Earlier this month the General Court of the EU (the “Court”) delivered its much-anticipated judgment on Google’s action for annulment of the Commission’s decision in Case AT.40099 (Google Android) – the decision currently holding the record for the highest antitrust fine ever imposed, namely EUR 4.3 billion.
By way of reminder, the Commission found that Google had infringed Article 102 TFEU by entering into a number of agreements with OEMs and MNOs relating to the installation of its mobile apps and the licensing of the Android OS, namely: (1) the Anti-Fragmentation Agreements (“AFAs”), which OEMs and MNOs had to sign before being eligible to distribute Google apps on their smartphones, and which prohibited them from marketing devices running Android versions (known as “forks”) not approved by Google; (2) the Mobile Application Distribution Agreements (“MADAs”), which required OEMs/MNOs wishing to pre-install Google Play on their devices to also pre-install the Google Search and Chrome apps; and (3) the portfolio-based Revenue Sharing Agreements (“RSAs”), according to which Google provided payments to OEMs/MNOs in return for the Google Search app being exclusively pre-installed on a given portfolio of smart mobile devices. The Commission considered that Google’s practices formed a single and continuous infringement, in that they all served the same overarching objective of protecting and strengthening Google’s dominance in general search. Specifically, Google’s practices were said to be part of an overall strategy aimed at anticipating the effects from consumers’ shift to mobile devices, and the risks such shift posed to Google’s business model centring around its eponymous search engine.
As predicted last year, the Court largely dismissed Google’s action, but annulled the decision (on both procedural and substantive grounds) insofar it condemned Google’s portfolio-based RSAs (this is the third case in a row where the Court has annulled a Commission decision on exclusivity payments, the other two being Intel (RENV) and Qualcomm). Exercising its unlimited jurisdiction, the Court decided to vary the amount of the fine, setting it at EUR 4.125 billion, but not without first engaging in a fairly aggressive analysis of Google’s conduct.
I shall not endeavour to summarize every aspect of this landmark ruling – this a very long and detailed judgment, and the more one reads it the more one discovers new elements. Rather, I would like to discuss several issues that caught my attention while reading the judgment, including issues of principle and of broader significance for the application of EU competition law in digital markets.
In this post, I will focus on the first abuse identified in the contested decision, namely the MADA pre-installation conditions (in a subsequent post I will discuss the AFAs and market definition/dominance), which the Commission had analysed as a form of tying arrangement.
Threshold issue 1: the concept of exclusionary effects
After citing well-rehearsed case law on the concept of abuse, the Court recalled that not every exclusionary effect is necessarily detrimental to competition, in that competition on the merits may by definition lead to the marginalisation or departure of less efficient competitors (para. 278, citing Intel). Then, in paragraph 281, the Court stated the following with respect to the concept of exclusionary effects:
“Exclusionary effects characterize situations in which effective access of actual or potential competitors to markets or to their components is hampered or eliminated as a result of the conduct of the dominant undertaking, thus allowing that undertaking negatively to influence, to its own advantage and to the detriment of consumers, the various parameters of competition, such as price, production, innovation, variety or quality of goods or services.”
This is a rich passage which neatly summarizes the case-law, and which is worth breaking down:
- First, the Court recalls that exclusionary effects relate to the effective access of actual or potential competitors to markets or their components. For such an effect to arise, it suffices that effective access of rivals is made harder (“hampered”), there being no need to show that access is eliminated. This is what the Court of Justice held in TeliaSonera (see para. 63, referring to conduct capable of marking market entry “more difficult, or impossible”).
- Second, the Court recalls that the exclusionary effects must be the result of the conduct of the dominant undertaking (causal link).
- Third, the Court distinguishes between (i) exclusionary effects and (ii) consumer harm, the latter being captured by the second part of the passage, referring to the dominant undertaking “negatively [influencing], to its own advantage and to the detriment of consumers, the various parameters of competition such as price, production, innovation, variety or quality of goods or services”. This is in line with the view in the case-law (see e.g., Google Shopping, paragraph 443) that a restriction of competition is presumed to result in consumer harm in the form of e.g., higher prices, less choice or lower quality.
