The EU’s investigations into American tech giants could stifle innovation

The European Commission has launched a series of investigations into US tech giants, accusing them of anti-competitive practices. But, asks Aaran Fronda, might there be an ulterior motive at play?

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Margrethe Vestager, European Commissioner for Competition, who accused Google of abusing its position as the biggest provider of internet search results

American tech giants are probably feeling a little hard done by in Europe at the moment. This is primarily due to the European Commission’s decision to launch antitrust investigations and a host of other inquiries into some of the biggest US tech companies, including Google, Facebook and Apple.

Some commentators have commended EU officials for cracking down on the US companies, partly because of the heavy criticism they have come under in the media for the use of shady tax-planning practices, which have allegedly allowed them to avoid paying billions to revenue authorities across Europe.

While the allegations against the three big tech companies may be sufficient to justify Brussels’ decision to launch a series of investigations, the move happens to coincide with the unveiling of a policy strategy aimed at ‘reinforcing Europe’s digital authority’, leading some to question what the real motives behind the recent flurry of inquiries really are.

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The investigation into Google is not the first time the European Commission has gone after a US tech giant. In 2004, the Commission fined Microsoft €497m in an antitrust case over the company’s licencing practices and the way it integrated its own media platforms with Windows. A further €899m was added to the fine in 2008, as Microsoft failed to comply with aspects of the first ruling. This additional fine, however, was dwarfed only a year later, when the Commission fined chipmaker Intel an incredible €1.06bn for anti-competitive practices

Google clampdown
The crackdown on US tech companies began in April this year, with Margrethe Vestager, European Commissioner for Competition, accusing Google of abusing its position as the biggest provider of internet search results. Although this is the first time that antitrust charges have been formally directed at the California company, there have been a number of complaints from competitors claiming that Google’s search engine favours its own products over those of its rivals.

“The Commission’s objective is to apply EU antitrust rules to ensure that companies operating in Europe, wherever they may be based, do not artificially deny European consumers as wide a choice as possible or stifle innovation”, states Vestager. “In the case of Google, I am concerned that the company has given an unfair advantage to its own comparison shopping service, in breach of EU antitrust rules. Google now has the opportunity to convince the Commission to the contrary. However, if the investigation confirmed our concerns, Google would have to face the legal consequences and change the way it does business in Europe.”

Comparison-shopping permits consumers to type a particular product into a search engine (in this case Google) and compare prices between different vendors. The EU watchdog contends that Google gives systematic favourable treatment to its own comparison-shopping product – Google Shopping – in its general search results pages, by showing it more prominently on the screen. Based on this, the Commission has raised concerns that Google artificially diverts traffic from rival comparison-shopping services and, by doing so, hinders their ability to compete in the marketplace.

EU regulators are also worried that consumers do not necessarily see the most relevant results in response to queries, which they claim is to the detriment of the consumer, and stifles innovation. In order to try and rectify the situation, the Commission has advised Google to take steps to ensure that it treats its own comparison-shopping service and those of its rivals in the same manner. Google now has the opportunity to respond to the allegations within 10 weeks, and to then seek a formal hearing.

Should Google fail to make changes or be unable to refute the accusations, regulators have said they may fine the company 10 percent of its annual revenue – which would equate to more than €6bn. If this was to go ahead, it would eclipse the €1.1bn that the EU levied against Intel when it was found guilty of abusing its dominance in the computer chip market.

Public misconceptions
Some observers claim that Google’s huge market share is part of what strengthens the Commission’s antitrust case, with the company holding more than 90 percent of the market. In fact, in some countries within the EU, such as Belgium, Germany and Finland, the company claims more than 97 percent of all search engine use, according to a 2010 report by market research firm PTG Media.

The Commission’s main argument against the search provider is that it’s abusing its market dominance, but that is an accusation that deserves further analysis. For starters, if the Commission is really more concerned about consumers than imposing fines, it should attempt to educate consumers, and itself, that Google is not, despite views to the contrary, a public utility. Over the years, the company has grown to become synonymous with the internet and, in particular, the process of searching for things on it – so much so that the noun has become a verb, with the world ‘Googling’ over 3.5 billion times a day.

“The presumption that Google is a public service is wrong”, notes James Temperton in Wired. “If the argument is that the public are too stupid to realise that Google isn’t just the internet, to some extent that is the public’s fault. Google become a verb for a reason, and that is because Google is really good.”

