12 December 2016

Europe won’t close its innovation gap by punishing Google

By Massimiliano Trovato

Slowly, but inexorably, one of the most important competition cases on the planet is drawing to a close.

The confrontation between Google and the European Commission – in the form of Margrethe Verstager, the Competition Commissioner – does not just threaten the Silicon Valley giant with the loss of 10 per cent of its revenues and sweeping changes to its business model. It promises to shape the nature of competition in Europe for the next 20 years.

There are three main charges against Google, relating to three pillars of its business: Android, Search, and Adsense.

The least interesting case is the Adsense one, in which the Commission accuses Google of imposing quantity and placement constraints on the ads it shows, thus hampering the emergence of new actors in the market.

With Android, the regulator’s complaints concern how the mobile operating system is distributed. This should not be an issue, given that it is both free and entirely customisable. However, the automatic installation of Google Play Store, Google Chrome and the Google search engine is deemed to give Google an unfair advantage.

Finally, there is search – and in particular the integration between different aspects of Google’s business, such as Google’s “horizontal” search offering (aka vanilla search) and the “vertical” services it layers on top (such as its price-comparison service). This is accused of harming alternative providers.

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Beyond the specific issues involved, these cases raise some common and vitally important issues.

The first one is the definition of the relevant market – where in both instances, the boundaries outlined by the Commission are far too limited.

Anyone who has used the internet knows that comparison-shopping services, or even search engines, are just one of many tools available for orienting oneself among the different offers.

Often, consumers prefer to turn directly to the virtual shops they have come to know and trust, for instance through apps. Or to use platforms on which various sellers compete, such as eBay or Amazon – the undisputed leader in e-commerce.

If you narrow the definition of a market sufficiently, it will always be possible to label someone a monopolist: the pizzeria close to my apartment has an effective delivery monopoly over my house. But as I sometimes go out to restaurants, or stay home and cook, it does not have a monopoly on my food consumption overall.

Similar criticism can be made of the investigation into Android, which misunderstands the competitive context of the smartphone market. In particular, Apple – arguably the creator and leader of the sector – remains completely ignored, despite its monopoly over all those using its iOS software.

Paradoxically, the effect is to penalise Google’s open model, because it is insufficiently open, thus supporting Apple’s closed one.

This leads us to a second issue underlying both investigations: the treatment of innovation and industrial models. The Commission implicitly states that an horizontal search engine and a vertical one are distinct products, and as such need to be separated. Similarly, those in Brussels assume they can strip a mobile operating system of its search and navigation functionalities.

Yet this means hampering the products’ future development – and denying consumers the benefits already generated by innovation.

For example, the integration between horizontal search and price comparison services guarantees more relevant results, while the inclusion of Google’s services suite in the Android operating system ensures that interfaces are easily recognisable and easy to use.

The fact that there are currently 2.5 million apps on the official store, which have been downloaded 65 billion times in 2015 alone, hardly suggests a monopoly.

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Above all, the approach followed by the Commission shows the old vice of antitrust authorities: the tendency to focus on protecting competitors rather than competition per se, as if firms had a divine right to their market share.

With the investigation into Google – one of the many points of confrontation between Brussels and the tech giants – Commissioner Vestager is poised to have a disproportionate impact, both via the regulatory tools she is introducing and with respect to Europe’s role in the digital economy.

Businesses respond to incentives. And it is not by constraining firms’ freedom to experiment with new products and services that Europe will close its innovation gap.

The original Italian version of this article can be found here

Massimiliano Trovato is a fellow of the Istituto Bruno Leoni.