Google Starts the Year With a Big Win

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

On Jan. 3, the Federal Trade Commission put their investigation into Google (NASDAQ: GOOG) to rest, reaching a settlement with the search giant. The FTC had been pursuing the search giant based on claims of unfairly manipulating search results to favor its own products. While the FTC does highlight some changes to be made in its release (found here), the commission also reports no evidence that Google’s changes to its search engine were specifically designed to inhibit competition. It does note that the changes were likely detrimental to individual competitors, but did not call for action on their part. Much to the chagrin of competitors Microsoft (NASDAQ: MSFT) and Yelp (NYSE: YELP)this does little to change the status quo of search, when both could gain tremendously from a weakening of the search giant.

Google did not remain entirely unscathed, agreeing to several changes and what could turn out to be a major concession. Google will allow greater flexibility with its advertising, even allowing companies to completely transfer their campaigns out of Google’s AdWords. Websites will also have the option of opting out of specialized search results without being excluded from the traditional search results. This change may help Yelp, protecting its reviews and ratings from being displayed directly on Google’s search page, allowing them to receive traffic that otherwise would have stayed with Google.

For its part Microsoft has been very vocal about its displeasure with Google’s business practices, complaining loudly and frequently to any regulatory body that will listen. The company even offered its own commentary on the FTC agreement (found here) and clearly feels as though the FTC missed the mark. It did applaud the changes to advertising, though they do point out it falls short of the kind of flexibility they believe should be allowed. As a competitor, Microsoft obviously has motive to be angry about any outcome that doesn’t significantly improve its own position, but it does highlight some important points, particularly concerning what seems to be the biggest concession made by Google.

The aforementioned concession revolves around Google’s use of patents in legal battles. The FTC has stepped in primarily due to the type of patents held and used by Google in its legal maneuvers. Rivals Apple (NASDAQ: AAPL) and Microsoft tend to use design-based patents to seek legal injunctions where Google tends to use patents which are considered standard-essential. Standard-essential patents are essential to the core functions of a device, in this case driving communication and Internet access in cellular devices. Control of such significant elements of mobile devices gives Google significant leverage over competitors.

The FTC fears that if left unchecked, these types of patents can be used to extract higher royalties that ultimately would result in higher prices, harming consumers. To assuage the FTC’s fears, Google agreed not to seek an injunction against a willing licensee, which may significantly weaken the company’s legal position in several ongoing legal battles. Google’s description of the concession is a bit different, stating they agreed to attempt to resolve standard-essential patent disputes through a neutral third-party before seeking an injunction, which seems substantially weaker than the language used by the FTC.

Either way it seems as though Google’s hands are tied, but is that the case? Microsoft seems to think the FTC should have done more, pointing to the loopholes in the language surrounding patent use. They also highlight the fact both Apple and Microsoft were urged by the Justice Department to make stronger commitments regarding their use of standard-essential patents. As I pointed out earlier, both the FTC and Google use differing language when describing the concession and both seem fairly vague. Time will tell how this changes Google’s approach to patent litigation, but even if it has a major effect, the company has still dodged a major hazard.  

Unfortunately for Google, they aren’t out of the woods yet. Following the FTC’s announcement the European Commission announced it has not finished its antitrust investigation. In a release on Jan. 4, the EC noted the results of the FTC investigation and dismissed the notion that the FTC decision would have any direct impact on its own decision. Google has been under investigation by the EC for the past two years and last month was offered an opportunity to resolve the investigation by coming up with its own proposal to address complaints. Without a resolution Google stands to be fined up to 10% of its revenue, a major hit to any company, even one as successful as Google.

Google has already leapt one major hurdle this year, but with up to 10 percent of its revenue at risk, the year could take a turn for the worse.

TigerAnalyst has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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