While Google may be the most used search engine, there are a number of alternatives to choose from. If consumers are not being served adequately or fairly, they have the freedom to go elsewhere. Google even chose to outline the many choices on offer in a blog post, which acted as a public rebuttal to the accusations directed at it.

In the post, the US tech giant pointed out that Bing, Yahoo, Quora, DuckDuckGo, and the new wave of search assistants like Apple’s Siri and Microsoft’s Cortana are all available for consumers to access. There is also a wide range of more specialised services like Amazon, Idealo, Le Guide, Expedia and eBay. Indeed, Amazon, eBay, and Axel Springer’s Idealo are the three most popular shopping services in Germany. Then there are social media sites like Facebook, Pinterest and Twitter which allow people to find recommendations based on location. And when it comes to news, internet users have many ways to reach their favourite sites, with aggregators like Reddit proving an extremely popular way to filter content.

“Any economist would say that you typically do not see a ton of innovation, new entrants or investment in sectors where competition is stagnating or dominated by one player. Yet that is exactly what’s happening in our world”, writes Amit Singhal, Senior Vice President at Google. “Zalando, the German shopping site, went public in 2014 in one of Europe’s biggest-ever tech IPOs. Companies like Facebook, Pinterest and Amazon have been investing in their own search services, and search engines like Quixey, DuckDuckGo and Qwant have attracted new funding.”

“We’re seeing innovation in voice search and the rise of search assistants, with even more to come”, adds Singhal. “It’s why we respectfully but strongly disagree with the need to issue a Statement of Objections, and look forward to making our case over the weeks ahead.”

Facebook’s first non-US data centre, located in Lulea, Swedish Lapland
Facebook’s first non-US data centre, located in Lulea, Swedish Lapland

Wide remit
As if going after Google’s search division is not enough for the Commission, Vestager has also chosen to open proceedings against the company to investigate its conduct in relation to the Android mobile operating system, as well as applications and services for smartphones and tablets, to decipher if it has breached EU antitrust rules in these departments. “Smartphones, tablets and similar devices play an increasing role in many people’s daily lives, and I want to make sure the markets in this area can flourish without anticompetitive constraints imposed by any company”, says Vestager.

Since 2005, Google has led development of the Android operating system. Android is an open-source system, meaning it can be freely used and developed by anyone. The majority of smartphone and tablet manufacturers use the Android system in combination with a range of Google’s proprietary applications and services. These manufacturers enter into agreements with Google to obtain the rights to install Google applications on their Android devices.

The Commission’s in-depth investigation will focus on whether Google has breached EU antitrust rules by hindering the development and market access of rival mobile operating systems, applications and services, to the detriment of consumers and developers of innovative services and products.

The inquiry aims to assess if, by entering into anticompetitive agreements or by abusing a possible dominant position, Google has illegally hindered the development and market access of rival mobile operating systems, mobile communication applications and services in the European Economic Area.

Not only that, but at beginning of May, the Commission decided to go on an all-out offensive, launching an inquiry into the entire e-commerce sector. According to a press release, the investigation will focus particularly on potential barriers erected by companies to cross-border online trade in goods and in those services where e-commerce is most widespread, such as electronics, clothing and digital content.

“European citizens face too many barriers to accessing goods and services online across borders”, argues Vestager. “Some of these barriers are put in place by companies themselves. With this sector inquiry, my aim is to determine how widespread these barriers are and what effects they have on competition and consumers. If they are anti-competitive, we will not hesitate to take enforcement action under EU antitrust rules.”

The Commissioner is also concerned that businesses may establish barriers to cross-border online trade, with a view to fragmenting the EU’s attempt at creating a Digital Single Market. Therefore, the watchdog wants to gather market information in order to better understand the nature, prevalence and effects of these and similar barriers erected by companies, and to assess them in light of EU antitrust rules. Should the Commission identify specific competition concerns, it has said that it would not hesitate to open further cases in order to ensure compliance with EU rules.

Protectionist policies
It’s pretty safe to say that US tech companies are beginning to feel under siege in Europe. In fact, EU regulators are looking into more and more US firms every month. For example, Microsoft has been involved in a longstanding antitrust case, with the company racking up fines of up to €2bn over the last 10 years. Apple and Amazon are embroiled in an ongoing tax dispute, involving preferential tax treatment they were allegedly given in Ireland and Luxembourg, respectively. Facebook, meanwhile, is being investigated by numerous EU member states – Austria, Belgium, France, Germany, Italy and Spain – over its privacy policies.

