“Imagine if the financial markets are controlled by one monopoly company, say Goldman Sachs, and that company then owns the NYSE, which is the largest financial exchange, that then trades on that exchange to advantage itself, eliminate competition, and charge a monopoly tax on billions of daily transactions. Obviously, no free, fair and functioning market could operate that way. Yet, that is today’s world of online display advertising,” an antitrust lawsuit filed by sixteen US states led by Texas against Google reads.
The lawsuit, which argues that Google has monopolised online advertising, was unredacted last month by a New York court bringing to light many of the anti-competitive practices of the company.
In part 1, we will explore how online advertising works and look at Google’s monopoly power in various markets in online advertising. In subsequent posts, we will dive into the alleged anticompetitive conduct Google engaged in to acquire and maintain its monopoly power.
You can read other parts of this series here.
How online advertising works?
“The scale of online display advertising markets in the United States is extraordinary […] Whereas financial exchanges such as the NYSE and NASDAQ match millions of trades to thousands of company symbols daily, Google’s exchange processes about 11 billion online ad spaces each day.” — Lawsuit
Overview of relevant markets
Online advertising for display ads (e.g. image-based ads) relies on three main markets:
- 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.
- Ad buying tools: The software that advertisers use to buy display inventory from publishers.
- 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.
The market for ad servers
Publishers have two sales channels:
- Direct sales: This refers to the ad spaces sold by the publisher directly to advertisers. For example, a news site like the New York Times (NYT) can negotiate directly with an advertiser like Ford. But since a publisher’s inventory depends on how many users actually visit the publisher’s website, it is hard to predict how many ad spaces will be available to sell directly to advertisers.
- Indirect sales: In this method, sales of ad spaces occur on centralised electronic trading venues called “ad exchanges” or through “ad networks.” Publishers allow ad exchanges to auction off their inventory to advertisers in real-time and in return, the ad exchange will retain a portion of proceeds. This sales channel is more commonly used because of the real-time ability to determine how many ad spaces are available to be sold, ensuring that there is no unsold inventory.
Regardless of sales channels, publishers have the ability to target specific users in real-time. This means if a website with 1 million visitors has three pages and three ad spaces per page, it has up to 9 million ad units to sell. Because of this, online publishers have a large, heterogeneous inventory, and rely on inventory management systems known as ad servers.
What does an ad server do? “Ad servers keep track of publishers’ heterogeneous ad inventory and help them sell that inventory both directly and indirectly through exchanges, with the stated goal of maximizing their advertising revenue,” the lawsuit explains. Ad servers perform three critical tasks related to selling ad space:
- Identifying users: The ad server identifies users visiting the publisher’s webpage by using tracking technologies facilitated by the user’s web browser or mobile device. The ad server generally assigns a unique user ID to each individual visitor to the site and this helps publishers, ad exchanges, and advertisers know the identity and characteristics of that user.
- Selling ad spaces through exchanges: The ad server manages how publishers sell ad space indirectly through ad exchanges. “Publisher ad servers connect with multiple marketplaces and let publishers automatically route their inventory into them for sale as the users load publishers’ webpages,” the lawsuit explains.
- Allocating spaces between direct and indirect channels: Ad servers route inventory between a publisher’s direct and indirect sales channels. “When a publisher like ESPN sells their most valuable inventory directly to an advertiser like Fanatics.com for premium prices, they rely on their ad server to allocate the impressions targeted to high-value users—e.g., sports fanatics who have a propensity for buying merchandise for their favorite sports team—to those direct deals,” the lawsuit states.
The market for ad marketplaces (exchanges and networks)
Ad marketplaces are where publishers’ display inventory is auctioned off to end-advertisers in real-time. There are two main kinds of ad marketplaces: exchanges and networks.
