European Competition Law Is Hurting Consumers

By Tom Struble

Thursday, September 06, 2018

Antitrust law — or, as the rest of the world calls it, competition law — is designed to police unfair business practices that stifle competition and harm consumers. However, if done incorrectly, antitrust law can itself stifle competition and harm consumers by punishing conduct that looks unfair — especially through the eyes of a competitor — but actually produces benefits that far outweigh any associated harms.

Unfortunately, the Europeans seem to be getting it dreadfully wrong these days. Eager to protect small businesses (usually domestic) from their stronger competitors (usually foreign), the European Commission repeatedly intervenes in the market in ways that stifle competition, reduce innovation, and hurt consumers. Consider, for example, its recent case against Google.

In July, the European Commission fined Google over $5 billion for the way it licenses the Android mobile operating system to device manufacturers. The full text of the decision still hasn’t been released, but the press release identifies three allegedly harmful practices: Tying Google’s Search and Chrome apps to the Play Store in a software bundle; sharing Google’s Search-app revenues with manufacturers who exclusively pre-install the app; and preventing manufacturers from offering both Android devices and devices that run on variations, or “forks,” of the open-source Android operating system (such as Amazon’s Fire OS, for example).

It’s easy to see how these restrictions harm certain competitors in the mobile ecosystem, but it’s also easy to see how they all benefit consumers. First, consider Google’s tying practices.

Google ties the Play Store to its Search and Chrome apps in a bundle, so manufacturers who want the Play Store pre-installed on their Android devices must also pre-install the Chrome and Search apps. Manufacturers can also pre-install competing apps (such as Bing and Firefox), but Google’s bundle ensures that any Android device with the Play Store also has at least one browser app and one search app pre-installed, allowing consumers to start using their new devices right out of the box without having to search for and download new apps. That’s a clear benefit to consumers, but the European Commission has nonetheless sought to outlaw this type of bundling, in a clear break from how American officials handled the similar antitrust case against Microsoft in the late 1990s.

When Microsoft was convicted of tying Internet Explorer to the Windows operating system in ways that stifled competition from alternative browser apps (such as Netscape Navigator), the remedy wasn’t to prohibit the tying — Windows still comes bundled with Internet Explorer — but simply to prohibit Microsoft from using licensing or software restrictions that make it difficult or even impossible for users to switch to alternatives.

Google was one of the primary beneficiaries of that case — Chrome has now displaced Internet Explorer as the most popular web browser — and it intentionally designed Android to avoid antitrust liability by making it the most open, flexible, and differentiated platform in the world. That’s why it’s triflingly easy for Android users to uninstall or disable existing apps and switch to alternatives. Breaking apart Google’s software bundle won’t give consumers any added choices or make switching between competing apps any easier, but it could make Android devices more expensive (if a drop in ad revenues from its Chrome and Search apps forced Google to start charging licensing fees for Android in order to cover its software-development costs) and more difficult to set up and use (if manufacturers either pre-installed no browser or search apps or pre-installed apps that were inferior to Google’s). That seems like a net loss for consumers.

The commission’s complaint over exclusive pre-installation and revenue sharing is similarly misguided. Manufacturers are already allowed to pre-install applications that compete with Google’s apps and to pursue revenue-sharing deals with those competing application providers in exchange for pre-installation. However, Google offered manufacturers a share of the revenue generated via the Google apps on their devices if they agreed not to pre-install competing apps alongside Google’s. The commission found that practice illegal because it harms competition among application developers, but consider the effects this will have on the rest of the market. Prohibiting revenue-sharing deals between Google and Android manufacturers may benefit competing application developers, but at the expense of both manufacturers (as access to that source of revenue is cut off) and, more important, consumers (as manufacturers raise device prices to make up for that lost revenue). That also seems like a net harm to consumer welfare, but this is what passes for competition law in the EU.

And finally, consider the commission’s complaint over forking. Giving manufacturers complete freedom to both use and fork Android as they wish may help them differentiate their products and services, which could boost competition among device manufacturers. However, such fragmentation would come at an immense cost to consumers (who may be confused about subtle differences between devices running Android and Android forks) and to app developers (who would have to do extra work in order to ensure compatibility of their apps across additional operating systems). Historical evidence with Unix, Symbian, and Linux clearly shows how fragmentation can harm open-source software, but the commission rejected this argument by merely asserting that Google could prevent harmful fragmentation in other ways. There is no mention, however, of just how effective these alternative anti-fragmentation strategies may be, or of how costly they would be to implement.

In failing to account for these costs, the commission has lost the plot and elevated competitors’ welfare over that of consumers. Unsurprisingly, many are now questioning Europeans’ motives — and not for the first time either. Claims that European competition law is just thinly veiled protectionism stretch back at least to the early 2000s, when the commission unilaterally blocked General Electric’s acquisition of Honeywell — a combination that would have threatened domestic firms such as Airbus and Siemens. However, these claims have grown louder in recent years as the number of enforcements and severity of penalties brought against foreign firms have both increased. Even President Trump has taken notice.

Whether European competition law and the recently implemented General Data Protection Regulation (GDPR) truly are mercantilist policies designed to fleece foreign businesses and protect domestic firms is up for debate, but they do fit the pattern of an undeclared trade war. The commission’s recent move to block Apple’s takeover of Shazam does, too, since the primary beneficiary seems to be Stockholm-based Spotify. And this could all be just the beginning. Whatever their intentions, it will ultimately be consumers who wind up paying the price.

A recent study from Thibault Schrepel explained this point, showing how European competition law dramatically slows the pace of innovation by curtailing sanctioned firms’ investments in research and development. Again, hobbling bigger and stronger rivals will benefit firms that are less efficient and less profitable, but it hurts consumers by discouraging fair competition, raising prices, and slowing the pace of innovation. And that, ultimately, is what’s wrong with European competition policy. As Senator Mike Lee observed, “appropriate competition policy should serve the interests of consumers and not be used as a vehicle by competitors to punish their successful rivals.” Hopefully someday soon our European friends will realize that fundamental truth, because their current version of competition policy is hurting consumers.