Google Might Split Off Shopping Unit to Satisfy EU, But Move Won't Be Disastrous

The company's reported move to satisfy EU complaints about its shopping search engine will cause some operational headaches, but shouldn't badly damage its search cash cow.

By Eric Jhonsa , Sep 27, 2017 10:44 AM EDT

Relative to how Alphabet Inc./Google (GOOGL) - Get Report may have hoped the EU's probe into its shopping search results would resolve itself when the EU began probing the matter, the company could see the compromise it just reportedly agreed to as disappointing and messy. But compared with what Google quite possibly feared after being hit with a $2.8 billion fine over the matter in June, things don't look too bad.

Just ask rival shopping search platforms, which are less than thrilled with the reported settlement.

On Sept. 26, Bloomberg reported that Google will deal with charges that it's unfairly prioritizing shopping search results provided via its very lucrative Google Shopping ad platform by "[creating] a standalone unit for its shopping service and [requiring] it to bid against rivals for ads." Google Shopping would have to pay for any bids it makes with its own revenue.

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Naturally, any changes would only affect Google's EU-region sites. The reported compromise comes just ahead of a Sept. 28 deadline for Google to stop prioritizing Google Shopping listings or face a daily fine equal to up to 5% of its daily revenue.

Worth noting: Google appealed the EU's June fine earlier in September, and it's likely that it will continue pursuing that appeal. The fact that the EU's highest court recently backed Intel Corp.'s (INTC) - Get Report appeal of $1.3 billion 2009 fine related to CPU rebates provided to customers is arguably an encouraging sign for Google's appeal.

Either way, Google's compromise stands to cause some near-term disruption for a search ad business that from all appearances is due to account for a solid majority of the $108 billion in gross revenue analysts on average expect Google to produce this year. Shopping ads -- they appear at the top of relevant search pages and on a standalone Google Shopping site, and feature an image, a price and a link to a retailer's site -- have been widely embraced by online merchants battling Amazon.com Inc. (AMZN) - Get Report , and to some degree, by Amazon as well.

The popularity of mobile Shopping ads, together with YouTube's ad growth, is a big reason why Google's paid ad clicks and impressions rose 52% annually in Q2, and 61% on Google's sites and apps. Meanwhile, Google's gross EMEA revenue, much of which comes from the EU, equaled 33% of its total gross Q2 revenue.

Requiring a separate Google Shopping unit to place bids for search ad inventory on behalf of retail clients, and preventing it from using any revenue besides what it gets from clients to run the ads, runs some risk of disrupting a well-oiled machine in the short-term. Some clients could pare back their ad buys as they adjust to a system in which they're not directly bidding for Shopping ad inventory on search pages, and lower demand would bring with it lower ad prices.

But the situation should resolve itself in time. Based on what's been reported, Google Shopping should be able to implement a system in which it places bids for Google Search ads based on ad-buying deals it has worked out with retailers, and then charge the retailers whatever the ad costs plus a small markup (to cover its operating costs) whenever a user clicks on it. It's a more complicated arrangement than what Google has in place today, but the end result is pretty similar.

Also: If retailers want to keep things simple and buy e-commerce ads with images directly from Google Search, it looks as if the reported settlement allows Google to set up such arrangements. If rival shopping engines can bid for the ad inventory, why can't major Google Shopping ad-buyers such as Walmart Stores Inc. (WMT) - Get Report , Target Corp. (TGT) - Get Report and eBay Inc. (EBAY) - Get Report ?

As for those shopping engines, while they in theory will be able to bid for the inventory, in practice they might find that it's not worth their while, since they'll be competing with a European Google Shopping unit that will likely run at breakeven and possibly also with retailers looking to cut out the middleman. For a Walmart or eBay, there's little point in giving a shopping engine such as PriceGrabber or Shopzilla a major cut when they can buy search ads directly from Google Search or get them via Google Shopping for a small markup.

Shopping search engines Kelkoo and Foundem, each of which have criticized the reported Google settlement, seem to grasp this. In a blog post, Foundem blasted the settlement as "[creating] an additional anti-competitive barrier-one that would formalize the transformation of free, relevance-based traffic into paid, pay-for-placement traffic for all services but Google's own." However, Bloomberg reports that EU regulators have accepted that the shopping ad panels on Google's search pages are "for advertising and [that] slots cannot be given away."

This is logical enough: Google Search has long been monetized via both text and image-based ad panels, and it can't be expected to provide free space on some of those panels simply because they indirectly provide an alternative to shopping search engine listings. One might also argue, as Google has done before, that its shopping ad panels provide a useful service to people who have already been searching for items on Google and face serious competition from Amazon's product search engine, and thus shouldn't be seen as violating antitrust law.

But that's water under the bridge at this point. More important to Google is that barring any unexpected twists, the company should be able to escape this particular EU legal battle -- there are still two others -- with some minor operational headaches rather than major financial damage.

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