- Ad Exchanges: Predominantly used by large publishers like CNN and The Wall Street Journal, “ad exchanges for display ads are real-time auction marketplaces that match multiple buyers and multiple sellers on an impression-by-impression basis. A publisher’s ad server can route the publisher’s inventory to exchanges in real-time as users load web pages. The exchanges then connect with advertisers through their respective middlemen (ad buying tools). […] Exchange marketplaces exhibit several unique features. First, they do not bear inventory risk. Instead, they connect a publisher’s inventory with an immediate willing buyer, as opposed to purchasing and then reselling ad space. Second, exchanges monetize by charging the publisher with a transparent percentage of transaction value, as opposed to monetizing via arbitrage or taking a non-transparent fee. Third, to sell directly on an exchange, most exchanges require publishers to meet minimum monthly requirements for impression volume and/or spend,” the lawsuit explains.
- Ad Networks: “Like ad exchanges, ad networks match publishers’ inventory with their advertisers’ demand. But unlike exchanges, networks do not require publishers to meet high monthly minimum impression or spend requirements. Rather, networks obscure prices within auctions, which enables them to capture undisclosed margins; neither the buyers nor sellers will know whether the network takes, e.g., 20 or 50 percent of matched trades. Moreover, networks often carry inventory risk. That is, they purchase (and then sell) impressions on their own behalf, as opposed to purchasing on behalf of an advertiser or buy-side middleman,” the lawsuit explains. Ad networks are used by smaller publishers like local newspapers and individual blogs.
The market for ad buying tools
Just as how ad servers allow publishers to sell ads, advertisers use ad buying tools to buy ads for their campaigns by setting parameters like the type of users they want to target and the maximum bids they are willing to submit. Based on these parameters, ad buying tools bid on behalf of the advertisers for ad space in exchanges and networks.
Like the ad server market, the ad buying tools market has differentiated products for large and small players:
- Ad buying tools for larger advertisers: Large advertisers like Ford and Nike use ad buying tools called demand-side platforms (DSPs). DSPs usually require high minimum monthly spend commitments, sometimes $10,000 or more, and offer robust and complex bidding and trading options that might be too sophisticated for smaller advertisers. “In fact, DSPs are so complex that they are frequently not used or managed by the actual advertisers (e.g., Ford), but by the advertisers’ specialized ad buying team (e.g., an ad agency or specialized division at an agency called a “trading desk”),” the lawsuit states.
- Ad buying tools for smaller advertisers: Small advertisers like real estate agents and car dealerships use pared-down analogs of DSPs and there is usually no minimum spend on these.
Monopoly power of Google in various online advertising markets
The monopoly tax Google imposes on American businesses—advertisers like clothing brands, restaurants, and realtors—is a tax that is ultimately borne by American consumers through higher prices and lower quality on the goods, services, and information those businesses provide. Every American suffers when Google imposes its monopoly pricing on the sale of targeted advertising. — Lawsuit
Monopoly power of Google in the ad servers market
- Market share of Google Ad Manager (GAM): Google monopolises the ad server market for display inventory through its product called Google Ad Manager (GAM), the lawsuit alleges. GAM finds its roots in DoubleClick, which Google acquired in 2008, but since then Google’s closest competitors have either exited the market or have been relegated to negligible market shares. GAM now controls over 90 percent of the ad server market in the US and many major websites like USA Today, ESPN, and Walmart use GAM, the lawsuit states. According to internal documents cited by the lawsuit, GAM served 75 percent of all online display ad impressions in the US in the third quarter of 2018.
- Supra-competitive fees charged by GAM: Google’s ad server charges publishers 5 percent of gross spend for routing their inventory to non-Google exchanges and 10 percent for routing publishers’ inventory to non-Google ad networks. “When publishers route their inventory to exchanges and networks using a non-Google routing service called header bidding, publishers pay no fee whatsoever for routing to exchanges and networks. Google’s unilateral ability to extract non-competitive ad server fees demonstrates its monopoly power,” the lawsuit states.
- Significant barriers to entry and expansion:
- High switching costs: Google’s market power in the publisher ad server market is protected by high switching costs. “Some publishers have inventory on hundreds of thousands, or even hundreds of millions, of webpages, which makes switching ad servers exceedingly expensive, difficult, and time-consuming,” the lawsuit reads.
