Why the EU's $2.7 billion fine on Google defies logic

Euro coins are seen in front of a Google logo in this picture illustration
The European Union has fined Google a record $2.7 billion for breaching antitrust rules by abusing its dominance to give prominence to its own shopping service verticals. The EU says the move constitutes an illegal advantage to another Google product and has given the company 90 days to pay the fine and to “comply with the simple principle of giving equal treatment to rival comparison shopping services”. 

So, Google pays the fine and withdraws these verticals. On the face of it, the allegation that Google’s results are ‘biased towards its own properties’, such as websites or verticals on shopping, travel, food, sports etc seems to point to a classic example of antitrust abuse of vertical foreclosure by leveraging. However, the EU ruling has led to more ambiguity than clarity.  

Google, allegedly, has been leveraging its entry into specialised search markets or websites by virtue of its pre-eminence as a general search engine and in this case, the reference is to shopping web portals under the name Froggie. The fact that the EU ruling is the first antitrust conviction among a spate of similar complaints by website publishers to antitrust or competition authorities, calls for greater introspection and understanding of competition in search engines and digital markets. In India, the Competition Commission of India (CCI) has a case against Google with similar allegations, though not with a shopping portal but with a matrimonial site (Case No Consim v Google). While CCI's decision is still awaited, I am provoked to initiate a larger discussion on the main focus of competition law: does the consumer in Europe gain from the European Commission's verdict? 

Coming to the end of a long investigation, the decision of the European Commission remains unsatisfactorily out of sync with rapid developments in search engines. Arguments on leveraging have traditionally been unable to capture the innovative mechanism that search engines engage in, to provide searchers on the internet with quick answers to queries. This requires imaginative interpretation and understanding of digital spaces by competition authorities who have yet to take a view. From creating web links to specialised websites to universal search to providing knowledge graphs on one side, and specialised websites on the other side of a web page that Google provides does not suggest blocking of specialised websites. Rather, the intent is to enhance consumer search experience.

Froggie, the shopping site of the EU investigation, has itself has undergone several changes shifting to Google shopping. In India, a fluid and dynamic digital space where there is no compartmentalisation for search engines into general and specialised search markets have lost relevance, more so with the increasing use of apps and social networks on smartphones. By staying within a static framework and in failing to comprehend innovations provoked by competition, the EU gives no indication of whether consumers have gained or lost.

No doubt, a large quantum of information has been gathered and comprehensively analysed on a broad range of evidence. From the long list of 5.2 terabytes of evidence and as many as 1.7 billion search queries summarised in its June 27 press release, and of market investigation of customers achieved through questionnaires to several hundred companies, it is not clear whether consumers have gained or lost; whether they have benefitted or been harmed.

The primary object of competition law and, therefore, of competition or antitrust authorities, is to protect competition and enhance consumer welfare (gains). The business strategy of firms is to improve and innovate on their core business. The core business for a search engine is to provide quick and easy access to required information, and successful firms such as Google are continuously innovating to strengthen that core. The allegation, therefore, of bias in algorithms for their own verticals seems at odd with the objective of sustaining the search engine, especially when history is replete with failures of sites that failed to innovate, starting with Archies, CompuServe, AltaVista, and so on. The decision provokes us to question who has been protected -- the consumer or inefficient competitors. Another question that demands an answer is: what are the gains to Google from competing with websites specialising in shopping, travel, sport etc that get linked in the main search engine. 

Verticals are created by search engines to facilitate search on the internet. Google's initiative designed products that anticipate consumer queries and provide quick information. The web page as we now see it provides a wide choice to get the best results -- whether shopping or finding a groom. 

Digital markets on the internet in India have seen phenomenal growth. It is a country in which, out of 315 million internet users, two-thirds are on the app on smartphones, providing stiff competition to Google. How would one assess cases of abuse of dominance filed against Google with CCI, of which the most prominent is of Consim (Bharat Matrimonial), considering the complaint is very similar to that investigated by EC, given that both claim bias in Google's algorithms? The jury is not yet out. It would be interesting to see how much revenue Bharat Matrimony earned from its digital advertising on the Google search engines as compared to other matrimonial website alleged to be ranked higher, as also how many couples found their match from this site.  

Surprisingly, the claims of bias in Google's algorithms towards its own verticals as antitrust violations premised on grounds of vertical foreclosure, have not been addressed in the press release. Vertical foreclosure is a major antitrust abuse that requires rigorous scrutiny. What is noticeable in all decisions of competition authorities is a marked lack of evidence of foreclosure on account of leveraging. In the MCX-SX vs NSE case involving verticals on a stock exchange, the Majority Order of CCI relied on an accepted opinion that NSE's zero-pricing strategy was intended to foreclose competition, and was without an understanding of networks or platform markets. It left me with a sense of unease then, and now again, with the EU decision persuading that a rigorous scrutiny of verticals and foreclosure is critical for antitrust analysis. 

Let me pose the question: when is leveraging profitable and when does it lead to foreclosure? I leave the details to readers who might desire to read a paper co-authored with Michael Salinger | Protecting Competition vs. Protecting Competitors: Assessing the Antitrust Complaints Against Google

Allegations of leveraging entail two stages of production, where the profit in one stage is maximised with the benefit of the other stage, and both make profits. As stated in Section 4(2)(e) of the Competition Act, it “uses its dominant position in one relevant market to enter into, or to protect other relevant markets”. Standard examples are of a final product, say cement with limestone. Foreclosure arises when the cement manufacturer does not permit the sale of cement to other cement manufacturers. 

The analogy is perhaps inappropriate to the technology of search engines and their economics. Firstly, there a no two stages, as in the cement and limestone example. Two clicks on the internet are not the same. Secondly, the term 'verticals' is perhaps an inappropriate nomenclature for websites that are included in the web page of the desired search. Websites do not pay a price when they are part of the organic search and Google receives no revenue from Universals. Searchers also do not pay a price. Google's earnings come from paid sites. The incentive to Google is to earn from paid sites so that consumers keep visiting and revisiting these sites. Every click on paid sites generates revenue and the websites --- shopping, travel, food or otherwise -- are two-sided businesses that earn from advertisers who pay higher amounts on sites that have a higher ranking. Google with its innovations ensures advertisement revenue to platform businesses in its search facility.  Ranking on paid sites depends on the auction held daily for Adwords. Ranking becomes anonymous and autonomous in turn, generating a separate professional team of tech savvy people. Two-sided, or as some insist. multi-sided platforms earn from advertisers who, in turn, prefer sites that have high traffic. Google, in providing comfort in the design of its product to the searcher, ensures the traffic sought by websites. In brief, the claim, therefore, that Google’s algorithms are biased against itself is extending the argument to put it crudely is of “cutting one's own nose”.  

The decision of the EC ultimately suggests that the product design of all search engines -- in fact all innovations -- can be considered anti-competitive. 
The writer is a former member of the Competition Commission of India

Disclaimer: Views expressed are personal. They do not reflect the view/s of Business Standard.

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