Google’s EU Fine: Analysts Weigh In On How It Could Comply With The Order

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Google’s EU fine has attracted a lot of attention because it marks a new record for fines of that nature. Alphabet, Google’s parent company, may appeal the $2.7 billion (€2.4 billion) fine, which the European Commission handed out for what it said were anticompetitive practices. The commission has now ordered Google to come up with a plan to give equal treatment to other price comparison websites in its Shopping search results, so what might the company do to comply with the EU’s order?

Google’s EU fine related to Shopping search results

The European Commission ruled after a multi-year probe that the company “abused its market dominance as a search engine by promoting its own comparison shopping service in its search results and demoting those of competitors.” Google’s general counsel said they disagree with antitrust regulators’ conclusions and may appeal the fine, although at least seven other U.S.-based tech firms applauded the EU’s decision.

The amount of Google’s EU fine was based on the amount of revenue the company generated from its Shopping search results and the length of time regulators believe the company took advantage of its dominance as a search engine. In addition to the fine, regulators gave Google 60 days to submit its plan to give competitors’ shopping services a billing that’s equal to its own and 90 days to stop the anticompetitive practices.

Analysts are now weighing in on the possible steps the company could take to comply with the antitrust regulator’s order.

Quantifying the impact of Google’s EU fine

Although Google’s EU fine is a record $2.7 billion, it’s still pocket change for a company with billions of dollars in cash sitting around. Goldman Sachs analyst Heather Bellini said in a note to investors dated June 27 that Alphabet had $92.4 billion in cash and equivalents at the end of March, with $55.7 billion of that being held outside the U.S.

Se expects Alphabet to generate almost $40 billion in operating cash flow this year and more than $27 billion in free cash flow, so this certainly isn’t a company that will be hurt if it has to hand over $2.7 billion. She noted that any changes the company will make could have a much greater impact, but that impact can’t be quantified without knowing if the company will appeal the fine or how it will change its practices.

She also pointed out that the EU still has two other open investigations on Alphabet. One of the probes is on Android, while the other is on AdSense, and decisions on both of them are still pending.

Possible ways for Google to handle the EU’s order

If the company ends up paying the fine, the impact will be much broader than the fine itself. In a note to investors dated June 27, Credit Suisse analyst Stephen Ju also noted that at this stage, the full impact of Google’s EU fine is impossible to quantify. The company will have to make changes to its search and Product Listing Ads. He’s particularly interested in the impact Google’s EU fine will have on its PLA revenue.

Ju noted that after the initial changes Google will make to its search engine results pages to comply with the commission’s order, it may take additional steps later to mitigate the negative revenue impact caused by those changes. He also offered some potential steps Alphabet might take to comply with the order accompanying Google’s EU fine.

One potential outcome

One such scenario is that Google might forgo monetization on one of the sponsored ad slots in the Shopping search results in the European Union. He noted that Alphabet has reported that about 33% of its total revenue comes from the region. Although the company doesn’t disclose how much of that revenue is from search or Product Listing Ads, he estimates that 73% of the approximately $30 billion in EMEA revenue is from search and about 30% is from PLAs.

Ju also pointed out that Google usually displays five sponsored listings in Shopping results. If valuing all five of the ad slots equally, he calculates a negative impact of up to 1.5% of consolidated gross revenue and up to 2.6% of operating income.

He added that there are many other ways the company could comply with the order, like by adding an extra link to the right of the PLAs that already exist or putting the links at the top of the organic results. He sees both of these scenarios as having a smaller impact on the company’s revenue.

Shares of Alphabet seem to have hit bottom on Wednesday after two days of declines following the announcement regarding Google’s EU fine. The stock closed up 1.36% at $961.01 on Wednesday.

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