Google's parent company makes an astonishing amount of money from advertising revenues.
Google's parent company makes an astonishing amount of money from advertising revenues.
ANALYSIS:
Spare a thought for the utopians. When the internet first exploded in the mid-1990s, much of the enthusiasm came from market-friendly idealists. They had good reason to be optimistic, too. Electronic networks should make price signals clearer and barriers to entry lower.
If nobody on the internet knows you'rea dog, according to the classic New Yorker cartoon, nobody would know you were a small business either, one that was punching above its weight. All of this promised to make many of the traditional tools of the monopolist redundant. A new world of dynamism and competition awaited us all – a world of purer markets.
We're a little wiser today, and so are competition regulators. Ten days ago, the UK's Competition and Markets Authority (CMA) opened an investigation into an esoteric practice in digital advertising – 'header bidding' – that only a few insiders ever really understood. But don't let that fool you. The probe goes to the heart of how Google makes its astonishing fortune.
The legal discovery work of mining millions of corporate emails and documents was undertaken by the state attorney general office in Texas, and culminated in a lawsuit filed by the state in December 2020.
But the details only came out in dribs and drabs until the full unredacted document was disclosed this January. The subsequent outcry left the CMA little choice but to join in, and Brussels launched its own probe the same day as the CMA.
Digital advertising is intimidatingly complex, but conceptually it remains fairly straightforward. Publishers of a newspaper or an app or a game have a blank space to sell. For their part, businesses with products or services want to reach a potential audience, and to do so as cheaply and effectively as possible.
In more traditional times, advertisers bought space in a physical product. Photo / Sarah Ivey
Using the traditional method in the old physical world, newspapers negotiated a price for the space directly with agencies representing big brands. But with electronic ads, there is an opportunity for an efficient electronic marketplace. An intermediary sits between buyer and seller, and this is where we find Google, which dominates the sector. By its own calculations, 84 per cent of publishers worldwide and 99 per cent of large US publishers use Google ad services to fill their digital slots.
Google owes its dominance to the way it can control information – with a presence on both sides of the digital ad platform, buying and selling, as well as sitting pretty in the middle. In one of the most notorious emails unearthed by Texas investigators, one Google staffer explains: "the analogy would be if Goldman or Citibank owned the New York Stock Exchange".
But were the publishers getting good value? Were the ad buyers? It was a mystery, and they couldn't accurately say, because the digital ad auction manipulations were so complex and obscure.
As another senior Google employee explained in an internal communication: "charging non-transparently on both sides" gave Google "some flexibility to react and counteract market changes". No wonder the casino always appeared to win.
That was until 2014, when publishers devised a clever wheeze that allowed them to compare the performance of Google's ad exchange with rival ad exchanges. This was via a technique called header bidding – because some code was inserted in the header of a web page – and, for the first time, the market could function as it should and reveal the true value of the digital ad slots. Each side could now get more precious information too.
The results were astonishing. Publishers' ad revenues rose by between 30 per cent and 70 per cent, the Texas lawsuit alleges. Advertisers liked it too, since the smaller, scrappier rival ad exchanges charged lower fees than Google. Internally Google acknowledged how much all this hurt: rather than taking 20 per cent, a figure mentioned internally, one manager predicted "margins will stabilise at around 5 per cent".
Facebook is the other dominant player in the new advertising marketplace.
When Google's rival Facebook, number two in the ad market, jumped on the header bidding bandwagon, it really changed things. The lawsuit says that Google devised a secret agreement with Facebook, codenamed 'Jedi Blue' that gave its biggest competitor huge perks. It also tried to lure publishers to a mobile platform called AMP, where header bidding wasn't possible.
Google denies the claims, arguing that the deal was a "publicly documented, procompetitive agreement". The alleged collusion between Meta (Facebook) and Alphabet (Google) is what makes this lawsuit so explosive: the lawsuit claims that two leading participants in the market colluded, acting like a buying cartel. Incredibly, we are told that Google could guarantee how many bids Facebook would win, down to a tenth of a percentage point.
The 242-page Texas lawsuit reveals a cat-and-mouse game played out over several years, but consistent themes emerge. As the piggy in the middle, Google was making life more difficult for the buyer and seller, obscuring processes, and preserving their own margin. Google denies the Texas allegations were anti-competitive, and argues that header bidding continues to grow.
But publishers now wonder aloud how much healthier the media landscape would look today if the ad business had been more competitive. Perhaps more might have gone to keep revenue-starved local media alive, for example. Last year Google's owner Alphabet reported revenue of $257bn.
Although financial and commodities exchanges are regulated, digital ad exchanges are not. They might have been, but a decade ago President Barack Obama shut down an FTC probe that would have obliged exchange owners to be transparent with information. Regulating them wisely today, so a market can grow, is one of our regulators' biggest challenges.
