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8 August 2018 0 Comments
Posted in Dispute Resolution, Opinion

Android – Anticompetitive or innovative market leader?

Posted by , Paralegal

The European Commission has fined Google 4.3 billion euros ($5bn) for using its dominant market position to sway the Android app market in their favour. Google has indicated they will challenge the decision. An appeal could make it months, if not years, before any fine is actually enforced – their previous 2.4 billion euro fine, from Sept 2017, has yet to be paid.

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Android is an ‘open source’ operating system – meaning any phone manufacturer can license it from Google without a cost. Under this agreement manufacturers are often bound to certain conditions. Generally, they are prohibited from altering the Android code and, must pre-install certain Google apps before their phone can access the Android ‘Play Store’ – a digital store where the phone’s user will download and purchase additional apps.

By offering the software for free, Google have disguised market control with market accessibility. On the one hand, Google argue that software continuity across devices means app developers can access a larger market without incurring costs from recoding their apps to run them on different systems – like they would to also run them on Apple. On the other hand, they are forced to sell their apps in a saturated market controlled, and dominated, by Google products.

Google benefits from controlling the market in this way because its revenue is driven by advertisements, not licensing fees from its software. As a result, the company’s value comes from its ability to collect data and access individual users. This collection and access comes through use of their apps. However, there is little incentive for manufacturers to pre-install a particular app over another because they are all accessible to consumers once the phone can access the Play Store. Whereas, there is a big incentive to adopt an existing operating system because it is essential to make the phone run, but expensive and time-consuming to create. Therefore, attaching pre-installation conditions for apps to a free operating system licence gives Google a stronger position to collect data and access individuals.

This is what the Commission is essentially challenging – Google’s intention to indirectly benefit its advertising business from hindering competitors’ market access by controlling a dominant market software.

Has Google “denied rivals the chance to innovate and compete”?

Sundat Pichai, Google CEO, sees his competition as companies like Apple, which competes on how many devices run each operating system. However, the Commission also identifies app developers as Google’s competition, who cannot access Android consumers unless phone manufacturers license the Play Store. Phone manufactures are prohibited from altering Android software, which could remove the need to license the Play Store, and cannot license the Play Store without pre-installing certain Google Apps.

Sundat Pichai rebutted the allegation that he prevents manufacturers altering their software by citing Amazon’s unique Android system – FireOS. But, he did not address the allegation that Google’s contracts prevent manufacturers other than Amazon from using FireOS. Additionally, many app developers disagree that one operating system increases their consumer base, so the argument of a benefit from continuity is weakened.

As with any market, once it becomes crowded, saturated or dominated, it becomes difficult for many individuals to penetrate it. Increasing the number of smaller markets with a sufficient flow of consumers will help producers promote the differences between their products and incentivise customers to understand and choose from a variety of products based of their individual preferences – not simply because one product is a dominant name. It is no different for digital apps. Increasing the number of available operating systems would provide developers and consumers with more markets and options – which drives development and innovation.

What does this mean for Google?

The biggest risk for Google is to its advertising model. Its ad business is growing rapidly, and mobile devices are responsible for a large proportion of this revenue. Google’s obvious response to a fall in ad-based revenue will be to license the Android software. This will involve adopting a new business model which can withstand the pressure of achieving licensing targets or quotas. When reviewing its strategy, they should not become complacent with their current position. Digital products are a significant and increasingly valuable part of our economy. If a new enterprise is backed by sufficient expertise and finance at a time Google is slow to restructure, it could lose a large stake of its market control. However, many experts have concerns that the Commission’s intervention is too little too late to stimulate any serious competition because, compared with its other territories, Google is especially influential in Europe.

What does this mean for mobile phones?

About 80% of smart mobile devices in Europe and in the world run on Android. Whether manufacturers continue to use Android, find an alternative licence or create their own will mostly reflect consumer demand, available resources and their entrepreneurial objective. Nevertheless, even if several entrepreneurs attempt to disrupt Google’s 80% market share, without an ineffective commercial response from Google it is unlikely to lose control over the majority of smart phones. Considering its resources, including cash and expertise, Google is in a strong position to invest in incentives that support a high output of Android enabled devices.

What’s next?

This fine may have shown a shift in consumer attitudes of digital devices and data. As consumers become more technologically educated, the demand for variation, individualism and controlled uses of data increases.

Gabriel Weinber of DuckDuckGo Inc., a search engine that does not track its users, believes people will choose different search engines if they are available. Edge has integrated AdBlock Plus into its mobile app. These organisations have tapped into the demand from consumers to control how their digital devices and products interact with their lives. While Google’s fine is based on anti-competitive behaviour, the market they are trying to monopolise is one facing increasing changes and challenges. Consequently, if Google is prohibited from continuing with this practice, there is an opportunity for competitors to destabilise Google’s dominant app position even if Android continues to operate the majority of smart phones. By addressing the increasing concerns consumers have with digital products, at a time where Google’s market position is weakened, they could establish a considerable challenge to Google’s current business model.

If you have any concerns over data-based business models and the competitive advantage they can provide, especially in crowded markets, please do not hesitate to contact our Data Protection and Corporate and Commercial experts. They work closely together to ensure efficient commercial strategies that utilise available options for a variety of market positions.

For more information or if you have any enquiries, please contact William Bartoli-Edwards on:

01865 264 003     Email uswilliam.bartoli-edwards@roydswithyking.com

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