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Unbundling Google users from Europe

The European Parliament is about to approve a motion calling for the unbundling of Google's services. But the proposal misses the point: will consumers be better off?

By: Date: November 27, 2014 Topic: Innovation & Competition Policy

Without naming it, the proposal points straight to the Google antitrust case

The European Parliament is set to adopt a non-binding resolution on ‘Supporting Consumer Rights in the Digital Single Market’ on Thursday (27 November). Among other things, this calls on the European Commission ‘to consider proposals with the aim of unbundling search engines from other commercial services’. Without naming it, the proposal points straight to the Google antitrust case, in which it was alleged that Google applies its search algorithm with a bias: in response to a user’s search query, links to websites that provide news or access to business services, for example, are ranked below Google’s own commercial services. The Commission has investigated the case for five years; Google has attempted to settle three times, with no success.

With its initiative, the parliament seems to suggest a radical solution. Unbundling Google’s search engine and commercial services would presumably mean forcing a split in Google’s business between a division that provides the input (the search query results needed to give visibility to business services) and a division that supplies specific products (news, etc). Access to the input would arguably be regulated, a bit like the way incumbent telecoms or energy companies are forced to sell wholesale access to their networks to allow competition in the retail market. The proposal has its own logic. If Google is truly discriminating against downstream players, such a separation would remove Google’s ability to do so.

The parliament’s proposal has no power to oblige the Commission to act. Enforcement of antitrust laws is (and should be) a prerogative of antitrust authorities and any attempt to pressure them to respond to political will is very dangerous because it undermines the fundamental principle of independence in the application of the law.

The proposal has a fundamental flaw: addressing the issue from the point of view of Google’s competitors and not that of final users

Yet, should the Commission consider following the path proposed by the parliament, one might wonder if it would be the right decision. Besides being limited by a number of hurdles of a legal (such an intervention would most likely require new law) and practical (Google should apply two different business models within and outside Europe) nature, the proposal has a fundamental flaw. It seems to address the issue more from the point of view of Google’s competitors and not from that of final users (despite the claimed intention to ‘support consumer rights’).

Any antitrust case requires first the identification of a mechanism through which consumers are negatively affected by the behaviour of the investigated company. This means understanding whether users are currently unhappy with Google’s services and, if so, why they do not use other search engines, since those are available for free and there are no switching costs for leaving Google.

Once the harm is identified, remedies are designed by the authority to stop the harmful behaviour, being mindful that the remedies will have to leave the consumers better-off when implemented. The ‘unbundling solution’ might directly protect Google’s competitors, but it has no straightforward benefits for final users, who might even end up being worse-off. For example, economic theory suggests that vertical integration between complementary services (such as those that the parliament suggests could be split off) can create important synergies. In this case a ‘bundled’ Google might be able to more accurately identify the needs of the users and provide faster answers to their queries. This applies also to telecoms or energy suppliers. But the fundamental difference here is that the loss of synergies resulting from unbundling might be not compensated for by a significant benefit to the downstream market: access to Google’s services is free and if it were not, users could easily click on other comparable services. While regulated access to telecoms networks is essential to allow competition in the retail market and keep prices down and quality up, this is not the case in the market for digital services, where competition is already strong and very dynamic.

Penalising Google by breaking up its business model suggests to any new Google-like innovator not to be too successful

An even bigger risk for users is the signal that such an intrusive remedy would give to the market. No doubt Google has developed a very successful product that Europeans in particular value highly (that explains the high market share). Penalising Google by breaking up its business model would suggest to any potential new Google-like innovator that it should not be too successful otherwise its business model might also need to be broken up one day. This is contrary to the very nature of competition policy, which aims to reward successful companies for being successful, not to punish them, unless it is shown that the company achieved its market power through illegal behaviour. And it is fundamentally contrary to the interest of consumers, because fewer innovators will bring successful products to Europe in the future.

The European Parliament might be rightfully concerned about — and has the power of co-decision over — a number of issues that affect digital markets and that could require legislative action: privacy protection, copyright or cyber-security for example. But when it comes to enforcement of EU law, the parliament should not attempt to influence the Commission.

Full disclosure: Bruegel is supported by a number of public and private members, including Google, Microsoft and Deutsche Telekom. Neither was involved in the writing of this commentary, and their contributions amounted to 1.3% of Bruegel’s total 2012 budget. A full list of members and their contributions can be found here

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