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Google antitrust lawsuit part 2: How Google unlawfully ties its various products in online advertising

A deep dive into Google’s alleged anticompetitive conduct including the tying of its ad server and ad exchange.


“Google demanded that it represent the buy-side, where it extracted one fee, as well as the sell-side, where it extracted a second fee, and it also forced transactions to clear in its own ad network and ad exchange, where it extracted even more fees,” an antitrust lawsuit filed by sixteen US states led by Texas against Google reads.

The lawsuit alleges that Google unlawfully monopolised online advertising. In part 1 we explored how online advertising works and Google’s monopoly power in various markets in online advertising. In this post we will dive into the alleged anticompetitive conduct Google engaged in to acquire and maintain its monopoly power, specifically the unlawful tying of Google’s various products. 

You can read other parts of this series here

Overview of how online advertising works

Online advertising for display ads (e.g. image-based ads) relies on three main components:

  1. Ad servers: The inventory management software that helps publishers sell their ad inventory. Publishers are websites with ad spaces such as news websites and blogs.
  2. Ad buying tools: The software that advertisers use to buy display inventory from publishers.
  3. Ad marketplaces: The electronic marketplaces where buyers and sellers of display ads are matched. Buyers (advertisers) are represented by their ad buying tool whereas sellers (publishers) are represented by their ad server. There are two main types of marketplaces: ad exchanges and ad networks.

For more on how the online advertising market works, read our explainer here.

How Google forces publishers to use Google’s ad server and trade in Google’s ad exchange?

  • Prior to anti-competitive practices, Google was not dominant in the market for ad servers and exchanges but dominated the ad buying tools market: Google’s ad server, which was acquired from DoubleClick in 2008, faced competition from companies such as 24/7 Real Media,  aQuantive (owned by Microsoft), and ValueClick at the time. Google’s ad exchange faced competition from Yahoo. In 2009, while Yahoo’s exchange processed nine billion daily ad impressions, Google which launched that year, transacted fewer than 200 million daily impressions. Although its ad server and exchange were relatively new to the market, Google operated an ad buying tool (originally called AdWords but now called Google Ads) for small advertisers and had significant power in that market.
  • Forcing advertisers on Google Ads to use Google’s ad exchange: “Immediately after acquiring a publisher ad server and launching its exchange in 2009, Google began to require that the small advertisers bidding through Google Ads transact in both Google’s ad network and Google’s ad exchange,” the lawsuit states. Google did this by first automatically routing small advertisers’ ad network bids to Google’s exchange and then by refusing to route advertisers’ bids to non-Google exchanges. “If Google were serving the interests of the small businesses using Google Ads, Google would have routed their bids to the exchanges that offered the lowest prices for the identical inventory, just as competing ad buying tools did,” the lawsuit argues. Although in 2016, Google started routing the bids of small advertisers to non-Google exchanges, it significantly and intentionally restrained this practice, the lawsuit states.
  • Forcing publishers to use Google ad server and ad exchange to gain access to Google Ads advertisers: “Google also required that the large publishers wanting to receive bids from this enormous group of small advertisers trade in Google’s exchange and license Google’s ad server,” the lawsuit alleges. Google used several strategies to tie its ad server, ad exchange, and ad buying tools. For example, Google made many of the features in DV360, Google’s ad buying tool for large advertisers, unavailable to advertisers if they participate in exchanges other than Google’s. “Because Google’s exchange then only routes live bids (more on this below) to publishers using Google’s ad server, publishers are effectively forced to use Google’s ad server to receive bids from DV360 advertisers,” the lawsuit explains.
  • Current market status: “When Google acquired the DoubleClick ad server in 2008, Google’s share of the publisher ad server market was around 48 to 57 percent […] By 2011, approximately 78 percent of publishers in the United States used Google’s ad server, and by 2019, Google’s share of the market increased to over 90 percent of large publishers,” the lawsuit states.

