Article from HBR:
What's Google's Best Strategy for Fighting Microsoft in the EU?
9:45 AM Tuesday April 5, 2011
by David Bach
Rather than delving into many ironies of Microsoft accusing Google of similar anti-competitive practices to the ones that resulted in billions of dollars in fines against the Redmond company over the past decade, let's consider what Microsoft's move means and how Google might respond.
By filing a complaint with the European Commission last Thursday, Microsoft has taken its battle with Google into the 'nonmarket' domain — the social, political, and regulatory space where the rules governing market competition are set and enforced. Better than any other technology company, Microsoft knows — painfully well — that the nonmarket domain forms part of the competitive playing field. It also knows that firms can shape this part of the business environment through deliberate strategies.
Microsoft's complaint is additional fuel for an investigation launched by the European Commission several months ago that was triggered by a prior complaint, which alleged that Google gives preferential treatment to its own services when displaying search results. The new complaint focuses on YouTube, embedded search boxes, and (lack of) portability of advertiser data. It accuses Google of "walling off access to content and data that competitors need to provide search results to consumers and to attract advertisers," according to Microsoft General Counsel Brad Smith.
If the European Commission concludes Google has broken EU competition law, it could impose fines of up to 10 percent of the company's global revenue, or almost $3 billion. As with Microsoft, however, the real threat isn't money — Google sits on more than $25 billion in cash. The real threat is twofold. First, drawn-out litigation could divert top management attention and cause serious reputation damage. Should the European Commission conclude that Google indeed deliberately manipulates search results in its favor, "don't be evil" could go the way of "beyond petroleum" as far as corporate mottos are concerned. Second, there is a high probability Google will be more constrained moving forward. How much more depends on how skillfully the company manages the challenge.
Broadly speaking, Google has two possible lines of defense. The first is to claim that it simply does not have a dominant position in the markets for Internet search and search-related advertising. That's a tough sell in light of their more than 90 percent market share in Europe. Microsoft tried the same tactic when defending their dominance of the desktop operating system market, pointing — not unlike Google today — to the fact that intense competition and the need for constant innovation meant that even 90 percent did not constitute a monopoly. The second line of defense is to demonstrate that the company does not abuse its dominant position, i.e., that it does not privilege its own services in search results. To do this, the company would have to be a lot more transparent than it has been to date, particularly when it comes to the secret algorithms underpinning its core products. From a pure market perspective, such transparency seems foolish. Google's algorithms are right up there with the recipe for Coke as the most closely guarded trade secrets. But from a nonmarket perspective, a transparency offensive may be the way to go. Indeed, what is happening to Google now was probably inevitable — it's the scrutiny that comes from being No. 1. Just ask Walmart, Goldman Sachs, or McDonald's about the perils of market leadership. All of them began to face tremendous nonmarket pressure precisely because they were the leaders of their respective industries.
Perhaps the best advice for Google is not to repeat Microsoft's strategy. Accused of using its dominant position in operating systems to beat out competitors in other markets, Microsoft built much of its defense on legal technicalities and technological minutiae. The strategy brought Microsoft to the brink of a government-ordered break-up in the US and earned it a decade of costly litigation in Europe. In the end, it lost both in the court of law and in the court of public opinion.
The nonmarket environment has its own rules. Technical or legal hair-splitting often doesn't work. This is the realm of politics and the media, and in this domain perceptions are everything. Microsoft's move reinforces the perception that Google has become a bully that needs to be controlled. Only a charm offensive and a lot more transparency can put such perceptions to rest.
David Bach is Professor of Strategic Management at IE Business School and directs the school's Center for Nonmarket Strategy
