Google just proved its $5 billion fine was too small

Last week, the European Union slapped Google and its corporate parent, Alphabet, with the biggest single fine ever levied on a company — a cool $5.1 billion. Then on Monday, Alphabet announced it was raking in second quarter profits of $3.2 billion despite the fine. The company's stock leapt on the news.

Regulatory fines are all about incentives. Sure they can theoretically be too large. But if they're too small, the company won't feel any actual need to change its behavior. One research analyst compared Google's EU fine to "a delivery company having to pay for a parking ticket."

If that's true about the biggest fine ever recorded, think about what that means for the rest of regulatory enforcement.

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Back in 2012, for example, major firms in America and Britain got hit with more than $10 billion in fines in the course of just three months. HSBC ran afoul of laws against money laundering, Barclays was mixed up in a price fixing scandal, and the pharmaceutical companies GlaxoSmithKline and Abbott Laboratories were fined for breaking marketing rules. The Economist noted at the time that these were record-smashing penalties.

More to the point, penalties had been increasing in size at a rapid clip: Fines for anti-competitive shenanigans, for instance, had increased by a factor of 1,000 from the 1990s to the 2000s. Yet The Economist gloomily noted that — despite the huge upswing in cost — these penalties would probably be much too low to actually affect the firms' behavior.

Then in 2015, an investigation of the major banks revealed they'd paid $130 billion in fines and other penalties from 2009 to 2014 for wrongdoing related to the financial crisis. But those penalties amounted to just 26 percent of their profits — and much, much less of their overall revenue and assets. It was enough to make "occasional dents in some quarterly earnings" as HuffPost noted at the time, but that was about it. After JPMorgan got hit with a major penalty for manipulating foreign exchange markets, it literally sent a letter to clients the next day that basically said it had no intention of reforming its behavior.

In fact, the EU's previous record-breaking fine was also levied against Google: A $2.7 billion hit last year for boosting its own comparison-shopping service in its search engine results. That brings us back to the latest $5 billion penalty, which Google was hit with thanks to behavior reminiscent of Microsoft's antitrust behavior in the 1990s: Google was effectively forcing European smartphone manufacturers to bundle its search engine and internet browser on the devices if they also wanted to use Google's Android software. That, in turn, basically squeezed competing app providers out of the market.

Just to pound home the absurdity of it all, there's yet another case against Google making its way through the EU's bureaucracy. And at the rate things are going, that next fine could hit the upper limit — 10 percent of a company's global revenue — that the EU allows.

Astonishingly, even that may not be enough to really slow down Google.

It's too coldly rational to assume that corporate executives simply weigh the potential profits of breaking rules against the expected costs if they get caught. But it's still a useful tradeoff to think through. A study cited by The Economist found that fines would need to be as much as 60 percent of revenue to really be effective. That was what would offset both the expected gains of wrongdoing, as well as transgressors' bets that they won't be found out.

Needless to say, none of the fines we've seen so far even come close to reaching that mark. The $5 billion fine against Google will eat up a mere two weeks of its revenue.

To the EU's credit, though, this latest case against Google should have some effect. The company has been ordered to layoff its requirements for smartphone makers — but the EU also left it up to Google itself to figure out whatever the new arrangement will be. In that sense it's a weaker remedy than Microsoft faced for similar behavior a few decades ago — the latter company was actually forced by regulators to pro-actively provide a ballot for rival software providers.

The decision also didn't arrive in time to prevent Google from squeezing most actual competitors out of the market, and it will likely take alternative app and service providers to reassert themselves. “The EU stance is arguably six to eight years too late,” Ben Wood, the research head at CCS Insight, told The Verge. “Android has already helped establish Google apps and services as essentials for consumers in the Western world. While the separation of apps from the operating system may help foster competition over the longer term, manufacturers will continue to need to offer Google services to be competitive and address consumer demand." Similarly, the EU's previous comparison-shopping case against Google took seven years to finally reach a conclusion.

What really pours salt in the wound here is that most regulators — at least here in America — are actually much better about levying fines than they are prosecuting individuals. From the financial collapse of 2008 to various industry deaths, major business executives are almost never prosecuted on an individual basis for negligence or malfeasance.

Yet the fines themselves remain big enough to draw headlines, but not so big as to actually pose an existential threat to businesses. "Depressingly, this outcome may suit everyone," The Economist concludes.

Everyone, that is, except for consumers.