How Google uses its ad servers’ control over publishers’ inventory to block competition in the ad exchange market?

Google used its control over publishers’ inventory to foreclose exchange competition through a host of anticompetitive practices, the lawsuit alleges. These practices include:

  • Blocking publishers from sending their inventory to more than one marketplace at a time: Around 2009-2010 when ad exchange started to compete with one another by submitting real-time bids for publishers’ inventory, Google used its new control over publishers’ inventory to route their ad space to a single exchange, one at a time, rather than all at once, in a practice referred to as waterfalling that lasted till 2016, the lawsuit states.
  • Blocking competition from non-Google exchanges under a false pretense: In addition to preventing real-time competition between exchanges, Google gave its own ad exchange an upper hand through a process called Dynamic Allocation, which gives “Google’s exchange a superior right of first refusal on all of the impressions a publisher made available to exchanges,” the lawsuit states. Google told its publishers this process will help maximise their revenue but “internally discussed how publishers could make more money selling their inventory if exchanges really competed,” the lawsuit states.
  • Blocking publishers from accessing and sharing information about their heterogeneous inventory with non-Google exchanges: “Google further foreclosed competition in the exchange and ad buying tool markets by blocking publishers’ ability to access information about their heterogenous inventory,” the lawsuit claims. The ad server is responsible for identifying users visiting the publisher’s site and assigning IDs to the users. In 2009, Google’s ad server started encrypting these user IDs prohibiting publishers from sharing them with non-Google exchanges or ad buying tools. However, this information was available for Google to use when it came to its own products i.e. the user ID could be shared with Google’s own ad network, ad exchange, and ad buying tools.
    1. Information asymmetry causing publishers and advertisers to prefer Google ad exchange: Since Google’s exchange always has better information about publishers’ heterogenous inventory, advertisers will prefer to use Google’s ad exchange over others, the lawsuit states.
    2. Google forecloses competition by using inside information to win auctions: Google’s gTrade team designed sophisticated programs like Reserve Price Optimization (RPO), Dynamic Revenue Share (DRS), and Project Bernanke, all of which allowed the company to take advantage of the proprietary user ID information to win auctions and foreclose competition in the exchange and ad buying tool markets, the lawsuit alleges. “The programs create inefficiencies in the allocation of impressions and reduce competitors’ ability to compete on price. Moreover, these programs account for substantial additional Google revenue at the direct expense of harm to competition. RPO alone accounts for an additional $250 million dollars of annual recurring revenue, while various other auction programs shift substantial additional revenue to Google: DRS ($250m), Bernanke ($230m), Bell ($140m), and Elmo ($220m),” the lawsuit reveals.
    3. Google’s “privacy” justification contradicts with company’s practices: Google claims that it does not allow publishers to share user IDs with other ad exchanges or buying tools because it violates users’ privacy. “But Google does not actually care about users’ privacy. Google’s ad server shares those very user IDs with Google’s exchange and buying tools. Google then does what it wants to prevent others from doing: it combines the data sets to create more comprehensive user profiles and deliver more targeted advertising,” the lawsuit states. The lawsuit goes on to cite other examples of how Google violated user privacy including when the company knew that WhatsApp backups on Google Drive are not end-to-end encrypted but did nothing to correct the misunderstanding when users believed otherwise. The lawsuit also reveals that Google secretly met with competitors like Facebook, Microsoft, and Apple to discuss competition and forestall consumer privacy efforts including the European Union’s ePrivacy Regulation and the US Federal Trade Commission’s child privacy protections. Google has denied these allegations saying: “We’ve been clear about our support for consistent privacy rules around the globe,” and that the company has encouraged the government to pass federal privacy legislation for years.
    4. Google blocks competing exchanges from accessing publishers’ high-value inventory and reaps the benefits for itself: Google developed a program for its ad server called Enhanced Dynamic Allocation (EDA) that allowed Google’s ad exchange to compete for valuable impressions that the ad server would previously allocate to publishers’ premium direct deals, the lawsuit states. But Google blocked non-Google exchanges from competing for those same impressions. “In a review of revenue and impressions on AdX in the United States, Google found that the vast majority—80 percent—of web publishers’ ad revenue is generated from a much smaller percent—just 20 percent—of impressions. Google refers to this internally as “cookie concentration.” As a result of this “cookie concentration” dynamic, EDA made it so only Google’s exchange could trade publishers’ most valuable inventory,” the lawsuit explains. “Cherry-picking the best impressions under EDA helped Google make an additional $150 million per year,” the lawsuit states.

