The European Commission has imposed a second record fine on Google, this time for €4.34 billion, for exclusionary abuses of its dominant position in relation to its Android Operating System. It is the highest fine imposed by the EC to date (EC press release).

The fine follows last year’s €2.4 billion fine in the Google Shopping case (see our previous alert) and is part two of a trilogy of EC investigations concerning Google’s practices (the third concerns Google’s AdSense online advertising business and a decision is expected later this year).

The decision means that the onus is on Google to bring its business practices relating to Android in line within the next three months or face additional fines. This will require Google to re-think its current business model and revenue streams. The practical impact on the online ecosystem will also depend on the future behaviour of device manufacturers, network operators, rival App developers and of course consumers.

What is the concern?

Since its launch in 2007, Google’s free, open source operating system Android has become the dominant mobile operating system worldwide. According to the EC, Android is used today in more than 80% of all smartphones worldwide and around 60% of tablets. Alternatives such as Windows Phone and Symbian have fallen by the way-side in recent years, so device manufacturers use operating systems that have been developed based on Android (so-called Android forks). The EC does not consider Apple's iOS to be a viable alternative to Android for device manufacturers, because it is not available to install on devices offered by manufacturers such as HTC, Lenovo, LG and Samsung. The EC also found that competition at the device level from Apple is not sufficient to constrain Google’s market power in Android licensing.

The EC’s theory of harm is, in the main part, a classic leveraging case: Google leveraged its dominant position in Android OS to “cement its dominant position” in general internet search. The EC was also concerned with loyalty inducing payments and contractual restrictions not to use competing versions of Android OS.

The restrictions

The EC found that three types of exclusionary practices formed part of the overall strategy:

  • Tying of Google Search and Google Chrome. Google bundled Google Play Store, a “must-have” App for Android, together with Google Search and Google Chrome browser. Device manufacturers could only pre-install them as a package. Given the “must-have” nature of Play Store, this tying practice reduced the incentives for manufacturers to pre-install competing search and browser Apps. Users, in turn, were not incentivised to download competing Apps (empirical evidence showed that consumers typically stick with pre-installed Apps). This ultimately foreclosed rivals from search and browser Apps.
  • Illegal payments conditioned on exclusivity. Google offered financial incentives to device manufacturers and network operators on the condition that they exclusively pre-install Google Search across their entire portfolio of Android devices. This “significantly reduced” the incentives for device manufacturers and network operators to pre-install competing search Apps.
  • Illegal obstruction of competing Android OS. Google contractually prevented device manufacturers that decided to pre-install Play Store or Google Search from selling any devices running on competing Android operating systems (Android forks). The EC found that this practice restricted innovation in Android OS, as it prevented the development of new open source versions of Android. The EC cited Amazon’s Android fork (Fire OS) as an example of an Android fork that failed to gain traction because of these restrictions.

Google’s view

Google, on the other hand, takes a very different view of the market dynamics, which can be summarised as follows:

  • Android is an open source platform that has cost billions to build and has created more choice for consumers – not less.
  • Android is constrained by Apple’s closed proprietary system.
  • Google’s business model is to offer Android for free, and it finances the Android cost through the increased traffic to Google’s Apps.
  • Competition is only “one download away” as consumers are free to download any competing Apps even if they are not pre-installed.
  • The prohibition on Android forks is necessary to ensure technical integrity of the Android ecosystem.

What is the impact of the decision?

Like Google Shopping, the Android decision imposes a “cease and desist” obligation on Google. The burden is therefore on Google to amend its behaviour, or face further fines for non-compliance. During a press conference on Wednesday, Commissioner Vestager stressed that the Commission will monitor Google’s behaviour closely.

There are at least three key open questions:

First, how will Google comply with the EC’s cease and desist? As the Commissioner said, the immediate termination of these practices is the minimum required, but the burden is on Google to come up with a solution.

Secondly, will this decision have an impact on Google’s business model, at least in the EU? There are suggestions that Google might decide to finance Android through licensing fees, which could in turn increase the cost of handsets. Commissioner Vestager seems confident that Google would not have to resort to charging a licensing fee, as Google is able to recoup its investment in Android through other channels, such as the Play Store.

Last (but not least), whether the removal of the Android-related restrictions will have any concrete impact in the marketplace? Some argue that the action comes too late and that Google has entrenched itself so firmly that competitors will find it difficult to recover. This will largely depend on the future behaviour of device manufacturers, network operators, competing App developers and ultimately consumers.

What’s next?

The story is not over for Google, with another significant fine expected later this year (see the EC’s page on AdSense). And whilst Google has clearly failed to persuade the European antitrust regulator of its Android business model, it remains to be seen whether it will be more successful before the European Courts (Google has already announced its intention to appeal the decision).

The €2.4 billion fine in Google Shopping is currently under appeal before the General Court (see the case file). Interestingly, Commissioner Vestager also stated in Wednesday’s press conference that the EC had not yet taken a view on whether Google has complied with the 2017 decision and that this remains an open question.

More generally, the Google fines, together with the EC’s recent €997 million fine on Qualcomm (see our previous alert), leave little doubt that abuse of dominance cases in the tech sector are at the top of the EC’s enforcement agenda and we expect more to come in this arena. During Wednesday’s press conference, Commissioner Vestager was asked repeatedly about the political context of the decision, in reference to accusations that the EC is specifically targeting U.S. tech giants. Her response was clear when she stated that the EC does not enforce competition law in a political context. The mission is simple: to protect consumers and competition, no matter the political context.