- Tying of ad server with other Google products: In addition to high switching costs, Google ties its publisher ad server product with its ad exchange, ad network, and ad buying tools. For example, publishers can access the massive number of advertisers using Google Ads (the ad buying tool for smaller advertisers) only if they used Google’s ad server and ad exchange.
Monopoly power of Google in the ad marketplace market
1. Ad exchange market
- Market share of Google AdX: Google’s ad exchange (historically called AdX) has enjoyed dominance in the US since at least 2013, the lawsuit states. By October 2019, AdX transacted over 60 percent of all display ad inventory sold on ad exchanges in the US and that number has “increased substantially” since Google’s introduction of Unified Pricing rules in late 2019, the lawsuit adds. Google’s closest exchange competitors like Magnite and AT&T’s Xandr typically transact a mere 4 to 5 percent of the same publishers’ exchange impressions, the lawsuit claims.
- Google’s exchange has the power to control prices: Normally ad exchanges charge publishers 5 to 20 percent of the transaction value as fees. Google charges publishers 19 to 22 percent of exchange clearing prices, “which is double to quadruple the prices of some of its nearest exchange competitors,” the lawsuit states. “The dramatically higher price (or “take rate”) of Google’s exchange evidences its substantial market power,” the lawsuit states. Furthermore, “when rival exchanges attempted to gain market share by lowering their prices in 2017, Google’s exchange maintained or even increased prices and still increased its market share,” the lawsuit reveals.
- Significant barriers to entry and expansion: Google’s market power in the ad exchange market is protected by significant barriers to entry and expansion. “The first is a sort of chicken-and-egg problem; a new entrant must achieve a sufficient scale of both publishers and advertisers on its exchange to become viable. A second barrier is imposed by Google itself. Employing a variety of anti-competitive tactics, Google unilaterally captures a large volume of the transactions otherwise available to competing exchanges by causing its publisher ad server to preferentially route transactions to its exchange. Moreover, Google imposes yet another barrier by exclusively and preferentially routing the bids of advertisers who use DV360 and Google Ads to Google’s exchange,” the lawsuit explains.
- Conflict of interest between Google ad server and ad exchange: “By controlling publishers’ inventory through its ad server and simultaneously operating the largest ad exchange, Google has inherent conflicts of interest between publishers’ best interests and its own. Google charges a low cost for acting as publishers’ sell-side intermediary but then makes substantially higher fees when selling those publishers’ inventory in its exchange. Accordingly, Google incentivizes itself to steer publishers’ inventory towards its exchange, where it can extract double to quadruple the rate of some of its nearest exchange competitors,” the lawsuit explains.
2. Ad network market
- Market share of Google Display Network: Google’s display advertising network, Google Display Network (GDN), “reaches more user impressions and websites than any other display network, including over 2 million small online publishers globally,” the lawsuit claims.
- Market share of Google AdMob: Google also operates AdMob, the largest ad network selling mobile app inventory on behalf of mobile app developers.” Google’s closest competitor in the mobile app network market is Facebook’s Audience Network, FAN, although Google internal documents suggest that Google’s share of the market is eight times larger than FAN’s,” the lawsuit reveals.
- High fees: Google charges an exorbitant 32 to 40 percent fee for each transaction made using its ad network, which is much higher than what it charges large publishers using its ad exchange, the lawsuit alleges. “Internally, Google acknowledges that its fees are very high and that it can demand them because of its market power. For example, in an internal 2016 conversation, Google executives commented that Google’s ad networks make ‘A LOT of money’ with its commission, and they acknowledged that they do this because, quite simply, ‘we can,’” the lawsuit reveals.
- Significant barriers to entry and expansion: Google protects its dominance by employing anticompetitive tactics to capture a large volume of transactions. It does this by making its publisher ad server preferentially route transactions to its display ad network, the lawsuit states. Furthermore, Google also preferentially routes the bids of advertisers who use Google’s ad buying tool for small advertisers (Google Ads) to its own GDN ad network. “Scale also operates as a barrier to entry. Ad networks need scale on both the supply and demand sides; natural network effects make it difficult for any new networks to enter and achieve scale,” the lawsuit adds.
