An investigation by the competition regulator goes to the heart of how Google's parent company Alphabet makes its astonishing fortune
When the internet burst into the public consciousness in
the mid 1990s after being the exclusive territory of computer professionals and nerds for a decade, foremost among the early adopters of the simplified internetworking technology known as theWorld Wide Web were libertarian idealists. These people believed the new electronic publisjing and communications medium would open a universe of information to anybody who had access to a computer, modem and phone line. All the information in the world would be at the fingertips of every human being. And for those who wanted to participate by publishing their thoughts, opinions and ideas which some of their friends might not understan and their bosses might take exception too, the internet offered the bonus of anonimity.
Form a business point of view a classic cartoon in The New Yorker magazine sumed up the equalising nature of this new medium in the caption: If nobody on the internet knows you’re a dog, nobody would know you were a small business either, especially one that was punching above its weight.
This promised to make the built - in advantages of the muli - national corporation, the globally recognised brand and the mega - factory redundant. A new business environment of dynamism and competition awaited us all – a world of free information, level playing fields and purer , less manipulated markets.
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We’re a little wiser today, and so are competition
regulators. Ten days ago, the UK’s Competition and Markets Authority
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.
The traditional method in the old physical world saw newspapers
negotiating 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, 84pc of publishers worldwide, and 99pc 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 other 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 saw ad revenues rise by
between 30pc and 70pc, 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 20pc, a figure mentioned internally, one manager
predicted “margins will stabilise at around 5pc”.
When Google’s rival Facebook, number two in the ad market, jumped on to 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 on 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.
At the end of the day, while financial and commodities
exchanges are regulated, the digital ad exchanges are not. They might
have been, but a decade ago President Obama shut down an FTC probe which
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.
Andrew Orlowski