B.A. LL.B (Hons.) student at National Law School of India University, Bangalore. [1]Case AT.40099 – Google Android.

[2] Commission sends Statement of Objections to Google on comparison shopping service; opens separate formal investigation on Android  (2015) <http://europa.eu/rapid/press-release_IP-15-4780_en.htm> accessed 24 May 2019.

[3] Commission fines Google €4.34 billion for illegal practices regarding Android mobile devices to strengthen dominance of Google's search engine (2018) <http://europa.eu/rapid/press-release_IP-18-4581_en.htm> accessed 24 May 2019.

[4]ibid.

[5]George Stigler, ‘The Optimum Enforcement of Laws’, Essays in Economics of Crime and Punishment 56 (William H Lande& Gary S. Becker (Ed. UMI,1974) <http://www.nber.org/chapters/c3626.pdf>.

[6]Google’s Android fine is not enough to change its behaviour The Economist (19 July 2018) <https://www.economist.com/leaders/2018/07/19/googles-android-fine-is-not-enough-to-change-its-behaviour> accessed 24 May 2019.

[7]The EU fining Google over Android is too little, too late, say experts The Guardian (18 July 2018) <https://www.theguardian.com/technology/2018/jul/18/eu-fine-google-android-anti-competitive-behaviour-consumers> accessed 24 May 2019.

[8]ibid.

[9]Guidelines on the method of setting fines imposed pursuant to Article 23(3)(a) of Regulation No. 1/2003 (2006) <https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52006XC0901(01)&from=EN>.

[10]Google posts its first $100 billion year CNN Business (1 February 2018) <https://money.cnn.com/2018/02/01/technology/google-earnings/index.html> accessed 24 May 2019.

[11]ibid.

[12] CNN Business (n 10).

[13]Google’s Parent, Alphabet, Misses on Q3 Revenue But Rakes in $9.2 Billion Net Profit (25 October 2018) <https://variety.com/2018/digital/news/google-alphabet-q3-2018-earnings-1202994554/> accessed 24 May 2019.

[14] The Fortune 500's 10 Most Profitable Companies The Fortune (7 June 2017) <http://fortune.com/2017/06/07/fortune-500-companies-profit-apple-berkshire-hathaway/> accessed 24 May 2019.

[15]William Breit and Kenneth G. Elizinga, ‘Antitrust Penalties and Attitudes towards Risk: An Economic Analysis’ 86 Harvard law Review (1973) 693, 704.

[16]ibid 706.

[17]Guidelines on the method of setting fines imposed pursuant to Article 23(3)(a) of Regulation No. 1/2003 (2006) < https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52006XC0901(01)&from=EN>.

[18]Alphabet Net Income 2006-2019 | GOOG <https://www.macrotrends.net/stocks/charts/GOOG/alphabet/net-income>; Google's 5 Key Financial Ratios (GOOG) <https://www.investopedia.com/articles/markets/021316/googles-5-key-financial-ratios-goog.asp>; Earnings Estimates <https://markets.businessinsider.com/stocks/googl/financials> accessed 24 May 2019.

[19]Kenneth G. Elzinga& William Breit, The Antitrust Penalties: A Study in Law and Economics 134 (Yale University Press, London, 1977).

[20]ibid 134.

[21]Breit and Elzinga (n 15) 712.

[22]Guidelines on the method of setting fines imposed pursuant to Article 23(3)(a) of Regulation No. 1/2003 (2006) <https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52006XC0901(01)&from=EN>.

[23]Guidelines on the method of setting fines imposed pursuant to Article 23(3)(a) of Regulation No. 1/2003 (2006) <https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52006XC0901(01)&from=EN>.

[24]Microsoft Corp v Commission (2007) T-201/04.

[25]CASE AT.39740 Google Search (Shopping) <http://ec.europa.eu/competition/elojade/isef/case_details.cfm?proc_code=1_40099>.