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Antitrust allegations strike at heart of Google's strategy

SILICON VALLEY -- The European Commission's allegations that Google has breached antitrust rules have thrown a wrench into the company's strategy for the Android operating system, the linchpin of its growth plans.

     The U.S. company, which had focused on Internet search services on personal computers, broke into the smartphone OS business in 2007 with the release of Android. Its strategy of offering the software to manufacturers for free helped Android's global market share skyrocket from less than 4% in 2009 to more than 50% in 2012.

     More than 1 billion people now use Android worldwide. Its share reached 82% last year, according to U.S. research firm Gartner.

     Smartphone users typically obtain the information that they need with apps rather than through browser-based search engines. Google has gotten makers of Android phones to favor its own applications and distribution services, expanding its user base and boosting advertising revenue.

     American research firm eMarketer estimates that Google's net mobile ad revenue will grow 40% to $34.1 billion this year, accounting for more than half of the company's total advertising revenue for the first time.

     But this sharp growth could suffer if the commission's preliminary judgment holds and Google cannot continue its current strategy. The consequences could be far more severe than the blow dealt by a similar case a year ago involving Google's comparison shopping service.

     "We take [the commission's] concerns seriously, but we also believe that our business model keeps manufacturers' costs low and their flexibility high, while giving consumers unprecedented control of their mobile devices," Senior Vice President Kent Walker wrote Wednesday.

     Google parent Alphabet's share price has soared nearly 50% over the past year. Although Google's fundamentals are perfect for strong growth, regulatory risk in Europe is underestimated, said Jake Fuller, an analyst at Guggenheim Securities.

     European antitrust authorities have clashed with Microsoft and Intel in the past, slapping both with heavy fines and forcing them to rework their strategies. While Google has indicated that it will stand firm, a protracted battle could sap employee morale, hindering innovation. The company faces the tough decision of whether to butt heads with the commission again or seek a compromise.

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