“It’s no wonder Europe is going after these companies”, says Luca Schiavoni, a regulatory analyst at technology research company Ovum, in an interview with The New York Times. “They are the biggest fish in the pond and have become very powerful. That inevitably means regulators are going to get involved.”

According to a statement released by the Commission, the digital economy represents around €3.2trn in G20 economies, and already contributes up to eight percent of GDP, helping to power growth rates across the struggling economies of the world and creating countless jobs for a global labour market in turmoil. The digital economy is also indisputably the single most important driver of innovation, competiveness and growth. However, much to EU officials’ dismay, only two percent of European enterprises are tapping into the potential it has to offer.

Abundant alternatives

A key part of google’s defence is the wide availability of alternative search platforms

Bing: Microsoft’s platform is Google’s biggest competitor, despite claiming less than 10 percent of global market share. Heavy Windows integration has fuelled a steady increase in Bing’s popularity.

Yahoo: Once the preeminent search engine, Yahoo was powered by Google until 2004. It went independent for a short time, but has been powered by Microsoft’s Bing platform since 2009.

DuckDuckGo: Launched as an antidote to the lax privacy settings of the major players, DuckDuckGo also avoids the ‘filter bubble’ effect caused by personalised search results, a key Google feature.

Baidu: The market leader in China’s restricted internet space, Baidu is accessible worldwide. The engine is a valuable entry point for websites in Mandarin, a language growing in importance.

In order to combat this worrying statistic, the Commission unveiled its Digital Single Market (DSM) strategy in Brussels on May 6. And, according to the European Commissioner for Digital Economy and Society, Günther Oettinger, the plan will “reinforce Europe’s digital authority, give us digital sovereignty, and make us competitive globally”.

“Our economies and societies are going digital”, says Oettinger. “Future prosperity will depend largely on how well we master this transition. Europe has strengths to build on, but also homework to do, in particular to make sure its industries adapt and its citizens make full use of the potential of new digital services and goods. We have to prepare for a modern society and will table proposals balancing the interests of consumers and industry.”

On the surface, the DSM looks like a positive step for the 28 member states. Consumers and businesses are set to gain better digital goods and services across the region, with the aim of maximising the growth potential of the digital economy within Europe’s borders. However, part of the DSM entails the Commission engaging in yet more investigations into the role of US tech companies. Philippe Legrain, once economic adviser to the Commission’s President, notes: “The key driver of the EU’s regulatory onslaught is not concern for the welfare of ordinary Europeans; it is the lobbying power of protectionist German businesses and their corporatist champions in government.”

Legrain argues that Germany’s influence within the Commission has grown substantially. A result which is itself due to the ongoing debt crisis, which he says has distracted the once-dominant France and left the UK feeling alienated.

“Germany’s government boasts about how ‘globally competitive’ the country is, and its officials lecture their EU peers on the need to emulate their supposed reformist zeal”, writes Legrain. “And yet, while the country remains a world-beating exporter in industries like automobiles, it is an also-ran in the internet realm. There is no German equivalent of Google or Facebook. Stymied at home by red tape and a risk-averse culture, the most successful German internet entrepreneurs live in Silicon Valley. While US-based companies conquer the cloud, Germany is stuck in the mud.”

The creation of the DSM makes a lot of sense, at least insofar as it breaks down the limitations imposed on European tech start-ups by moulding the many different regulatory frameworks that currently exist in each of the member states into one. But, as Legrain contends, the hidden purpose of the DSM may well be to constrain US digital platforms and, thereby, reduce their market dominance, a step some EU officials believe is essential for Europe’s domestic start-ups to flourish.

“The EU has an attractive single market and significant political means to structure it; the EU must bring these factors into play in order to assert itself against other parties involved at the global level”, wrote German politician Sigmar Gabriel in a letter to the Commission in November 2014.

Considering the market share of companies like Google, Amazon, Facebook and Apple in Europe, it is understandable that some within the EU feel that the only way for domestic start-ups to gain a foothold in the digital economy is to limit the dominance of their rivals across the pond. However, these companies have become household names in the US and beyond because, like it or not, they are the best in the business at what they do. No one should ever hinder the competition just to stay in the race – that truly stifles innovation. It is time, in the words of Legrain, for Europe to stop “conspiring to hobble its American rivals, stifle innovation, and deprive Europeans of the full benefit of the internet”, and to start competing fairly with the US in order to provide a better digital economy for all.