The case followed complaints by Microsoft and others over Google’s treatment of rivals’ web services in its search results. These companies argue that Google favors its own services, which are not clearly marked as such, and also that it unfairly locks advertisers onto its platform and scrapes content from third-party search and comparison sites without consent.

A recent leak outlined the terms of the proposed settlement deal, but here’s the official version:

To address these concerns, Google offers for a period of 5 years to:

(i) – label promoted links to its own specialised search services so that users can distinguish them from natural web search results,
- clearly separate these promoted links from other web search results by clear graphical features (such as a frame), and
- display links to three rival specialised search services close to its own services, in a place that is clearly visible to users,

(ii) – offer all websites the option to opt-out from the use of all their content in Google’s specialised search services, while ensuring that any opt-out does not unduly affect the ranking of those web sites in Google’s general web search results,
- offer all specialised search web sites that focus on product search or local search the option to mark certain categories of information in such a way that such information is not indexed or used by Google,
- provide newspaper publishers with a mechanism allowing them to control on a web page per web page basis the display of their content in Google News,

(iii) no longer include in its agreements with publishers any written or unwritten obligations that would require them to source online search advertisements exclusively from Google, and

(iv) no longer impose obligations that would prevent advertisers from managing search advertising campaigns across competing advertising platforms.

Authorities in the U.S. more-or-less cleared Google over similar complaints, but it’s important to note that Google’s share of the search market there is around 67 percent, whereas in the E.U, it’s around 90 percent. This gives it stronger market power in Europe, and forces the regulators’ hand somewhat (as do local laws).

A Q&A document, which outlines the Commission’s concerns in detail, points out that “it does not seem likely that another web search service will replace [Google] as European users’ web search service of choice.”

“In this context, it is important for the Commission to intervene in order to ensure that Google’s prominent market position in web search does not affect the possibility for other competitors to innovate in neighbouring markets, including in the long-term,” the document states.

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The long-awaited deal is significant because it concludes a multi-year investigation by EU competition authorities, and because it is the first time that Google has bent to government demands over how it presents its search results. The details of the five-year deal, which has yet to be formally announced, were reported on Saturday by the Financial Times.

The terms of the deal

According to the FT, Google’s obligations vary depending on the nature of the search results. The most onerous conditions relate to listings like travel or restaurants where Google has a clear financial interest. In these cases, the company must identify any search listings that are Google-owned, and also provide at least three links to competing search engines. For other Google-related listings that do not produce direct revenue — weather or news, for instance — the company must provide a label.

The labeling will involve markers like boxes, separate page placement and “hover links.” A third party will monitor for compliance with these and other parts of the agreement.

The deal also requires Google to honor requests from news agencies and other sites not to “scrape” their content for use in its search listings, and to provide assurances that it won’t punish these sites by deleting them from the search listings altogether.

The agreement also addresses Google’s advertising practices by preventing it from imposing exclusive ad deals on its partners, and by making it easier for those partners to switch their ad campaigns to rivals like Microsoft and Yahoo.

The FT has a detailed account of the obligations here.

A victory for the EU, the public or Google?

When the deal is formally announced by EU regulators, we can expect to see considerable spin from Google and its competitors about what it really means.

At this stage, it’s clear that the deal represents the largest regulatory imposition to date over Google’s search business, which is still the core of the company and its prime money maker. This amounts to a victory for the EU and its high-profile competition commissioner, Joaquín Almunia.

While Google will hardly be celebrating the regulations, the company could have fared far worse. The five-year deal, which is legally binding, means Google avoids the sort of heavy fines and bitter regulatory battles that ensnared arch-rival Microsoft for well over a decade.

Europeans consumers, meanwhile, are likely to continue using Google as they have done so far. Despite repeated accusation by groups and companies tied to Microsoft that Google manipulates its search results, there is little actual evidence that the company blatantly puts its thumb on the scale.

The agreement may, however, serve to give Google critics some peace of mind by providing legal assurances that their worst fears won’t come true. And, as the deal is not finalized, critics and others will have time to comment on its provisions.

A different outcome from America

One of the most noticeable features of the deal is how much it differs from the outcome of a similar investigation carried out by America’s Federal Trade Commission.

