It may feel like the words “Google” and “lawsuit” are commonplace, but the trial in September carries enormous weight and is unlike the lawsuits of the past. Not only do we want to keep an eye on ad-tech names that could benefit should Google’s monopoly be broken up and the juggernaut come out weaker, but we also want to be prepared if the tech giant is able to hold off regulators.
Considering that Google is sitting on the world’s very best consumer data, which is not an exaggeration in the least bit, its ability to lead on artificial intelligence and large language models should not be underestimated. For our purposes, the company is far from sitting on its laurels and there’s a predictable path where the company competes in a duopoly with Microsoft.
Therein lies the issue. Google undisputedly has the world’s best consumer data, but did this grow to become part and parcel with operating a monopoly? The Department of Justice has asserted anti-trust violations against Google with the trial beginning in September 2023. The trial is expected to last ten to 12 weeks, although a lawyer for the DOJ told CNBC it could be as brief as five weeks.
Why it matters:
With Google and other ad-tech companies trading this low, one of two outcomes will happen. The antitrust outcome will be mild, and Google will be empowered to continue to dominate. Or, the outcome will require the ad properties to be broken up, leading to a weaker stance for Google. This could benefit smaller ad-tech players.
The Goal — Looking back:
A few years back, I analyzed the potential outcome of a government decision when the Pentagon was evaluating cloud providers. Clearly, this decision is far outside of anyone’s control and requires some speculation. At the time, I speculated Azure would be a winner. For a year or so, Microsoft did secure the Pentagon contract over the more-favored Amazon. This decision was ultimately reversed, and the contract was split between four tech companies.
The exact outcome of the Pentagon contract was not particularly important because the analysis led to my conclusion that Microsoft’s hybrid computing was a material advantage and this would be the path Nadella would most likely use to take market share from AWS’s heavily-slanted public cloud strategy.
I’m hoping for something similar, which is to acknowledge something very important is going on with ad-tech, which is Google’s antitrust case. This is not a headline to simply dismiss. It’s the first time the DOJ has brought a case of this kind against a technology company since Microsoft. If there are even minor cracks in Google’s monopoly, there could stand to be a stock or two that starts a new trajectory.
On similar note, Cambridge Analytica is what sparked my coverage on Facebook. Similar to Google’s antitrust case, it became apparent to me that Facebook was peaking in terms of its ability to monetize through third party data. I covered this extensively, for example here and here.
Brief Overview of Antitrust Case:
According to Lanier Law Firm, which is the litigation team for the State of Texas in the state coalition case, a primary argument against Google is that the company went above and beyond to become the default search engine on iOS devices by paying Apple $12 billion per year.
The lawsuit includes other deals that Google struck with Apple’s Safari browser, the Mozilla browser and Android device manufacturers where Google either paid up or imposed restrictions on Android device makers to strongarm having their suite of apps pre-installed on the home screen.
The company has already lost an antitrust case in Europe in 2018 with a $4.4 billion Euro fine for forcing Android manufacturers to pre-install Google’s bundle of apps on the device, including Chrome, Maps and the Play Store.
Google’s market share of Search is at 91% and the argument is being made this was accomplished through anti-competitive practices, especially since Google owns Android and had leverage over the many device makers that used this operating system.
In addition to being pre-installed and the default browser/search engine, Google also attempts to keep people on its search engine by using a website’s data on its page. For example, if you look up “Best Dog Breed” Google scrapes Wikipedia and puts the results onto the search page instead of sending you to Wikipedia. This is seen as anti-competitive as it takes a website’s data to profit from it, rather than directing the traffic to the rightful copyright owner, which is the function of a search engine.
Part of Microsoft’s antitrust case was based on Microsoft using its dominance on Windows to force a Microsoft Explorer to be the default browser. At the time, the decision was that default settings are anticompetitive.
The secondary argument filed by a 10-state group led by Texas, is that Google leverages its properties to be the buyer and the seller via its ad exchange. Per Lanier Law Firm, the Texas case states Google and Facebook “unreasonably restrained trade and harmed competition through an unlawful agreement to allocate auction wins and to fix prices in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1”
This is where it gets very messy, and so I’ve dedicated a specific section below to break down these details. The purpose of understanding the minutiae is not to only determine if we should buy Google and when, but also what companies could stand to benefit if Google’s products are shutdown or broken up.