- Later on, the Court supplemented the above, by adding that exclusionary effects are to be distinguished from the existence of a competitive advantage. The Court nevertheless held that the contested decision was careful to draw this distinction, in that it established, first, the existence of an advantage linked to the MADA pre-installation conditions that cannot be offset by competitors, and second, the anticompetitive effects of that advantage (para. 564).
Threshold issue 2: the legal test for tying and actual vs potential effects
Next, the Court considered the legal test for tying. In essence, the Court adopted the legal test laid down in Microsoft, where the Court of First Instance assessed the bundling by reference to the four conditions analysed in the Commission decision, including the condition that the bundling “forecloses competition”.
In Google Android, the Commission considered that the condition relating to foreclosure of competition is satisfied if the conduct of the dominant undertaking is “capable of restricting competition” (to that end, the Commission had cited the Court’s judgment in Microsoft, para. 867). The Court noted that in reality, however, the Commission sought to establish the actual exclusionary effects of Google’s conduct (para. 290). By way of example, the Commission found that Google’s conduct had the effect of, among others (i) making it harder for rival search engines to gain search queries and the related revenue/data needed to improve their services; (ii) increasing barriers to entry in the market for general search services; and (iii) reducing the incentives of rivals to innovate (para. 294).
The Court endorsed the Commission’s approach of examining actual effects. In fact, the Court went beyond simply endorsing it; it held that the Commission was required to engage in “a close examination of the actual effects” (para. 295), and this for the following reasons:
- This was not a case of classical tying since users could easily download rival search or browser apps (see paras. 292-293). The Court drew an analogy with Microsoft, where the Commission took the view that it could not assume that the tying of Windows Media Player had by its nature foreclosure effects, since consumers could download rival media playing software through the Internet; as such, the Commission engaged in a “close examination of the actual effects” of the bundling arrangement on the relevant market.
- Another consideration is the that the practices at issue took place over a long period (para. 296); this is not a case of the Commission carrying out a prospective analysis based on effects that will arise in light of assumptions that cannot yet be verified (citing Generics). Contrast this with Google Shopping, where the Court rejected Google’s argument that the Commission had to demonstrate actual (as opposed to potential) effects because of the duration of the practices at issue (see paras. 426 and 442).
From a policy perspective, the Court noted that close examination of the actual effects has two advantages (para. 295): (i) first, it reduces the risk of penalizing conduct which is not actually detrimental to competition on the merits; and (ii) second, it serves to further clarify the gravity of the conduct in question, which will facilitate the penalty calculation.
Now, it is rather unlikely that the Court’s approach can be easily transposed to other practices; after all, the case law is clear that, for the purposes of establishing an infringement of Article 102 TFEU, it suffices, in principle, for the Commission to show potential effects. Rather, the Court’s approach is best understood by having regard to the circumstances of Google Android, and in particular the fact that users could easily download rival software.
The effects of the MADA pre-installation conditions
Against this background, the Court examined the Commission’s analysis of the MADA pre-installation conditions. The Commission’s reasoning for the Search-Play Store bundle involved two steps (the Commission used similar reasoning for the Chrome-Play Store/Search bundle):
- First, the Google Search-Play Store bundle provides Google with a significant competitive advantage which rivals cannot offset. This is because pre-installation is an important distribution channel, as it can increase significantly on a lasting basis the usage of the app due to the “status quo bias”. Rivals cannot offset such advantage, whether through downloads, agreements with search engine developers or pre-installation agreements.
- Second, the bundle helps Google maintain and strengthen its dominant position in general search by increasing barriers to entry and deterring innovation. This is because Google’s conduct makes it harder for rivals to gain search queries and the respective revenues and data needed to improve their services.
The Court by and large upheld the Commission’s reasoning. The following points are worth noting.
The “status quo bias” linked to pre-installation
Much of the first part of the Commission’s reasoning was predicated on the “status quo bias” linked to pre-installation, a concept from behavioural economics which refers to consumer’s tendency to stick to what is offered to them. Google, on its part, argued that the pre-installation conditions did not create a “status quo bias”, and that the evidence in the contested decision in fact concerned the setting of defaults, not pre-installation.
The Court noted that Google agreed that, like any form of promotion, pre-installation increases the likelihood of users trying the pre-installed app; as such pre-installation has at least a promotional value for Google (para. 331). In the present case, pre-installation of Search and Chrome had significant consequences in quantitative terms (paras. 336-339).