In a January report, the FTC concluded a two-year antitrust inquiry by announcing that Google had done nothing wrong in the field of search. While the FTC did extract a pledge the company related to patent abuse, this was more a face-saving measure for the FTC than a burden on Google. (Here’s a plain English summary of the US investigation).

Different laws in the US and EU explain the divergent outcomes. American antitrust laws, for instance, focus on harm to consumers not competitors — a different line of inquiry to what happens in Europe. America also has more robust speech laws. Google argued strenuously that its search results are protected by the First Amendment; the FTC likely folded its cards rather than risk losing a court case over the question.

Google also controls a higher share of the search market in Europe than it does in the U.S. — more than 90 percent, compared with around 67 percent.

According to a source familiar with the investigations, Google was also more willing to settle in Europe because a legally binding EU commitment  does not expose the company to civil lawsuits.

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The Microsoft-led group, called FairSearch, was already behind a previous (and as yet unresolved) complaint to the Commission over Google’s search practices, in particular its alleged tendency to rank Google services higher than those of rivals. However, Nokia (the handset maker) and Oracle (the anti-Android litigator) joined FairSearch last September, indicating that the fight would be further extended to the mobile sphere.

That has now happened. According to a FairSearch statement on Tuesday, “Google uses deceptive conduct to lock out competition in mobile”. The main issue at play here is the way in which Google bundles its suite of services with Android: if a phone manufacturer wants to build an Android phone that includes consumer favorites such as Maps or YouTube, the manufacturer is then also obliged to “pre-load an entire suite of Google mobile services and to give them prominent default placement on the phone”, the complaint states.

The other issue is that of Google’s distribution method. FairSearch characterizes the giving-away of Android as “predatory” and “below-cost”, arguing that it “makes it difficult for other providers of operating systems to recoup investments in competing with Google’s dominant mobile platform”.

According to FairSearch counsel Thomas Vinje:

“Google is using its Android mobile operating system as a ‘Trojan Horse’ to deceive partners, monopolize the mobile marketplace, and control consumer data. We are asking the Commission to move quickly and decisively to protect competition and innovation in this critical market. Failure to act will only embolden Google to repeat its desktop abuses of dominance as consumers increasingly turn to a mobile platform dominated by Google’s Android operating system.”

So far, Google’s only response has been to say: “We continue to work cooperatively with the European Commission.” Meanwhile, a New York Times interview with EU Competition Commissioner Joaquín Almunia suggests that European antitrust officials had already been looking into Android separately from their long-running Google desktop search investigation.

Is there a case here?

The fundamental concept in antitrust regulation is that of market dominance – if the target of the regulation doesn’t dominate the market in a way that potentially lets them stunt competition, regulators can’t hold them back, as that would mean distorting the market unnecessarily. That’s why I don’t believe anything will come of complaints made over Apple’s carrier contract terms, for example – iOS devices don’t actually dominate their market.

The case for Android dominating the smartphone market, though, is much stronger. We’re not talking about the levels of dominance Google enjoys in desktop search – there, it owns just under 90 percent of the market – but, as FairSearch has noted, around 70 percent of smartphones shipped worldwide at the end of 2012 carried Android. That is a lot, but does it amount to market dominance?

There are three main problems with this theory. The first is that iOS, while not dominant, is very strong; much stronger than OS X was as a rival to Windows when Microsoft (oh, the irony) got hit with a $794 million EU antitrust fine for bundling Windows Media Player with its OS. Indeed, in the EU, iOS has a market share of around 25 percent, and Android has a market share of just over 60 percent (the 70 percent figure quoted by FairSearch is weighted somewhat by the high numbers of Android phones being shipped to developing countries).

Secondly, it is viable to fork Android and forego the standard Google suite. Amazon has done just that with its Kindle Fire range of tablets, which is doing just fine. In China, Baidu has done the same, replacing the Google suite with its own services. In Russia, Yandex is also developing its own set of rivals to Google’s services, although its strategy is more a case of piggybacking on standard Android than of rip-out-and-replace – in itself, this demonstrates that rival services can get a chance on Android, particularly if the operator rolling out the phone is keen.

