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Analysis: Europe’s competition authority is heading for a fall over the Google antitrust inquiry

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By Simon Davies 

Earlier this week the EU’s competition commissioner, Joaquín Almunia, delivered a speech at the European Parliament that can best be described as astonishing.

Indeed, Almunia’s presentation – on the subject of his ongoing anti-trust investigation of Google – quickly went beyond astonishing and headed swiftly toward being outrightly bizarre.

Joaquín Almunia

Joaquín Almunia

The commissioner was speaking at an event organised by parliamentary Members to discuss the current status of competition issues surrounding a company that now has more than an eighty percent choke-hold on the European search market. His department has been investigating Google for more than three years over a spectrum of related complaints.

The EU competition authority is looking into whether Google actively abuses its dominant position to achieve an even greater advantage in the market. The present inquiry is focused in part on whether Google has manipulated its dominant position in search and search advertising to exclude potential competition, raise barriers to entry and cement its dominance. The European consumer umbrella organisation BEUC also raised concerns, warning that if claims against Google were substantiated it would mean that the company had “harmed competition, misled European consumers and reduced consumer choice”.

However Almunia’s presentation this week, which appeared to give a qualified thumbs-up to the advertising giant, has created more shadow than light. In its wake emerged several unsettling questions both about the competition authority’s processes and the strength of its investigation. Almunia’s position has all but ignored the crucial value of personal data – and of the company’s disregard for privacy – in cementing Google’s dominance. In circumventing these issues Almunia has potentially created a fragile and vacuous competition position destined for a short shelf life.

As recently as mid July, Almunia had put Google on notice that it risked huge fines if the company could not propose improvements to its search business. Less than ten days earlier he had formally advised Google that its first “offering” of improvements was inadequate and would need to be substantially strengthened and resubmitted. His comments were seen by many as putting the advertising giant into checkmate. 

Almunia’s position has all but ignored the crucial value of personal data – and of the company’s disregard for privacy – in cementing Google’s dominance.

“I concluded that the proposals that Google sent to us months ago are not enough to overcome our concerns”, he said, adding that the company would need to offer a much stronger package of proposals if it wished to avoid a head-on confrontation with EU competition safeguards.

Compare this with Almunia’s stated position this week:

“Although I cannot describe the details, I can tell you that the new proposal more appropriately addresses the need for any commitments to be able to cover future developments.”

Let’s consider for a moment the timing of these conflicting assessments.

Almunia confirmed in mid-July that the first offering by Google – which took many months to develop and which over subsequent months was rejected after detailed consideration by the competition authority – was substantially inadequate. This is understandable. Such matters are extremely complex and go to the heart of both EU competition law and of a complex global business model. And as Almunia himself has observed, the competition authority is on virgin turf and is feeling its way.

So one immediate question in my mind is this:  what precisely happened over the space of ten weeks to apparently overturn the competition authority’s previous negative position which had evolved over more than three years of negotiation and analysis? How was it possible for Google to comprehensively respond at lightning speed to Europe’s demands for a new proposal – and for the competition authority to assess that new offer with equal speed?

The short answer is that in normal events such a time frame would be inconceivable. Unless, that is, Google already had the new offer on standby, and – most important – that the competition authority had already second-guessed and pre-empted its position on the undisclosed new offer. Google submitted its new proposals on September 10th, and yet only seventeen working days later it seems the competition authority was in a position to tentatively approve the offering. Consider this timing in the light of a requirement for detailed analysis of hundreds of pages of argument, and Almunia’s own assessment that final agreement on the proposals will not happen until next Spring at the earliest.

Google submitted its new proposals on September 10th, and yet only seventeen working days later it seems the competition authority was in a position to tentatively approve the offering.

Perhaps one piece of the puzzle can be found in Almunia’s New York meeting with Google Executive Chairman Eric Schmidt, which occurred last Friday – two working days before Almunia’s public statement. In an interview with the New York Times last April, Almunia had commented on being in “open” SMS, phone and email contact with Schmidt. Apparently the two are in regular contact.

Maybe in the big scheme of things this could viewed as a relatively small matter. Perhaps in the world of global regulatory affairs, negotiations operate routinely in this way and are seen by all players as efficient.

No-one – least of all me – is alleging improper dealings, but the situation, nonetheless, is disquieting. Almunia is judge and jury in European competition matters and there’s a compelling argument that this extent of power and independence requires a higher test of transparency and process. Public knowledge of precisely how this inquiry has been conducted is extremely limited.

Importantly, there’s merit in the argument that a commissioner who is judge and jury should rely on intermediaries instead of direct advocacy, in the manner of most judicial systems. That at least would potentially be a more accountable approach.

