When fining Google fails, rewrite the rules

The EU wants new powers to curb tech companies’ dominance — including the ability to break them up. Silicon Valley should pay attention.

A decade of antitrust efforts against Google parent Alphabet Inc, including levying fines topping 8.2 billion euros ($10 billion), have done little to dissuade other tech firms from pursuing seemingly anticompetitive behavior. (AFP)

There's a good reason that breaking up tech giants is the nuclear option: It's a deterrent. If everything works as planned, you should never have to do it.

On Tuesday, European Union antitrust chief Margrethe Vestager and internal market commissioner Thierry Breton announced a range of new tools to tackle the excesses of the West Coast's finest, including the ability to dismantle them. If the legislation has the desired effect, then the more extreme measures will remain untouched.

The EU is right to be arming itself. A decade of antitrust efforts against Google parent Alphabet Inc., including levying fines topping 8.2 billion euros ($10 billion), have done little to dissuade other tech firms from pursuing seemingly anticompetitive behavior. The European Commission is now digging into Amazon.com Inc., Facebook Inc. and Apple Inc. In the U.S., the House Subcommittee on Antitrust is pulling together its own new legislative proposals for the same reason: Existing legal structures have not been an adequate deterrent. 

The regulations that the European Commission proposed on Tuesday — the Digital Markets Act and Digital Services Act — aim to fix that. The DMA will classify some online platforms — for example, those with annual European sales of more than 6.5 billion euros and more than 45 million users in the region — as “gatekeepers,” making them subject to new rules that prohibit activities that unfairly disadvantage competitors.

Offenders could be fined 10% of revenue, in line with existing antitrust laws. (Although in practice companies are often fined less, a 10% penalty would mean, say, $27 billion for Apple, based on the last fiscal year's revenue.) The DSA meanwhile aims to make those platforms crack down more proactively on illegal goods, services and content, with fines of up to 6% of sales.

Fines of the size mooted can be readily swallowed by the tech firms, given that their free cash flow will average 19% of sales this year. That's why the DMA also states that repeat violations that serve to entrench the gatekeeper firm's dominance could lead to forced divestments — the aforementioned nuclear option.

The new tools the EU wants to crack down on Big Tech

The new legislation could be on the statute book within a year, and take effect six months later. That will, of course, depend on how long it takes to get through the European Parliament and Council. But so far the proposals appear to have widespread support from member states — with Ireland being the one notable exception.

That shouldn't come as a surprise. As home to many of the West Coast behemoths' European headquarters, Ireland is responsible for ensuring they obey existing rules, such as the General Data Protection Regulation. Yet it has largely failed to do so, much to the chagrin of its EU partners.

Indeed, the DSA implicitly chided Ireland for its lackadaisical handling of those companies. While a firm's European country of domicile would still be responsible for administering the new rules, the Commission will, unlike with GDPR, retain the ability to step in and take over if the relevant member state doesn't. It was a none-too-subtle dig at Ireland's seeming indifference.

The stance further suggests that the EU is taking enforcement more seriously. But as with any nuclear option, the proposed weapons can only be deemed a success if the powers-that-be never have to deploy them. It's in the technology companies' interests not to give them the incentive.