Google's $2.7B EU Fine: Analysts Gauge Impact on Operations, Predict More "Adverse" Rulings

Brussels - H 2016
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"The European Commission's action could create a pro-Google, 'circle the wagons' mindset among Team Trump," said one Wall Street observer.

The European Union last week issued a record 2.4 billion euro ($2.7 billion) fine against online giant Google, arguing it has been skewing search results, favoring its own shopping search service over competitors' offers.

"What Google has done is illegal under EU antitrust rules. It denied other companies the chance to compete on the merits and to innovate," said European Commissioner Margrethe Vestager, head of competition policy in the EU. "And most importantly, it denied European consumers a genuine choice of services and the full benefits of innovation."

Google said it would review the commission’s decision "in detail as we consider an appeal, and we look forward to continuing to make our case."

With Google getting 90 days to change its way of doing business or face more fines, Wall Street analysts last week started discussing what the ruling means for the internet giant. 

"We think the EC's decision ... is the first of several adverse EC rulings against Google," Cowen analyst Paul Gallant wrote in a report. "We view the fine as immaterial — what matters is potential business model changes, particularly Google's ability to leverage search strength into vertical clicks. We believe the EC will pursue similar rulings in other verticals, including travel and local search."

He continued: "If the EC's search bias investigation ended with shopping, we doubt it would matter to Google or other companies. But it appears that the EC is pursuing Google in other verticals as well."

Could Google hope for help from the courts? "Google probably can't forestall changes to its business via court review, which will take three years to play out," the analyst said. "Unless Google wins a near-term injunction — which we view as unlikely — Google must make the changes ordered by the Commission in the coming months."

With the EC not telling Google how to change its business, Gallant said: "So Google must craft a revised presentation of shopping results and submit to the Commission, which will then test the results to see if consumers shift clicks from Google's Product Listing Ads to organic results. We believe there needs to be a shift in consumer behavior (as measured by relative click share) for the EC to be satisfied with Google's changes."

The EC has also been looking at Android, and Gallant expect it to make a decision on that topic as well. "We would estimate an EC ruling in the October timeframe," he said. "If the EC simply orders better access and placement of third-party apps on Android devices, we doubt that matters to Google. If the Commission were to facilitate some type of mobile interface competition (whereby Amazon or Facebook could develop virtual phones), that might be more of a concern for Google's mobile click share."

Gallant also called the U.S. a political "wild card" for Google with President Donald Trump still set to appoint a Federal Trade Commission chairman. "Whomever he appoints will clearly affect Google's U.S. antitrust exposure," the analyst wrote. "But at a high level, our instinct is that the EC's action could create a pro-Google, 'circle the wagons' mindset among Team Trump — the idea being that Trump isn't necessarily a huge fan of Google, but it is an American champion company whose principal regulator should be the U.S., not the EC."

Meanwhile, Moody's analyst Neil Begley in a report last week weighed up the financial fallout against the operational impact.

"The $2.7 billion fine has a minimal impact on the company's balance sheet as Alphabet has over $92 billion of cash and marketable securities as of 3/31/2017," he wrote. "Thus, we do not believe the that this fine has an impact on the company's ... long-term credit rating or its ... short-term debt rating."

"However, the operational impact this fine has on the company could become more negative than the monetary loss," Begley highlighted. "It is unclear at this moment what changes the EU will force Google to make moving forward to comply with EU antitrust law, but we believe regulatory risk, particularly in Europe, will remain high for the world's leading digital advertising company."

Another Cowen analyst, John Blackledge, tried to gauge the potential financial underpinnings of the Google fine worth $2.7 billion. "Our understanding is that a 5 percent-30 percent penalty is assessed on the cumulative infringed revenue, which equates to $9 billion-$54 billion of potential cumulative infringed revenue. For us, the math works out to a likely $9 billion-$11 billion in cumulative revenue from Google Shopping" generated in 13 countries from 2008 through 2016.