In the past two weeks, all eyes have been on two high-profile US Supreme Court cases, Gonzalez v. Google and Twitter v. Taamneh, questioning the suitability of Section 230 of the Communications Decency Act, which protects the rights of online platforms to moderate themselves as they see fit. Now Google is facing yet another significant challenge to its dominance, this time in the ad tech space.
Beneath the bewildering array of jargon that characterises the ad tech space, a review of a lawsuit against Google filed by the US Department of Justice (DOJ) and eight other states on 24 Jan 2023 reveals that the case could present a significant threat to the company’s capacity to generate revenue. Should Jonathan Kanter, the progressive Assistant Attorney General for the DOJ’s Antitrust Division, achieve success in his lawsuit, we could see a new era of competitive innovation in the digital advertising space – and perhaps even an era in which Google is no longer the incumbent.
Google’s ad tech infrastructure and control strategy
Google’s dominant position in search makes it a logical beneficiary of the internet display advertising market. After all, knowing what users are looking for is precisely what advertisers are interested in. Google began by selling advertising space alongside its search engine results. Fast-forward to today, and Google alone (not including its subsidiary YouTube) controls 26% of all online display ads.
The mechanics of the business are as follows. Digital ads displayed on websites are known as display ads. An ad tech transaction starts when a user opens a website. While content is loading, the website uses a publisher ad server to select the most appropriate ads to populate the page for that user. A single display ad shown to a single user on a single occasion is known as an impression, and the marketing of these impressions generates revenue for digital advertisers. In 2022, Google’s ad revenue amounted to a whopping $224.47 billion, constituting 80% of its total revenue.
Google’s ad tech stack comprises a range of tools that allow websites and other online publishers to sell digital advertising slots to major brands. These include applications on the sell side, the bid side, and the exchange itself.
An aggressive expansion strategy led to Google commanding the sizeable chunk of the business that it holds today. In 2007, Google acquired the ad tech industry’s leading publisher ad server DoubleClick for Publishers (now Google Ad Manager). This was followed by a series of other acquisitions including AdMob, a technology system enabling publishers of mobile apps to sell ads; demand-side platform Invite Media; and Admeld, a competitive yield manager.
Over the years, Google has also gained control of important parts of the ad tech ecosystem itself, leading to allegations of competition-threatening behaviour. The acquisition of DoubleClick for Publishers enabled Google to function simultaneously as buyer, seller, and auctioneer of digital display advertising. Furthermore, shutting down Admeld and forcing all existing business through its own AdX ad exchange effectively prohibited publishers from using other platforms. Meanwhile, Google’s Project Bernanke sought to ensure it had preferential access to publisher inventories through its control of publisher ad server Google Ad Manager. It is now alleged that together, these measures have driven up costs for rival ad exchanges and advertiser ad networks.
Google is also accused of impeding independent publishers’ attempts to identify appropriate matches for advertising, thereby reducing its rivals’ overall capacity for effective operation. It is this combination of activity on the part of Google that has led competition regulators to step in.
The US antitrust lawsuit: background and allegations
The US lawsuit comes hot on the heels of similar action in the UK (via the Competition Appeal Tribunal), and in the EU, which is seeking claims against Google of up to €25 billion for depriving publishers of revenues through anticompetitive conduct. The US State of Texas’s Attorney General Ken Paxton also sought to sue Google in 2020 over its ad tech business and claims of collusion between Facebook and Google. However, several parts of that suit were thrown out in federal court.
While fines such as those sought by the EU are likely to have a relatively minor impact on Google, this DOJ case has the potential to hit the tech giant harder. It has been refined, and in a departure from previous instances, is requested in front of a jury, which could prove the decisive factor. At its heart, the lawsuit claims that Google systematically abuses its role as one of the largest brokers, suppliers, and auctioneers of online ads. Prosecutors claim that Google’s acquisition strategy has created an anticompetitive business whose tools have driven up prices in the market and harmed rivals. They also claim that Google forged exclusive links through its AdX ad exchange, to restrict all demand to its own technology.
As an example of this behaviour, the case alleges that Google sought to stymie an innovative non-Google ad tech marketing process known as header bidding, whereby publishers can bid on multiple advertising exchanges, and are not restricted to using Google’s own exchange. As a result, website creators earn less, and advertisers pay more.
Google’s response and the future implications for online advertising
Google is no stranger to scrutiny of its business practices by regulators. Indeed, former US President Donald Trump’s administration launched a similar lawsuit against Google for its monopoly of online search and the partnerships it struck up to achieve its dominant position. So far, Google has been successful in shaking off these challenges, and the search monopoly suit has yet to make it to trial (it is expected in September 2023).
Of greater relevance is the antitrust case brought by the state of Texas, which Google opposed. It has already demonstrated that it is likely to respond in a similar fashion this time round, saying: “The DOJ attempts to pick winners and losers in the highly competitive advertising technology sector. It largely duplicates an unfounded lawsuit by the Texas Attorney General, much of which was recently dismissed by a federal court. DOJ is doubling down on a flawed argument that would slow innovation, raise advertising fees, and make it harder for thousands of small businesses and publishers to grow.”
The DOJ has openly expressed its preference for a divestiture and a complete change in the way Google conducts its ad tech business. Whether Google would settle for its ad tech stack being operated via a separate (albeit controlled) entity, or sold altogether, remains to be seen. However, there is little doubt that the case has wide-ranging implications – not only for Google, but also for the wider digital advertising industry. Some believe it will encourage competition and pave the way for a freer market for ad tech services. Others, however, fear that the efficiencies derived from the enormous scale of Google’s entire ad tech stack will be the real victim.
Regardless of the outcome, the continued attention paid by the US judicial system to the power of Google and its secretive algorithm, which continues to hold over 90% of the global market share of internet users, demonstrates the increasing global appetite for the giant’s sway to be reassessed. As for the reign of the internet giant as the arbiter of value, we might finally be seeing the beginning of the end.