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Google antitrust lawsuit part 3: What is header bidding and how did a secret deal with Facebook kill it?

A look at how Google teamed with Facebook to kill a new industry innovation and maintain its monopoly.


In 2014, a new innovation called header bidding (HB) gained popularity as it allowed publishers to route inventory to multiple ad exchanges. But Google did not welcome the competition and wanted to “kill” header bidding, an antitrust lawsuit filed by sixteen US states led by Texas against Google alleges.

The lawsuit argues 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 how Google teamed up with Facebook to kill a new industry innovation called header bidding.

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.

What is header-bidding and how did Google initially try to quash it?

  • How does header bidding work? “Header bidding involves a creative piece of code that publishers could insert into the header section of their webpages to facilitate competition between exchanges. When a user visited a page, the code enabled publishers to direct a user’s browser to solicit real-time bids from multiple exchanges, before Google’s ad server could prevent them from doing so. Instead of being subject to the restraints of Google’s ad server, header bidding shifted routing from the ad server to the browser. Publishers then sent the highest exchange bid in header bidding into their Google ad server,” the lawsuit states.
  • The popularity of header bidding: Because of its advantages, header bidding became popular and by 2016 approximately 70 percent of major publishers in the US were using header bidding. “With header bidding, publishers saw their ad revenue jump overnight simply because exchanges could actually compete,” the lawsuit states.
  • Why Google wanted to quash header bidding? According to internal documents cited by the lawsuit, Google wanted to quash this new innovation for three reasons:
    1. Avoiding price competition: Google wanted to protect its high exchange take rates from competition but header bidding would’ve forced the company to drop its rates dramatically, the lawsuit argues. “One Google employee, proposed the ‘nuclear option’ of reducing Google exchange fees down to zero. Another employee rejected even that idea: ‘problem is that this doesn’t kill HB,’” the lawsuit reveals.
    2. Permitting itself to continue to trade on inside information: At the time, Google’s ad server secretly shared competing bids on publishers’ inventory with Google’s ad buying tools, allowing these tools to win auctions using this information, the lawsuit alleges. “This is similar to a form of insider trading, whereby Google is the only one able to bid with knowledge of others’ bids,” the lawsuit reads, but header bidding threatened the ability of Google to access this price information.
    3. Foreclosing competition against its ad server monopoly: “The companies involved with header bidding would have a foothold on a key function of Google’s ad server: routing publishers’ inventory to exchanges. With that, a major player like Amazon or Facebook using header bidding would be well-positioned to eventually compete directly with Google’s monopoly ad server,” the lawsuit states.
  • Google creates an alternative to header bidding that secretly worked in favor of Google and against publishers: Google’s ad server started allowing publishers to route their inventory to more than one exchange at a time with a program called Exchange Bidding/Open Bidding. “However, Google secretly devised the program in a way to foreclose exchange competition and codenamed it “Jedi.” Google measured Jedi’s success not by financial targets or output increases, but by how much it stopped publishers from using header bidding,” the lawsuit alleges. Here are some ways Exchange Bidding foreclosed competition:
    1. Diminishing the ability of non-Google exchanges to return competitive bids: “Header bidding let each exchange access a cookie on the user’s page, which permitted those exchanges to recapture some information about the user’s identity. Google’s new program prohibited exchanges from directly accessing the user’s page. As a result, they identified users in auctions even less often, causing them to bid and win less often,” the lawsuit explains.
    2. Charging extra for selling on non-Google exchange: Google charged publishers an additional 5 to 10 percent penalty fee for selling inventory in a non-Google exchange, making it unattractive to use rival exchanges, the lawsuit states.
    3. Forcing its ad server customers to use Google’s ad exchange: “When publishers chose to route their ad space from Google’s ad server directly to multiple exchanges at the same time, Google’s new program required them to route that inventory through Google’s exchange, even if they did not want to do so,” the lawsuit alleges.
    4. Secretly rigging the Exchange Bidding program to let Google win: “Google designed Exchange Bidding to provide Google’s exchange a special “prioritization,” which Google kept secret. Google made it so its own AdX exchange won publishers’ inventory even over another exchange’s higher bid. In the following email, Google employee explained how the Exchange Bidding program returned results that were “suboptimal for pubs yield”: a Google AdX bid of $6 would win even though another exchange (“EB SSP”) submitted a higher $8 bid,” the lawsuit reveals.

