EU Android Antitrust Decision Shakes Mobile Industry, Google Business Model - $5 Billion Fine

Android Antitrust Decision Shakes Mobile Industry, Google Business Model

Google has been given 90 days to make changes that threaten to shake up the mobile industry

By Douglas MacMillan Updated July 18, 2018 8:28 a.m. ET

When the first Android phone went on sale a decade ago, Google made a bet: Its free operating system would hook smartphone makers, allowing it to disseminate apps and bolster its online ad business in the emerging era of smartphones.

Now that business model may need an upgrade.

On Wednesday, the European Commission found Google abused its power over the industry, fining it $5 billion and calling on the internet giant to rewrite contracts with dozens of partners. The regulator ordered Google to stop forcing these partners to bundle its Search and Chrome apps on devices that also include the Google Play store for third-party apps.

Google, which said it would appeal the decision, has rejected the EU’s case since the bloc issued formal charges over two years ago. Google says Android, which is free for manufacturers to use, has increased competition among smartphone makers, lowering the prices for consumers. Google also says the allegation that it stymied competing apps is false because manufacturers typically install many rival apps on Android devices—and consumers can download others.

“Today’s decision rejects the business model that supports Android, which has created more choice for everyone, not less,” Sundar Pichai, Google’s chief executive, said in a blog post following the decision.

Brussels has given Google just 90 days to make changes that may threaten to shake up the mobile industry. They could also present sizable challenges for Google.

The company, owned by Alphabet Inc., is a mobile superpower, expected to generate more than $60 billion in revenue this year from mobile ads, according to eMarketer Inc. That would be 44% of Alphabet’s estimated overall revenue of $136 billion for 2018, according to S&P Global Market Intelligence.

That dominance was partly achieved through a simple tradeoff: In exchange for providing Android to smartphone makers for free, Google requires them to offer devices preloaded with Google services such as search, YouTube, Gmail and Google Maps. That allowed the firm to gather vast amounts of smartphone data from those popular apps and then devise and target ads to users.

In its ruling, the EU found that Google’s bundling of search and browser apps “reduced the incentives of manufacturers to pre-install competing search and browser apps, as well as the incentives of users to download such apps.” In turn, the EU found, this “reduced the ability of rivals to compete effectively with Google.”

As a result, Google may be forced to offer new terms that give handset makers and phone carriers more freedom to feature their own apps, strike deals with Google’s rivals or even charge Google for pre-installing its apps.

“It could give the mobile phone companies, or the operators, greater leverage to extract payment from Google,” Mark Mahaney, an analyst at RBC Capital Markets, said before the EU decision.

The ruling also forces Google to permit phone makers to offer their own tailored operating systems based on Android’s open source version. That requirement could make it harder for Google to offer a single, standardized version of its mobile software on which all Android apps can be used.

Android can be installed by any manufacturer without any Google apps. But to get access to Google’s Play Store, which houses thousands of apps made by outside developers, Android device makers must sign a “Mobile Application Distribution Agreement” with Google.

Google doesn’t publicly disclose such agreements. Two such documents, though, admitted as exhibits during a 2012 patent and copyright case between Google and Oracle Corp., stipulated that a dozen Google applications must be “preinstalled” on the devices. The agreements require Google be set as the default search provider and that search and the Play Store appear “immediately adjacent” to the home screen, while other Google apps appear no more than one screen swipe away.

A spokeswoman for Google said the agreements no longer ask manufacturers to make Google the default or exclusive search engine on their devices.

The impact of any changes mandated by the EU decision on Google’s ability to target ads—and its profitability—is an open question. The two apps targeted in the EU decision—Google’s search and its Chrome browser—are extremely popular in their own right. Consumers are likely to seek them out from an app store, even if they weren’t pre-installed on the phone, said Tarun Pathak, an analyst at research firm Counterpoint.

Today, Android phones come preloaded with 11 apps, each of which generates revenue for Google in a different way. YouTube shows ads. Google Drive sells 100 gigabytes of storage for $2 a month. This past May, Google sent a push notification to some users of Google Photos, suggesting that they buy a photobook for Mother’s Day.

And while the EU ruling may have opened the door for device makers who want to charge Google to preinstall its search and browser apps, Google has its own leverage over manufacturers. The internet giant could counter by demanding payment for Android. Mark Mahaney of RBC notes there aren’t many competing options.

Last decade, Google was struggling to compete as a mobile player. Its executives believed owning the largest mobile operating system would be the key to the future of computing, said Sumit Agarwal, a former head of mobile product management at Google.

“Owning the OS was a matter of owning destiny,” Mr. Agarwal said.

In 2005, Google paid $50 million to acquire Android, a small startup behind a new touch-screen operating system for phones. The Android team’s initial plan was to give phone carriers the core software for free, but charge them for extra features.

That was scrapped as the company started discussing a sale with Google executives. They saw a different business model, said Nick Sears, one of Android’s co-founders. “The idea they were pitching to us was, ‘If you come to Google, we could have a different business model and we could make Android free for everybody,’” Mr. Sears said.

Instead, Google wanted to collect data and show ads to the millions of people who they envisioned conducting searches or watching videos on Android-operated phones. A Google spokesman declined to comment on the characterization of the talks.

The first Android phone, made by HTC Corp., shipped in 2008. Within two years, Android surpassed iPhone in new phone sales. Dozens of handset makers adopted the operating system to fend off Apple.

—Sam Schechner contributed to this article.

https://www.wsj.com/articles/eu-decision-shakes-mobile-industry-google-business-model-1531913525