In Europe vs. Google, neither side is totally right

Google just received some rather unpleasant, though not entirely unexpected, news from EU officials.

After a full year of investigation by antitrust regulators, the European Commission sent Google a Statement of Objections that targets three key facets of its Android business. This is the first step in a process that could result in significant fines and mandated changes for the Internet giant.

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Like most regulatory matters involving multinational corporations, the issues here are complex. And because the EU has identified three specific, and somewhat unrelated, topics of contention, this case is even more complicated than most — almost certainly more so than the last great international antitrust inquiry into a major tech company: the turn-of-the-millennium case against Microsoft and Internet Explorer.

Because the matter isn’t cut-and-dried, you may have mixed opinions about the commission’s grievances. Indeed, I don’t think either party is 100 percent right here. While Google appears to be playing fairly with respect to two of the charges against it — regarding app bundling and search exclusivity — I’d argue that it’s almost definitely stifling competition and damaging consumer choice, as id asserted in the third charge.

Let’s unwrap these allegations piece by piece.

Android’s business model

Android is often touted as a free, open source platform, but that’s only partly true. There are two major versions of Android for device manufacturers to choose from: the truly free and open Android Open Source Project (AOSP) and the decidedly more constrained — and much more popular — version that contains a suite of Google Mobile Services (GMS).

The difference between these two versions is significant, and the chasm between them has grown over the years (as illustrated in this excellent Ars Technica explainer). Whereas the GMS version contains most of the proprietary Google apps and services that Western users of Android devices are accustomed to — Gmail, Google Now, the Play Store, etc. — the AOSP build contains almost none of these. It is, for lack of a better description, a bare-bones, feature-stripped version that would be almost unrecognizable to the casual Android user.

But Google’s AOSP Android is important. It lets Google claim that anyone can build an Android device with no licensing fees, thereby establishing a very low barrier to entry. It’s one of the aspects of this antitrust action that makes this case far different from the one against Microsoft, which bundled Internet Explorer as the only default browser in commercial Windows packages. And that’s because there’s no such thing as a non-commercial Windows package; any original electronics manufacturer (OEM) who wants to build a Windows-powered product with a screen larger than eight inches (or a desktop machine) must pay Microsoft a fee.

Google has made the licensed GMS version of Android much more appealing to manufacturers because it contains the applications and services that users desire from Android — most crucially, the Play Store app market. But there are a lot of strings attached to the license: Manufacturers must agree to a whole host of stipulations in order to build devices with the licensed version of Android. And it’s these stipulations that form a large chunk of the European commission’s objections.

Problem 1: App bundling

The first concern regards Google’s requirement that manufacturing partners preload their devices with a proprietary suite of apps. The commission argues that this stipulation stifles competition, as it precludes OEMs from including their own offerings on devices and serves as an impediment to consumers. The commission claims that device owners rarely take the proactive step of downloading apps whose functionality mirrors that of preloaded software.

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This may be the EU’s weakest complaint overall, primarily due to the existence of AOSP. It’s true that Google has strict rules for employing the “better” version of Android, but why shouldn’t it? Android is expensive to develop and maintain, and Google deserves to make a profit from it. That profit comes from advertising, which is done primarily through the apps and services that Google offers — products that are all free for consumers to use.

If a manufacturer wants to include its own applications instead of Google’s, it is free to do so by employing an AOSP build. And, in fact, this is exactly what Amazon does with its Fire tablets.

Problem 2: Search exclusivity

The second complaint addresses allegations that Google provides its manufacturing partners with financial incentives to ensure that only Google’s search product is featured on their devices. I say alleged because all the terms of this and other partner agreements are closely guarded trade secrets, and it’s not clear exactly how regulators learned the specifics.

Nonetheless, this seems to be a legitimate business agreement that, importantly, any other search provider could make with a manufacturer or carrier. Granted, it’s probably not easy to outbid Google, but it seems to have been done before: Back in 2010, Microsoft paid Verizon to employ Bing as the default search engine on some handsets.

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It was an arrangement that did not last long, which I think may speak to another argument in Google’s favor: Despite alternatives, Google owns the best search engine on the market. In fact, it’s likely that enough Verizon customers ditched Bing that the deal wasn’t financially beneficial to Verizon. I concede that saying Google is the best is subjective, but having used numerous search services extensively, I am nearly always struck by the poor quality of results served up by Google’s competition. You’d be hard-pressed to convince me that Bing or Yahoo or AOL or Duck Duck Go provides even close to the breadth of results that Google does.

Problem 3: Alternative products forbidden

Finally, we have the third and, I’ll argue, only legitimate complaint lodged against Google: If a device maker licenses Android from Google, the company is banned from making devices using the free AOSP version. It’s an exclusivity clause that keeps manufacturers from experimenting with forked versions of Android that don’t contain the profit-generating Google apps and services.

In its blog-published rebuttal to the Commission’s findings, Google suggests that this stipulation exists to ensure continuity in the user experience. The takeaway seems to be that forked builds might not run all the apps a consumer expects to be able to use on Android and that this would be confusing and problematic.

But this smacks of misdirection to me, with Google claiming that it is acting to protect consumers when, in fact, it is protecting Google’s own revenue. By making these partnerships “all-in” affairs, Google is forcing OEMs to make a choice, which does, indeed, stifle competition unnaturally. Among the three complaints, this seems to target the one practice by which the company is clearly leveraging Android’s market dominance to further consolidate its own position in some of the other verticals in which it competes.

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Doing the right thing

It doesn’t seem like Google will be able to move past these three concerns without having at least some penalties imposed, in terms of both fines and forced changes to its business model, at least in Europe. However, the nature of these penalties is up in the air and could vary widely depending on the final decisions reached with regard to each of the complaints.

Google’s unofficial corporate motto was, until fairly recently, “Don’t be evil.” After the Alphabet business reorganization, this was replaced with “Do the right thing,” which conveys a similar philosophy. In my opinion, Google seems to be abiding by these mantras, for the most part, in the practices to which the European Commission has objected. But I also feel that it’s straying from these values by locking manufacturers into its profitable Google Mobile Services program to the detriment of other potential product lines that device makers are forbidden from exploring.

We’ll see if European regulators ultimately agree.