MACQUARIE: Google’s ability to make search better for everyone has been choked by the EC fine (GOOGL)

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Google was served the biggest antitrust fine in history by the European Commission Tuesday.

The $2.7 billion fine was aimed at Google’s shopping practices, which the EC deemed unfair to Google’s competition. Macquarie Research thinks that while the practice probably is unfair, the fine severely limits Google’s ability to refine and improve its core product, which could mean big headwinds for Google in Europe.

The recent fine dealt directly with how Google shows shopping results at the top of the search, but the company is also facing antitrust investigations into its Android operating system and AdSense advertising platform. Macquarie argues in a recent note to clients that the recent decision to fine Google is a basic assault on its ability to do business in the EU.

Here is the firm’s argument in a nutshell.

“In our view, the key issue here is that the EC is first making the (likely correct) determination that Google is dominant in general internet search markets throughout the European Economic Area. It is then, in effect, stating that if Google improves its services within is general offering (e.g., adding shopping services, or potentially a host of other features), then these improvements are harming competitors unfairly. We see this as misguided given that, in our view, Google should (and must) continually improve its offerings if it is to provide consumers and advertisers more useful features. We think improving its product is a good thing even if it means others do not rank as highly as they otherwise might have in the search engine results page,” Macquarie wrote.

This argument makes sense. Every company is working to make its products and services more popular. Google put its shopping results at the top of its search page because it had seemingly put a lot of work into the shopping results algorithm and believed it would provide the best results for its users. Thinking in this way is what got Google to its dominant position.

What the EC is arguing then, is that because Google favors itself in its own products, it is anticompetitive simply because of its search engine dominance. This isn’t necessarily wrong, but it shows that the EC values a fair market more than good products. A valid choice in a hard decision.

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For Google, Macquarie argues the shopping decision will ripple across the company’s entire ecosystem. “Our biggest concern is once the EC takes this stance that by including more functionality in its core offering that Google is acting illegally, it opens the door to potentially even more far-reaching remedies and challenges to Google,” Macquarie wrote.

Google has to place something in its search results. When Google chooses its own shopping service to place at the top of results, it is denying other search comparison companies access to that top spot.

This is really powerful. Citing the EC, Macquarie said that the top result in Google’s search results receives 35% of the traffic, and moving that search result to the third position means the result received 50% less traffic. The EC claims that that means it’s not the relevance of information that drives traffic, but the position in search. Google agrees with this logic, but not with its conclusion.

“GOOG claims that the EU’s decision underestimates the value that GOOG’s features provides users, and that customers usually prefer links that take them directly to the products themselves, not to other websites where they have to repeat their search,” Macquarie wrote.

“Google’s response also points to other online retail platforms like Amazon and eBay, who have their own comparison tools, and particularly cites AMZN as being a “first port of call ” for product searches. Essentially, Google’s response is that large online retailers like Amazon and eBay are its real competition in this space, not legacy comparison sites (where GOOG believes its functionality is superior for both third-party retailers and customers), and in that broader e-commerce landscape, we think GOOG clearly does not have a dominant position.”

Google may still appeal the decision, according to Macquarie. If it does, it would be arguing that a better product which serves users is more important than allowing fair competition on the platform. More broadly, it would be arguing its right to develop its product however the company sees fit, even as its dominant position means these developments can have an outsized impact on competitors.

Even if Google doesn’t appeal, it is still fighting two other antitrust cases in the EU, regarding Android and AdSense. Both of these other cases come down to the same basic principle. Given the recent outcome, Macquarie still rates Alphabet, Google’s parent company, a buy with a price target of $995 that is 2.4% higher than Alphabet’s current price.

Google’s stock slipped after the decision Tuesday, along with general FAANG stocks. Google is trading flat on Wednesday.

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