EU Crackdown Threatens to Return Google to ‘Ten Blue Link’ Era

Google has a few months to produce a solution that appeases the region's antitrust regulator
Google's Next Move After $2.7B Fine

Google's search results page has evolved a lot in the almost two decades since its debut. A crackdown by European regulators threatens to force Google to backtrack on upgrades to that real estate, some of the most lucrative on the web.

European Union competition chief Margrethe Vestager fined Alphabet Inc.'s Google a record $2.7 billion on Tuesday for favoring its own shopping service in search results. Google in-house lawyer Kent Walker denied wrongdoing in a blog post and said the company was considering an appeal.

Google has little choice but to accede to her demands. That would mean tweaking the lucrative box of paid posts that appear atop searches for products in the region -- or removing it altogether, giving Europeans the retro look from the 1990's when search results prominently featured ten blue links to outside websites. It's a major blow to the company's strategy, hatched about a decade ago, of keeping searchers on Google services, rather than sending them elsewhere on the internet. 

Vestager gave the search giant a 90-day ultimatum to find ways to give "equal treatment" to smaller price-comparison services that compete with Google Shopping. She did not give a specific prescription, but said the EU will levy a further fine of up to five percent of Alphabet's total daily revenue should Google not comply. That's about $10 million a day, according to Needham & Co. analyst Kerry Rice. 

"More important than the fine, we believe the changes Google may need to make to its Search algorithms and Google Shopping placement to comply with the EU ruling could potentially impact its financials greater," he wrote in a note to investors. "Google has a range of options from doing nothing to modifying its Search and Shopping algorithm, to removing its Google Shopping service from European countries."

Google has 60 days to show a fix is in the works. It will try to do so without sacrificing one of its best performing types of ad in one of its largest markets. Google's Shopping ads, much more prominent than its older text ads, have exploded in the past two years as a key revenue source. Looming over this effort is another potentially more damaging European antitrust case against the company's Android mobile operating system. The company declined to comment beyond Walker's post.

During negotiations with the EU in 2014, Google proposed putting results from as many as three competitors in its Shopping results. That was shot down when rivals complained that the plan would have required them to pay Google for placement. An extreme option would be to ditch the Shopping format in Europe entirely. Such a move is not without precedent: It shut down Google News in Spain in 2014 after regulators imposed new limits on that service. 

Analysts generally waved off the EU fine as a concern. However, they struggled to imagine how Google could refashion shopping search to satisfy Vestager without a measurable impact on sales and profit.

Credit Suisse analysts suggested a solution where Google drop one of the five ad units that appear in a panel for shopping searches in Europe. That would shave 1.5 percent off Google's total revenue and 2.6 percent off profit, they estimated. Or it could add an additional link for competitors to the right of current Shopping results, or place those rival links at the top of organic search results. That would be an unusual step because the search giant rarely mixes paid and unpaid results in the same service, they noted.

Morgan Stanley analysts suggested in a research note that Google simply "innovate its way through" the EU demands, creating new shopping ad formats that somehow feature competitors and keep revenue flowing. The analysts didn't say what this would look like, but they estimated Google Shopping in Europe accounts for less than five percent of overall revenue, which crossed $90 billion last year.

"Clicking off Google to another comparison shopping search page is just adding one more step to the process. That's not as good as getting the result you want the first time," said Steve Weinstein, head of technology, media and telecom research at M Science LLC. "I'm not sure how they will bridge that gap. That will be a delicate balance between maintaining the user experience and placating regulators by including more participants in the results."

Weinstein, like many other analysts, did not change his forecast on Google ad revenue. Morgan Stanley also kept with its price target of $1,050, above Alphabet's stock which was trading around $955 on Tuesday after falling more than two percent.

A deeper concern for analysts is that Vestager will continue bringing charges on other slices of Google search that have evolved dramatically, like maps and travel. 

``It is imperative that the Commission now maintains the momentum by requiring Google to cease leveraging its dominant position in general search services into other verticals beyond comparison shopping,”' said Christoph Klenner, who represents online travel companies like Expedia Inc. and TripAdvisor Inc. as head of the European Technology & Travel Services Association.

No matter what decision Google comes to, it still faces the thornier Android case. Complying to the Shopping search demands may help with future negotiations, or embolden EU regulators. The Android probe questions how the company bundles Search and its other services on mobile devices, a crucial pillar for its ad business, media sales and huge future bets on voice-based computing.

Having to bow to the EU order on Shopping would pale next to pulling its apps from Android phones, said James Cakmak, an analyst at Monness Crespi Hardt & Co. "If there is any forced unbundling, you're in a situation where it could have much more of an impact that's materially felt,'' he added.

— With assistance by Gerrit De Vynck

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