Alphabet Inc. (NASDAQ:GOOGL) has spent years fighting European regulators over how Google Search treats competing services. Now the argument is moving from the courtroom and regulators’ offices directly onto the search-results page. Earlier this month, Google rolled out major changes to Search in Europe as it works to comply with the EU’s Digital Markets Act. The changes follow a €460 million fine imposed in July for favoring Google’s own services in search results covering areas including shopping, hotels, transport, and sports.
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For Alphabet investors, the interesting part is the trade-off. Compliance could help Google address one source of regulatory pressure, but the company argues that the required changes make Search less useful for European consumers and could increase costs for businesses.
Bull Case
Google is responding to the European Commission rather than allowing the dispute to remain unresolved. After the €460 million fine in July, the Commission gave Google 60 days to comply with the DMA or face periodic penalty payments of up to 5% of its total worldwide turnover. Google has now changed how certain European search results are displayed. Under the revamped format, one specialized search engine will appear prominently at the top of the page, followed by two others with less information. Listings for hotels, airlines and restaurants will appear below them, with features including real-time prices removed. Google’s algorithm will determine the rankings.
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From an investor perspective, the significance is straightforward, as Google is modifying its product in response to the Commission’s requirements rather than leaving itself exposed to the same compliance issue without taking action. The changes are also limited geographically, since Google Senior Vice President Nick Fox said users outside the European Union will not be affected. That means the changes do not represent a worldwide redesign of Google Search.
Bear Case
Compliance, however, comes with a cost according to Google. The company told Reuters that the latest changes represent the largest reduction in Search service quality in its 29-year history. That is Google’s characterization rather than an independent assessment, but it illustrates how strongly the company views the effect of the DMA requirements on its product. Google argues that the new format gives greater prominence to price-comparison and other vertical search services at the expense of hotels, airlines, restaurants, and other businesses that would otherwise appear with links to their own websites.
The company also said previous DMA-related changes resulted in a 30% decline in free, direct booking traffic to European businesses. Google expects the latest changes to affect them further. Again, those figures and expectations come from Google. Google said it tested the new format with millions of European users and found high levels of dissatisfaction, including users having to retype searches to find what they wanted.
Regulatory pressure also extends beyond Search. The EU imposed a separate €430 million fine in July over restrictions that regulators said prevented app developers from steering users free of charge toward cheaper offers outside Google Play. Google said it has updated its external offers program in response. More broadly, Reuters reported that Google’s EU antitrust penalties have reached €10.38 billion over nearly two decades.
Conclusion
For Alphabet investors, the latest Search changes illustrate why European regulation matters beyond the fines themselves. Google can pay a penalty, but changing how one of its most important products works is a different kind of consequence.
The company is now implementing the changes demanded under the DMA, but it argues that doing so produces a worse experience for European users and shifts traffic away from businesses toward intermediaries. Whether those concerns translate into a meaningful effect on Search usage or Alphabet’s (NASDAQ:GOOGL) financial performance is not established by the information available so far.
That makes the next stage worth watching. The immediate question is whether Google’s(NASDAQ:GOOGL) changes satisfy EU regulators and prevent the periodic penalties that could otherwise follow. Beyond that, investors will get a clearer picture of whether complying with the DMA materially changes how Europeans use Google Search.
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This article is originally published at Insider Monkey.
