GOOGL Alphabet Inc

By Sam Schechner 

For phone makers selling devices in Europe, Google-owned apps like Gmail, YouTube and Google Maps are about to get a new feature: a price.

Alphabet Inc.'s Google said Tuesday that it will start charging device manufacturers license fees to pre-install Google apps on devices running the company's Android operating system in Europe, a stark shift in the business model for an advertising-dominated company that has until now distributed its consumer software for free on mobile devices.

The company disclosed the shift as part of its plan to comply with the European Union's antitrust order in July that fined the search company EUR4.34 billion ($5.03 billion) for allegedly abusing Android's dominance. Google has appealed the decision, but faces an Oct. 29 deadline to implement it or face further fines.

The license fee is the first major sign that the EU's Android decision -- the bloc's second against Google in as many years -- will have an impact on Google's business model. The EU contends that Google has abused the dominance of the Android operating system, which powers more than 80% of the world's smartphones, to promote its own mobile-advertising services at the expense of rivals.

As part of the decision, the EU ordered Google to stop forcing phone manufacturers to pre-install its cash-cow search engine and the Chrome web browser if they want to pre-install Google's Play store, which is the dominant way to download Android apps. It argued that Google's bundling of its search and browser apps reduced the incentive for manufacturers to pre-install competing search apps.

Google said Tuesday that it has dropped those restrictions. But it will start charging an unspecified per-device license fee for manufacturers to pre-install the suite of apps that includes the Play store. Those that pay the fee will then have the option to pre-install Chrome or Google search if they choose. Google declined to specify the fee, except to say it will be modest and apply uniformly across all manufacturers.

People close to the company said it applied the fee to guarantee the viability of the Android business model if it can no longer bundle its biggest moneymaking apps in the EU.

The company's decision to implement license fees for its apps will have ripple effects on the global mobile phone ecosystem. While the new fees only apply to devices sold in Europe, phone makers in Asia, the U.S. and elsewhere will have to adjust their cost structures in Europe -- one of the world's most mature smartphone markets. Consumers bought more than 94 million new Android smartphones in Europe last year, according to research firm IDC.

It isn't clear yet how large an impact the fees will have on phone makers -- or on what consumers pay for phones. Some low-cost manufacturers may opt to stop pre-installing Google apps, instead allowing consumers to download them manually. But others may decide it's in their interest to pay for a suite of popular apps.

One of Google's fastest-growing costs is what it pays to partners -- such as phone makers -- to direct traffic to its search engine. The ability to tap into such payments, which are often revenue-sharing deals, could give manufacturers an incentive to pay a one-time fee. Revenue-sharing payments could also offset the fees' impact.

As part of the compliance measures announced Tuesday, Google said it would also comply with the EU's order to drop restrictions that blocked phone makers from selling tweaked versions of Android if they also want to sell an official Android phone. Now those companies will also be able to sell modified versions -- called forks -- that may not be compatible with official apps.

The EU contends that the restriction had stymied the development of rival operating systems based on Android, which is open source, meaning anyone can use its code. Google has warned that doing away with its anti-fragmentation rules will make it harder to develop Android apps that work across a variety of phones.

Write to Sam Schechner at sam.schechner@wsj.com

(END) Dow Jones Newswires

October 16, 2018 13:40 ET (17:40 GMT)

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