Finally, this is a market in constant flux. Android’s rise has certainly been meteoric, but there is a chance that some alternative, whether it be Firefox OS or a Kindle phone or a de-Googlified Samsung OS, will stop it in its tracks. Microsoft and Nokia would certainly have something to gain from straitjacketing Google in the near future, as they want Windows Phone to succeed, but the regulators may be queasy at the thought of interfering in an already tumultuous scene.

In short, this one is complicated. Whatever happens, though, it’s a formal complaint, so the EU will be forced to acknowledge it and decide whether or not to launch a formal investigation.

Anything else?

Glad you asked! Almunia also dropped a few interesting tidbits in that NYT interview about the Google search case. He insisted that the Commission wouldn’t require Google to change its ranking algorithms, but he did say Google would need to start more clearly identifying results that link to its own services.

“Maybe we will ask Google to signal what are the relevant options, alternative options, in the way they present the results,” he suggested.

According to Almunia, Google will submit proposals this week about settling the investigation. In the U.S., the Federal Trade Commission (FTC) has already concluded a similar investigation without any major crackdown on Google, but that will not necessarily influence the Commission’s thinking, particularly as Google has a greater share of the European search market than it does in the U.S.

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“Amazon’s acquisition of Goodreads is a textbook example of how modern Internet monopolies can be built,” said Guild president Scott Turow in a statement issued on Friday. Turow claims that Amazon sought to eliminate Goodreads as a future competitor and that it has “squelched” an important source of independent discussion and reviews.

It’s unlikely anything so dramatic will occur in the short term. As executives from Goodreads and Amazon told my colleague Laura Owen, the book network will remain for now a standalone site and the first goal of the merger is to “do no harm.”

The data and marketing insight Amazon receives from Goodreads is likely to strengthen the retailer’s already powerful position in book selling. The question of whether this will lead to an Amazon “monopoly” is another matter altogether. Under American rules on vertical integration, a company breaks antitrust laws only it obtains a dominant positions and abuses that position to harm consumers.

Turow and the Authors Guild have already been vociferous critics of Amazon. Last year, Turow accused the company of using discounting to “destroy bookselling.” More recently, the Guild joined with the Association of American Publishers to demand that Amazon be denied control over new internet suffixes “.book” and “.author.”

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The details of this information remain sketchy, although the report suggests that French carriers are concerned that Apple’s contracts hold back competition by setting excessively high quotas for iPhone sales, thereby making it difficult to assign marketing resources to rival smartphones. While no one is forcing the operators to sell the iPhone, they really want to do so because customers want it, and that means agreeing to Apple’s demands. The terms of such contracts are always secret.

Here’s a statement sent out on Friday by Antoine Colombani, spokesman for Competition Commissioner Joaquín Almunia:

“The markets for smartphones and tablets are very dynamic, innovative and fast-growing. Samsung’s growing market position and the success of Google’s Android platform are good reasons to believe that competition is strong in the markets for smartphones and tablets.

“The Commission has been made aware of Apple’s distribution practices for iPhones and iPads. There have been no formal complaints, though. The Commission is currently looking at the situation and, more generally, is actively monitoring market developments. We will intervene if there are indications of anticompetitive behaviour to the detriment of consumers.”

I find it hard to believe this will come to anything. As the statement suggests, iOS devices are not the only game in town — in fact, the iPhone only has around 25 percent share of the smartphone market across the five biggest European economies. Apple certainly has a lot of weight to throw around in the mobile market, but nowhere near enough as to constitute a monopoly.

A good (though not perfect) point of comparison here would be Intel, which found itself the subject of a $1.45 billion EU fine back in 2009 for abuse of its dominant position. Intel, which utterly dominated the x86 processor market as it does now, gave secret kickbacks to computer manufacturers and retailers for not stocking AMD-based products. It even paid manufacturers to delay or cancel the launch of non-Intel products.

That was a clear-cut case of illegal practices, hurting consumers by limiting their choices. It’s hard, if not impossible, to argue that consumers in the EU do not have easy access to non-Apple mobile devices. In the Intel case, those manufacturers and retailers did not seriously have the option of telling the chipmaker to show itself the door. In this Apple business, the anonymous carriers in question could likely have done what U.S. Cellular did, and just not stock the iPhone. There are plenty of alternatives.

I suspect that the carriers in this situation are simply trying to weaken Apple’s hand in contract negotiations, and that the Commission is highly unlikely to step in and help.

