Wednesday 18 October 2017

Europe targets Android as dispute with Google grows

The EU says Google's mobile division is anti-competitive, writes Adrian Weckler and Jack Clark

A woman at Google’s offices on Barrow Street in Dublin.
A woman at Google’s offices on Barrow Street in Dublin.
EU Competiton Commissioner Margrethe Vestager.

Europe has escalated its competition row with search giant Google, this time unveiling a list of charges against the company's mobile division, Android.

The European Commission's competition tsar, Margrethe Vestager, accused Google of abusing its dominant market position by imposing restrictions on Android device manufacturers and mobile network operators.

"Based on our investigation thus far, we believe that Google's behaviour denies consumers a wider choice of mobile apps and services and stands in the way of innovation by other players, in breach of EU antitrust rules."

The Commission charges Google with a number of contraventions. It says that Google requires manufacturers to pre-install Google Search and Google's Chrome browser and then requires them to set Google Search as a default search service on their devices as a condition to license certain Google proprietary apps. The Commission also says that Google is preventing manufacturers from selling smart mobile devices running on competing operating systems based on the Android open source code. And Google, says the Commission, is giving financial incentives to manufacturers and mobile network operators on condition that they exclusively pre-install Google Search on their devices.

"The Commission's preliminary view is that Google has implemented a strategy on mobile devices to preserve and strengthen its dominance in general internet search," said a spokesman for the European Commission. "First, the practices mean that Google Search is pre-installed and set as the default, or exclusive, search service on most Android devices sold in Europe. Second, the practices appear to close off ways for rival search engines to access the market, via competing mobile browsers and operating systems. In addition, they also seem to harm consumers by stifling competition and restricting innovation in the wider mobile space."

In response, Google says that it intends to disprove the Commission's charges.

"We take these concerns seriously, but we also believe that our business model keeps manufacturers' costs low and their flexibility high, while giving consumers unprecedented control of their mobile devices," said Kent Walker, Google vice president and senior counsel.

"Manufacturers who want to participate in the Android ecosystem commit to test and certify that their devices will support Android apps. Without this system, apps wouldn't work from one Android device to the next. Imagine how frustrating it would be if an app you downloaded on one Android phone didn't also work on your replacement Android phone from the same manufacturer."

The Commission's investigation on Google's Android system has been underway for a year, with the law-making body now considering that Google "is dominant" in the markets for general internet search services, licensable smart mobile operating systems and app stores for the Android mobile operating system.

But some observers believe that the probe could disrupt Google's Android business.

"It's hugely important," said Victor Anthony, an analyst at Axiom Capital Management. "My main concern is that they force large-scale business model changes on Google."

At issue are agreements that give Google applications prominence on devices running the company's Android operating system. Without these services pre-installed, the company could generate less revenue from mobile ads while having to pay other companies more to distribute those offerings in the region.

"While Android is free for manufacturers to use, it's costly to develop, improve, keep secure, and defend against patent suits," said Google's Walker. "We provide Android for free, and offset our costs through the revenue we generate on our Google apps and services we distribute via Android."

Margrethe Vestager, the European Union's competition commissioner, has previously outlined concerns about these agreements, saying Google may be stifling innovation by making it harder for other apps to get attention.

"By requiring phone makers and operators to pre-load a set of Google apps, rather than letting them decide for themselves which apps to load, Google might have cut off one of the main ways that new apps can reach customers," she said.

If Vestager succeeds in loosening the ties between Google's apps and Android phones, the operating system could become a less valuable distribution tool for Google services and ads in Europe. Phones without Google Search on their home screens may mean fewer mobile searches and fewer ads sold, analysts say.

The company doesn't disclose Android results, but there are clues to its significance. About a third of Google's $75bn revenue last year came from Europe, analysts estimate. A lawyer for Oracle said in January that Android has generated $31bn in revenue and $22bn in profit for Google since it started in 2009. Google declined to comment on its Android financials.

Android, once a scrappy underdog to BlackBerry and Apple's iOS in 2009, has become the most popular mobile operating system in the world, running 70pc of phones in Western Europe, according to Gartner.

Europe's crackdown may also make it easier for handset manufacturers to replace Google services with their own software or those of a partner. That could force Google to pay more to companies to get Search and apps in front of people, some analysts say.

The traffic acquisition costs, or TAC, that Google pays partners to distribute its services amounted to 21pc of ad revenue in the fourth quarter, down from 24pc two years earlier. Part of this expense is how much Google pays to get search prominently on mobile devices. It paid $1bn to Apple in 2014 to be the default search provider on iPhones and iPads.

Google's TAC could increase if Android phone makers were free to use different search engines, chose to do so and few users switched back to Google, according to Pacific Crest Securities.

"The monetisation of Android comes from the fact that when folks do searches on Android they're not paying TAC to Apple, they're not paying TAC to Mozilla," said Evan Wilson, an analyst at Pacific Crest Securities.

Without pre-installation, and beyond paying extra for distribution, Google would have to rely more on consumers choosing to download its apps. In April 2015, analysts at Goldman Sachs Group Inc. asked iPhone and iPad users if they would go back to Google if the default search engine changed.

The survey found 48pc would switch, while 43pc didn't care or didn't know.

Google has already taken steps that could allay Vestager's concerns. Last year, it reduced the number of apps in some of its Android bundles.

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