Will the European Union Break Up Google and Should They Include YouTube?

When Kim Dot Com was arrested, a reporter asked me if I was surprised.  This reaction completely went against the mood of the moment about the fellow.  You’re not? (Incredulous)  Why not? (Scandalized).

Because if you get down on your knees and beg to be punished, don’t be surprised if you are.

I have the same reaction to news that the European Parliament is considering a resolution that Google should be treated as a monopoly in Europe and be “broken up” or required to divest itself of its search business.  According to Reuters:

The European Parliament is preparing a non-binding resolution that proposes splitting Google Inc’s search engine operations in Europe from the rest of its business as one possible option to rein in the Internet company’s dominance in the search market.

European politicians have grown increasingly concerned about Google’s and other American companies’ command of the Internet industry, and have sought ways to curb their power. A public call for a break-up would be the most far-reaching action proposed and a significant threat to Google’s business.

The draft motion does not mention Google or any specific search engine, though Google is by far the dominant provider of such services in Europe with an estimated 90 percent market share.

So how did this come to pass?  It’s simple:  Once again, Google overplayed their hand.  Supposedly the master of public relations and behind the scenes play, Google–and in particular Eric Schmidt (call sign “Uncle Sugar”)–dragged out the European Commission’s antitrust investigation for four years.  But oopsie–that also coincided with the term of the antitrust official of the EC with whom Schmidt had become BFFs.  Uncle Sugar left out the closing part.  When you spend four years working on a deal with a guy, you want to be thinking in terms of that closing bit.  Especially when you know going in that the guy you’re schmoozing is LEAVING ON A DATE CERTAIN.

What Google was truing to avoid was/is something called a “Statement of Objections” that is an administrative proceeding in EC law that allows the imposition of a fine for violating the EC competition law.  That should be a huge amount of money–in Google’s case some estimates are $10 Billion–and it comes with service after the sale, meaning regulatory oversight.

What has become apparent in the not one, not two, not three but an unprecedented four settlement negotiations with the OUTGOING competition commissioner, is that Google has in fact violated the laws that they are avoiding prosecution under.  And even if Google is prosecuted now, they’ve still had an extra four years of operating profits, an extra four years of expanding their control over European governments and an extra four years of extending what Public Citizen called Google’s “soft power”.

However, what has also happened in the intervening four years is hockey stick increase in the public distrust of Google and extreme dissatisfaction with the way the EC was handling the Google investigation.  All the supposed “settlement” proposals that Google made were that special kind of “we think you’re an idiot” approach that anyone who has dealt with Google will immediately recognize.  A fish rots from Uncle Sugar down, don’t you know.

What has happened instead is that there is a full throated movement now among Members of the European Parliament to do what’s worse for Google than paying almost any fine:  Divestiture.

It is possible for governments to require extremely large (check), arrogant (check) and unrepentant (check) violators of antitrust law to divest themselves of certain assets.  This is a relatively normal process with mergers (we’ve even seen record companies required to do this as a condition of approving the merger), and that’s a different breed of cat altogether as it’s part of an overall negotiation.

But to cause divestiture with a company that has violated the antitrust laws is far less common.  We saw this with the break up of the Bell system in the US (United States v. AT&T, 552 F.Supp. 131 (D.D.C. 1982) for those reading along).  The reason for the AT&T case was that the FCC accused the company of using monopoly profits from its Western Electric subsidiary to subsidize the costs of its network.  Sound familiar? I’ll come back to this.

It’s important to note that the way that this break up would be accomplished is not through the European Parliament as Deutche Welle reports:

While the European Parliament lacks the authority to break up corporations and has no power to initiate legislation, such a resolution would increase the pressure on the European Commission to take action against Google.

“It’s a strong expression of the fact that things are going to change,” Gary Reback, a United States attorney who has filed complaints against Google on behalf of companies said, adding “The parliament doesn’t bind the commission for sure, but they have to listen.”

According to Reuters, the resolution was co-sponsored by German center-right Christian Democrat lawmaker Andreas Schwab and Spanish centrist Ramon Tremosa earlier this week. Schwab told Reuters it was “very likely” to be adopted by his own parliamentary group and it was also supported by the main center-left group.

The new anti-trust chief for Europe, European Competition Commissioner Margrethe Vestager, said she would take some time to decide on the next step in a long-running investigation into Google, after her predecessor, Joaquin Almunia, had rejected a proposed settlement with Google which would have ended the matter.

Regardless of whether the European Parliament has the authority to break up Google, it is not a good thing on many levels for even a nonbinding resolution to be adopted in favor of that result.  It’s like the Parliament is telling the public we don’t like Google, we’re keeping an eye on Google and we really don’t trust Google.  And the signal it sends to the new European Competition Commissioner is–go for it.

But that’s not really the end of it.  What about YouTube?  Extremely large (check), arrogant (check) and unrepentant (check) violators of antitrust law.

If Google dominates search in Europe, YouTube is just another search vertical–video search.  And we know that Google used its monopoly profits from search advertising to subsidize YouTube for years.  We’ve seen in the indie label case filed against YouTube with the same European Competition Commission that YouTube certainly behaves like a monopolist–because YouTube is a monopoly.  So Google used its monopoly profits to create a new search monopoly with YouTube and then used its monopoly control to try to bully independent labels.

It also appears that YouTube was unable to use the brass knuckle negotiation tactics it’s so famous for to bully the indie labels into dropping their complaint in Brussels as a condition of closing the Music Key license.  But the case stands out as a prime example of what should be done if the divestment train gets rolling.  Google search and YouTube are just two sides of the same coin.

And of course what it all comes down to is that Google uses its monopoly position to dominate smaller players, all the while harvesting data to profile Google’s search users and music fans on YouTube.  And we all are contributing to Google’s ultimate monopoly–data.

Google shares data across all its platforms which itself a kind of monopoly subsidy across all it’s platforms.  So you can’t really accomplish the goal if all you do is divest the search platform.  YouTube itself must also be spun off with separate management and transparency in data sharing.

As Garth Brooks said, “I’m telling you, [YouTube is] the devil.”  Who never would have survived without subsidies from Google’s monopoly profits.