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That’s one major hurdle overcome to closing the deal, which would make T-Metro a publically traded company majority owned by DT, though it still faces regulatory scrutiny from the Federal Communications Commission as well as vote from Metro stockholders.

The DOJ’s tacit blessing, however, isn’t a trivial matter. The Justice Department has become much more actively involved in U.S. telecom deals ever since it joined forces with the FCC to kill AT&T-Mo in 2011. Since then it has thrown up a roadblock to Sprint’s mammoth deal with Softbank, citing national security issues. It also played a big role is shaping Verizon’s spectrum acquisition and partnership with the cable providers, though it eventually let that deal slide through despite its potential impact on broadband competition.

The fact that T-Metro’s paperwork passed through the DOJ’s offices without a word is a good sign that the deal will surmount its remaining regulatory hurdles without a hitch. While the DOJ has frowned on consolidation among the Big 4 U.S. operators, this deal would combine the smallest nationwide operator with the biggest regional operator and put T-Mobile in a much stronger spectrum position. Since AT&T-Mo, regulators have been, first and foremost, concerned with maintaining the four-operator equilibrium at the top of the mobile market.

The combined spectrum of T-Mobile USA and MetroPCS as compiled by Mosaik

MetroPCS has set a vote for on the deal on April 12. The hedge funds opposing the deals want MetroPCS to negotiate better terms with DT – creating either a less debt-laden final company or giving Metro shareholders a better payout – but so far they only represent a little more than 10 percent of the voting shares of the company. But DT seemed worried enough about their influence to issue a warning Wednesday to those stockholders.

“The MetroPCS board unanimously recommends that stockholders vote their shares FOR all of the proposals relating to the proposed combination with T-Mobile,” DT said in a statement. “The failure to vote or an abstention has the same effect as a vote against the proposed combination.  If stockholders vote against the proposed combination, there is no assurance that MetroPCS will be able to deliver the same or better stockholder value.”

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Well whaddya know. When you’ve been the subject of a lengthy antitrust investigation and you settle with the authorities by promising to clean up your act, then “accidentally” go back to doing what you were doing in the first place and you get caught, you might find yourself in expensive trouble.

That’s what happened with Microsoft and its bundling of Internet Explorer (IE) with Windows in Europe, and now we see the result: a €561 million ($732 million) fine, handed down on Wednesday by Competition Commissioner Joaquin Almunia.

That’s a lot of money. What happened?

Last decade, Opera complained to the European Commission about the fact that Microsoft bundled IE with Windows, to the detriment of third-party rivals such as Opera, Mozilla Firefox, Apple Safari and Google Chrome. The resulting antitrust case was dropped in 2009 when Microsoft promised to introduce a browser choice or “browser ballot” screen, so when users fire up a copy of Windows for the first time and open IE, it will ask them which of the various browsers on the market they’d like to go with.

As part of the deal, Microsoft agreed to submit an annual compliance report to the European Commission. For a couple years, everything went according to plan, right up until Microsoft’s December 2011 compliance report, which assured Almunia’s office that everything was hunky-dory. Only it wasn’t: the browser choice screen (BCS) had somehow been left out of Windows 7 Service Pack 1, which came out in February 2011, and Microsoft’s report was false.

When the Commission found out in mid-2012 and opened a fresh investigation into Microsoft and its bundled browser, the company immediately confessed, blaming the BCS’s omission on a “technical error” that somehow went unnoticed for more than a year. Microsoft said it had pushed out the BCS software to the 15 million affected users as soon as it realized its error, but Almunia nonetheless put the company on notice that it could face a fine of up to 10 percent of its global annual turnover: around $7 billion.

So it could have been much worse. Why not the full amount?

According to Almunia, “such a breach is of course very serious, irrespective of when it was intentional or not, and it calls for sanctions”.

However, he said on Wednesday that he set the figure at the level he did — around one percent of turnover — because “once the breach was discovered Microsoft cooperated with us and provided information which helped the investigation”.

And that’s why this isn’t even a record for Microsoft in terms of EU antitrust fines.

