France's antitrust watchdog put Google on notice not to abuse what it said was its dominant position in online search advertising, adding to European regulatory pressure on the U.S. Web search giant.
The French regulator said on Tuesday Google's market power was not necessarily bad or illegal but its practices needed to be carefully monitored to avoid anti-competitive impact.
The European Commission has recently launched its own formal investigation of Google, while the French parliament is weighing a 1 percent tax on all on-line advertising which has been dubbed the Google tax.
Google, which has argued that it is not a dominant company, said the regulator's market analysis was too narrow.
Search ads are one of many options for advertisers. If the price of search ads rises, advertisers can and do switch to other formats, both online and offline. That is the sign of a competitive and dynamic industry, the company said.
Guy Lougher, a partner on the EU competition team of law firm Pinsent Masons, said the French finding could lead rivals to charge Google with abusing its dominant position or encourage further investigation from the regulator.
It's a shot across the bow, Google is now formally on notice that they might be vulnerable depending on what they do, he said. It's starting to look horribly like a rerun of the Microsoft cases.
The U.S. software giant pledged last year to allow easier access to rival browsers in Windows, ending a 10-year antitrust dispute with the European Union.
It's part of a gathering storm, said Thomas Vinje, a partner at law firm Clifford Chance. It will make it easier for the EU to come to the same conclusion on market dominance.
The Google ruling by the Authorite de la Concurrence followed a 10-month investigation requested by the French economy ministry.
The probe examined Google's services that allow companies to buy targeted advertising, which places ads when a user searches for keywords or looks at a web page with related content. Such ads generate the majority of Google's revenues and are a cornerstone of its business model.
Google will now have to consider whether to modify its operations to avoid accusations of abusing its position or to fight the regulators' conclusions, said Lougher.
France's competition regulator wrote of Google: This dominant position is not reprehensible: it results from a great deal of innovation, supported by significant and continuous investments. Only the abusive exercise of such market power could be sanctioned.
But it found that Google's search ads represents a specific market that cannot be replaced by other forms of communication, notably because it allows for very fine-tuned targeting, and because no other equivalent alternative offer exists in the eyes of advertisers.
Google's share of the global online advertising market rose to 43 percent in the third quarter from 42 percent in the previous three months, according to research firm Strategy Analytics. The market was worth $16.4 billion overall.
Yahoo was a distant second, with 8.7 percent of the market, while Microsoft came third with 3.2 percent.