Gordon Campbell on the EU’s beef with Google

Gordon Campbell on the EU’s beef with GoogleFirst published on Werewolf

Essentially, the case involved Google’s alleged abuse of the stranglehold it enjoys on the online advertising associated with its search activities. In the U.K. a rival shopping comparison engine called Foundem laid a complaint in 2010 with the EU Competition Commission alleging that Google was unfairly promoting its own in-house service – now known as Google Shopping – to the disadvantage of its competitors. Other European and some U.S. firms eventually joined the suit. Three years ago, Google offered a solution whereby Google would allow its rivals to buy ads that Google pledged to place at the top of its pages of search results. This offer was rejected, and battle was rejoined. As Bloomberg News has reported, the court actions began to metastasise, with one arm of the EU case dealing with AdSense ads and another with the Android operating system. Where to from here?

Google is nothing if not rational. It would have agreed to a compromise had the stakes been lower. But so-called product listing ads -- the kind displayed in the Google Shopping modules that appear to the right of search results if your query looks like you're trying to buy something -- have been growing faster in recent years than Google's traditional text ads. In the first quarter of this year, they accounted for more than half of retail search ad clicks, and advertiser spending on them rose 32 percent year-on-year. Making these ads less prominent or removing them from search results altogether would have resulted in a sharp revenue drop. [EU Competition Commissioner Margrethe] Vestager is aware of that, and the size of the fine reflects her intention to drive home to Google that noncompliance won't be worth it.

Google has 90 days to comply with the EU ruling, or it will face an additional fine of 5% of its global daily revenues, estimated to be in the range of $12.5 billion. Moreover, the EU ruling can also be used as a precedent within cases that may now be lodged within other national jurisdictions - such as, say, with the Commerce Commission here. In the US, the climate for Google is a lot friendlier. The Trump administration seems intent on further weakening the (less than robust) anti-trust policies of the Obama era. Yet the global threat posed by the EU findings are serious. Bloomberg again, spells it out:

Google’s parent company, Alphabet, made $8.1 billion of revenue in Europe, the Middle East and Africa in the first quarter of the year. That's a third of its revenue and probably a higher share of net income, given that it barely pays any taxes in Europe…. If Europe accounts for 40 percent of the company's net income, it delivered $2.2 billion to Alphabet in the first quarter. Vestager's fine alone eats up more than that. The maximum daily noncompliance fine would destroy almost two quarters' profit in a year. And then there are almost certain further penalties from national courts. It's worth losing some -- not all -- of the product listing ad revenue to avoid such an outcome.

The other option for Google of course, is to appeal the EU ruling. Good luck with that. It didn’t work for Microsoft which lost all of its appeals over the course of eight years of litigation with the EU on a different, but not dissimilar anti-trust case. Reportedly, the EU’s General Court operates in a conservatively legalistic way that’s unsympathetic to the laissez faire arguments of Chicago School economists. The GC tends to uphold Commission findings, even though its own reasoning on “abuse of dominance” law was strongly criticized in this thorough review of the GC’s rulings between 2000 and 2011.

The fact remains that the GC appears likely to side with the EU Competition Commission. At best for Google – an appeal might merely reduce the size of the fine, though even that is a something of a long shot. (Reportedly, only two out of eleven fines were reportedly revised on appeal in the 2000 -2011 period, and since then no large fine has been entirely overturned.)

Locally….

This isn’t simply about Google though. Abuse of dominance activities now permeate almost every dimension of commerce and culture in a small market like New Zealand, affecting everything from supermarkets to banking – let alone with respect to the market dominant behaviours of global Godzillas like Google, Facebook, Amazon and Apple. The relevant case law here is still a work in progress. This week, a mid-October date was announced for the Court of Appeal hearing on the Commerce Commission’s rejection of the Fairfax/NZME merger application.

The trends involved are not entirely bad news. Nostalgia aside, no one wants to return to the virtual monoculture that existed post war, up until the 1970s – when most of us listened to the same radio stations, watched the same TV shows, read the same newspapers and talked about much the same stuff around the water cooler. Yet the apparent diversity we currently enjoy – be it in music via Spotify and Youtube, or via the range of box sets produced by this golden age of television – is all occurring at the retail end, the consumption end.

The exact opposite has been occurring at the wholesale end, among those who own the outlets of culture and news generation. Here the story is one of convergence near monopoly, and cartel dominance – and this trend is being cheered on by the likes of the Silicon Valley billionaire, Trump adviser and honorary Kiwi citizen Peter Thiel, who has famously decreed that “competition is for losers.” The aim of winners is to achieve and to wield monopoly power.

Look at the music business, where three companies – Universal-BMG, Sony and Warners – own over 90 % of the business, and they extort such punitive royalty charges from streaming services like Spotify as to threaten the viability of Spotify’s business model, let alone the downstream livelihood of musicians, or the best interests of their audiences. Digital commerce is seeing similar near monopoly powers in the hands of Google, Facebook and Amazon. The main (only?) safeguard we have against those trends is the Commerce Commission, and the regulatory powers they have. These powers are intended to keep markets open, and to save competition and innovation from capitalism’s own worst instincts to devour and converge - and then extract excessive profits from their captive markets.

Unfortunately, those regulatory powers tend to be decried as ‘red tape’ and ‘intervention’ by the 1980s dinosaurs who are still living in a pre-Thiel world of level playing fields and open markets that is increasingly out of touch with how the new, online giants operate. Reportedly, if the Fairfax/NZME merger were to be approved, this would deliver a 90 % level of market dominance to the merged news entity.

Such a ratio would be right up there with the problematic share of online ads that Google is currently extracting from its search activities. Clearly, New Zealanders have a stake in how the EU’s case against Google pans out. Presumably, the Court of Appeal will be looking hard at how the EU Competition Commission has gone about balancing desirable market efficiencies with the longer term interests of consumers. Right now, the forces of convergence have a lot more momentum than those much touted forces of disruption.

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