Last week, Google, the crown jewel of Alphabet (Nasdaq: GOOG, GOOGL), was fined $5 billion by the European Commission, the executive body of the European Union.
It’s the largest fine ever levied by the regulator.
For most companies, a $5 billion fine would be devastating, if not fatal. But Google is not most companies. GOOG stock hardly budged, falling a mere 0.3 percent on the news.
Here’s why most investors aren’t too worried about this fine, and why the EU is fighting a losing — or at least misguided — battle.
The power of Android. The EU generally takes a more activist approach to antitrust matters, and in recent years especially has been going after big tech. Google, which owns the popular open source mobile operating system (OS) Android, allows phone makers to use their OS for free — but only if they agree to pre-install a number of popular Google apps and services meant to drive consumers to Google’s search engine and increase ad revenue.
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The commission ruled this was illegal and anticompetitive, and after bringing the case two years ago, levied the record-breaking $5 billion fine.
(Incidentally, the second-highest fine ever levied by the European Commission was also against GOOG — a $2.7 billion fee in 2017 for driving search traffic to its Google Shopping results.)
Under the terms of the EC’s ruling, Google must stop these practices within the next 90 days or face additional fines.
Why the fine more impotent than important. A $5 billion fine, even for a company like Google, isn’t peanuts. The Mountain View, California-based search giant made $26.1 billion in global operating profits last year; GOOG can’t exactly afford to routinely sacrifice one-fifth of its pre-tax spoils.
So why is this fine not the end of the world? Why did Mr. Market essentially ignore this fine that accounts for 19 percent of GOOG’s 2017 operating profits? Industry experts tend to land on the same reason.
“The shares didn’t move because the market viewed this as a one-time event,” says Rob Enderle, technology analyst at the Enderle Group.
The fact that this friction with the EU was long known by the market, and that Google’s well-paid army of lawyers plans on appealing the fine also lessens the blow of the “record-breaking” ruling.
Tom Koulopoulous, founder of the Delphi Group, which provides thought leadership for technology businesses, agrees. “Wall Street doesn’t see Google as being in a position at present to be impacted by this isolated incident,” Koulopoulous says.
“In large part that’s because whether Google apps are bundled in an Android phone or not barely changes the end result,” Koulopoulous says. Either way, “an Android phone will have an abundance of Google apps.”
This is perhaps the key takeaway. The primary driver of GOOG stock over the years is the same thing that made it an up-and-comer in Silicon Valley in the years before its 2004 initial public offering: digital advertising dominance, driven almost entirely by traffic from its market-leading search engine.
Android is the dominant smartphone OS globally; over 80 percent of smartphones run on Android. Google was adamant early on, back in 2009 and 2010, that its future success depend on its success in mobile. Today, roughly 60 percent of search queries are done on mobile devices.
People are hooked on Google’s suite of (mostly free) products and services. Google Search, the Chrome browser, Gmail, Google Maps, YouTube, the Google Play app store, Google Drive, Photos, and its Calendar app all have hundreds of millions or billions of users.
If future Android devices no longer come pre-installed with Google’s suite of apps, a large number of European users will simply go to the app store and download the Google apps they need anyway.
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“The concern must be that this action comes too late — that Google has entrenched itself so well that rivals may never recover,” says Alec Burnside, an antitrust partner at Dechert, a global law firm, based in the Brussels office.
In so many words, Europe is a day late and a dollar short; Silicon Valley’s head start cannot be reversed by force.
Other points of contention (and in GOOG’s favor). All five of the European Commission’s largest-ever fines have been levied against American technology companies.
This has earned the commission a bit of a reputation: Once a company (typically foreign) reaches the pinnacle of its success, the commission comes up with a way to fine them and gets its piece.
Microsoft Corp. ( MSFT) was so unimpressed with the European Union’s $794 million fine in 2004 — imposed in part so that Microsoft would stop bundling its Media Player with its Windows OS — that the company simply ignored the ruling completely, incurring further fines in 2006 and 2008.
It’s true that GOOG doesn’t want the EU as an enemy. But nor should the EU particularly want to seek out the $830 billion tech giant as a foe.
The Android fine raises uncomfortable questions that the European Union may not be prepared to answer or enforce.
“Bundling has been a perennial topic in tech when it comes to software,” Koulopoulous says.
“Apple ( AAPL) has no such issue since its only OS/device option is the iPhone, which clearly comes bundled with myriad Apple apps. So, is not allowing Google to compete on equal terms itself anti-competitive?” Koulopoulous asks.
Don’t be surprised if GOOG lawyers pose the same question.
Android’s leverage. So, this $5 billion fine could be a one-time thing, already factored in by the market.
Additionally, investors may find some solace in the fact that Google is appealing the ruling, and that even de-bundling its apps in the EU is unlikely to make users ditch its apps and ruin its global growth prospects.
Finally, GOOG has a very strong, but potentially ugly, card left to play. Namely, it could do something entirely within its rights and start charging manufacturers a licensing fee for each device using the Android operating system.
Companies have to make money after all, and Google had no incentive to give away its OS for free while receiving absolutely nothing in return. There’s no such thing as a free lunch, and with its massive global market share, it seems clear most phone makers were more than willing to pre-install some Google apps in order to fend off competition from the likes of Apple.
This dynamic kept smartphone prices low, allowing hundreds of millions of people to access the new technology, which has become a fundamental part of everyday life, at affordable prices.
If the EU’s decision ends up forcing Google’s hand into charging for Android, undoubtedly many phone makers will have little choice but to comply, raising their prices or eating the costs, at the expense of European consumers, workers and investors.
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GOOG, in the meantime, will reap the rewards. And the EU will reap what it sows.
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Google (GOOG) Stock: Don’t Sweat $5 Billion EU Fine originally appeared on usnews.com