My long-ago analysis on Facebook pointed toward a conflict of interest in the company owning a third-party ad network called Audience Network while also being publisher. At the very least, the conflict of interest created a risk since Facebook was essentially siphoning oil from real estate the company didn’t own (iOS users). This was a serious, material risk for investors that played out over time (note: it certainly wasn’t immediate, it took four years from the first time I covered the topic).
If you’re a Meta investor, you’ll want to watch the CPMs on the company and make sure the erosion below is not permanent. Despite Apple only impacting third-party data, it’s unclear how much of that third-party data was informing its first party data. The unusually high CPMs that Meta charged points towards enhanced targeting – that in my opinion – was likely due to mixing both first-party data with third-party data. This means there will be an eventual erosion, over time, of the CPMs Facebook can charge even on its own applications.
Pictured above: Although subtle, there is an erosion to Facebook’s otherwise high CPMs. You can see that Nov 2022 made a lower high over Black Friday compared to the two previous years. Many factors could be at play, such as lower ad budgets, but it’s something investors should keep a close eye on.
Google currently does the same thing that Facebook used to do, which is to run an ad exchange that is undeniably a conflict of interest. The difference is that rather than renting real estate, like Facebook did with iOS, Google is a real estate tycoon. There isn’t a tech company that can kick Google off their turf because Google owns all of the turf – primarily Chrome, Android, Google Search, and YouTube.cBy conflict of interest, I’m referring to AdX, DoubleClick and DV360, collectively known as the Google Network.
Below, you can see Google Network is a $32 billion annual revenue stream. Not exactly peanuts.
To further the lawsuit, a 30-state coalition has issued a third claim that Google uses its monopoly to rip off smaller companies, such as Yelp, DoorDash, and Kayak. You can see evidence of this when Google Search returns flight searches powered by Google at the top, with a large embedded format, rather than producing a fair search result that includes competitors. Yelp has been in a battle with Google over this for over a decade. After Google Reviews were launched, Google pushed Yelp down the page in terms of search results.
The two search engine allegations are fairly straight forward. Most of us who use Google Search can reasonably understand those arguments.
The Messy, Blackbox that is AdExchange (AdX):
DoubleClick was acquired in 2007 for $3.1 billion. As author Tony Yiu points out on Toward Data Science, this was twice the amount paid for YouTube a year earlier. Google Network is a by-product of many acquisitions including AdMob for $750 million and AdMeld for $400 million, among others, yet DoubleClick truly set the supply side dominance in motion as the company owned 60% of the desktop publisher market at the time of acquisition.
DoubleClick allows Google to set a cookie on a website so that online publishers can better target visitors with ads. The DoubleClick cookie provides the time and date a user saw an advertisement, as well as a unique ID that identifies a user by their browser. Publishers are then able to auction inventory to advertisers.
DoubleClick was a major move by Google to expand beyond search advertising. This was the first time Google entered the market on display ads. As stated, DoubleClick owned 60% of the publisher market when it was acquired, which means Google would eventually profit from monetizing millions of websites.
This led to a concentration of power for Google, because with this advantage, it was able to grow quickly as a predominant ad server for publishers. Naturally, Google wanted to maximize this advantage, and so the company made the appropriate acquisitions to operate on the demand side (advertiser side) in addition to the publisher side.
Through a series of acquisitions, Google built DV360, which allows advertisers to use their own data to target customers across publisher inventory. Google always has strong ties to data, in this case powering DV360 with Google Analytics 360. In addition to this, Google’s AdX allows advertisers to create campaigns across Google-owned properties in addition to millions of websites from third-party publishers on the DoubleClick publisher side, as mentioned above.
An easy analogy here would be to compare it to a real estate transaction, since ads are transactional between a buyer and seller. In this case, Google was representing both the buyer and the seller, and in some cases brokered its own real estate to the buyers. You can imagine due to Google’s scale of doing millions of transactions a day, things might get unethical real quick.
Here’s how a Google executive put it:
“[I]s there a deeper issue with us owning the platform, the exchange, and a huge network?” the executive allegedly asked. “The analogy would be if Goldman or Citibank owned the NYSE.”
With that in mind, let’s continue because the depth of Google’s black box is quite deep.
The product AdSense further pools the data provided by publishers. When millions of websites join AdSense to pool data, Google can record more information on a person’s browsing history. It provides a complete view of the consumer for more enhanced targeting. Another area that Google allegedly monopolizes the market is that the company mixes its first party data with this third party data, but only in instances where Google will benefit.
The AdMob acquisition in 2009 provided a similar strategy as DoubleClick but on mobile. It deepened Google’s reach on the supply side for the mobile market. This, of course, was especially advantageous considering Google bought Android in 2005.
