Google's Main Strategy Is Under Threat From EU

By Jack Nicas Features Dow Jones Newswires

Google has thrived by launching new services out of its powerful search engine -- such as online travel, maps and news -- to make finding information easier for users.

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Now such expansion, a hallmark strategy of Google, is under threat.

European Union regulators this week determined for the first time that Google's search engine was a monopoly and fined the company $2.71 billion for favoring its shopping ads over rivals. Regulators said the decision set a precedent for future cases, paving the way for a series of similar actions against other Google products, such as tools to search for flights, hotels, photos and news, analysts said.

Such actions would rein in a company that has known few bounds to its growth over two decades.

In 13 years tracking Google since its 2004 public offering, "we've never been as concerned as we are following this ruling," Macquarie Capital analyst Ben Schachter wrote in a research note this week.

Regulators on Tuesday ordered Google to alter its search results in the EU to give other comparison-shopping sites higher billing, although those companies' offerings may not be as relevant to queries as Google's.

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Google, a unit of Alphabet Inc., said Tuesday it would review the EU decision and consider an appeal. It said its data show users and advertisers like its shopping ads, and that regulators aren't considering the prevalence of shopping sites like Amazon.com Inc. The company declined to comment further for this article.

"Our search engine is designed to provide the most relevant results," Google said in a 2015 post in response to EU regulators. "That's not 'favoring' -- that's giving our customers and advertisers what they find most useful."

In penalizing Google, the EU is prioritizing market competition over user experience, analysts said.

EU regulators are "stating that if Google improves its services...then these improvements are harming competitors unfairly," Macquarie's Mr. Schachter said. That stance "could dramatically limit Google's ability to offer what it views as the most relevant information in a potentially long list of categories," he said.

In two other cases, involving Google's Android smartphone software and its ad network called AdSense, European regulators have said they already determined "that Google has abused a dominant position." Google has denied the charges. Rulings are expected on them over the next year.

Google launched its search engine in the late 1990s as a list of 10 blue links to webpages relevant to users' queries. Over two decades, Google has reshaped its search results to also offer tools to find everything from jobs to plumbers to financial information. The search engine also now delivers song lyrics, internet-speed tests, and direct answers to users' questions, such as "How big is the sun?"

Such changes often reduced traffic to competing websites, hurting their ability to provide quality offerings. Critics also argue that Google's services are sometimes not as good as competitors', such as restaurant reviews on Yelp Inc. or Expedia Inc.'s flight-search tool. Affected companies for years have cried foul.

"We built search for users, not websites, and no matter what we do, there will always be some websites unhappy with where they rank," Alphabet Chairman Eric Schmidt told the U.S. Senate in 2011, when the Federal Trade Commission was investigating Google for antitrust violations.

In 2013, the FTC declined to press charges, going against some FTC staff recommendations.

The FTC prioritized the effect on consumers over market competition, said Paul Gallant, a tech-policy analyst at Cowen & Co. "The U.S. is willing to tolerate some competitive damage if consumers win in the end, " he said.

But that defense failed with EU antitrust regulators, who care more about a monopoly's effect on smaller competitors, Mr. Gallant said.

The split between U.S. and European regulators is why many of Google's U.S. competitors -- including Yelp, Oracle Corp., and News Corp, owner of The Wall Street Journal -- have focused lobbying efforts in the EU.

News Corp's complaint to the EU is that Google illegally pulls content off News Corp's websites to use in search results, and that Google penalizes its sites' search rankings for requiring users to have subscriptions to read articles. Similarly, Getty Images Inc. has complained that Google illegally pulls its photos from its websites for Google's image-search tool.

News Corp declined to comment. Getty didn't respond to a request for comment.

Last year, Google prevailed in a U.K. lawsuit filed by a British mapping firm that accused Google of unfairly favoring its maps in search results. The court ruled that Google's mapping product didn't harm competition.

Such moves by Google are designed to improve the utility of its search engine, which keeps users coming back -- and clicking on search ads that account for much of its revenue. Airlines, hotels and retailers also pay Google for traffic from its flight, hotel and shopping search tools.

"Google absolutely believes that everything it has done in the evolution of its business is improving the consumer experience. That doesn't mean they're not guilty of competition problems, but it is why this case could be hard to settle," Mr. Gallant said. "These aren't just tactics by Google. This is religion to Google."

Write to Jack Nicas at jack.nicas@wsj.com

(END) Dow Jones Newswires

June 29, 2017 12:20 ET (16:20 GMT)