Bidding farewell

Imagine a stock exchange that was also the largest broker and the largest seller of the shares traded on it. Regulators would call that a conflict of interest, and then call a lawyer. On 24 January the Justice Department made roughly that complaint about Google, filing suit in the Eastern District of Virginia alongside eight states: California, Colorado, Connecticut, New Jersey, New York, Rhode Island, Tennessee and Virginia.^{1CBS NewsDepartment of Justice accuses Google of monopolizing advertising technology24 Jan 2023,2California Attorney GeneralAttorney General Bonta files lawsuit against Google for monopolization of ad tech markets24 Jan 2023}

The complaint says Google spent about two decades acquiring and then defending control of nearly every link in the chain that puts an advert on a web page: the tools publishers use to sell space, the tools advertisers use to buy it, and the exchange where the two meet.^{2California Attorney GeneralAttorney General Bonta files lawsuit against Google for monopolization of ad tech markets24 Jan 2023} It is the fifth federal antitrust suit against Google since 2020.^{1CBS NewsDepartment of Justice accuses Google of monopolizing advertising technology24 Jan 2023} The government wants Google Ad Manager, which includes the exchange, split from the rest of the firm.^{1CBS NewsDepartment of Justice accuses Google of monopolizing advertising technology24 Jan 2023}

We think the government has chosen its fight well. Antitrust law should be slow to punish a firm for being popular, and size alone proves nothing. Ad tech is a better test than most. Google is not accused of building a better auction. It is accused of owning the auction, the biggest bidders and the auctioneer’s clerk, and of writing the rules to suit all three.

The complaint is vivid. Google’s goal, the government alleges, was to be “the be-all, and end-all location for all ad serving”.^{3CNBC, via NBC NewsDOJ files second antitrust suit against Google, seeks to break up its ad business24 Jan 2023} It bought DoubleClick in 2008 and AdMeld in 2011.^{3CNBC, via NBC NewsDOJ files second antitrust suit against Google, seeks to break up its ad business24 Jan 2023} Its strategy was to “acquire, then extinguish, any competitive threat”.^{3CNBC, via NBC NewsDOJ files second antitrust suit against Google, seeks to break up its ad business24 Jan 2023} When rivals found a workaround called header bidding, which lets publishers offer space to several exchanges at once, Google executives are said to have called it an “existential threat”.^{3CNBC, via NBC NewsDOJ files second antitrust suit against Google, seeks to break up its ad business24 Jan 2023} Google’s answer, Open Bidding, the complaint calls a “Trojan Horse”.^{3CNBC, via NBC NewsDOJ files second antitrust suit against Google, seeks to break up its ad business24 Jan 2023} One executive allegedly asked whether there was “a deeper issue with us owning the platform, the exchange, and a huge network?”^{3CNBC, via NBC NewsDOJ files second antitrust suit against Google, seeks to break up its ad business24 Jan 2023} It is rare to find the prosecution’s closing argument in the defendant’s inbox.

The cost, says the government, lands on both sides of the market. Attorney-General Merrick Garland said competition had been “severely weakened”, with the result that “website creators earn less and advertisers pay more”.^{1CBS NewsDepartment of Justice accuses Google of monopolizing advertising technology24 Jan 2023} The complaint alleges that Google keeps at least 30 cents of each ad dollar passing through its technology, sometimes much more.^{1CBS NewsDepartment of Justice accuses Google of monopolizing advertising technology24 Jan 2023} That is a hefty toll for a system that is, in the end, a matching algorithm.

Google has a defence, and part of it is fair. A spokesperson called the suit an attempt “to pick winners and losers in the highly competitive advertising technology sector”, and said the government was “doubling down on a flawed argument that would slow innovation”.^{1CBS NewsDepartment of Justice accuses Google of monopolizing advertising technology24 Jan 2023} The firm also notes that programmatic advertising, the subject of the suit, is about 12% of its revenue.^{1CBS NewsDepartment of Justice accuses Google of monopolizing advertising technology24 Jan 2023} Market definition will matter: whether online display advertising is a market apart from print, broadcast and billboards is a question on which reasonable economists differ. Google’s share of all American digital advertising, nearly 29%, is well short of a monopoly.^{1CBS NewsDepartment of Justice accuses Google of monopolizing advertising technology24 Jan 2023}

But the case does not depend on the wide market. It depends on narrow ones: the ad server publishers use and the exchange they sell through. There the complaint alleges monopolisation and attempted monopolisation, plus the unlawful tying of products together.^{2California Attorney GeneralAttorney General Bonta files lawsuit against Google for monopolization of ad tech markets24 Jan 2023} Tying is the cleanest charge. If publishers who want the best demand must use Google’s server, and Google’s server favours Google’s exchange, the market has not chosen anything. It has been told.

Pro-market people should be wary of breaking up firms and should say so. The usual objection to divestiture is that it destroys value without restoring competition. Here the objection is weak. An ad exchange is a piece of plumbing that can be separated cleanly from search and YouTube, and its value to Google lies largely in the advantage of owning it. A conduct remedy, by contrast, would need a monitor to watch an auction that runs in milliseconds, which sounds like a job for a regulator with a long career ahead of it.

Delay is the real risk. The earlier search case has been in the courts since 2020 and its trial is not expected until September.^{3CNBC, via NBC NewsDOJ files second antitrust suit against Google, seeks to break up its ad business24 Jan 2023} Ad tech moves faster than judges do. A remedy that arrives after publishers have moved on, or after the market has been rebuilt around a rival, would be a prize no one wanted.

Google earned $54.5bn from advertising in the quarter to September alone.^{3CNBC, via NBC NewsDOJ files second antitrust suit against Google, seeks to break up its ad business24 Jan 2023} It can afford the lawyers. Whether it can afford to be both the house and the croupier is what the court must now decide.