The biggest threat to Google from Europe

After years of consideration, the European Union filed formal antitrust charges against Google this morning, and it's even worse for Google than most people expected.

Europe could fine Google 10% of its annual revenue, or $6 billion, although that's unlikely.

It could also force Google to make all kinds of changes that would hurt its business, from splitting its search business into a separate company (unlikely) to restricting how it displays results or certain kinds of searches (more likely) and limiting the kinds of deals it forces Android phone makers to sign.

But even if Europe does none of these things, life is about to get a lot harder at Google.

The evidence comes from what happened to Microsoft when it faced its own antitrust troubles in the late 1990s and early 2000s.

Microsoft ruled computing in the mid 1990s. By 2010, it was widely considered an also-ran.

It failed to create a great online advertising business like Google or Facebook. It completely blew an early lead in both smartphones and tablets, losing both of those markets to Apple and Android.

Part of this is just the natural cycle of technology companies. Technology changes fast, and the new leaders are seldom the same as the old ones.

But a lot of Microsoft employees who were there during the antitrust investigations blame them for causing a cultural shift. Some of the specifics:

• New products and potential business partnerships had to go through legal review, which took lots of time and discouraged employees from pursuing certain kinds of innovations or tactics for fear they'd land in hot water.
• Tactics that Microsoft could have taken to boost new products were outright discouraged or banned - such as bundling Bing web search into Windows.
• Employees on product teams had to spend time in depositions and on other legal activities that had nothing to do with making better products. Some talented employees, including executives, left the company before they would have otherwise simply because they didn't want to deal with these legal hassles and distractions. In fact, the antitrust case is one big reason why founder and visionary Bill Gates handed the CEO reins to Steve Ballmer in 2000.
• Certain new projects like HailStorm - which was basically a set of online identity and information services that presaged a lot of what Google and Facebook did years later - were attacked by the press and competitors and (in many cases) investigated by government agencies before they even launched. In many cases, Microsoft looked at the risk and decided not to move forward.
• The government's antitrust case led to all kinds of subsequent lawsuits from private companies like RealNetworks, Sun, and AOL. These created more distractions and Microsoft had to pay billions to settle these cases.
• Press coverage of Microsoft went from mostly positive to mostly negative.
• Potential partners and competitors got insight into Microsoft's tactics and became more wary of striking deals.

So Europe doesn't even have to levy fines or restrictions to hurt Google. The fact that things have gotten this far will do plenty of harm on its own.