The Court dismissed Google’s arguments seeking to call into question the evidence relied on by the Commission in the contested decision. It also held that the Commission was entitled to rely on the evolution of usage shares to support its theory of harm built around the “status quo bias” effect (para. 574).
Causal link between the MADA pre-installation conditions and evolution of usage shares
On this point, Google argued that the contested decision did not demonstrate that the increase in Google’s usage shares was caused by the pre-installation conditions, instead of the superior quality of Google’s products. In essence, Google argued that consumers made greater use of its products because these were better, not because they were pre-installed.
The Court dismissed Google’s argument, holding that the Commission was not required to determine precisely whether Google’s usage shares could also be explained by the alleged superior quality of Google’s products (para. 575). Rather, it was for Google to show that its usage shares were linked to the alleged superior quality of its products (para. 575). However, the evidence relied on by Google was insufficient (para. 576).
Interestingly, the Court expressed in passing certain doubts over the alleged superior quality of Google’s products:
- The Court observed that the needs of consumers are not necessarily met by the technically best solution; variables such as privacy protection or the account taken of specific linguistic features also play a role (para. 578).
- The Court agreed with the Commission that the alleged quality advantage is not borne out by the ratings given to products of Google and rivals in the Play Store (para. 579). The Commission was entitled to rely on this to find that the various rivals offered a service capable of meeting consumer demand (para. 582).
Google’s counterfactual argument
Google argued that the Commission failed to assess whether the MADA pre-installation conditions were capable of restricting competition that would have existed in their absence, having regard to their legal and economic context. According to Google, the MADA pre-installation conditions were part of the free licensing model for the Android platform; they thus created, rather than removed, opportunities for rivals (para. 585).
This is essentially an argument about the counterfactual (=absent the MADA conditions, Google would not have been able to develop and maintain the free and open Android platform, in which case competition would have been less). The Court notes that the Commission acknowledged that the Android platform increased opportunities for Google’s competitors (para. 590).
Rather disappointingly, the Court sidestepped Google’s arguments on the basis that the Commission did not take issue with the MADA as a whole (or the open and free licensing system developed by Google), but with a specific aspect of them, namely the pre-installation conditions (paras. 591 et seq). The Court also refrained from framing this as a counterfactual issue, instead preferring to state that the Commission considered all the relevant circumstances when assessing Google’s conduct (para. 596).
One may express doubts as to whether this approach is correct; one could argue that the pre-installation conditions were an integral part of the MADA. If this is correct, then taking issue with the pre-installation conditions would be tantamount to taking issue with the MADA as a whole. I expect Google to come back on this point if it lodges an appeal against the Court’s ruling.
Google’s objective justifications
Google had argued that the MADA pre-installation conditions were justified, in that (i) they enabled it to monetize the Android platform through the advertising revenue generated by Google Search; and (ii) they enabled it to offer the Play Store free of charge to OEMs. The above arguments had prompted commentators to consider that Google Android was a rather exceptional case, in that the Commission was interfering with the business model of a dominant undertaking and the way in which it sought to monetize its platform.
Even so, the Court dismissed Google’s arguments, holding that Google had failed to discharge its burden of proof.
In the first place, Google had not demonstrated that the bundles were necessary for it to monetise its investment in Android. The Court relied on the following considerations:
- Google has always been in the position of having significant revenue sources to finance its investments (para. 608).
- Google would have still (i) generated revenues from the Play Store; (ii) generated PC search advertising revenue; and (iii) captured valuable user data on Android (paras. 609-610).
- It is reasonable to consider that Google would have the incentive to develop and maintain the Android platform without even being certain that it would recoup its expenditure by the revenues generated by that platform, in order to counter the risks to its search-advertising business model resulting from the switch to smart mobile devices (para. 613). In other words, the Court was not convinced that, from an ex ante perspective, Google would not have the incentive to invest in the Android platform.
In the second place, the Court was not convinced that Google’s conduct was justified because it allegedly enabled it to offer the Play Store free of charge to OEMs. In fact, the Court held that Google’s preferred solution (free licensing in return for pre-installation) did not preclude the other solutions envisaged by the Commission in the contested decision (e.g., licensing against a fee) (para. 617).
That’s all for the moment – stay tuned for Part II of this post!