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A brief background: the European Union vs. Google
In 2017, after a lengthy procedure, the European Commission has ruled that Google has breached EU antitrust rules. Google has abused its market dominance as a search engine by giving an illegal advantage to Google Shopping, its comparison shopping engine.
What Is Antitrust?
Antitrust are all efforts, mostly laws and regulations, that encourage competition by limiting the market power of any particular firm. This often involves ensuring that mergers and acquisitions don’t overly concentrate market power or form monopolies, as well as breaking up firms that have become monopolies.
Google’s flagship product is the Google search engine and almost 90% of Google’s revenues stem from advertisements. In 2004 Google entered the separate market of comparison shopping in Europe, with a product that was initially called “Froogle”, re-named “Google Product Search” in 2008 and since 2013 has been called “Google Shopping”. It was not a new service: there were already a number of established players. Comparison shopping services rely to a large extent on traffic to be competitive. To make its CSS work in Europe, Google relied on its dominance in general internet search, instead of competition on the merits in comparison shopping markets.
This is where the European Commission has determined that:
- Google has systematically given prominent placement to its own comparison shopping service: placements of their CSS are displayed at or near the top of the search results.
- Google has demoted rival comparison shopping services in its search results. Google has included a number of criteria in their algorithms which cause rival CSS placements to be less visible.
- A fine of €2.4 billion (€2.424.495.000 to be precise)
- Google has to stop its illegal conduct within 90 days
- Google has to treat rival CSSs equally to its own service
Why did the Google CSS program come into existence?
Google Shopping is a subsidiary of Google. The full EU Commission report (read) states that in order to comply with EU antitrust regulations, the subsidiary has to act independently on the market. In recent years, Google has therefore separated its European shopping unit from the company and they have made the Product Listing Ads shopping section open to competitors. Approved comparison shopping engines can participate in this auction to obtain a prime spot in Google’s search engine: the Google CSS program was born. This creates a fair ground for equal competition and thus Google complies with the necessity to treat rival CSSs equally to its own service. The current structure means that in countries where the CSS Program is available, a merchant can only place Shopping ads by using one or several Comparison Shopping Services. Google Shopping is the default CSS, but you can contact other CSSs who can switch you to their CSS. Google still determines who can participate in the auction and they have set up a procedure to become a CSS. Google provides a list of requirements here. In short: Comparison Shopping Service websites can become accredited when they allow shoppers to search, filter and compare products from at least 50 merchants in a particular country.
In which countries is the Google CSS program active?
Comparison Shopping Services can participate in the Google CSS program in the following countries: Austria, Belgium, Czechia, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, the Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Spain, Sweden, Switzerland and the United Kingdom.
Not all of these countries are part the EU, but most are a member of the European Economic Area (EEA). In addition, the program is also active in Switzerland.
The alleged 20% margin deduction
The costs for shopping ads remain unchanged: you or your CSS still manage campaigns in Google Ads and pay Google per click on each ad. However, as an independent comparison shopping service, Google Shopping has to be able to be independently profitable. Just like with any other Comparison Shopping Service, you have to pay for Google Shopping’s services. That is why Google Shopping deducts a margin from each bid before in enters the auction. In Google’s own words:Google Shopping is required by the European Commission to be independently profitable in EEA countries where Shopping ads are available. Google Shopping currently ensures profitability by deducting a fixed percentage margin from each merchant bid before entering it into the auction. The margin is included in the CPC paid by the merchant and is charged only when a user clicks on one of the merchant’s ads. Source: Google.comGoogle does not specify nor communicate anywhere the specific percentage that they deduct from each bid. However, the CSS industry claims that daily practice has demonstrated that this must be 20%. Other Comparison Shopping Services than Google Shopping cannot deduct a fixed percentage, but they are free to choose another model of their liking. Most of the times this will be a flat fee, a cost per click on their website or cost per sale using an affiliate network. So Google deducts a margin from every CPC bid, what does this imply? Let’s assume that the margin is 20% and imagine that you work with CSS A and your competitor works with Google Shopping CSS. Both of you enter a bid of €1:
In this situation you win the auction because of your higher bid. Due to the nature of the Google Ads auction, the winner only pays the next highest bid, which is €0.80 in this case. This is why every CSS offers you to “save up to 20% on Google Shopping ads!”. You can watch Google’s own explanatory video (the margin deduction is not discussed however):
https://www.youtube.com/watch?v=4QnIQy3ly9I