Incidentally, Microsoft says it won’t appeal this time round:

“We take full responsibility for the technical error that caused this problem and have apologized for it. We provided the Commission with a complete and candid assessment of the situation, and we have taken steps to strengthen our software development and other processes to help avoid this mistake — or anything similar — in the future.”

Could Microsoft be in a similar situation again?

Tough question. The reason the European Commission came down so hard on Microsoft in the first place was that Windows was so utterly dominant in personal computing -– it really mattered if IE was bundled and the ordinary user may have been left unaware than rivals existed.

We can see the results for ourselves. Chrome is now the world’s leading web browser, ahead of IE and Firefox (which also benefited greatly from the decision). And if you play around with IE10, the most recent version, you will see an iteration of the browser that reflects Microsoft’s need to keep up with those rivals: the company was forced to be competitive, which is surely one of the key points of antitrust law.

However, times change. While Windows still dominates the personal computing market by installed base, the PC sector – by which I mean the hardware, distinct from the concept of personal computing – is unarguably in decline as the world shifts to mobile. So, while in the 2000s Microsoft was the titan stomping all over OS X and Linux (by market share), today we find Windows 8 battling it out against iOS and Android across several hardware form factors.

This matters because the core concept of competition law is what is known as “significant market power” – the European Commission felt it had to crack down on Microsoft because it had such power in the established personal computing market. Now it’s losing its grip on that power, and quickly.

We are unlikely to see antitrust regulators crack down on Microsoft, or indeed Apple or Google, in the same way again – at least the way the market is shaping up now.

Windows 8 is still an unknown quantity. Someone out there may want to complain that the iPad comes with Safari preinstalled and doesn’t prompt the user to install Chrome or Opera, but, while the iPad is the dominant tablet, it isn’t so dominant that it requires that kind of regulatory intervention. Also, the tablet market is in itself immature, so early regulation could be seen as distorting the market rather than protecting the consumer.

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Class action lawyers had earlier demanded that Isaacson provide evidence, based on his interviews with Steve Jobs, about why Jobs asked publishers to sell books on Apple’s iPad device. Isaacson refused to hand over his notes and invoked a New York law that allows journalists to shield their sources in many situations.

The lawyers, who want Apple to pay for allegedly fixing book prices, had subpoenaed Isaacson and said the reporters’ shield did not apply. Last week, however, court documents show the parties agreed to drop Isaacson from the case.

The Isaacson dispute comes at a time when Apple’s antitrust showdown with the Department of Justice and class action lawyers is coming to a head. While the five publishers who were also named as defendants decided to settle, Apple is rejecting the accusations that it acted as the hub for an illegal conspiracy to raise book prices and thwart Amazon. Meanwhile, Amazon executives are poised to testify against Apple.

Even though the Isaacson biography is no longer part of the case, a court transcript shows Steve Jobs will remain a central figure. In response to a question about who decided to sign contracts with book publishers, Apple executive Keith Moerer said, “Ultimately, I would say it was — Steve. But working closely with — with Eddy, Mr. Cue.”

Meanwhile, other recently filed court documents identify one recipient of a highly publicized Jobs email about Amazon and pricing — the recipient was James Murdoch, a senior executive at News Corp, parent company of HarperCollins. The other recipient(s) are still redacted. You can see the email below:

Steve Jobs Emails by

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How this settlement is different

According to documents filed with the court Friday (PDF, and see links below), Macmillan agreed to many of the same settlement terms that HarperCollins, Simon & Schuster, Hachette and Penguin already agreed to — but there are also significant differences. Retailers will immediately be allowed to discount Macmillan’s ebooks, in order to “provide for more prompt relief to consumers.” In the cases of the three original settling publishers (HarperCollins, Simon & Schuster and Hachette) and Penguin (which settled in December), “several months passed before consumers saw the benefits of the settlements through lower retail prices on many of the settling publishers’ ebooks.” In Macmillan’s case, however, according to the competitive impact statement:

That “two-year cooling-off period” means that, for two years, settling publishers can’t restrict retailers like Amazon from setting, changing, or lowering ebook prices. The settlement means Macmillan gets a back-dated head start on this period, so it will again be able to restrict discounting in December 2014. Most-favored nations clauses are prohibited for five years, but Macmillan had already removed those from its contracts.

