The European Commission’s announcement yesterday that it has fined Google-owner Alphabet Inc. €4.5bn for breaking EU Competition Law is the latest stage in a long antitrust battle with the technology company. The recent case, like Microsoft’s bundling of certain programmes into the Windows Operating System before it, highlights how easily dominant companies can get into hot water when bundling two different products or services together.
Let’s take a closer look at the Google example. Aside from being the global search engine of choice, Google is also the author of the world’s most popular mobile phone operating system, Android. Although Android is open source software, Google is an essential partner for mobile phone manufacturers and developers. Google has fallen foul of Brussels by requiring Android handset and tablet manufacturers to pre-install the Google Search app and its own Chrome web browser as a condition for allowing them to offer access to Google Play (the Android equivalent of the App Store).
This aspect of the case bears striking similarities to the Microsoft decision of 2004. MS Windows, at that time, was the operating system which ran on more than 90% of personal computers. Microsoft pre-installed certain of its programmes (for example, Windows Media Player and Internet Explorer) into MS Windows, which were then provided free of charge with computers sold to customers. That led to cries of foul play from rival providers of media players and browsers, and ultimately a fine of €497m.
When can this practice of bundling products or services together risk antitrust liability? In some transactions, a customer expects products will be tied together. The classic example is a car, normally sold with four wheels, a radio and a set of windscreen wipers, none of which are seen as a tie, even if they can be purchased separately.
Things may be different if a dominant car manufacturer – or a number of leading manufacturers – were to bundle car sales with car insurance policies. The bundling of these two products is an unnatural fit and would put rival insurers at a distinct disadvantage to the favoured policy.
Antitrust law will tend to target those tying arrangements that have been put in place by a dominant company, usually where it has a share of more than 40% of a particular market.
There are four scenarios when tying will be deemed as illegal. The first and most obvious is when the dominant company has obviously tied two distinct products together. The products will be distinct if, absent the tying arrangement, most customers would have bought them separately, as with cars and car insurance, for example.
There could also be a problem if a non-dominant company agreed to tie the sale of its own products to those of a dominant company. In other instances, customers may be coerced into buying the two products together, either contractually or through pricing incentives.
The third illegal example of tying is when the tie is capable of foreclosing access to a market for goods or services. In the Microsoft case, there was strong evidence that customers would not switch from the default Microsoft media player or browser provided.
Finally, a company will flout the law if there is no objective justification for the tie, i.e. the tying arrangement does not result in actual benefits for the consumer.
In the Android case, this last scenario is particularly important. Google has argued that it is only able to provide Android on a free, open source basis because of its remuneration structure. Forced changes threaten a move towards a more traditional licensing model where access to Android would be licensed rather than open source. Forcing a change could, according to Google, force up prices and be anti-consumer.
Given the financial firepower of Google and its interest in fighting the Commission’s findings, it could be several years before there is any resolution to the case. When that day comes, however, it is to be hoped that we will have increased legal certainty over when a tie falls on the right side of the law.
Paul Henty is partner at Charles Russell Speechlys.
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