This article originally appeared on Real Money on Oct. 3, 2016.
If the EU succeeds in fully unbundling Google Search from Android, that could do real damage to the profitability of the European mobile search ad business, whose annual sales now likely run into the billions. However, a lot depends on the details.
According to documents picked up by Reuters and The Wall Street Journal, EU regulators are demanding that Google no longer incentivize smartphone makers to exclusively pre-install Google Search on their Android phones. These incentives normally consist of a cut of the search ad revenue produced by Google queries on a device (i.e. traffic acquisition payments).
The EU also wants Google to stop denying access to the Play Store to smartphone makers who don't meet its requirements. These requirements are said to include making Google the default search engine on Android phones and not allowing licensees to offer phones featuring alternate versions of Android -- for example, Amazon's (AMZN - Get Report) Fire OS.
Both Reuters and the WSJ note Google, which is also facing an EU probe related the favorable treatment given to Google Shopping results within its search engine, could be hit with a large fine to compel the company to change its ways. Reuters states the fine could be based on revenue produced by search ad clicks, Play Store purchases and mobile display ad sales.
Search ads are believed to account for the lion's share of Google's ad business, with YouTube and display ads playing supporting roles. Thanks to mobile search and YouTube growth, global ad revenue from Google sites rose 24% annually in the second quarter to $15.4 billion. And the EU is believed to easily be Google's second most lucrative ad market, after the U.S.
The EU's demands could give the likes of Samsung (SSNLF) , Huawei and Lenovo more freedom to pre-install other search engines, such as Yahoo! (YHOO) and Microsoft (MSFT - Get Report) , and even set them as a phone's default search engine. That, in turn, could force Google to make substantial traffic acquisition payments to guarantee it remains the default engine. The company is believed to make large payments to Apple (AAPL - Get Report) to remain the default search engine for the Mobile Safari browser on iOS.
At the same time, Google's tremendous popularity in Europe would give it some negotiating leverage. As the EU itself admits, Google has a 90%-plus mobile search share in the European Economic Area. StatCounter puts Google's total European search share at 93.1% in September. Any smartphone maker that designates Yahoo! or Bing its default search engine risks upsetting customers.
Also: Giving Google's Android licensees the right to sell phones running third-party versions of Android might not amount to much in practice, in that the overwhelming popularity of Google Android and the fact that third-party offerings lack Google's core apps and services. Does anyone remember Amazon's Fire Phone debacle?
It's not entirely clear if the EU will insist Google stop requiring the bundling of Google Search -- whether it's the default engine or not -- with Android to get Play Store access. The bundling of Search and Chrome were among the complaints levied in the EU's April Statement of Objections to Google, but Reuters didn't list it among the EU's current demands. Google has defended such policies by pointing out it gives Android away for free, and relies on bundled apps and services to monetize the OS.
A lot is still up in the air. And there's always the chance Google could get a harsh EU ruling overturned or watered down through an appeal to the European Court of Justice, or that a reasonable settlement could be struck. But even more than the shopping probe, the EU's Android probe should be watched closely, since it strikes at the heart of Google's Android monetization strategy.