The European Union recently announced it would fine Google $5 billion for alleged anti-competitive practices in the licensing of its Android smartphone operating system. There is so much wrong with this decision it is difficult to know where to start to critique it, but the first thing to note is that it will very likely harm consumer welfare, and is at odds with American antitrust doctrine. Worse, given the EU’s outsized influence on the world economy, it represents an attempt by the EU to become the world’s antitrust regulator — a move that the United States should oppose with every tool it can muster.
At the heart of the decision was Google’s business model for Android. The company licenses the software to makers of mobile phones free of charge. However, there are development costs for improving the Android platform, and Google needs to recoup these. So it asked mobile-phone makers to install certain Google apps, including Google Search, and the Google Play app store. Customers using those apps provide a revenue stream to Google via advertising on the apps. This has allowed those manufacturers to keep their smartphones affordable.
The European Union calls this practice “tying,” which it defines as using a dominant position in one market — smartphone software — to disadvantage competitors in another market — Internet search. This is an unusual interpretation of “tying,” as it refers to a party using a dominant position in one market to achieve dominance in a market where it is not dominant. But Google is already dominant in Internet search.
The EU also presupposes that people do not use certain competitors’ apps because of the placement of the default apps, rather than their actually preferring the latter. As Matt Kilcoyne of the London-based Adam Smith Institute tweeted, “The EU commissioner saying ‘we have to fine Google £3.5bn because although people can freely access another search engine they don’t choose to’ is utterly insane.” Indeed.
Furthermore, the EU defined the market very narrowly, as licensable smartphone operating systems. This definition excludes Apple’s iOS, which the company does not license. Apple enjoys a large market share in western EU countries, including the U.K., France, Ireland, and in Scandinavia. That means that the EU has ignored a major source of competition in its competition analysis (just as when it ignored Amazon when going after Google over online shopping).
So if the EU’s hinders Google’s ability to get revenue from its apps, how will Google pay to develop its platform and accompanying software? It may well have to charge for the privilege of using its software. That means goodbye to the $50 smartphone. That may not mean much to French or British consumers who can afford iPhones, but it will mean a lot to less well-off consumers in Greece, Bulgaria, and Romania.
And if Google decides to roll out that model to the rest of the world — which is presumably what the EU wants, since the EU fines are on the basis of global revenue — then smartphone makers and users in the developing world will be even more hard hit. Smartphones are a major engine of growth and innovation in Africa, where the loss of access to affordable mobile phones means loss of opportunity for millions of the world’s poorer people.
Ultimately, the EU’s action against Google may help entrench Apple’s business model around the world. If that were the case, expect Google to start limiting the ability of its competitors to use Google Play the way Apple limits access to its App Store. That means less choice for consumers and less opportunity for entrepreneurs. We’ll all be worse off.
For years, the EU has tended to go hard after big American tech firms — remember its incessant complaints against Microsoft?). Notably, the EU has no big innovative tech firms of its own to speak of. The last were the Scandinavian mobile-phone giants, who were caught napping by . . . iOS and Android. The EU’s harsh antitrust laws surely didn’t help, either.
For these reasons, the United States needs to seek allies to stand up to the EU’s regulatory imperialism, including Great Britain, when it leaves the EU. Pushing back the regulatory onslaught from Brussels will be good for innovators, good for consumers, and good for choice.