A $5.1 Billion Fine for Google Won’t Fix Tech

The European Union’s decision to fine Google $5.1 billion for abusing its dominance in the smartphone business unearthed some dubious corporate practices, but the penalty and an order for Google to change its practices are, regrettably, unlikely to make the technology industry more competitive.

After a yearslong investigation, Europe’s top antitrust official, Margrethe Vestager, said Wednesday that Google had unfairly exploited its market power by imposing restrictions on manufacturers like Samsung that use the company’s Android software on their smartphones. This case is important because about 80 percent of smartphones sold in Europe and globally run on Android, and Google is by far the largest player in internet search. The company is also the biggest player in online advertising, with a nearly 40 percent market share last year, and it has a commanding presence in a number of other internet businesses, like video, email and maps.

The European Union had three main complaints: Google required cellphone companies that wanted to offer its Play app store or search to pre-install 11 of its apps as a bundle, whether they wanted all of them or not. The company gave the largest manufacturers money if the only search they installed was Google’s. And the company prohibited manufacturers from developing phones on altered versions of Android not approved by Google if they wanted to use any of its other services. The company strongly disputed the allegation that its practices are anti-competitive, arguing that they are designed to help recoup Google’s investment in Android, which it licenses free to device manufacturers. Google, which plans to appeal the decision, asserts that Android is a much more open and competitive platform than its main rival, which is used by the iPhone, in which Apple controls both the device and the software. Indeed, Android devices tend to be cheaper than iPhones because manufacturers like Samsung, Motorola and LG make competing phones.

The European case is strongest when it argues against Google’s exclusionary requirements — that cellphone makers not produce devices with other versions of Android and that they install only the Google search app. Such contractual terms serve to limit consumer choices and squelch innovation by making it harder for people to discover alternatives to Google products. But the regulator is on much weaker ground when it asserts that by making its apps and services available only as a bundle, Google is hurting consumers. Companies like Samsung also pre-install apps that compete with Google’s, and users can easily download software by other developers.

But the larger problem with the union’s case is that it’s unlikely to shake Google’s dominance. For starters, while a $5.1 billion fine is large in absolute terms, it’s a relative bargain for Google and its parent company, Alphabet, which had $103 billion in cash and securities warming its accounts at the end of March and had nearly $13 billion in profits last year. Even more important, billions of people around the world are already accustomed to using the company’s apps and services on their Android phones and are likely to stick to them. Even new users will most likely gravitate toward Google even if the company’s apps are not preinstalled because of the superiority of many of its products and because so many other people use them — the network effect.

This case highlights the importance of more proactive and thoughtful antitrust enforcement and regulation. For example, officials in Europe and the United States need to be more vigilant about blocking mergers and acquisitions that have allowed tech platforms like Google’s to become so dominant or impose rules to limit the use of exclusionary contracts in oligopolistic industries like technology and telecommunications to encourage more competition.

Regrettably, that does not seem to be a top priority for the Trump administration. The head of the Justice Department’s antitrust division, Makan Delrahim, recently told The Financial Times that big tech companies’ buying smaller businesses could bring “great efficiencies.” He cited the example of Google acquiring YouTube in 2006. In fact, a compelling argument could be made that the online video business would be much more competitive and innovative had officials blocked that acquisition.

Antitrust officials have a difficult job: By the time they bring enforcement cases it can be hard to reverse the harm that has already been done. It’s also difficult to foresee and prevent bad outcomes. That’s why it is vital that regulators use all the tools they have to encourage fair play.