Google and Facebook's EU Problem Isn't Going Away Anytime Soon

Google grabbed headlines late last month when the European Commission handed it a record-breaking  $2.7 billion antitrust fine for abusing its dominance as a search engine. 

While the penalty was historic in its size, the decision against the Alphabet Inc. (GOOGL) unit is hardly an isolated case. Instead, it's the opposite, being one of a growing number of cases where the European Union has cracked down on a Silicon Valley giant over matters concerning competition, taxes and privacy. Google, Facebook Inc. (FB) , Apple Inc. (AAPL) , Amazon.com Inc. (AMZN) and Microsoft Inc. (MSFT) have all found themselves in the sights of the European Union's foremost antitrust regulator on various occasions.

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On Wednesday, Google was handed a rare reprieve, however, when a French court threw out a roughly $1.3 billion tax judgment against the company. The French tax administration argued that the search giant owed taxes for the years 2005 to 2010. French officials have said they will appeal the decision.  
  
Despite Google's win on Wednesday, the EU doesn't pose any less of a threat to Silicon Valley.

Google still faces several ongoing antitrust battles with the EU surrounding its Android and AdSense businesses. Facebook could also become a target of the EU if Germany's Federal Cartel Office can establish a link between Facebook's data collection practices and its market power. The antitrust watchdog is currently investigating whether Facebook's dominance has given consumers no choice but to agree to its terms and conditions -- a practice the Cartel Office describes as "extorting" information from users.

Analysts say tax disputes like those faced by Google and Apple (the Cupertino, Calif.-based company owes $14.5 billion in back taxes, according to the EU) are small potatoes compared to the wider implications of EU investigations into competition and privacy concerns. 

"Those are sideshows to the big event," said Jonathan Taplin, a professor at the USC Annenberg Innovation Lab and author of Move Fast and Break Things: How Facebook, Google and Amazon Cornered Culture and Undermined Democracy. "[Competition and privacy issues] change the nature of the business for Facebook or Google." 

As part of the EU's decision, Google has 90 days to stop breaking EU rules, or it will face more fines that could cost it billions. It may also hurt Google's business depending on how it decides to resolve the issues with its Google Shopping platform. Until now, Google has displayed paid product listings at the top of its search results, with unpaid search results appearing below them. Changes like these to the company's practices may hurt its revenue growth, according to Pivotal Research analyst Brian Wieser, who lowered Google's stock price target to $980 from $990 because of the risks.

"Other investigations could lead to more fines and changes to business practices which could further reduce growth," Wieser explained in a note to clients on Tuesday. "We don't see the European Commission letting up any time soon." 

.@Google gave illegal advantage to own comparison shopping service by abusing its search dominance: It must stop & pay fine of €2,4 bn.

— Margrethe Vestager (@vestager) June 27, 2017
Google and Facebook could come under further pressure once the EU's set of new, stricter privacy rules go into effect in May 2018. The General Data Protection Regulation will allow the EU to fine tech companies up to 4% of their annual revenue for privacy violations. Under the new laws, users can opt out of giving personal data, which could represent a gigantic shift in Facebook and Google's typical data collection practices because for most users, agreeing to terms and conditions is a pretty mindless thing, Taplin noted.

"Significant fines may cause industry participants including marketers (who could be liable for fines themselves) to become hyper-cautious in use of media owners' data, and invest more heavily in first-party data," Wieser noted. "This could limit the advantages that Google and Facebook possess."

In time, America's stance on the tech giants may inch closer toward being similar to the EU, said Keith Hylton, an antitrust professor at Boston University. President Donald Trump has said he'd bring renewed antitrust scrutiny to tech giants like Amazon and Google. The search giant had close ties to the White House under President Barack Obama, but now that's no longer the case. 

"There's a general perception that the Obama administration was hands off on Google," Taplin said. "But Trump seems to have indicated that that's not the operative anymore."

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