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Europe hits Google with record $5 billion antitrust fine over bundling of its apps on Android

The E.U. handed the tech giant a record antitrust fine of $5 billion for using its Android mobile operating system to squeeze out rivals. (Video: Reuters)

European regulators hit Google with a record $5 billion antitrust fine on Wednesday for bundling its apps on Android and undermining its competitors, a penalty that could spell major changes to the world's most popular mobile operating system and risks encumbering the tech giant with legal battles for decades to come.

Margrethe Vestager, the European Union’s competition chief, ordered the company to cease pushing its own search and Web-browsing tools on smartphones and tablets running Google’s Android system. Two years after filing charges, she faulted Google for using Android as a means to solidify its strong foothold in search, while making it harder for rivals to offer competing apps and services.

Vestager gave Google 90 days to “bring its illegal conduct to an end” or face additional fines from the E.U. It is up to Google to restructure its relationships with device-makers, to whom it licenses Android for free, and submit the fixes to European regulators for approval -- a wide spectrum of potential changes that leaves up in the air how many of Google’s more than 2 billion Android users will be affected.

Why Europe, not Congress, will rein in big tech

For years, Google has required handset makers like Samsung, LG and Huawei to set Google as the default search engine on Android devices and install the Chrome web browser or risk losing access to Google’s app store. The EU said that 95 percent of Android users globally, excluding China, use Google Search, indicating to regulators that the vast majority of people are not changing their settings.

Bundling those apps helps Google collect data about mobile users and ensures a wide audience is using Google products, which means the company can show more ads to more people -- the lifeblood of its revenue. It also defrays some of the "costs involved in building Android," Google chief executive Sundar Pichai said in his defense of Google’s practices.

“Today’s decision rejects the business model that supports Android, which has created more choice for everyone, not less,” he wrote on the company’s blog. Google said it would appeal the ruling and declined further comment.

The European pressure on Google highlights how the greatest threat to the power and scope of American tech giants increasingly comes from across the Atlantic. The fine is the second record EU antitrust penalty levied on Google in a year, and Vestager said Wednesday that European regulators are still probing other areas of the company, including search and advertising. Such constant regulatory scrutiny helped knock Microsoft from its perch atop the tech industry more than a decade ago and distracted it from generational changes in the way people use technology, such as the rise of mobile phones.

“If you look at the history of antitrust policy, where either the U.S. or [the EU] have gone after companies at the leading edge of innovation, it does put a pall on their aggressiveness,” said Rob Atkinson, the president of the Information Technology Industry Foundation, a think tank where Google is a board member. He criticized the EU’s decision.

During a press conference Wednesday, Vestager suggested she wasn’t ready to break Google into smaller companies. But the total $8 billion in European fines Google has racked up since last year, as well as the months it is spending to retool its businesses to satisfy European regulators, could slash the momentum of the third most-valuable American corporation.

For consumers, the result could be a different Android experience from today. While the E.U. ruling only pertains to Android users in the region, the amendments that Google makes to its deals with device makers could apply to smartphones worldwide if the tech giant finds that it is too cumbersome to have different policies for different markets. In a similar way, Silicon Valley companies including Google and Facebook implemented sweeping new privacy rules in May for users globally after strict new European protections came into effect.

On a small scale, the ruling could change what apps are installed when Europeans pick up a new Android phone from the store. When faced with antitrust charges before, Google has given people the option to choose between services while setting up their phones. An antitrust dispute in Russia, for example, prompted Google to change its design to offer people a choice of search engines on the Chrome browser when they set up their phones.

"Part of what you're trying to do with a remedy like this is to create opportunity for new technologies and new innovations to emerge," said Jonathan Kanter, a former federal antitrust regulator who now is partner at Paul Weiss. He previously worked with Microsoft in earlier battles against Google.

In one extreme, Google could become more like Apple, which exerts full control over its operating system and devices - iPhones and iPads - said Larry Downes, project director at the Georgetown Center for Business and Public Policy and a columnist for The Washington Post. If Google adopted that model, it could have to sell the Android operating system to smartphone makers upfront. That cost would likely be passed on to all consumers, he said.

Europe last demanded major changes to Google’s business practices a year ago, after Vestager found that the company had given prime real estate in its search results to its own shopping-comparison tool -- while disadvantaging its rivals' offerings. The complaint, driven by local competitors like Foundem, came with a $2.7 billion fine, and Google had to change its policy to allow other shopping-comparison sites to bid for slots atop search results. Google’s foes have said the change is insufficient, however, and the EU has not yet ruled on the matter.

While Vestager has wielded Europe’s expansive competition and consumer protection laws aggressively against Google, regulators in the U.S. have been more wary to challenge the company. The EU and the U.S. examine competition differently: The U.S. focuses on harm to consumers, while Europe is more receptive to harm to competitors.

Antitrust enforcers at the Federal Trade Commission previously have studied Google’s business practices, but they concluded their investigation in 2013 without bringing major penalties -- a fact that's riled some in Congress who increasingly see Google as too big and powerful.

"The FTC should end its decade of inaction and deference, and confront the mounting evidence that Google’s business practices have stifled robust competition in a market that is critical to our economy and society," said Democratic Sen. Richard Blumenthal. "Europe should not be alone setting the agenda.”

The European ruling could serve as a fresh "forcing mechanism" prompting regulators around the world to scrutinize the tech giant, said Luther Lowe, the senior vice president for public policy and government affairs at Yelp, a constant adversary of Google. The online reviews site has filed multiple antitrust complaints challenging Google's business practices.

More than a decade ago, Google found itself in a similar position to Yelp, balking at the way the dominant player at the time, Microsoft, restricted and bundled its own software, including Internet Explorer, with Windows. “We believe users should choose,” Marissa Mayer, then a top Google executive, said in 2006.

Google may have to make major changes to Android in response to a forthcoming fine in Europe

Microsoft had to contend with U.S. regulators who sought to break apart the company, and a slew of fines in Europe after it failed to comply with the region’s demands. A legacy of Microsoft's antitrust fight was that it distracted the Redmond, Washington-based software giant while allowing newer competitors, including Google, to thrive.

“Microsoft was knocked down enough times that it woke up and smelled the coffee. Google is not yet smelling the coffee,” said Alec Burnside, an antitrust lawyer in Europe at Dechert who has represented some of Google’s critics. “The parallels are easy enough to find.”

Google’s allies insist a similar fate won’t befall the tech giant now because the company is aware of the risk of losing focus. “There are so many areas of active innovation in the company that I believe they have tried hard to insulate themselves from that," said Ed Black, the president of the Computers & Communications Industry Association, a trade group that includes Google.

Hayley Tsukayama in San Francisco and Quentin Ariès in Brussels contributed to this report.