Google Counters EU Attack on Its Mobile Money-Making Machine

(Bloomberg) -- Google lashed out in court at the European Union regulators who levied a record-breaking $5 billion fine and imposed an antitrust order that struck at the heart of the U.S. tech giant’s ability to make money. 

The search giant’s power over mobile phones is the focus of a week-long hearing at the EU’s General Court in Luxembourg. Google’s lawyers said the European Commission blundered by demanding changes to allegedly anti-competitive contracts with suppliers of phones running its Android operating system -- the engine room for the vast majority of mobile devices in the region.

“The commission shut its eyes to the real competitive dynamic in this industry -- that between Apple Inc. and Android,” Meredith Pickford, a lawyer for Google, told a five-judge panel on Monday. Regulators “mistakenly found Google to be dominant” for mobile phone software licensed to phone manufacturers. Apple doesn’t allow other phones use its iOS system.

The Android case is one of a trio of decisions that have been the centerpiece of EU antitrust chief Margrethe Vestager’s bid to rein in the growing dominance of Silicon Valley. She’s fined the Alphabet Inc. unit more than 8.2 billion euros ($9.6 billion) in total and is still probing the company’s suspected stranglehold over digital advertising. 

The legal challenge “is going to be a big precedent for the U.S.” where “exactly the same issues” are under investigation, said Tommaso Valletti, an economics professor at Imperial College in London who advised regulators on the case during his time as the EU’s antitrust economist. Despite hitting the headlines, he said that investigations into Silicon Valley firms are relatively unusual and “that if the commission loses in this case, they may become even more rare.”

At issue this week are the EU’s findings against contracts that require Android phone makers to take Google’s search and browser apps and other Google services when they want to license the Play app store. 

The EU deemed the contracts to be an illegal restraint, but Google says this decision undermines a business model that allowed it to provide the Android software for free while it generated ad revenue. Mountain View, California-based Google, which had revenues of $182.5 billion last year, has built a massive business of banner and videos ads, thanks largely to its central role on Android devices. 

Pickford said Google needed the ability to tie its apps to mobile phone software to give it “the right incentives” to invest billions of euros in the Android ecosystem which created “a reliable non-fragmented platform, that provided a real competitive alternative” to Apple. That benefited app developers and consumers, he said.

EU lawyer Nicholas Khan countered that the restrictive contracts allowed Google to build a near-monopoly for search, which helped global revenues more than triple from $50 billion in 2012.

The hearing is likely to look back a decade into how Google’s contracts might have hampered potential rivals emerging. The commission says these prevented handset makers from selling phones using other versions of Android, such as Amazon.com Inc.’s Fire OS Android version. Google says the rules were necessary to make sure Android apps and devices could work smoothly together.

The court is less likely to focus on what Google has done since 2018 when it made moves to comply with the EU order to open up competition. It started charging a licensing fee to manufacturers to use Android. It also moved slowly to address rivals’ complaints that it didn’t offer a broad choice of rival apps to be set as a default on new phones.

Market Share

Neither step has undermined Android which runs on nearly 70% of European mobile phones or mobile search where Google has held a steady market share of just under 97%.

The Android case comes as competition authorities across Europe are also keeping up the pressure with probes into its ads and news operations. Google and rivals such as Apple are coming under pressure from planned new laws that could curb tech firms’ behavior. 

A ruling may take as long as a year to emerge. While a court victory in this, or one of the other two court challenges Google is taking against the EU, could bolster the company, it’s unlikely to halt the regulatory onslaught. At most it may crimp some of the specific rules that legislators are discussing, said Georgios Petropoulos, a research fellow at Brussels-based think tank Bruegel.

But beating the powerful EU’s antitrust authority will dent its ability to curb tech firms and constrain how far it goes to require changes to business behavior. A first test comes on Nov. 10 when the court delivers its ruling on an earlier appeal against the EU’s fine over shopping search.