Privacy and Data Protection Commissioners such as those in Ireland and the UK should take note. Their impartiality and integrity have been called into question in the past over investigations into Google – precisely because they attempted to cosy up to executives and cut a private deal.

I offer no solution to this puzzle, but I do believe its resolution is central to public trust in the integrity of the competition process. After all, the primary mandate of the EU competition authority is the protection of consumers – even beyond the protection of innovation.

On a more operational level the most astonishing element of Almunia’s remarks (or absence of remarks) is that he failed to acknowledge Google’s apparent refusal to address the fundamental flaw of its remedy proposal. That is, Google will still be allowed to manipulate search results in its favour – both the ranking, and the richness of content. Almunia acknowledged that the main “improvement” appears to be more prominent links for those competitors of Google which the company deems adequate to pay it for piggy backing on its search diversion, away from the most relevant competitors.

 Google’s new offer assumes that it can still divert traffic to its own services, though a little less ubiquitously. For the clicks going elsewhere however, the EU is presumed to allow Google to charge. The company makes money either way. Some would argue that this goes against every theory of fair competition.

And while (in his Privacy Platform speech) the commissioner raised issues of portability, the chicken and egg question is exactly to where – in a near-monopoly environment – can consumers port?

Google’s new offer assumes that it can still divert traffic to its own services, though a little less ubiquitously. For the clicks going elsewhere however, the EU is presumed to allow Google to charge. The company makes money either way. Some would argue that this goes against every theory of fair competition.

So much for the “astonishing” elements of Almunia’s presentation. However of equal importance are the bizarre aspects. This includes disregard for recent high-profile incidents concerning Google’s antagonism toward both privacy and to regulatory authorities in Europe.

These aspects should have been well and truly on the commissioner’s radar. Toward the end of November last year he gave a presentation at the Privacy Platform at the European Parliament in which he acknowledged the growing importance of privacy as a competition aspect. Almunia gave a surprisingly frank keynote address, telling delegates “I believe we are only at the beginning of a proper governance of privacy rights and of the commercial use of personal data”.

Almunia stated that the online economy exhibited fast and massive changes in the markets of data that almost inevitably expose the industry to the risk of abuse. “I understand there are and have been many cases of privacy violation involving a large number of firms.”

He continued “Companies evidently try to use their access to personal data to gain commercial advantage vis à vis users. It is necessary to strike the right balance between regulation and competition policy enforcement”.

Almunia expressed the view that decisions may not ideally be left to markets because consumers are sometimes ill-informed of the practices of merchants and may not have alternatives to turn to. He went on to remark that elements of data protection went to the “heart” of competition policy. “A single dominant company could of course think to infringe privacy laws to gain an advantage over its competitors.”

In the case of Google’s continuing failure to respect the directives of EU data protection regulators, Almunia might well consider just how much of a hostage to fortune his close relations with Google executives may have made him. 

Now – just ten months on – Almunia has all but dismissed the privacy element, stating:  “And of course other issues voiced about Google are not within my remit as commissioner for competition: for instance, the current privacy disputes with national regulators and litigations on copyright.”

I need to be clear about the gravity of these “disputes” that have been so casually dismissed. First, even before privacy, comes the matter of integrity. Did it escape Almunia’s notice that in the past week Google has refused point-blank to respond to the French privacy regulator (CNIL) over charges that its data practices breach EU data protection law because of one-sided user agreements? Did it escape his notice than on two occasions in the past few weeks, US courts have held Google accountable for class-action suits on the basis of claims that its advertising interface with Gmail breaches state and federal wiretap laws?

In these latter cases the contract which appears to form the basis of the consumer interface has been held to have little or no relevance to Google’s defence. And while the EU competition authorities might strike out consideration of breach of criminal or civil interception law, the contractual instrument that forms the basis of relations with consumers surely is at the heart of competition assessment.

In the case of Google’s continuing failure to respect the directives of EU data protection regulators, Almunia might well consider just how much of a hostage to fortune his close relations with Google executives may have made him. If in agreeing to face-to-face meetings and indulging in SMS messages results in a false sense of confidence in the company’s commitments then perhaps Almunia might consider how other regulators have been trashed. True, the capacity of the competition authority to levy huge fines is a differentiator, but so too is the potential income leverage Google can achieve by manipulating the margins of any agreed compromise.

But beyond these specific aspects, there is an apparently strengthening view that Google’s dominance is leveraging vast troves of personal data – a resource that no other company can (or would) exploit so comprehensively. Nathan Newman of New York University has recently written a compelling paper which argues that Google’s dominance will continue until competition regulators understand the relationship between accumulated data and market advantage. The EU clearly hasn’t yet made this connection.