Google and Facebook enter an unlawful agreement to “kill” header bidding

  • Background: Facebook announced its support for header bidding in March 2017 allowing many web and mobile app publishers and advertisers to bypass the fees associated with transacting through Google’s services.
  • Competitive benefits of Facebook supporting header bidding: “According to metrics posted in Facebook’s public blog, Facebook was helping publishers and advertisers match two to three times more users in auctions and increase third-party publishers’ revenue by 10-30 percent,” the lawsuit states.
  • Google prioritizes stopping Facebook from supporting header bidding: “[One] Google executive outlined that Google’s priorities for 2017 included stopping Facebook from supporting header bidding. In a company deck, he outlined the ‘top priorities’ for 2017, writing, ‘Need to fight off the existential threat posed by Header Bidding and FAN. This is my personal #1 priority. If we do nothing else, this need[s] to [be] an all hand[s] on deck approach,” the lawsuit reveals.
  • Facebook’s intent was to threaten Google: According to Facebook’s internal documents, the purpose of the March 2017 announcement was “mainly intended to signal Facebook’s willingness to compete with Google in the markets for publisher ad servers and ad networks,” the lawsuit reveals.
  • Google was willing to partner with Facebook to maintain the status quo and build a moat: Facebook’s maneuvers proved successful when Google in November 2017 discussed a potential partnership with Facebook, the lawsuit reveals. According to an internal document cited by the lawsuit, Google’s endgame was to “collaborate when necessary to maintain status quo.” In another internal presentation from 2018, “one slide averred that if Google could not ‘avoid competing with FAN,’ then it would instead collaborate with Facebook to build a moat,’” the lawsuit further reveals.
  • Facebook wanted the deal to be successful as well: Facebook on its part understood Google’s motivation with one company executive writing an email that “they want this deal to kill header bidding,” the lawsuit reveals. “Facebook was highly interested in a successful outcome to these negotiations […] As internal Facebook documents reveal, Facebook ‘believed strongly’ that partnering with Google was ‘relatively cheap compared to build/buy and compete in zero-sum ad tech game,” the lawsuit reveals.
  • The Jedi Blue deal: In September 2018, Facebook and Google ultimately came to an agreement that was codenamed Jedi Blue. As a result of this agreement, Facebook “significantly curtailed its header bidding initiatives and would instead bid through Google’s ad server. In return, Google agreed to give Facebook a leg up in its auctions,” the lawsuit reveals.
  • Benefits for Facebook: As part of the Jedi Blue deal, both Google and Facebook “agreed upfront on when and how often Facebook would bid in auctions, and when and how often Facebook would ultimately win,” the lawsuit states. Here are some of the advantages given to Facebook:
    • Facebook gets special pricing, longer timeouts, and direct billing relationships: 
      1. Lower fee: Google allowed Facebook’s ad network FAN to circumvent exchanges and bid directly into Google’s ad server. Thus, instead of paying exchange fees like other ad networks had to, Facebook had to only pay a 5 to 10 percent fee. Facebook was not allowed to publically reveal this special lower rate, the lawsuit states.
      2. Long timeout: Google also gave Facebook speed advantages by giving it a 300 ms timeout to place bids compared to the 160 ms that other bidders on Open Bidding got. “Competitors have actively complained that 160ms is not enough time to recognize users in auctions and return bids before they are excluded,” the lawsuit states. The longer timeout allows Facebook to win more auctions, the lawsuit adds.
      3. Direct relationships: Google also allowed Facebook to have direct contractual relationships with publishers which other ad networks are prohibited from doing, the lawsuit stated.
      4. Spam info: Furthermore, Google gives Facebook information on what impressions are likely targeted to spam users like bots. Other networks do not get this information, the lawsuit says.
      5. Match rate commitments: Google also promised Facebook to help it recognise the identity of users in publishers’ auctions. To do so, it agreed “to benchmark ‘match rate’ commitments, i.e., the percent of users Facebook could identify in auctions over the percent of bid requests received. Google promised Facebook an 80 percent match rate in auctions for mobile inventory and a 60 percent match rate in auctions for web inventory,” the lawsuit reveals. This allows Facebook to bid and win more often in auctions because advertisers only bid when they recognize the identity of the user, the lawsuit states. Facebook and Google have also integrated their software to pass Facebook data for user ID cookie matching and are also working together to “improve Facebook’s ability to recognize users using browsers with blocked cookies, on Apple devices, and on Apple’s Safari browser,” the lawsuit alleges.
      6. Google not allowed to manipulate auctions: Since Google could’ve used Facebook’s bid data to manipulate auctions, Facebook was explicit in demanding that Google be prohibited from doing this, the lawsuit states.
    • Google and Facebook agree to a secret bid, spend and win commitments: In the auctions for publishers’ ad inventory, Google’s ad networks GDN and AdMob bid against Facebook’s ad network FAN, making them head-to-head competitors. But as part of the Jedi Blue deal, “Google and Facebook agreed to manipulate publisher auctions in Facebook’s favor through secret bid, spend, and win commitments,” the lawsuit alleges. As part of these commitments, Facebook agreed to bid on at least 90 percent of auctions in which it recognises the end-user and that it will spend at least $500 million in its auctions annually from the fourth year of the agreement. In response, Google guaranteed Facebook a win in at least 10 percent of the auctions it participates in subject to Facebook bidding high enough.
  • Google kept deal terms secret and misled public: “As one would expect with a market allocation agreement, Google and Facebook do not disclose their secret match rate, bid rate, or win rate agreements to other auction participants. Rather, Google publicly misrepresents that all bidders in publishers’ auctions compete on equal footing,” the lawsuit states.
  • Google and Facebook were aware that the deal could trigger antitrust action: The lawsuit alleges that  “Google and Facebook were highly aware that their agreement could trigger antitrust violations.” So the companies made a plan on “how they would cooperate with one another should a government entity in the United States or globally start to investigate the agreement under antitrust laws,” the lawsuit adds. As part of this understanding, the companies are allowed to terminate the deal in the face of regulatory actions. “The agreement also requires the parties to coordinate on antitrust defenses, such that Facebook must approve any and all arguments that Google presents relating to their illegal agreement in its answer to this Complaint,” the lawsuit adds.

Response from Google and Facebook

A Google spokesperson told the Wall Street Journal that the “complaint misrepresents this agreement” and Facebook disputed the claims saying: “Partnerships like this are common in the industry, and we have similar agreements with several other companies […] Any suggestion that these types of agreements harm competition is baseless.”

Google has also broadly denied the other allegations of the lawsuit. “This lawsuit is riddled with inaccuracies,” another Google spokesperson said.

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