The digital economy has boasted of 'unicorns', 'change agents' and 'disruption'. But the difficult question that competition law, and the European Commission, must grapple with is whether the nature of digital economies means that they operate as, effectively, zero-sum games.

This growing concern was reflected in the European Commission’s recent decision fining Google €2.42 billion.

Decision

When Google users search for a product, Google shows product results in a box that sits just above its regular search results. The findings of the European Commission in summary were:

  1. Google has systematically given prominent placement to its own comparison shopping service.
  2. Google has demoted rival comparison shopping services in its search results.

Google has 90 days from the date of the decision (27 June 2017) to give equal treatment to competitors in its search results. If Google fails to do so, it will face additional fines of up to 5% of average annual turnover.

Impact

The effects of this decision both for Google and for the wider tech community are significant.

Article 102 of the TFEU and Article 54 of the EEA Agreement prohibit abuse of a dominant position. The European Commission’s finding of dominance will be of significant concern to Google given other antitrust investigations into Google AdSense and its Android operating system. Margrethe Vestager said:

'Today’s decision is a precedent, a precedent that can be used as a framework to analyse the legality of such conduct.’

Many will undoubtedly celebrate this decision. However, it is this reference to the decision as ‘a precedent’ and a ‘framework to analyse’ which is particularly concerning.

Although the fine is itself a massive blow to Google, this decision will have considerable effect on other projects such as Google’s voice controlled assistant, Google maps, images and other future creations.

Issues

Without the full decision yet available it is difficult to assess the detail of the evidence presented before the European Commission. Google will no doubt eagerly await the ECJ’s verdict in Intel's antitrust appeal on 6 September, offering clarity on how antitrust applies to dominant companies. Meanwhile, Google is considering an appeal to the General Court in Luxembourg.

Vestager said of the decision:

'It’s a lot of data. And it is of course needed — because our decision has to be based on firm evidence. We have to prove our points, even if they may seem intuitive.’

In many ways, this statement sums up the issues with the European Commission’s decision. The European Commission may have amassed vast amounts of data, but what appears to be lacking in its final conclusion is economic analysis of that data. So far as the decision goes as being ‘intuitive’, there is a real danger in presuming that Google’s conduct is intuitively anti-competitive.

In fact, there is a strong argument that Google’s model does a lot more to facilitate competition. This is particularly for small and medium businesses using Google’s advertising solutions, therefore enabling them to compete with the Big Five, as Alphabet, Amazon, Apple, Facebook and Microsoft are collectively known.

Competition in a digital age

Barry Lynn, in his book Cornered – The New Monopoly Capitalism and the Economics of Destruction, compares Google’s behaviour to a railroad, steering towards stores the railroad company owns. And this is certainly the same kind of view that the European Commission took. However, the decision skimmed the central question – whether Google is a King or a Kingmaker.

Amazon will likely feature significantly in any appeal made by Google. As referenced by Google’s General Counsel Kent Walker in a blog post:

‘When the Commission asks why some comparison websites have not done as well as others, we think it should consider the many sites that have grown in this period--including platforms like Amazon and eBay. With its comparison tools, reviews, millions of retailers, and vast range of products from sneakers to groceries, Amazon is a formidable competitor and has become the first port of call for product searches.  And as Amazon has grown, it’s natural that some comparison services have proven less popular than others.’

Amazon will be an important marker for competition, both evidentially and ideologically. Google will argue that Amazon’s dramatic rise offers both a better explanation as to why traffic to comparison websites has dropped and also serves to demonstrate that online competition exists.

However, the European Commission considered that while it might seem like Google Shopping has competition from companies like Amazon, in fact:

‘On Amazon, you find retailers that want Amazon to do part of their services. Those, you don't find to the same degree on Google Shopping.’

Further Vestager said the European Commission had ‘been very thorough in assessing this to make sure we don’t mix up markets’. However, there are real problems with treating these two ‘markets’ as distinct.

The implication of the European Commission’s conclusion may lead not to substantive fairness, but to artificial distinctions. Market definition played a significant role in deciding whether Google is responsible for a reduction in online competition from smaller players. The impact of market definition on assessing the fundamental issue of competition means that Google could adopt practices such as integrating retail products or developing its own shopping universe similar to Amazon.

What this serves to underline is that, by attempting to demonstrate that EU competition law is suited to the digital age, the European Commission has drawn an artificial, rather than substantive, distinction. The inadvertent result of the European Commission’s decision may be that it increases closed shopping ‘universes’ – which may only serve to strengthen the oligopoly the digital space has created.

In particular, although Amazon does facilitate other retailers currently, it has consistently moved closer towards an all-encompassing market place. Amazon, having oversight of consumer behaviour, has been able to take over the manufacturing of some popular products itself and achieve scale by reducing the need for third parties, controlling its own supply chain privately.

Conversely the advantage of Google’s model is that it allows smaller retailers to gain a larger audience. That is not to say that Google’s model is perfect, or that they have not demonstrated themselves to be at times anti-competitive. But this does underline the danger in creating a strong distinction between different models for selling products online. The effect of this ruling may be that it creates incentives to build further closed shopping universes and disincentivises models that offer smaller businesses the possibility to compete through mechanisms such as advertising solutions.

Consumer behaviour

In addition, the European Commission lacks adequate detail on how consumers behave online. The European Commission seems to have relied heavily on there being a distinct market for consumers comparing offers. In this way, the European Commission placed a narrow emphasis on price-comparison shopping.

It is arguable that a broader assessment is more appropriate. Google Shopping products are labelled as ‘sponsored’ content. This is less evident on comparison-shopping websites. As such, it is questionable whether the European Commission had sufficient evidence to conclude that Google users interact with Google’s sponsored content as neutral content.

Whether Amazon, eBay and similar companies are competitors for Google Shopping is fundamental to the issue of whether Google has abused its position. Without sufficient data on consumer behaviour and how consumers engage with different models, it is difficult to accurately answer the question of whether Google’s shopping feature more accurately falls under the category of advertising.

Conclusion

Ideally every retailer would be able to sell to consumers directly. In a digital age, the question is how to optimise this aim.

Some have argued that digital economies represent some of the same problems that led to the breaking up of Standard Oil in the early 20th century. The difficulty with this comparison is that digital economies do not occupy physical, finite space, or sell finite products. However, the infinity of the internet poses its own problems. The core problem the European Commission must address is the unique way in which the Big Five build their empires on the network effects of the digital economy itself.

It is certainly true that there are significant concerns both about the oligopoly of the Big Five and some of Google’s practices. However this case is, as Vestager pointed out, precedent-setting. The result is that one does not have to think that Google is right to hold that the European Commission may be wrong. Given the far reaching implications of this decision for business both online and offline, the greatest rigour must be applied to both the logic and the evidence used by the European Commission in reaching its conclusion.

Ruth Keating is Research Assistant at the Law Commission of England and Wales.