How Much Pain Will Google Feel From the Latest E.U. Fine?

E.U. Google - How Much Pain Will Google Feel From the Latest E.U. Fine?

Source: Google

While everyone has been distracted by Amazon’s (NASDAQ:AMZN) Prime Day sale, a very big event took place in Europe. Not Helsinki, either. On July 17, the Economic Union imposed a record-setting antitrust fine of $5 billion on Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google, and gave the company 90 days to stop bundling its apps and services with Android. In response, Google is appealing and yesterday, CEO Sundar Pichai published a blog post that warns Android may not remain free. This is not the first E.U. Google fine, but the stakes are higher than ever this time.

GOOGL stock dipped on the 17th after the E.U. Google decision was announced, but quickly bounced back. However, that won’t be the case if the company loses its appeal. Here’s why, but first the details on that E.U. decision.

European Union Slaps Google With Record Fine

On July 17, the E.U. imposed a record, $5 billion antitrust penalty on Google. The decision was based on findings that the company was forcing smartphone manufacturers to bundle Google apps and services with Android phones. The E.U. also took exception to the company’s practice of increasingly folding key services into Android — a supposedly open source operating system — making it difficult for manufacturers to fork their own version, or to install a competing version like Amazon’s Fire OS.

In addition to the initial E.U. Google fine, the company was given 90 days (until mid-October) to stop the bundling or face additional penalties of 5% of Alphabet’s average worldwide revenue, per day.

The market reacted to the E.U. decision with GOOGL stock immediately dipping. But with the company announcing an appeal and three months for this to play out, investors soon shrugged and GOOGL ended the day near record highs once again.

Google’s CEO Responds

Yesterday, Google CEO Sundar Pichai fired back at the E.U. with a blog post, pointing out that his company’s strategy of releasing Android at no charge had made affordable smartphones possible. That has given consumers plenty of choices. Included in the post was a thinly veiled threat, suggesting that if the E.U. is able to enforce its decision to de-bundle Google apps and services from Android, the company may start charging for its operating system:

“If phone makers and mobile network operators couldn’t include our apps on their wide range of devices, it would upset the balance of the Android ecosystem. So far, the Android business model has meant that we haven’t had to charge phone makers for our technology”.

The possibility of charging for Android may not upset the E.U., but it’s going to rile consumers and especially smartphone makers. Outside of Apple (NASDAQ:AAPL) and Samsung, smartphone profit margins are razor thin or non-existent. Adding even a few dollars in Android licensing fees will hurt many manufacturers. Google is undoubtedly counting on them to put on pressure to reverse that decision.

The Potential Impact of the E.U. Google Ruling

Google has good cause to be worried about the E.U.’s ruling. The $5 billion fine is a record-setter and painful (Alphabet’s profit for 2017 was $12.6 billion), but it’s that order to de-bundle apps and services from Android that is the real concern. Ad revenue is what drives GOOGL stock, and that increasingly  means mobile ad revenue. Ad revenue generated by smartphones is projected to top $61 billion for 2018 and climb to over $73 billion in 2019.

And that mobile ad revenue is generated by smartphone owners using GOOGL services: Google search, the Chrome web browser, Google Maps and others. If the E.U. has its way, Android smartphone buyers would have to download Google apps instead of them being installed by default on their Android smartphone. That opens the doors to them downloading a rival app instead, which would mean Google misses out on mobile ad revenue.

That would not be good for GOOGL stock.

However, it may not be as bad as it sounds. As CNBC points out, Google Search has a marketshare in Europe of over 90%. With that level of popularity, it seems unlikely that a meaningful number of Android smartphone buyers would download a rival web browser instead of Chrome. And the E.U. Google ruling wouldn’t mean that Android smartphones sold in the U.S. would also have to be unbundled.

However, if it’s upheld, the E.U. Google decision disrupts the company’s long-time Android strategy that has helped lead to smartphone market domination: give away the operating system, make money from ad revenue generated by the bundled apps. The temptation will be there for GOOGL to follow through with that threat to charge a licensing fee for Android, both to help make up for lost mobile ad revenue, and to put pressure on smartphone manufacturers to campaign against similar measures being imposed in other markets.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

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