Unlike the other big-six publishers, Macmillan also publishes digital textbooks. Those are exempt from the settlement because the DOJ antitrust case focused only on trade books.

Finally, there are provisions to make it clear that Macmillan’s parent company, Holtzbrinck, would be in trouble if it “worked in concert with Macmillan to evade Macmillan’s obligations under the settlement.”

“Our company is not large enough to risk a worst case judgment”

In his letter, Sargent describes massive legal bills that Macmillan — the smallest of the big-six publishers, and the only one that is entirely privately owned — would have had to pay in “a worst case judgment”:

As each publisher settled, the remaining defendants became responsible not only for their own treble damages, but also possibly for the treble damages of the settling publishers (minus what they settled for).  A few weeks ago I got an estimate of the maximum possible damage figure. I cannot share the breathtaking amount with you, but it was much more than the entire equity of our company.

Court docs

Macmillan’s proposed final judgment (PDF)

Competitive impact statement (PDF)

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So why were the feds investigating Google in the first place?

A group of Google competitors, many of them tied to Microsoft, claimed the company was breaking antitrust laws by kicking competitors down its search rankings. Sites like Yelp and Kayak complained that Google favored its own search and travel businesses ahead of theirs in the search listings.

The Federal Trade Commission responded by “exhaustively” investigating a wide range of Google’s business practices, including its ad business and use of patents.

So what did the FTC find?

Today, the FTC concluded that Google didn’t break any laws in the way it displayed its search results. The agency said that Google did change the way its search algorithm sorted results but that those changes were “plausibly connected” to efforts to improve its user experience — not simply to crush competitors.

The FTC did say that Google misbehaved by using standards-essential patents (ones it is supposed to share at reasonable royalty rates) as a weapon. Google responded by saying it won’t do that anymore.

So why is this a big win for Google?

It’s a win for Google because the government won’t get all up in its search results. Microsoft and others had hoped the government would impose some sort of “search neutrality” requirement on Google but that won’t happen now. The end of the investigation also means that Google won’t have to reveal any of the “secret sauce” that it uses to order the search results.

The company also avoided a so-called “consent decree” about its search practices; these decrees set out what the agency thinks a company has done wrong and how it must behave in the future. Consent decrees also act as a magnet for private lawsuits.

As for the patent issue, it was just a sideshow that has little effect on Google’s core business or strategy.

So Google can do what it likes with its search results?

Pretty much. In the past, the company claimed its results were strictly objective but more recently it has argued that search listings are simply a matter of opinion protected by the First Amendment.

The company did, however, make a voluntary pledge today to remove snippets from Yelp reviews and other such sites if the company in question asks them to; Google also said it won’t punish those who opt out.

Is this bad news for consumers?

Not necessarily. So far, Google has stayed more or less true to its stated mission of helping people find any type of information (search “Google sucks” for instance). It’s only in so-called “search verticals” like shopping that Google, like rival Bing, has really been putting its thumb on the scale and favoring certain partners. But in the future who knows what Google will do.

So who loses?

The biggest loser is Microsoft, which funded a long-running cloak-and-dagger lobbying campaign to convince the public and government that its arch-enemy had to be regulated. Sites like Yelp, Kayak and Expedia also lose in the sense that Google can now push them down its search listing with impunity (though there is no sign for now that Google is actually doing this).

The FTC is also a loser because it ran a high profile two-year investigation but came up dry. In this context, the patent ruling is just a minor victory that lets the agency save face.

Did the FTC simply cave in to Google?

Not really. The FTC was in an awkward spot because it didn’t have a slam-dunk case. The agency would have had to prove the existence of a Google monopoly and that Google abused that monopoly; it would also have to clear the First Amendment issue. Rather than risk the embarrassment of losing a lawsuit, the FTC decided to fold its cards instead.

But aren’t European regulators going to force Google to bend on search rules?

The European Commission suggested in December it will come down harder on Google. According to a source familiar with the matter, the outcome is likely to be a “commitment decision” in which Google promises to behave a certain way or else be fined. The source added, however that the rules of a European “commitment” do not expose companies to private lawsuits so, unlike in the U.S., Google will be willing to enter a binding agreement.

It’s too soon to know what that outcome will be but we’re likely to find out in the next month.

(Image by Kzenon via Shutterstock)

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