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Why Facebook Has the Most to Gain From the EU’s Google Crackdown

Google (GOOG) stands accused in the EU of violating competition law in the way it runs the Android platform. If the European Commission gets its way and Google has to change its business practices, who stands to gain?

The most obvious answer can be found by looking at those whose businesses Google has allegedly suppressed through its contractual terms for manufacturers and mobile operators—rival search engines and browser-makers, and the developers of alternative versions of Android.

But the real winner in that scenario would probably be Facebook (FB). Here’s why.

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First, a quick reminder of the charges. According to the Commission, which has been listening to complaints for years and seriously gathering evidence over the past year, Google forces manufacturers that want to preinstall its Play Store—the big Android app store—to also preinstall Google Search and the Chrome browser as the device defaults. As Google already has over 90% of the EU search market and over 80% of the EU smartphone market, this would be seriously anti-competitive.

Yes, Android users can decide to use other search engines and browsers, but people often don’t know alternatives exist and rarely change default settings—that’s why they’re so valuable, and that’s why antitrust investigators are interested in them.

Meanwhile, any manufacturer that wants to sell Google-flavored Android phones, which are the norm, is banned by Google from selling any device that runs an alternative flavor. According to EU antitrust chief Margrethe Vestager, this condition has scared manufacturers off selling phones based on a “credible competitor”—possibly a reference to the Cyanogen version of Android that AT&T is currently looking into. (Again, Android users can often install Cyanogen on their devices themselves, but few know of the option.)

On top of all that, Vestager also thinks Google is breaking antitrust law through its revenue-sharing agreements with manufacturers and operators, in which they get a tasty cut of search revenue in exchange for making Google the default search option on their devices.

These charges are arguably more serious than those the Commission laid at Google’s door a year ago. That was about the comparison-shopping market, where Google stands accused of boosting its own services over those of rivals in its search results. From the outset, Vestager has insisted that the EU won’t force Google to change how its search algorithms work. That would be a seismic change for Google, but it’s not a threat that’s on the table.

What is now on the table is the threat of breaking Google’s stranglehold on the Android ecosystem, and that would be disastrous for the firm.

This is where Facebook comes in.

Google and Facebook are, at their core, advertising companies that are engaging in a fierce, quasi-generational war. The two companies are now taking in 85% of all online advertising revenue, according to a recent estimate by Morgan Stanley analyst Brian Nowak, and that’s what they’re fighting over.

For Google, Android has always been a funnel for pouring advertising dollars into its maw. While Apple (AAPL) largely makes its money from selling devices, and Android manufacturers such as Samsung (SSNLF) try to do the same (with less success), Google mostly makes money off the attention of smartphone users.

As long as they are using Google Search and other tied-in services such as Maps and Chrome, Android users are giving Google an opportunity to show them ads, while also feeding it the data it needs to keep its services at the top of their respective games.

However, the scene is slowly shifting. Increasingly, mobile users turn to apps rather than search when they want to discover new content. If you have a bit of time to kill, do you search for stuff on your phone or do you check out Facebook or Twitter (TWTR) to see what’s recommended by people you follow? The second option involves casual clicking, and not having to type something on a tiny screen. It’s the mobile way.

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Facebook is the big beast of social, and is best-placed to gain from this shift. Google’s search-based model may be better for the open web and online diversity, but efforts like Google+ have failed to make it a serious competitor to Facebook’s more user-friendly, albeit walled-off, take on content discovery. Over the long term, Google risks losing people’s lucrative attention.

This is where we come back to the EU’s antitrust action.

If the European Commission is correct in characterizing Google’s revenue-sharing arrangements with manufacturers and mobile operators as improper payments, given Google’s market position, then perhaps there are some parallels with the EU’s antitrust case against Intel (INTC), which saw the chip giant fined a record-breaking $1.4 billion for paying PC makers not to use AMD (AMD) chips.

However, the comparison that everyone’s talking about is that with the Commission’s big Microsoft crackdown—in particular, its investigation over Microsoft’s (MSFT) bundling of Internet Explorer with Windows. Microsoft settled in 2009 by agreeing to give EU Windows users a choice of browser when they first fired up the operating system on a new computer, rather than defaulting to Internet Explorer. (It subsequently reneged on the deal and got fined $731 million for its troubles.)

There’s some difference of opinion about the effectiveness of the “browser ballot” tool that Microsoft put into Windows to satisfy the Commission, though it’s certainly true that the period in which it was in force, from 2009 to 2014, saw Internet Explorer’s usage plummet in the EU while Google’s Chrome became the leading browser.

But by the time that five-year period was over, the market had moved on. Having browser choices is good, but web services—which run in any browser—had become the most important thing for many PC users. Just as Facebook, an app that runs on all mobile platforms and in all mobile browsers, is becoming the most important environment for many smartphone users.

There is no question that the search market is extremely important today, and it will probably remain so for a long time to come. Equally, it cannot be disputed that Google has extraordinary dominance in the EU search and smartphone markets—much more so than in the U.S., where more people use iPhones and rival search engines—and that it is therefore a legitimate target for EU regulators.

However, if social ends up slowly beating search in the battle for smartphone users’ attention, and all the ad revenue that comes with it, then the game will have changed again. Depending on how long it takes to reach the end-game of settlements or fines, the Commission’s Google crackdown could end up less timely than it is today—or perhaps even accelerate the shift from search to social.

Sure, rival search providers would benefit from having a better chance to get in front of Europeans’ eyeballs, and the likes of Cyanogen would get a big boost from being able to more easily sign up phone manufacturers and operators, develop their own app stores and strike their own search deals. They would all get more revenue than they’re currently getting.

But the real beneficiary, facing an increasingly fragmented opposition in the battle for users’ attention, and therefore providing even more of a no-brainer choice for advertisers deciding where to spend their cash, would be the leader in social networking.

If the European Commission gets its way, the future will look ever brighter for Facebook.