Today @C2
July 19, 2018


By Matthew Klein


EU fines Google $5 billion for… making perfectly reasonable business decisions

It is said that every nation gets the regulators it deserves.

If this is true, then Europeans must have done very stupid things in a previous life, because karma has brought them this: clueless regulators who are fining Google $5 billion dollars for… get ready for it… giving away Android for free to consumers.

So, okay, first things first. Let me explain how Google makes money. Google makes money selling ads on its search engine. When you search for information about “new cars” or “apartments in my area,” or whatever, Google shows you ads related to what you’re looking for. Each time you click an ad, Google makes a few dollars.

About twelve years ago, Google realized that they were in deep doo-doo, because everyone was moving away from desktop computers, where Google was dominant, and was starting to use smartphones, where Apple was dominant.

Which meant that when consumers wanted to “search” for something, they reached first for their Apple phone, not for their desktop computer.

That could potentially be bad for Google, and its ad revenue. The company that “owns the glass” (i.e. the company that controls the phone screen) controls how customers access information. If Apple “owned the glass” of every smart phone in people’s hands, Apple could strangle Google. In this worst-case scenario, users would shout at their phone, “Hey, Siri, show me apartments in my area!”

And Siri would respond, “I’m sorry, I didn’t quite get that.”

No, just kidding. In the nightmare scenario that Google dreads, Siri would actually understand what you are asking for, and would show you relevant apartment listings without involving Google in any way.

Which would be a problem for Google and its ad revenue.

The smart guys at Google saw this nightmare scenario coming, and they decided to defend themselves. If Apple or Microsoft “owned the glass” of every smart phone in the world, there would be no more search revenue for Google!

So what did Google do? They decided to compete with Apple by offering non-Apple smartphones. They would put Google-friendly “glass” in lots of consumers’ hands.

They did this in an interesting way. The hard part of building smartphones is creating the operating system — the software that runs the phone. Apple has spent hundreds of millions — maybe even billions — of dollars developing its iPhone’s operating system.

Google knew that most phone manufacturers would be unable to develop their own operating systems to compete with Apple’s. So Google bought a smartphone operating system (Android), and gave it away for free. Not to consumers, who don’t own manufacturing factories and can’t build their own smartphones. Rather, Google gave away the Android operating system to phone-manufacturing companies.

It was a win-win. Companies like Samsung and HTC could focus on building beautiful hardware, and wouldn’t have to re-invent the wheel by building half-assed operating systems for their phones. They could install a free, high-quality operating system (Android) on their phones.

Consumers benefited by getting a cheaper alternative to high-priced Apple phones.

And Google prevented Apple from “owning the glass” of all phone users everywhere. Instead, there would continue to be lots of high-quality but inexpensive Android phones in consumers hands, with access to Google search and services.

Sure, Google imposed some conditions on phone manufacturers. The conditions were exactly what you’d expect. Basically they boiled down to: “We’ll give you this amazing Android operating system for free, which will lower costs for you and your consumers, but please make sure Google still receives the search and services revenue generated by the phone.”

Which sounds like a pretty fair deal, does it not?

Consider the alternative: If Google did not give away Android for free, consumers would pay higher prices for Apple’s monopoly phones.

So it is bizarre, although not totally unexpected (given the EU’s anti-free-market reflexes), that EU regulators should decide to fine Google for, you know, defending their business. For providing free stuff to phone manufacturers. With some conditions imposed.

Google stock was basically unchanged today, despite the record EU fine.


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