Monopoly power of Google in ad buying tools market
1. Ad buying tools for small advertisers
- Market share of Google Ads: “According to Google’s records, advertises using Google Ads purchase at least half of the impressions in Google’s ad exchange (which is the largest ad exchange), and over 60 percent of the impressions on Google’s display network, GDN (which is the largest ad network),” the lawsuit states. “Other ad buying tools attempting to compete reached far fewer advertisers, and most have now exited the market altogether, leaving advertisers without alternatives to Google’s dominance,” the lawsuit adds.
- Undisclosed, high fees: Google Ads charges small advertisers an undisclosed 15 percent commission when purchasing inventory from Google’s exchange.
- Supra-competitive fees for access to Google Ads users: Google’s market power is further illustrated by the fact that Google’s exchange charges supra-competitive fees for exclusive access to Google Ads advertisers. “Google’s documents confirm as much, describing its exchange’s ability to charge double to quadruple the prices of some of its nearest exchange competitors because of exclusive access to Google Ads advertisers. The ability to extract such rents, dependent on Google Ads exclusivity, demonstrates Google Ads’ monopoly power,” the lawsuit states.
2. Ad buying tools for large advertisers
- Market share of Google DV360: Google’s tool for large advertisers called DV360 arose from Google’s acquisition of DSP Invite Media and is the largest ad buying tools for large advertisers, the lawsuit states. DV360 charges advertisers an 8 to 9 percent commission to purchase inventory from exchanges. There is some competition in this market from Amazon’s DSP and The Trade Desk.
- Majority of wins in Google’s ad exchange: “Google’s ad buying tools win the overwhelming majority—over 80 percent—of the auctions hosted on Google’s dominant ad exchange, AdX,” because of the advantages that these tools get in terms of information and speed, the lawsuit reveals.
- Significant switching and expansion costs for Google Ads and DV360: Advertisers tend to use a single ad buying tool because multiple tools post significant costs in terms of time, effort, training, and expenses, the lawsuit states. Advertisers prefer Google’s tools because it was the only way to purchase Google Search ads, YouTube ads, and display ads on Google’s leading display network, GDN. Advertisers using Google’s tools cannot export the data they need to easily switch to another ad buying tool and are hence locked in, the lawsuit adds.
Monopoly power of Google in the instream online video advertising market
- What is this market? Online instream ads are video ads that play before, during, or after a video. Outstream ads meanwhile show when the user scrolls through other content.
- Market share of YouTube in this market: “YouTube’s share of the overall online video advertising market is at least 43 percent in the United States, and potentially much higher for instream online video advertising,” the lawsuit alleges.
- Reach: “Further, 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,” the lawsuit says.
- Must-have source of advertising: Because of its reach, YouTube is a “must-have” source of inventory for advertisers and is considered a “strategic anchor” by Google for its buying tool DV360. “Accordingly, Google wields significant market power in the instream online video ads market, as demand for YouTube content is unique compared to other online video publishers that sell instream online video advertising adjacent to short-form user created video content,” the lawsuit explains.
Google has expectedly denied the allegations of the lawsuit. “This lawsuit is riddled with inaccuracies,” a Google spokesperson said.
Google said that it has been public about its fees and its ad tech fees are lower than reported industry averages.”Publishers keep about 70% of the revenue when using our products. And many publishers keep over 95% of the revenue when using Ad Manager,” the company said.
Google also published a blog post making detailed rebuttals to some of the claims in the lawsuit.
- Google Antitrust Lawsuit Part 2: How Google Unlawfully Ties Its Various Products In Online Advertising
- Google Antitrust Lawsuit Part 3: What Is Header Bidding And How Did A Secret Deal With Facebook Kill It?
- Google Antitrust Lawsuit Part 4: How AMP, Unified Pricing Rules, Chrome Privacy Sandbox Cement Google’s Monopoly?
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