In summary, Google’s actions at issue here—including waterfalling and Dynamic Allocation, the encryption of IDs for users that consent to ID sharing, and EDA—were all unlawful schemes to exclude competition. Without being able to compete for publishers’ impressions or receive full information about their inventory, non-Google exchanges could not compete on quality (volume) or price (take rate). As a result, even large and powerful companies like Microsoft and Yahoo! exited the market. By blocking competition outright, Google is able to charge very high 19-22 percent commissions on transactions, which is two to four times higher than the commissions charged by competing exchanges. These extra costs invariably are passed onto American consumers, who are harmed through higher prices and lower-quality goods and services. – Lawsuit

How Google cuts off YouTube from rival ad buying tools?

  • Reach of YouTube makes it a “must-have” source for advertisers: “YouTube has immense reach amongst consumers in the United States, reaching approximately 190 million such consumers. Among younger U.S. consumers, 77 percent of U.S. internet users aged 15-25 used YouTube, as measured in Q3 2020,” making it a “must-have” source of inventory for advertisers, the lawsuit states.
  • But YouTube inventory is only available to advertisers using Google products: “In 2013, Google noticed that its ad buying tool for large advertisers DV360 was falling behind the competition. Google started to consider withholding YouTube inventory from non-Google ad buying tools for the express purpose of pressuring advertisers to use DV360 and Google Ads. In an internal 2014 Google document, Google strategized that ‘[e]xclusivity of access to YouTube will likely be a significant driver of DBM Video adoption,’” the lawsuit states.
  • Steers advertisers’ budget to Google products: “Google also recognized that withholding YouTube from competing ad buying tools would give Google’s DV360 and Google Ads power as buyers’ agent to steer advertisers’ budgets back to Google’s properties,” the lawsuit adds.
  • Goes against YouTube’s interest as well: “By restricting non-Google ad buying tools from selling YouTube inventory, Google also acted against YouTube’s interest. Restricting the pool of buyers for YouTube inventory lowered the demand and revenue for YouTube content creators,” the lawsuit adds.
  • Harm to competitors magnified because advertisers prefer one tool: “The harm to rival ad buying tools is magnified because advertisers (and ad agencies) prefer to minimize the number of ad buying tools they use. Advertisers and ad agencies bear significant costs and inefficiencies when using more than one ad buying tool for an ad campaign,” the lawsuit states.
  • Protects Google’s power in the ad buying tool market: “Cutting off access to YouTube foreclosed competition in the ad buying tool markets and protected Google’s market power in these markets. Many DSPs stopped growing, many others went out of business, and the market overall has been closed to entry,” the lawsuit alleged.

Google’s response

Google has expectedly denied the allegations of the lawsuit. “This lawsuit is riddled with inaccuracies,” a Google spokesperson said.

“Just because Attorney General Paxton asserts something doesn’t make it true,” the spokesperson added. “In reality, our advertising technologies help websites and apps fund their content and enable small businesses to reach customers around the world. There is vigorous competition in online advertising, which has reduced ad tech fees, and expanded options for publishers and advertisers. We will strongly defend ourselves from his baseless claims in court.”

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Google also published a blog post making detailed rebuttals to some of the claims in the lawsuit.

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