You can imagine, that the depth of Google’s data on desktop users and mobile users is deep (and likely quite dark). Meaning, Google knows more about you than you know about yourself. Now, take that depth of data and add the serious conflict of interest that can occur when Google bids against competitors.
Where Google (Allegedly) Went Wrong with AdX
Despite the allegations below that Google was unethical, I want to point out that antitrust could be harder to prove for AdX. This is because many corporations combine first-party publisher data with a third-party ad exchange, such as Amazon, Facebook, Disney and Comcast. Microsoft is building its ad exchange, as well right now, after acquiring Xandr from AT&T. However, Xandr/Microsoft’s strategy is to support the “free and open web” by adopting the Unified ID.
Point being, if the product AdX is found to be anticompetitive, it could have far-reaching implications for other companies. This wasn’t the case with Microsoft, as the company was rather isolated on its throne in the late 90s. With that said, Google is the worst offender in terms of the sheer advantages it has compared to other corporations with large media properties.
Here are some of the more unethical things Google is being accused of:
According to the lawsuit, there was a 65% drop in revenue if publishers chose to not use Google on the demand side. Advertisers are also stating this was a conflict of interest as Google restricted inventory in this case. This would be like a real estate agent refusing to show a house if they did not have both the buyer and the seller to double-end the transaction.
Google also allegedly circumvented waterfall auctions to prioritize their own bids on AdX. Waterfalls were prevalent throughout the ecosystem because they allow exchanges to be ranked by bids. Based on historical bids, if the ad exchange in the number one position doesn’t buy the inventory, it goes to the next ad exchange in the waterfall (the number two position).
Where Google may have manipulated the bidding is by allowing their exchange to meet only floor prices to win the bid, even when another exchange would have bidded higher in a waterfall-like auction. This would be like a real estate agent only presenting their Buyer’s offer to a Seller even if they knew they could get higher offers from another agent.
Due to DoubleClick and AdX waterfalls having the issues described above, programmatic header bidding was introduced to offer true, real-time bidding to increase publisher yield. It essentially increased competition by holding an open auction rather than a closed, blackbox auction that pushes inventory back and forth in an attempt to sell the inventory.
Per Digiday written in 2015: “One notable side effect of header bidding adoption is that it puts pressure on Google’s DoubleClick for Publishers ad server, which, through its dynamic allocation feature, lets AdX — but no other exchange — see and bid on every impression.”
That sentence and general understandingand general understanding of what AdX did to manipulate the waterfall process nicely sums up where Google could face trouble in a courtroom. According to the lawsuit, publishers saw 30% to 40% more revenue through header bidding by simply removing Google’s ability to manipulate the waterfall auction. I bolded “general understanding” because Google is so powerful that the ad ecosystem knew full and well that it was using its monopoly in anticompetitive ways but there was nothing any publisher or advertiser could do about it.
Google has tens of thousands of engineers and is a very advanced company, which is why the allegations are quite complex. The lawsuit points out that Google then later manipulated header bidding by allowing AdX to bid last. As long as AdX beat the previous bids, then it would win the bid. Going back to the real estate agent scenario, this would be like having multiple offers on a house, and the listing agent going to their exclusive buyers to reveal what the prices are to help the buyers win the bidding war.
Google is also accused of using more acquisitions for ad technology that would later be leveraged to subsidize bids. This means Google paid the difference on an advertiser’s bid in order to be the winning bid. In this case, Google simply increased its margin or cut in order to make up for the amount that was subsidized.
Google’s DSP called DV360 was also allegedly engineered to decrease bids from competing ad exchanges, including those who were using header bidding for a more fair auction process. This was done by setting the highest competing bid at the floor price while AdX was able to bid higher.
Google is accused of suppressing header bidding through covert mechanisms by reducing header bids by up to 90%. Meanwhile, Google’s own DV360 bid was not decreased. This was done even when Publishers attempted to set a lower floor for competing ad exchanges, meaning, Publishers were without recourse even if they agreed to a lower bid.
Conclusion:
Given the sheer impact a weaker Google could have on the ad-tech ecosystem, we wanted to do a deep dive and get in front of this. I believe this is the number one catalyst across ad-tech this year and we want our readers to benefit no matter the outcome. As the market can often do, there may be some price movements ahead of the trial, and if so, we will be watching for entries closely.
We offer an Advanced service with specific stock picks that may benefit from Google’s lawsuit and we also offer real-time trade alerts for all of our portfolio entries and exits. You can learn more about this service here.about this service here.