Google, Alphabet and Article 102 TFEU

Ever since Larry Page’s blog post announcing the creation of Alphabet as the new holding company for Google, there has been a great deal of speculation over what Google/Alphabet stands to gain from a corporate restructure.

Google itself has stated in the blog post that the restructure was to ensure that the business would continue to operate well, and to offer investors greater reassurances over Google’s financials. And despite the current investigation from the European Commission, the blog post does not explicitly list legal concerns as a reason, beyond a somewhat vague statement to improve transparency and oversight, which may refer to regulator oversight or refer to oversight from the senior management. Yet there are plenty of articles regarding possible legal reasons for the restructure, such as from The Verge, The Guardian and The Register. Additionally, when I first saw the news pop up on Twitter, my first thought was to consider legal pressures, even before I had seen the post.

Beyond restructuring for tax purposes, the most known legal issues facing the company are the current European Commission investigations. The two open investigations into Android and the comparison shopping service, where the EC alleges Google is favouring its own shopping service in its general search results, appear to be dangerous enough to Google to warrant a major response. After all, the EC has opened investigations into Google’s main revenue stream, Search, and into Google’s prominent mobile platform, Android, which has been used to ensure that Search is dominant in mobile. And back in November 2014, the European Parliament voted to break up Google over the search investigation. While the European Parliament cannot enforce a break-up as it is a different body within the European Union apparatus, the message to Google seems to be clear. Therefore, it was noteworthy to see that the blog post did not contain a reference to the investigations and, in particular, that the new, slimmed-down Google still contains Search and Android, rather than either being spun-off into a new Alphabet company. So, what would Google or Alphabet stand to gain from the restructure, purely in terms of the EC investigations, if Search and Android are still to be in the same business?

Article 102 of the Treaty of the Functioning of the European Union (TFEU) prohibits the abuse of a dominant position that may affect trade between member states. Broken down, there are three key elements to note; the undertaking (Google) must have a dominant position in the market, there must have been an abuse of this dominant position, and might this abuse affect trade between the member states of the EU (note that Google must have a dominant position and must abuse this position, but it does not actually have to affect trade, it merely has to potentially affect trade). Whether the Commission can show that Google has infringed Article 102 TFEU will likely take years to determine, but the potential penalties are already known to Google. The European Commission April 2013 memo states that if Google makes commitments towards ensuring that there is no abuse, following the investigation and market test, then the Commission may ensure such commitments become legally binding, under Article 9 of Antitrust Regulation 1/2003. If Google broke such commitments, the company would be liable to face a fine of up to 10% of worldwide turnover, which was reported to be just over $66 billion for 2014, a potential fine of over $6.6 billion.

Following the restructure, it would then be the case that Alphabet would have a turnover of $66 billion, rather than the new, slimmed-down Google. However, the new Google is expected to keep Ads, Search, YouTube, Apps, Android and Maps, which are reported in the Guardian to cover 90% of the old Google turnover. Therefore, the new Google would still have reported roughly $59.4 billion in revenue for 2014, and a potential fine for the new Google at 10% would be $5.94 billion. At this point, it is unclear whether the European Commission will shift the investigation from old Google to Alphabet, or to new Google. Either way though, it is unlikely to make a drastic difference in financial terms.

So where does this leave the European Commission investigations as a reason for restructuring? There is an argument to be made that by restructuring the company now, Google are attempting to ensure that the company is not broken up later on by regulators. If Google was forced to break off Search, in particular, then it would lose a crucial revenue stream, which would then mean that the company could not fund offshoot projects or acquisitions such as Life Sciences, Calico, Venture, Fiber, Nest or Google X. By restructuring now, Google may have taken steps to not only improve how the separate businesses are run, but also ensure that they can continue to be funded by the main revenue streams such as Search and Ads. But purely from a financial standpoint, there does not seem to be a significant advantage.