19 July 2018

The EU’s Google fine will hinder – not help – European consumers


European Commissioner for Competition Margrethe Vestager’s job isn’t to pick winners. In fact, it’s the opposite – she’s tasked with enforcing the EU’s State Aid rules. Yet by hitting Google with a record €4.3bn fine, that is exactly what she’s done.

Competition doesn’t only happen between products (e.g. Coke vs Pepsi), it happens between business models too. The former may get more attention in textbooks, but the latter is just as, if not more, important.

Take Spotify and Apple Music’s predecessor. iTunes was the major player in the music downloads market before Spotify’s all-you-can-eat streaming service disrupted it. Both models were put to the market test and Apple eventually adopted Spotify’s streaming model.

By targeting Android the European Commission are favouring tightly-controlled vertically integrated platforms, such as iOS, over more open and customisable platforms, like Android.

The European Commission’s case is based on the idea that Google is using Android, its mobile operating system, to restrict competition. They argue that requiring manufacturers who wish to pre-install the Google Play store (an essential for Android users) to also pre-install Google Chrome and Google Search creates a lock-in effect that supports their highly profitable advertising business.

Let’s put aside the fact that the EU didn’t class Apple as a competitor to Android because users lose their data, contacts, and photos when they move from Android to iOS, ignoring the simple Move to iOS app on Android.

Let’s also ignore the fact that installing an alternative web browser on Android is easy — after all, over 100 million users have already installed Firefox Mobile. Of course Google uses Android to support its wider advertising business. It’s what allows them to offer Android for free to manufacturers. Consumers have benefited massively from that decision and it’s eliminated a massive barrier to entry for makers of mobile phones.

Before open-source Android came along, handset makers had two options: they could build their own operating system at great expense or buy in someone else’s. Android changed that. By giving away Android for free it’s massively reduced the cost of smartphones. It’s now possible to buy a brand new smartphone for under £50.

If the European Commission restricts Google’s ability to promote its other products through Android, then it could crush that low end of the market.

By releasing Android open-source, Google has let manufacturers and customers customise their products as much as they want. Companies can even take Android and create their own ‘forked’ operating systems. For example, Amazon’s popular Fire tablet runs off Fire OS, a modified version of Android.

The competition expert Geoff Manne argues the problem with the European Commission is that they’re committing the Nirvana Fallacy. They’re comparing the messy, complex, real world with a simplified, idealised alternative and using that to justify intervention.

The Commission imagines a world where Google continues to invest in Android, still offers it to developers for free, but doesn’t use it to push Search or Chrome. They reckon that Google makes enough money from data and Google Play to justify that.

In reality, Google’s options are to either charge manufacturers to use Android, move to an Apple-style vertically integrated model, or to stop investing in Android.

Now, there are real advantages to having a closed-platform. They’re better at updating security and pushing out new features. As an iPhone user myself, I prefer Apple’s relatively-closed iOS over Google’s open Android. Indeed, Apple makes the lion’s share of smartphone profits.

But fining Google has tilted the playing field in favour of tightly-controlled iPhone-like business models. It shouldn’t. Market competition, not the Commission, should decide which model is best.

Sam Dumitriu is Head of Research at the Adam Smith Institute